Construction Property Damage Claims: CGL Exclusions K, L and M, and Products-Completed Operations Coverage

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Construction Property Damage Claims: CGL Exclusions K, L and M, and Products-Completed Operations Coverage WEDNESDAY, NOVEMBER 8, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: David M. Adelstein, Partner, Kirwin Norris, Orlando and Ft. Lauderdale, Fla. Matthew J. Devereux, Partner, Tressler, Chicago Kristine M. Sorenson, Partner, Walker Wilcox Matousek, Houston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Property Damage Claims David Adelstein 5

6 What does CGL cover? 6 David Adelstein dma@kirwinnorris.com

7 It starts with the grant of coverage in the CGL policy... 7 David Adelstein dma@kirwinnorris.com

8 CGL overs property damage caused by an occurrence during the policy period 8 David Adelstein dma@kirwinnorris.com

9 How does the CGL define property damage and occurrence? 9 David Adelstein dma@kirwinnorris.com

10 Application of the definition of occurrence when the word State Farm accident Fire and Cas. is not Company defined v. McDermott, in standard 2014 CGL WL policies? (E.D.Pa. 2014): Courts in this district and in the state of Pennsylvania have, however, commented on identical language found in commercial general liability ( CGL ) insurer contracts and have defined an accident as [a]n unexpected and undesired event, or something that occurs unexpectedly or unintentionally, with [t]he key term in the ordinary definition of accident [being] unexpected. *** The Pennsylvania Supreme Court has held that faulty workmanship in cases such as these does not constitute accidents and are therefore not occurrences under CGL policies. *** McDermott's alleged failure to live up to contractual obligations cannot be seen as an accident or some unforeseeable event, as McDermott was specifically tasked with forestalling such a result. 10 David Adelstein dma@kirwinnorris.com

11 Application of the definition of occurrence when the word accident is not defined in standard CGL policies? K & L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. 2013): We have, however, defined accident for purposes of a CGL policy as happening by chance, unexpectedly taking place, not according to the usual course of things. *** We conclude faulty workmanship may constitute an occurrence if the faulty work was unexpected and not intended by the insured, and the property damage was not anticipated or intentional, so that neither the cause nor the harm was anticipated, intended, or expected. 11 David Adelstein dma@kirwinnorris.com

12 Application of the definition of occurrence when the word accident is not defined in standard CGL policies? U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007): [P]olicies provide coverage not only for accidental events, but also injuries or damage neither expected nor intended from the standpoint of the insured. *** In sum, we reject a definition of occurrence that renders damage to the insured's own work as a result of a subcontractor's faulty workmanship expected, but renders damage to property of a third party caused by the same faulty workmanship unexpected. 12 David Adelstein dma@kirwinnorris.com

13 Application of the definition of occurrence when the word accident is not defined in the policy? Lee Builders, Inc. v. Farm Bureau Mut. Ins. Co., 137 P.3d 486 (Kan. 2006): The damage in the present case is an occurrence an even more expansive coverage term than accident because faulty materials and workmanship provided by Lee's subcontractors caused continuous exposure of the Steinberger home to moisture. The moisture in turn caused damage that was both unforeseen and unintended. 13 David Adelstein

14 Application of the definition of occurrence when the word accident is not defined in the policy? Travelers Indem. Co. of America v. Moore & Associates, Inc., 216 S.W.3d 302 (Ten. 2007): We have held that when used in a liability insurance policy the word accident refers to an event not reasonably to be foreseen, unexpected and fortuitous. *** Travelers argues that the water penetration was foreseeable to Moore because water penetration is a natural consequence of improperly installed windows. We are unpersuaded that the foreseeability of damages should be determined under an assumption that the windows would be installed improperly. If foreseeability is determined from the negligent completion of the project, then the negligent acts of the insured will almost never be accidents because, by definition, negligence requires that damages be foreseeable. 14 David Adelstein dma@kirwinnorris.com

15 4 theories apply to determine when an occurrence is triggered: 1. Manifestation property damage occurs when it manifests itself / becomes discovered 2. Injury-in-fact- property damage occurs the moment there is damage irrespective of when the damage was discovered 3. Exposure-property damage occurs when there is the 1 st exposure to the damage-causing conditions 4. Continuous- all policies are triggered if in effect during manifestation, actual damage, and exposure to damagecausing conditions 15 David Adelstein dma@kirwinnorris.com

