Theft Of Long Distance Telephone Calling Card: Is This a Direct Physical Loss Of Personal Property? – Claims Magazine

Issue:

The insured's long distance telephone calling card was stolen. As a result, the insured received a very high long distance telephone bill. The standard Homeowners policy (HO 00 03 04 91) insures for "direct physical loss" to personal property owned or used by the insured while it is anywhere in the world. Would the theft of the calling card and the resulting increased telephone bill be considered a direct physical loss under the policy?

Analysis:

The nominal cost of replacing the card itself would be covered under the theft peril. However, the increased telephone bill would be considered an economic loss incurred for a service (as opposed to a product or property) and would therefore not be covered.

In the absence of any cases directly on point, several decisions which have held that products provided by other utilities such as water, electricity, and fuel oil are property are enlightening. Due to an important distinction, those cases are distinguishable from the service provided by the telephone company.

For example, $39,523.44 in water which passed through the insured's meter was held to be covered personal property in Gatti v. Hanover Ins. Co., 601 F. Supp. 210 (E.D. Pa. 1985), aff'd w/out opinion (3rd Cir. 1985). The court's holding was based on the fact that once the water passed through the meter, it became the personal property of the insured. Not only was the quantity of property lost measurable, but due to its physical nature, it was also capable of being stored for future use.

Gatti noted a Texas case involving a loss which would not be covered under a policy affording coverage for physical loss: in Glen Falls Ins. Co. v. Covert, 526 S.W.2d 222 (Tex. App. 1975), a manufacturer withdrew its warranty after safety stabilizers fell but suffered no damage. The court denied coverage for the loss of merchantability on the grounds of no "physical loss." Unlike the water in Gatti, the excluded property (the manufacturer's warranty) in Glen Falls was intangible and had no "physical" characteristics per se.

Electricity which has passed through an insured's meter, like water, is another example of property owned by the insured. However, electricity is not as easily classified as covered personal property because it seems to be tangible only in terms of its effect on other things, and not as property in and of itself. Two cases were located which shed some light on the subject. In Ransome v. Wisconsin Elec. Power Co., 275 N.W.2d 641 (Wis. 1979), the court stated that electricity is a form of energy which is distributed in the stream of commerce and can be made by man, confined, controlled, transmitted, and distributed for use as an energy source. In Sommers v. Secretary, Dept. of Revenue and Taxation, 593 So.2d 689, 692 (La. 1991), the court stated that electricity is a "corporeal movable" and thus was personal property.

The distribution of electricity is a service, but the electricity itself is a consumable product. Although neither Ransome nor Sommers was an insurance case, they do lend support to treating metered electricity the same as metered water.

Similarly, the theft of fuel oil from an insured has been held to be recoverable. PECO Energy Co. v. Boden, 64 F.3d 852 (3rd Cir. Pa. 1995). Crude oil sold by an oil company was considered personal property inasmuch as it could be seen, weighed, measured, felt, and touched. Sante Fe Energy Co. v. Board of Equalization of State of Cal., 206 Cal. Rptr. 499 (Cal. App. 1984).

Phone service, on the other hand, is substantially different from water, electricity, or fuel oil in that phone service is neither expendable nor containable. It appears to be most comparable to the service provided by the electricity company, save one important distinction: it is not a consumable product. Phone service is valued based upon the amount of time spent using the phone company's lines, transmitters, and/or other equipment, and the amount of distance between the caller and the recipient; it is not valued on any "physical" property basis. Phone service is a means to convey sound or data from one place to another; it is not the sound or data itself. Telephone service (electrons flowing through the copper wires, or optical links) cannot be stockpiled for future use and lacks the physical characteristics by which other utilities such as gas, electricity, fuel or water are measured, stored or contained.

The alternative argument that the unauthorized use of an insured's telephone service might be considered a theft of cash from the insured, since this is what the insured will have to pay as a result of the extra charges incurred, fails because in order for the special limit for money to apply, actual currency must be stolen from the insured. In State Farm Fire & Cas. Co. v. Holeczy, 504 So.2d 971 (Ill. App. 1987), the court held that "property damage" does not encompass loss to intangibles such as by monetary or economic loss. Therefore, by analogy, where the extent of the insured's loss is the creation of a debt for services used by an unauthorized user, the "physical loss" requirement for a covered loss has not been met.

Another alternative would be to consider the calling card a credit card for purposes of the Additional Coverage for the theft or unauthorized use of credit cards issued to or registered in an insured's name. If the calling card functions as does a credit card, albeit only for a limited purpose, a broad interpretation of the coverage provision would warrant up to $500 in coverage for the loss incurred by virtue of the unauthorized use of the card.

In conclusion, a distinction exists between the product (property) sold to consumers by utilities selling water, electricity, fuel oil and the like compared to the service sold to consumers by the telephone company. The purely economic loss incurred due to the unauthorized use of the card was not a loss to covered property. Under either of the alternative arguments raised, the Additional Coverage for the legal obligation of an insured to pay because of the theft or unauthorized use of credit cards appears to be the only basis for recovery under the policy.