Impaired Property

Impaired property is a concept found in the commercial general liability policy's exclusions section (ISO form CG 00 01, Exclusion m). The exclusion bars coverage for claims involving property that has lost value or usefulness because it contains or relies upon the insured's defective product or completed work, provided the impairment can be cured by removing, repairing, or replacing the defective component. For apartment owners, this exclusion most commonly arises in disputes with contractors and suppliers.

Consider an apartment owner who hires a contractor to install a new HVAC system across a 100-unit building. The system is defective, causing insufficient heating and tenant complaints. The building itself is impaired property—it cannot function properly because of the defective HVAC system—but the impairment can be cured by replacing the HVAC components. The contractor's CGL policy would exclude coverage for the cost of replacing the defective system itself under the impaired property exclusion, though it might cover consequential damages such as tenant relocation costs or lost rents if those losses fall outside the exclusion.

Apartment owners should understand the impaired property exclusion because it affects the recovery available from contractors' insurance policies when defective work damages the building. When negotiating construction or renovation contracts, owners should require contractors to carry completed operations coverage, obtain warranties backed by surety bonds, and include contract provisions that clearly allocate responsibility for defective work remediation beyond what the contractor's CGL policy covers.