16 Here Come the Exclusions Now that an occurrence potentially triggered CGL coverage for property damage, does an exclusion apply to bar or limit coverage for the property damage? In most jurisdictions, it is the exclusions that insurers rely on when there is a construction defect. 16 David Adelstein dma@kirwinnorris.com

17 Exclusion K Damage to Your Product 17 David Adelstein dma@kirwinnorris.com

18 Exclusion K Damage to Your Product 18 David Adelstein dma@kirwinnorris.com

19 Exclusion K Damage to Your Product Liberty Mutual Fire Ins. Co. v. MI Windows & Doors, Inc., 131 So.3d 15 (Fla. 2d DCA 2013) (your product exclusion barred coverage to manufacturer of defective sliding glass windows) 19 David Adelstein dma@kirwinnorris.com

20 Property Damage Claims Coverage Presented by: Matthew J. Devereux November 8, Tressler LLP

21 Exclusion k: Damage to Your Product» The your product exclusion precludes coverage for property damage arising out of a defect in an insured s product that renders the product useless or less useful. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 21

22 Exclusion k: Damage to Your Product Fireguard Sprinkler Systems, Inc. v. Scottsdale Ins. Co., 864 F.2d 648, 654 (9th Cir. 1988):» Exclusion precluded coverage for the costs of upgrading a sprinkler system.» Liability insurance should not be considered a warranty or performance bond for general contractors, controlling their work.» However, the exclusion is not intended to bar coverage for claims arising from the insured s products, but for coverage for property damage to the products themselves. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 22

23 Exclusion k: Damage to Your Product Liberty Mut. Fire Ins. Co. v. MI Windows & Doors, Inc., 2013 WL (Fla. App. 2 Dist. Sept. 4, 2013):» The your product exclusion will not preclude coverage if the insured product was fundamentally changed into a new product prior to the loss. The alteration of the insured s product must be significant.» Adding a transom to doors not a significant alteration to fundamentally change product. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 23

24 Exclusion k: Damage to Your Product Imperial Casualty & Indem. Co. v. High Concrete Structures, Inc., 858 F.2d 128 (3d Cir. Pa. 1988):» Insured sold sheet metal which was then stamped into individual washers. The court found that the washers were a new product. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 24

25 Exclusion k: Damage to Your Product Valmont Energy Steel, Inc. v. Commercial Union Ins. Co., 359 F.3d 770 (2004):» Your product exclusion unambiguously barred coverage for claims against the insured for damages arising out of the failure of the insured's steel flanges to meet contract specifications, and the insured s misrepresentations that such flanges were in compliance with the specifications. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 25

26 Exclusion k: Damage to Your Product Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563 (Pa. 1983):» Coverage excluded by your product exclusion where portico manufactured by insured collapsed and purchaser sought reimbursement for the costs of replacing the portico, repairing items stored beneath the portico and labor needed to remove the collapsed structure. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 26

27 Exclusion k: Damage to Your Product» Where the insured s product causes property damage to third party property, the exclusion will not bar coverage for the third party property damage. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 27

28 Exclusion k: Damage to Your Product Armstrong World Industries, Inc. v. Aetna Cas. & Sur. Co., 45 Cal.App.4th 1 (Cal. App. 1996):» The insured s asbestos-containing products were installed in various buildings, and the building owners sued the insured for the cost of the asbestos removal and repair of the building.» The court rejected the application of the your product exclusion to the suit brought against the insured because it held that the claims involved property damage to the buildings as a result of the insured s product, not merely damages due to the asbestos products themselves. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 28

29 Exclusion k: Damage to Your Product Scottsdale Ins. Co. v. Tri-State Ins. Co. of Minnesota, 302 F.Supp.2d 1100 (D. ND 2004):» The definition of your product indicates that products do not include real property. This clarification dispels the notion that a building completed by a general contractor is the product of the general contractor, such that any defect in the building would be excluded from coverage by the your product exclusion.» Modular building units affixed to foundation became real property. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 29

30 Exclusion k: Damage to Your Product Auto-Owners Ins. Co. v. American Building Materials, Inc., 820 F.Supp.2d 1265, 1272 (M.D.Fla. 2011):» Under Florida law, drywall became real property once it was installed and therefore the Your Product exclusion did not apply. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 30

31 Exclusion l: Damage To Your Work» This insurance does not apply to: Property damage to your work arising out of it or any part of it and included in the products-completed operations hazard. This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 31

