The 10th Circuit Correctly Construes “That Particular Part” Narrowly

David Smith | Farella Braun & Martel | April 12, 2019

We do not often write about coverage opinions from jurisdictions as far away as Oklahoma; however, a recent case from the Federal Tenth Circuit looked at one of our favorite topics and came out with a much better reasoned opinion than recent decisions from the Ninth Circuit.

I’ve written before on the topic of the meaning of “that particular part” as the phrase is used in exclusions j (5) and j(6) of the Commercial General Liability (“CGL”) policy.  The “j” exclusions exclude coverage for damage to certain property.  Specifically, the j (5) and (6) exclusions state that the insurance does not apply to:

(5)    That particular part of real property on which you or any contractors or subcontractors working directly indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or

(6)    That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

The part of these exclusions that some courts consistently get wrong is the meaning of the phrase “that particular part.”  In particular, in June 2017 I wrote about the way the Ninth Circuit (supposedly applying California law) has on several occasions ignored the insurance industry’s own explanation of the meaning of the phrase “that particular part” and applied the exclusion to the entire project a contractor was working on.

Ninth Circuit Finds Policy’s Definition of “Policy Period” Fatal to Insurer’s “Related Claims” Argument

Jason M. Taylor | Insurance Law Blog | March 27, 2019

Professional liability policies often include some form of a “related claims” or “related acts” provision stating that if more than one claim results from a single wrongful act, or a series of related wrongful acts, such claims will be treated as a single claim and deemed first made during the policy period in which the earliest claim was made.  These provisions can have significant implications on the applicable policy and policy limits, retroactive date issues, and whether such claims were first made and reported during a particular policy period.  Recently, the Ninth Circuit issued a stern reminder of how the particular policy language can effect, and in this case thwart, the intended scope of the carrier’s “related claims” provision.

In Attorneys Ins. Mut. Risk Retention Grp., Inc. v. Liberty Surplus Ins. Corp., 2019 WL 643442 (9th Cir. Feb. 15, 2019), the Ninth Circuit construed a “related claims” provision included in two consecutive lawyers professional liability policies. During both the 2009–2010 and 2010–2011 insurance policy periods, attorney J. Wayne Allen (“Allen”) was insured through his employer by Liberty Surplus Insurance Corporation’s (“Liberty”) professional liability insurance.  Third parties filed suit against Allen during the 2009–2010 policy period in a probate case, and a second, related civil suit during the 2010–2011 policy period.  

The 2010–2011 Policy was a “claims-made and reported policy,” which required that any claim made during the 2010–2011 policy period against the insured be reported during the 2010–2011 policy period. One provision limited Liberty’s liability for multiple related claims and provided, in relevant part:

Claims alleging, based upon, arising out of or attributable to the same or related acts, errors or omissions shall be treated as a single Claim regardless of whether made against one or more than one Insured. All such Claims, whenever made, shall be considered first made during the Policy Period or any Extended Reporting Period in which the earliest Claim arising out of such acts, errors or omissions was first made, and all such Claims shall be subject to the same Limits of Liability.

The earlier probate suit was not reported to Liberty until the second policy period.  When the civil suit was reported to Liberty (within the 2010-2011 policy period in which the claim was made), Liberty declined coverage for Allen in the civil action. Liberty argued that the “related claims” provision in the 2010–2011 Policy limited coverage so that if multiple claims regarding the same set of facts are made against an insured in multiple policy periods, the claims are all considered initially made during the policy period in which the first claim is made.  Here, Liberty argued that by virtue of the “related claims” provision, both the probate case and related civil suit were deemed to have been first made during the 2009-2010 Policy period, when the original probate suit was first made.  Further, because claims must be reported during the policy period in which they are made, Liberty asserted that it had no obligation to defend Allen against the civil action because he failed to report the earlier, related probate claim during the 2009–2010 policy period.  

The District Court rejected Liberty’s argument, and the Ninth Circuit affirmed.  The court’s analysis involved interpretation of one of the 2010–2011 Policy’s defined terms, “Policy Period.” In particular, the 2010–2011 Policy defined “Policy Period” as “the period from the Inception Date of this Policy to the Policy Expiration Date as set forth in the Declarations or its earlier termination date, if any.” The “Declarations” identified the policy period as from July 31, 2010 until July 31, 2011. According to the court, the specific definition of “Policy Period” within the 2010-2011 Policy precluded Liberty’s interpretation of the “related claims” provision.

