Sometimes a coverage case involves a novel issue that is unlikely to arise very often. However, it is just plain interesting. So for that reason it merits a look. Such is the Washington federal court’s decision in Country Mutual Insurance Company v. Deatley, No. 13-3029 (Nov. 21, 2013).

At issue in Deatley was coverage for disallowed tax credits. The tax credits came about like this (as described just about verbatim by the court). A conservation easement is an agreement between a private landowner and a government entity stipulating that a parcel of real property will remain permanently undeveloped. Due to their restrictive nature and infinite term, conservation easements can significantly diminish the value of real property. In an effort to neutralize this undesirable effect—and encourage donations—many states allow landowners to “write off” any decrease in value attributable to a conservation easement as a tax loss. As a further incentive, some states also allow landowners to sell their deductions on the open market as transferrable tax credits. In those states, tax credits are commonly sold to investors at a discount for tax shelter purposes.

Alan Deatley sold conservation easement tax credits to investors that were rejected by the Colorado Department of Revenue. Two actions were filed against him by plaintiffs seeking monetary damages in the total amount of $792,000 as compensation for their lost investments. Deatley sought coverage under a series of liability policies issued by Country Mutual. Country defended under a reservation of rights but sought a judicial determination that it had no such obligation to do so.

Country Mutual’s argument that it had no duty to defend was simple. The losses at issue were “strictly economic in nature” and, therefore, could not be construed as “bodily injury,” “property damage” or “personal and advertising injury” within the meaning of the available CGL coverages. The court quickly concluded that the losses were not “bodily injury” or “personal and advertising injury.” However, whether coverage was available for “property damage” was, the court observed, a “closer question.”

In general, the definition of “property damage” was physical injury to and/or loss of use of “tangible property.” With no definition of “tangible property” in the policy, the court turned to dictionaries for guidance. Based on these definitions, the court held that the tax credits were not “tangible property” and, therefore, Country Mutual had no duty to defend. “Unlike real property or chattels, tax credits do not have a physical form or substance that can be detected by the human senses. Indeed, tax credits are a prime example of intangible property; although they have value, they exist only on paper. Given that the damages actions arise solely from the Colorado Department of Revenue’s denial of Deatley’s conservation easement tax credits, the Court concludes that the plaintiffs in those actions cannot establish injury to and/or loss of use of ‘tangible property’ so as to trigger coverage.”

The court also rested its decision on the general rule that loss of an investment does not constitute damage to tangible property under a commercial general liability policy. “In the final analysis, the plaintiffs in the damages actions purchased the conservation easement tax credits from Deatley as tax shelter investments. Like the investors in the cases cited . . . , they ran the risk that their investments would decrease in value or be rendered worthless. Unfortunately, that is precisely what occurred when the Colorado Department of Revenue disallowed the tax credits.”