32 Exclusion l: Damage To Your Work» Your Work means: a. Work or operations performed by you or on your behalf; and b. Materials, parts or equipment furnished in connection with such work or operations.» Your work includes: a. Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work ; and b. The providing of or failure to provide warnings or instructions. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 32

33 Exclusion l: Damage To Your Work» Products-completed operations hazard : a. Includes all bodily injury and property damage occurring away from premises you own or rent and arising out of your product or your work except: 1) Products that are still in your physical possession; or 2) Work that has not yet been completed or abandoned. However, your work will be deemed completed at the earliest of the following times: a) When all of the work called for in your contract has been completed. b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site. c) When that part of the work to be done at the job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed. b. Does not include bodily injury or property damage arising out of: 1) The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the loading or unloading of that vehicle by any insured; 2) The existence of tools, uninstalled equipment or abandoned or unused materials; or 3) Products or operations for which the classification, listed in the Declarations or in a policy schedule operations are subject to the General Aggregate Limit. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 33

34 Exclusion l: Damage To Your Work» The your work exclusion precludes coverage for property damage to your work arising out of it or any part of it.» Your work refers exclusively to the named insured s work, materials used in conjunction therewith and warranties given by the named insured. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 34

35 Exclusion l: Damage To Your Work» Your work exclusion often addressed in tandem with the occurrence issue in addressing whether property damage resulting from faulty workmanship is covered. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 35

36 Exclusion l: Damage To Your Work» The your work exclusion requires that the property damage be included in the products-completed operations hazard.» The named insured s work must be completed or this exclusion is not applicable. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 36

37 Exclusion l: Damage To Your Work» Application of Exclusion J: Damage to Your Property» If the named insured becomes liable for property damage to its work before operations are completed, one or more subparts to exclusion j. may apply to the claim. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 37

38 Exclusion l: Damage To Your Work» The your work exclusion only negates coverage if the only property damaged is that upon which the named insured worked. If some other property is damaged, the exclusion will not preclude coverage for that third party s property damage. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 38

39 Exclusion l: Damage To Your Work Pine Oak Builders, Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650 (2009)(Texas):» Claims fell within your work exclusion where no allegations of property damage to property other than that upon which insured contractor worked. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 39

40 Exclusion l: Damage To Your Work Architex Ass'n v. Scottsdale Ins. Co., 27 So. 3d 1148 (Miss. 2010):» Your work exclusion does not apply if the damaged work or the work out of which the damage arises was performed on the named insured s behalf by a subcontractor. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 40

41 Exclusion l: Damage To Your Work Pulte Home Corp. v. Fidelity & Guar. Ins. Co., 2004 WL (Va. Cir. Ct. Feb. 6, 2004)» Your work exclusion in the context of an additional insured s claim for coverage.» Additional insured homebuilder (Pulte) not covered under subcontractors policy for installation of EIFS since your work exclusion precluded damage to named insured s work.» Pulte s own CGL would not have precluded coverage since it was work of subcontractor. CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 41

42 Exclusion l: Damage To Your Work Wanzek Constr., Inc. v. Emplrs. Ins., 679 N.W.2d 322 (Minn. 2004):» Who qualifies as a subcontractor? CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux mdevereux@tresslerllp.com 42

43 Exclusion l: Damage To Your Work Nautilus Insurance v. Board of Directors of Regal Lofts Condominiums, 2014 U.S. App. LEXIS (7 th Cir., August 21, 2014)» Products-completed operations hazard exclusion CALIFORNIA ILLINOIS NEW JERSEY NEW YORK Matthew J. Devereux 43

44 Exclusion M Impaired Property Exclusion Kristine M. Sorenson Walker Wilcox Matousek LLP 1001 McKinney Street, Suite 2000 Houston, Texas (713) ksorenson@wwmlawyers.com

45 EXCLUSION (m) Property damage to impaired property or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy, or dangerous condition in your product or your work ; or (2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to your product or your work after it has been put to its intended use. 45

46 Property damage means a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the occurrence that caused it. 46

47 Impaired property means tangible property, other than your product or your work that cannot be used or is less useful because: a. It incorporates your product or your work that is known or thought to be defective, deficient, inadequate or dangerous; or b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by: a. The repair, replacement, adjustment or removal of your product or your work ; or b. Your fulfilling the terms of the contract or agreement. 47

48 Your product a. Means: (1) Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by: (a) You; (b) Others trading under your name; or (c) A person or organization whose business or assets you have acquired; and (2) Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products. 48