The District Court reasoned that “[a]dopting Liberty’s interpretation would require the court to give different meanings to the same term used in the same policy, which would run afoul of the rules of contract interpretation.” Rather, the court held that the definition of “Policy Period” necessitated that the “related claims” provision be read to mean any relevant claims will be “considered first made during the Policy Period,” i.e., during the period from July 31, 2010, until July 31, 2011.  In other words,the specific policy language in the 2010-2011 Policy only applied to “related claims” made within the 2010-2011 Policy period and that such claims will be deemed made when the earliest of claims was made during that policy period only, and not the prior policy period.  The Ninth Circuit held that Liberty’s chosen definition of “Policy Period” may create an ambiguity in the meaning of the multiple related claims provision as a whole, but it nevertheless sided against Liberty as any ambiguities in an insurance policy are resolved against the insurer.

CGL Provides No Coverage for Damage to the Insured’s Work

Barry Zalma | Zalma on Insurance | March 22, 2019

Construction contracts are risk transfer devices. The owner shifts the risk of loss to the general contractor who shifts the risk of loss to subcontractors and all shift the risks of loss to their insurers. Commercial General Liability (CGL) policies agree to accept the risk of loss faced by those insured by the CGL for an “occurrence” happening during the policy period. It does not, however, provide coverage for the general costs of doing business.

In Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., and Amerisure Insurance Company and Amerisure Mutual Insurance Company, Skanska USA Building Inc. v. M.A.P. Mechanical Contractors, Inc., Amerisure Insurance Company, And Amerisure Mutual Insurance Company, No. 340871, No. 341589, State of Michigan Court of Appeals (March 19, 2019) the Michigan Court of Appeals was asked to resolve a dispute over whether there was an “occurrence” as defined by the policy that required defense and indemnity.

The dispute arose from the faulty installation of parts in the steam heat system of a hospital construction project resulted in an insurance coverage dispute. The resulting damage required extensive repairs, in excess of $1 million. The insurance carrier, Amerisure Insurance Company (“Amerisure”), appealed an order denying its motion for summary disposition.

BASIC FACTS

Starting in 2008, plaintiff was the construction manager on a renovation project for Mid-Michigan Medical Center in Midland (“Medical Center” or “MMMC”). Plaintiff subcontracted the heating and cooling portion of the project to defendant M.A.P. Mechanical Contractors (“MAP”). MAP obtained a commercial general liability insurance policy (“CGL policy”) from Amerisure. Plaintiff and the Medical Center are named as additional insureds on the CGL policy.

In 2009, MAP installed a steam boiler and related piping for the Medical Center’s heating system. MAP’s installation included several expansion joints, which are designed to accommodate the expansion of the piping caused by the flowing steam. Plaintiff determined that MAP had installed some of the expansion joints backward. Significant damage to concrete, steel, and the heating system had occurred.

According to plaintiff, the cost of the repair and replacement work was approximately $1.4 million. Plaintiff submitted a claim to Amerisure seeking coverage as an insured. Plaintiff’s claim was denied.

Amerisure asserted several grounds for summary disposition, including: (1) MAP’s defective construction was not a covered occurrence within the CGL policy; (2) plaintiff failed to provide proper notice of a claim; (3) plaintiff entered into a settlement without Amerisure’s consent; and (4) several exclusions barred coverage.

The trial court denied Amerisure’s motion.

The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” However, the policy did not define the word “accident.”

Defective workmanship, standing alone, is not an occurrence within the meaning of a general liability insurance contract, an occurrence exists where the insured’s faulty work product damages the property of another.

There is no indication MAP purposefully installed the expansion joints backwards. The parties affected by MAP’s negligence did not anticipate, foresee, or expect backward expansion joints or property damage to the entire length of the underground steam and condensate lines.

ANALYSIS

The dispositive issue in this case is whether there was an “occurrence” triggering coverage. There was no genuine issue of material fact that plaintiff sought coverage for replacement of its own work product.

At issue was whether there was an “occurrence” triggering coverage. Because the policy did not define “accident,” the Court looked to a common definition of “accident,”  that anything that begins to be, that happens, or that is a result which is not anticipated and is unforeseen and unexpected by the person injured or affected thereby—that is, takes place without the insured’s foresight or expectation and without design or intentional causation on his part. In other words, an accident is an undesigned contingency, a casualty, a happening by chance, something out of the usual course of things, unusual, fortuitous, not anticipated, and not naturally to be expected.

The fortuity required is not what is commonly meant by a failure of workmanship. The court was unable to find in the policy language a reasonable basis to expect coverage for defective workmanship.

In sum, the court concluded that defective workmanship of the insured, standing alone, was not the result of an occurrence within the meaning of the insurance contract. Summary disposition was properly granted on this issue.

A fundamental tenet of Michigan jurisprudence, like that of every state, is that unambiguous contracts are not open to judicial construction and must be enforced as written. Courts enforce contracts according to their unambiguous terms because doing so respects the freedom of individuals freely to arrange their affairs via contract. The general rule of contracts is that competent persons shall have the utmost liberty of contracting and that their agreements voluntarily and fairly made shall be held valid and enforced in the courts.

