When deciding on the types of fire/hazard property insurance coverage for a small business, an owner needs to consider a number of policy variables.
Insurance companies sometimes attempt to deny property insurance coverage for repair and replacement of a defective product, or the attendant decrease in value of the defective product, on the grounds that such losses are not the result of a "physical" loss, similar to their arguments against data as property. The small business owner should be aware that generally, insurance companies have also lost this argument in court.
However, property insurance policies may exclude coverage for this type of loss under a clause that applies to "defective design," "faulty workmanship," or "manufacturing error" exclusion.
This type of clause will be enforced. The insured's main argument would have to be that the terms of the clause were not met (i.e., that the product was not defectively designed, etc.).
Of course, in any of these situations, the insured may have recourse against the party from whom it bought the defective product.