49 Your product (continued) b. Includes (1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your product ; and (2) The providing of or failure to provide warnings or instructions. c. Does not include vending machines or other property rented to or located for the use of others but not sold. 49

50 Your work : a. Means: (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. b. Includes: (1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your work, and (2) The providing of or failure to provide warnings or instructions. 50

51 Purpose of Exclusion M Applies when a third party s property cannot be used because the insured s work or product, which is incorporated into the third party s property, is defective or inadequate. Applies to contractors ( your work ) and manufacturers ( your product ). Viewed as a business risk exclusion prohibits insured from recovering funds to correct deficiencies caused by its own defective performance. CGL policy is not a guarantee of the insured s work. CGL policy is not a performance bond or warranty that the insured s work or product is good. No coverage for economic loss or purely contractual damages claimed by the third party. 51

52 Purpose of Exclusion M To prevent the insured from recovering the cost of repairing or replacing the defective product or work, and/or for a third-party s economic losses resulting from loss of use of its property. But, does Exclusion (m) apply if the defective product is permanently attached to a thirdparty s property, and the third-party s property is damaged when the defective product is ripped out and replaced? 52

53 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, Certified questions to the Texas Supreme Court from the 5 th Circuit. 589 Fed. Appx. 659 (5 th Cir. 2014). U.S. Metals sold flanges to Exxon to be installed at two refineries. A subcontractor welded the flanges to pipes. Once welded together, the flange/pipe combinations were coated and insulated to withstand high temperatures. During post-installation testing, Exxon discovered a leak in one of the flanges. U.S. Metals had subcontracted the manufacture of the flanges to Maass Flange Corporation. The flanges were improperly manufactured against industry standards. Exxon wanted to replace all flanges with new ones from a different manufacturer. 53

54 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, The refineries were shut down for several weeks while repairs were made. Exxon s corporate representative testified that the leaks were discovered at the testing stage when the refineries were not operational. Exxon claimed damages in excess of $23 million. Exxon sued U.S. Metals and Maass in Texas state court. Exxon and U.S. Metals settled for $2.2 million. 54

55 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, U.S. Metals requested coverage from Liberty Mutual, its commercial general liability insurer. Liberty Mutual declined coverage under Exclusion (k) and Exclusion (m). U.S. Metals sued Liberty Mutual in federal court. The court granted summary judgment to Liberty Mutual. U.S. Metals appealed to the 5 th Circuit. 55

56 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, Liberty argued that Exclusion m bars coverage because there is physical damage (i.e. loss of use) to impaired property (the Exxon facility) arising from U.S. Metal s defective product (the flange) that was incorporated into someone else s property (the pipes in the Exxon facility). Liberty argued that the exception to Exclusion m does not apply because (1) the Exxon facilities were not operational so there is no evidence the flanges were put to their intended use; and (2) there was no sudden and accidental physical injury to the flanges (just defective). 56

57 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, U.S. Metal argued that Exclusion m does NOT apply because Exxon s facility was physically injured when the defective flanges were attached to the pipes ( incorporation theory ). U.S. Metal also argued that the exception to Exclusion m applies because the flanges suddenly and accidentally failed during pressure testing, which led to the loss of use of the Exxon facilities. 57

58 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, th Circuit certified four questions to the Texas Supreme Court, which were accepted. The Texas Supreme Court issued its decision on December 4, The four certified questions were distilled by the Texas Supreme Court into two inquires: 58

59 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, Did installation of the faulty flange constitute an injury to the whole product? ANSWER: No. Installation of a defective product is not physical damage. The court rejected the incorporation theory advanced by U.S. Metals - where a product is considered physically damaged when its value is lessened by a faulty component. The court adopted the actual harm theory where physical injury requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system. Faulty flanges and the loss of use of the diesel units were not covered. 59

60 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, other U.S. courts have expressly rejected the incorporation theory : FLORIDA: U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007). TENNESSEE: Travelers Indem. Co. of Am. V. Moore & Assoc., Inc., 216 S.W.3d 302 (Tenn. 2007) NEVADA: United National Ins. Co. v. Frontier Ins. Co., 99 P.3d 1153 (Nev. 2004). OREGON: Wyo. Sawmills, Inc. v. Transp. Ins. Co., 578 P.2d 1253 (Ore. 1978). GEORGIA: Taylor Morrison Servs., Inc. v. HDI-Gerling Am. Ins. Co., 746 S.E.2d 587 (Ga. 2013). 60