The Michigan Court of Appeal noted that it is an established principle of law that an “occurrence” cannot include damages for the insured’s own faulty workmanship. Amerisure was, therefore, entitled to judgment as a matter of law because coverage was not triggered due to lack of an “occurrence” and there is no genuine issue of material fact that the only damage was to plaintiff’s own work product (rather, that of its subcontractor).

Because there is no coverage, there was no need to address whether any of the exclusions apply or whether conditions precedent were met.

ZALMA OPINION

CGL policies provide extensive coverage to its policyholders. It does not, however, cover every potentiality. It will never provide coverage for a loss that is not fortuitous, contingent or an unknown event. It will not protect the policyholder from damage caused by the policyholder’s own negligence to its own product. For that reason judgment was entered in favor of the insurer.

Tenth Circuit: That “Particular Part” Deemed Ambiguous

Nadia A. Buraighis | Cozen O’Connor | February 25, 2019

On January 25, 2019, the U.S. Court of Appeals for the Tenth Circuit, applying Oklahoma law, held that the phrase “that particular part” is ambiguous and may refer to either the distinct component upon which an insured works or to all parts ultimately impacted by that work. MTI, Inc. v. Employers Ins. Co. of Wausau, No. 17-6206, 2019 WL 321423 (10th Cir. Jan. 25, 2019). Interpreting the phrase narrowly in favor of the insured, the Tenth Circuit held that the exclusion extends only to the distinct components upon which work was performed.

Western Farmers Electrical Cooperative (WFEC) owned cooling towers in Oklahoma, which were serviced by MTI, Inc. (MTI). After a 2011 inspection revealed that anchor bolts in MTI’s Cooling Tower 1 (Tower 1) were corroded, MTI and WFEC agreed to a repair contract for MTI to install new anchor castings. On May 23, 2011, MTI employees removed 64 corroded anchor bolts in Tower 1 but did not immediately install new anchor bolts. The next day, high winds caused structural damage to the tower, necessitating its removal and replacement. WFEC demanded that MTI pay the cost of removing and replacing the entire tower, which totaled more than $1.4 million.

MTI sought coverage under its commercial general liability policy with Employers Insurance Company of Wausau (Wausau). Wausau denied coverage under policy exclusions j(5) and j(6), which preclude coverage for property damage to:

  1. That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or
  2. That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.

MTI subsequently filed suit against Wausau in Oklahoma state court for breach of contract, which Wausau removed to the Western District of Oklahoma. On Wausau’s motion for summary judgment, the district court held that the alleged property damage fell within the scope of exclusions j(5) and j(6) and, consequently, entered judgment in favor of Wausau. MTI appealed.

The Tenth Circuit, relying on out-of-state authority, adopted the reasoning of those jurisdictions that interpret the exclusions narrowly to apply only to the distinct component upon which work was performed. Specifically, the Tenth Circuit noted that “the phrase ‘that particular part’ could be read to refer solely to the direct object on which the insured was operating. Alternatively, it could apply to those parts of the project directly impacted by the insured party’s work.” Id. at *3. Because the court deemed both readings permissible, the Tenth Circuit held that the exclusions were “facially ambiguous” and construed them strictly and narrowly in a manner favorable to MTI, the insured party. As a result, the court determined that the “particular part” on which MTI was “performing operations” and upon which work was “incorrectly performed” was the anchor bolts, which constitute “distinct component parts” of the tower. The Tenth Circuit reasoned that MTI performed work incorrectly by removing the anchor bolts without promptly replacing them or bracing the structure. Accordingly, the court concluded it was “objectively reasonable that MTI would expect coverage for the cost of replacing the entire tower, including all of its operational elements[.]” Id. at *4.

In reaching its holding, the Tenth Circuit rejected Wausau’s three arguments against coverage. First, the court dismissed Wausau’s argument that adopting this interpretation converted the policy into a performance bond. The court noted that MTI had not requested that Wausau cover the cost of replacing the anchor bolts, but rather sought coverage for damage to property other than MTI’s work. Second, the court declined to read an implied “business risk exclusion” into the policy, which it found would otherwise override the express language of the contract. Finally, the court rejected Wausau’s contention that the Tenth Circuit had previously decided this issue under Kansas law in Advantage Homebuilding, LLC v. Maryland Casualty Co., 470 F.3d 1003 (10th Cir. 2006), holding that, that case did not address the meaning of the phrase “that particular part.”

