Impaired Property Exclusion

The impaired property exclusion appears in the standard ISO commercial general liability policy and bars coverage for the loss of use of tangible property that has not been physically injured, where that loss of use results from the insured's product or work being defective, deficient, inadequate, or dangerous, or from a failure to fulfill the terms of a contract. In plain terms, if your faulty component makes someone else's larger product unusable but does not actually break it, the resulting economic loss is generally excluded. This reflects the long-standing principle that CGL is meant to insure accidental damage to third parties, not to guarantee the quality or performance of what the insured sells or builds.

For a small-business buyer, this matters because it defines the sharp line between an insurable liability claim and an uninsured business risk. If a machine shop supplies a bolt that is simply the wrong size, and an assembler has to shut down a production line until the bolt is swapped, the shutdown cost is loss of use of property that was never damaged — a classic impaired-property scenario the insurer will decline. This exclusion works alongside the your-work exclusion and the broader framework of products-completed operations coverage, all of which push warranty-type and workmanship costs back onto the business rather than the liability policy.

The critical nuance is the built-in exception: coverage is restored if the loss of use is caused by sudden and accidental physical injury to the product or work after it has been put to its intended use. So if that same defective bolt suddenly snaps during operation and physically damages the surrounding machine, you cross from impaired property into covered property damage territory. Buyers who provide critical components should review this exclusion carefully and, where warranted, negotiate manuscript endorsements or ensure their contracts allocate recall and rework costs, since the standard CGL will not fill that gap.