61 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, U.S. Courts have implicitly rejected the incorporation theory : CONNECTICUT: Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 67 A.3d 961 (Conn. 2013). SOUTH CAROLINA: Crossmann Cmtys. of N.C. Inc. v. Harleysville Mut. Ins. Co., 717 S.E.2d 589 (S.C. 2011). NEW HAMPSHIRE: Concord Gen. Mut. Ins. Co. v. Green & Co. Bldg. & Dev. Corp., 8 A.3d 24 (N.H. 2010). WISCONSIN: Vogel v. Russo, 613 N.W.2d 177 (Wis. 2000). WASHINGTON: Mut. Of Enumclaw Ins. Co. v. T & G Constr., Inc., 199 P.3d 376 (Wash. 2008). 61

62 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, Two U.S. courts followed the incorporation theory : MONTANA: Swank Enters, Inc. v. All Purpose Servs., Ltd., 154 P.3d 52 (Mont. 2007). WYOMING: Helm v. Bd. Of Cty. Comm rs., 989 P.2d 1273 (Wyo. 1999). 62

63 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 490 S.W.3d 20 (Tex. 2015), reh g denied June 17, Is property restored to use by replacing a faulty component when the property must be altered, damaged, and repaired in the process? ANSWER: No. The coating, insulation and gaskets were destroyed when the faulty flanges were removed from the pipes. Those parts were replaced and not restored to their intended use. 63

64 U.S. Metals, Inc. v. Liberty Mutual Group, Inc., 2017 WL (S.D. Tex. Feb. 27, 2017). - REMAND. What does this mean? 5 th Circuit remanded the case to the S.D. Texas to apply the law set forth by the Texas Supreme Court. The District Court held that Liberty Mutual must indemnify U.S. Metals for the costs of welds, coating, insulation, and gaskets that were destroyed and replaced during the removal process. The defective flanges themselve are not covered even if they were destroyed when removed. 64

65 Recent Exclusion M Cases Global Modular, Inc. v. Kadena Pacific, Inc., 15 Cal.App.5 th 127, 222 Cal.Rptr.3d 819 (Cal. App. 2017)(Exclusion M does not apply because to delay damages incurred by third party after buildings constructed by the insured were damaged by rain). Phoenix Ins. Co. v. Ed Boland Construction, Inc., 229 F. Supp. 3d 1183 (D. Montana 2017)(Exclusion M precludes coverage for loss of use of a hydraulic crane and other equipment due to unforeseen circumstances that caused the insured s work to be inadequate). Navigators Specialty Ins. Co. v. Guild Associates, Inc., 2016 WL (S.D. Ohio Nov. 28, 2016)(fact issue as to whether Exclusion M applies to claim for loss of revenue caused by insured s defective product). 65

66 Recent Exclusion M Cases Auto-Owners Ins. Co. v. High Country Coatings, Inc., 2017 WL (D. Colo. June 12, 2017)(Exclusion M does not apply because the defective coating applied by the insured damaged the floor owned by a third party). Wisconsin Pharmacal Co., LLC v. Nebraska Cultures of California, Inc., 876 N.W.2d 72 (Wis. 2016)(Exclusion M precludes coverage because the incorporation of the insured s defective ingredient into a probiotic supplement tablet did not result in loss of use of property, nor was there sudden and accidental property damage). Auto-Owners Ins. Co. v. Timbersmith, Inc., 2016 WL (D. Utah June 15, 2016)(Exclusion M bars coverage for loss of use of property caused by defective framing). 66

67 Recent Exclusion M Cases Park-Ohio Holdings Corp. v. Liberty Mutual Fire Ins. Co., 142 F. Supp. 3d 556 (N.D. Ohio 2015)(coverage for replacement of defective washers covered under the exception to Exclusion M for loss of use of other property arising out of sudden and accidental physical injury to your product... after it has been put to its intended use. Artisan & Truckers Casualty Co. v. Hanover Ins. Co., 126 F. Supp. 3d 998 (N.D. Ill. 2015)(Exclusion M precludes coverage for loss of stolen cargo because the cargo was not physically injured but there was a loss of use of the cargo). 67

