Business Risk Exclusions in CGL Policies Produce a Patchwork of Decisions

by Carlton Fields
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On July 23 and 24, 2014, respectively, intermediate appellate courts from South Carolina and Massachusetts released opinions upholding the application of the “your work” exclusion in a commercial general liability policy against claims based on contracted work that had been performed improperly.  These two decisions buttress application of the “your work” exclusion, but they also illustrate the fact that the area of business risk exclusions (which typically refers to the “your work” and “products completed operations hazard” exclusions) can be a thicket of competing rationales.  Recent decisions from other courts show that these results cannot be taken for granted.

South Carolina:  Let’s Go to the Tape

Up first was the South Carolina Court of Appeals, in a case involving a contractor that hired a subcontractor to install insulation in a new building. The subcontractor completed its work, including sealing the joints of the insulation with tape. The contractor then began constructing a wall over the insulation and, while doing so, discovered that the tape used to seal the insulation was defective and coming loose. The contractor tore down the wall and instructed the subcontractor to fix the insulation seals with new tape. The contractor then charged the cost of tearing down and re-building the wall to the subcontractor.

The subcontractor sought indemnification for the wall claim under its CGL policy. The policy covered “property damage” caused by an “occurrence,” and it expressly excluded from coverage “property damage” to “any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.” The policy defined “your work” to mean:

  1. Work or operations performed by you or on your behalf; and
  2. Materials, parts, or equipment furnished in connection with such work or operations.

In a declaratory judgment action brought by the insurer, the trial court found that the “your work” exclusion precluded coverage. In Precision Walls, Inc. v. Liberty Mutual Insurance Co., No. 2013-000787, 2014 WL 3610895 (S.C. Ct. App. July 23, 2014), the Court of Appeals agreed. Citing a line of South Carolina cases, the court noted that “your work” exclusions in general are consistent with the purpose of CGL policies “to insure risks of liability but not to insure normal, frequent, or predictable consequences of doing business.”

The court found that the subcontractor’s policy contained no ambiguities, and that the defective tape constituted “your work,” because it was “material furnished in connection” with the subcontractor’s work. The court also found that the brick wall was “property that must be restored, repaired, or replaced” because of the defective tape. The court thus held that, under its plain terms, the “your work” exclusion applied to preclude coverage for the contractor’s claim for the wall repair.

Massachusetts: The Nightmare by the Lake

The following day, the Massachusetts Appellate Court released a similar decision, captioned, Pacific Indem. Co. v. Lampro, 12 N.E.3d 1037 (Mass. Ct. App., July 24, 2014). In Lampro, homeowners hired a landscaper to develop their lakefront property in an environmentally sensitive area. One of the contractor’s subcontractors failed to follow certain environmental restrictions in the permits which the contractor had secured. Instead, the subcontractor “clear-cut” a swath of trees and brush, resulting in what was described as “an environmental nightmare” for the homeowners. The homeowners’ property insurer paid more than $100,000 to remedy the damage, and, as subrogee, sued the contractor and its general liability insurer for negligence and indemnity, respectively. The contractor’s insurer disclaimed coverage.

The general liability policy issued to the contractor covered “property damage” caused by an “occurrence.” It also contained an exclusion for damage to “[t]hat particular part of real property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The policy defines “your work” as “[w]ork or operations performed by you or on your behalf.”

The trial court found for the insurer, and the appellate court affirmed, but their reasoning was different from that of their sister court to the south.  The courts held  that there had been no “occurrence,” because a breach of contract is not “accidental” in nature, but rather a risk of doing business.  However, the courts also endorsed the approach of the South Carolina court, finding that, if there had been an occurrence, the claim would have come unambiguously within the terms of the “your work” exclusion, leaving the general liability carrier off the hook.

But Then There’s California …

One California appellate court recently expressed the rationale behind these exclusions in language that was strikingly similar to that of the Precision Walls case:

The rationale underlying the your work exclusion is that a liability insurance policy is not designed to serve as a performance bond or warranty of a contractor’s product. . . . The exclusion applies both to defective components in the insured’s product and to non-defective components damaged by the defective components. . . [G]eneral liability policies containing such exclusions “are not designed to provide contractors and developers with coverage against claims their work is inferior or defective. The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or products.

Certain Underwriters at Lloyd’s, London v. Transguard Ins. Co. of America,  (Cal. Ct. App. June 2, 2014).

Transguard involved the work of a specialty fine art shipper, which had successfully shipped several valuable paintings from Germany to Santa Monica, California. The owners then moved the paintings themselves to a different space in their home, and asked the contractor’s employee to hang them. The employee mistakenly believed that the cardboard frames on the paintings were packaging material and removed them, effectively destroying the works.

This was, then, precisely the type of error that a customer seeks to avoid by hiring a “specialty fine art shipper,” rather than an ordinary mover.  Yet the same court that declared that a CGL policy “is not designed to serve as a performance bond” also held that the contractor’s negligence “was not the type of defective work intended to be encompassed by the exclusion, and instead resulted in the type of injury that liability insurance is designed to cover. Indeed, construing ‘your work’ to include [the contractor's] alleged conduct would essentially eviscerate any coverage under appellant’s policy.” 2014 WL 2528656 at *8.

Another note of caution in interpreting these provisions was struck earlier this year by the Alabama Supreme Court, in Owners Ins. Co. v. Jim Carr Homebuilder, LLC, No. 1120764, 2014 WL 1270629 (Ala. March 28, 2014). There, the court analyzed coverage under a CGL policy issued to a homebuilder that was sued by the homeowners as a result of allegedly faulty workmanship in constructing the home. It analyzed the business risk exclusions together, noting that:

[O]nce [the builder's] “ongoing operations” with regard to the Johnsons’ house came to an end, it was not the intent of the Owners policy to insure [the builder] against claims for damage to the Johnsons’ house arising from exposure to generally harmful conditions made possible by faulty workmanship previously performed by [the builder]. This risk is known as the “completed operations hazard” and, absent supplemental coverage purchased by the insured, is not insured against by the standard CGL policy.

In manifestation of this latter fact, standard CGL policies—including the Owners policy—include an express “Your Work” exclusion that specifically addresses the completed-operations hazard. The parties acknowledge the applicability of the “Your Work” exclusion in this case, inasmuch as it is undisputed that [the builder's] “operations” on the Johnsons’ house were completed at the time of the alleged occurrences.

However, the Court noted that the builder had purchased, for an additional premium, separate “products-completed operations hazard” coverage, and, as a result, the “your work” exclusion was rendered inapplicable, insofar as it applied only to “[p]roperty damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.” Effectively, the decision read the “your work” exclusion out of the policy, because the separate coverage had been purchased.   That coverage removed the alleged property damage from the products-completed operations hazard, and so the damage was excepted from the “your work” exclusion.

The recent decisions from Massachusetts and South Carolina are good news for business risk exclusions generally, but there are often factual variables that create tension in the application of these exclusions, as well as in whether courts will find an “occurrence” in the first instance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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