Arizona “property damage” during the policy period.

In University Mechanical Contractors of Arizona, Inc. v. Puritan Ins. Co., 723 P.2d 648 (Ariz. 1986), the insured’s pipe and coupling system was installed by the general contractor in a solar heating and cooling facility.  After installation, leaks occurred.  The general contractor repaired the leaks and the system was tested and no further leaks were discovered.  Shortly after the facility was placed into operation, more leaks developed and the general contractor eventually repaired the entire system.   The general contractor obtained a judgment against the insured and then sought garnishment from the insured’s CGL insurer.   The trial court entered judgment in favor of the general contractor.  The intermediate appellate court reversed.  The Arizona Supreme Court vacated and affirmed the trial court judgment.   The CGL policy incepted just prior to installation and expired after the initial leaks which occurred during installation but before the leaks which occurred after the facility was completed.  The court first held that, under prong (2) of the definition of “property damage” — loss of use of tangible property which is not physically injured–which required the loss of use to be caused by an “occurrence” during the policy period, because the “occurrence” did not occur until after the policy expired, there was no prong (2) “property damage.”   However, the court then held that there was prong (1) “property damage” – physical injury to tangible property occurring during the policy period, because the installation of the faulty system constituted “physical injury to tangible property” “property damage” and also resulted in loss of use.