68 Recent Exclusion M Cases Thruway Produce, Inc. v. Massachusetts Bay Ins. Co., 114 F. Supp. 3d 81 (W.D.N.Y. 2015)(tainted baby food is not impaired property because it cannot be restored to use by repair, removal, or replacement of the work or product, or by fulfilling the terms of the contract. ) Wardcraft Homes, Inc. v. Employers Mut. Casualty Co., 70 F.Supp. 3d 1198 (D. Co. 2014)(Exclusion M precludes coverage for loss of use of modular home that was defective, but could be restored to use by the repair, replacement, adjustment or removal of the insured s work or product or if the insured fulfilled the terms of the contract or agreement.) 68

69 Recent Exclusion M Cases XL Specialty Ins. Co. v. Bollinger Shipyards, Inc., 57 F. Supp. 3d 728 (E.D. La. 2014)(Exclusion M does not apply because the property would not become usable by fixing the insured s defective work). North Star Mutual Ins. Co. v. Rose, 27 F. Supp. 3d 1250 (E.D. Okla. 2014)(Exclusion M does not apply because other property would need to be damaged to fix the defective HVAC system). Regional Steel Corp. v. Liberty Surplus Ins. Corp., 173 Cal. Rptr. 3d 91 (Cal. App. 2014)(Exclusion M bars coverage for allegations that the insured failed to properly perform its work, but where no property damage occurred). 69

70 Recent Exclusion M Cases Netherlands Ins. Co. v. Main St. Ingredients, LLC, 745 F.3d 909 (8 th Cir. 2014)(Exclusion M does not apply to tainted oatmeal, because it could not be restored to use). Harleysville Worcester Ins. Co. v. Paramount Concrete, Inc., 10 F. Supp. 3d 252 (D. Conn. 2014)(Exclusion M does not apply because the insured s product defective liquid shotcrete could not be removed from the property in which it was inserted). 70

71 Work of Subcontractors - Exclusion CG Exclusion (l) is replaced by the following: This insurance does not apply to: l. Damage To Your Work Property damage to your work arising out of it or any part of it and included in the products-completed operations hazard. 71

72 Work of Subcontractors - Exclusion CG Products-completed operations hazard : Includes all bodily injury and property damage occurring away from premises you own or rent and arising out of your product or your work. 72

73 Work of Subcontractors - Exclusion CG Products-completed operations hazard exceptions: (1) Products that are still in your physical possession; or (2) Work that has not yet been completed or abandoned. However, your work will be deemed completed at the earliest of the following times. a. When all of the work called for in your contract has been completed. b. When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site. c. When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed. 73

74 Work of Subcontractors - Exclusion CG Products-completed operations hazard does not include: bodily injury or property damage arising out of: (1) The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the loading or unloading of that vehicle by any insured; (2) The existence of tools, uninstalled equipment or abandoned or unused materials; or (3) Products or operations for which the classification, listed in the Declarations or in a policy schedule, states that products-completed operations are subject to the General Aggregate Limit. 74

75 Purpose of Exclusion CG General contractors hire subcontractors to perform work on a portion of the project. General contractors can be sued for defective work by subs. Exclusion (l) ( your work exclusion) precludes coverage for damage to the general contractor s work if the damage arises out of any part of it and occurs after the work is completed. Exclusion (l) contains an exception for work performed by a subcontractor on the general contractor s behalf. 75

76 Purpose of CG CG eliminates the subcontractor exception to Exclusion (l). Faulty construction is viewed as a business risk and not insurable. CGL policy is not a guarantee or warranty of the subcontractor s work. Eliminates completed operations coverage for general contractors. 76

77 Cases involving CG Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007). U.S. Fire Ins. Co. v. J.S. U.B., Inc., 979 So.2d 871 (Fla. 2007). Builders Mut. Ins. Co. v. Kalman, 2009 WL (D.S.C. Dec. 8, 2009). Builders Mut. Ins. Co. v. Wingard Properties, Inc., 2010 WL (D.S.C. July 1, 2010). Haskins Const., Inc. v. Mid-Continent Cas. Co., 2011 WL (D. Mont. Nov. 3, 2011). 77

78 Cases involving CG Lukes v. Mind-Continent Cas. Co., 2013 WL (D. Mont. Feb. 11, 2013). Penn Nat. Sec. Ins. Co. v. Design-Build Corp., 2012 WL (D.S.C. July 9, 2012). Grinnell Mut. Reinsurance Co. v. Wollack Const., Inc., 2010 WL (D. Minn. Oct. 15, 2010). American Home Assurance Co. v. SMG Stone Co., Inc., 119 F. Supp. 3d 1053 (N.D. Cal. 2015). 78