With this decision, the Tenth Circuit, interpreting Oklahoma law, joined those courts that interpret the damage to property exclusions j(5) and j(6) to extend only to the particular area of property on which the insured was working. See, e.g., Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 595 F.3d 308, 311 (6th Cir. 2010) (holding that “that particular part” applies only to building parts on which the defective work was performed, and not to the building generally); Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir. 2009) (finding “that particular part” language is used to distinguish the damaged property that was itself the subject of the defective work from other damaged property that was either the subject of non-defective work by the insured or that was not worked on by the insured at all).

This holding conflicts with holdings from other jurisdictions, such as the Seventh and Eighth Circuits, which broadly interpret the exclusion to extend beyond the specific area of the property being worked on to other parts of the property damaged by the defective work. See, e.g., W. Side Salvage, Inc. v. RSUI Indem. Co., No. 16-3928, 2017 WL 6422107 (7th Cir. Dec. 18, 2017); Spirtas Co. v. Nautilus Ins. Co., 715 F. 3d 667, 673 (8th Cir. 2013); William Crawford, Inc. v. Travelers Ins. Co., 838 F. Supp. 157 (S.D. N.Y. 1993). Following the MTI decision, insurers should carefully consider jurisdiction and choice of law when determining how to apply the j(5) and j(6) property damage exclusions.

Loss of Use can be “Property Damage” under Insurance Policies

Kevin Brodehl | Money & Dirt | February 10, 2019

General liability insurance policies normally cover “property damage.”  Physical injury to, or outright destruction of, property almost always fits within policy coverage.

But what about situations when the property is not physically injured at all, but the owner has lost important use rights associated with the property, such as the loss or alteration of a conditional use permit?

It all depends on the specific language in the insurance policy, as illustrated by a Court of Appeal opinion recently published by California’s Fourth Appellate District — Thee Sombrero, Inc. v. Scottsdale Insurance Company.

Background: insurance policy covers “loss of use;” property loses conditional use permit

Thee Sombrero, Inc. (Sombrero) owned commercial property in Colton, California.

The city issued a conditional use permit (CUP) authorizing the use of the property as a nightclub.  The CUP required city approval for the nightclub’s floor plan, and no modifications to the floor plan were allowed without city approval.

Sombrero’s tenant operated the nightclub.  Under the city-approved floor plan, the club had a single entrance door, equipped with a metal detector.

Crime Enforcement Services (CES) provided security services for the club.  CES obtained a corporate general liability policy from Scottsdale Insurance Company (Scottsdale).  The policy covered CES’s liability for “property damage,” which was defined as either “physical injury” to the property or “loss of use” of property that is not physically injured.

On June 4, 2007, one patron of the nightclub shot and killed another.  Investigation discovered that CES had created a second entrance to the club — a “VIP entrance” — that lacked a metal detector, and that the gun used in the killing got into the club through the VIP entrance.

The city revoked the CUP.  Sombrero eventually obtained a modified CUP allowing the property to be used as a banquet hall instead of a nightclub.

Sombrero sued CES for breach of contract and negligence, and obtained a default judgment in its favor for $923,078 — damages representing the diminution in value suffered by the property due to the lost CUP.

Sombrero then filed a direct action against Scottsdale under Insurance Code section 11580(b)(2) for breach of the insurance policy.

Trial court’s ruling: summary judgment granted for insurer

Scottsdale filed a motion for summary judgment, which the trial court granted.

The trial court held that Sombrero was essentially suing for “economic loss,” which was not the same thing as “lost use.”  Because the policy excluded coverage for mere economic loss, Scottsdale could not be liable, and the court entered judgment in Scottsdale’s favor.

Court of Appeal’s Opinion: insurer is on the hook

The Court of Appeal reversed the trial court’s judgment.

Looking to the language of the insurance policy, the court observed: “The loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’  It defies common sense to argue otherwise.”

Sombrero did not simply lose the CUP, as Scottsdale contended.  The court noted that “the appropriate focus is not on the loss of the entitlement, but rather on the loss of use of tangible property that results from the loss of the entitlement.”  Here, the revocation of the CUP meant that Sombrero could no longer use the property as a nightclub.

The court also rejected Scottsdale’s argument that a “total loss of all uses” would be required to trigger coverage.  The court held “the reasonable expectations of the insured would be that ‘loss of use’ means the loss of any significant use of the premises, not the total loss of all uses.”

The court acknowledged that strictly economic losses like lost profits, loss of goodwill, and investment losses typically are not covered by a comprehensive general liability policy.  Losses that are “exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”

But, those same items may be recovered from the insurer if they provide a measure of damages for a covered claim.  Here, diminution in value was an appropriate measure of damages for harm caused by the covered loss of use — the lost CUP.

Finally, the court emphasized that the language of the insurance policy will usually determine the outcome.  Where an insurance policy defines “property damage” more narrowly as “physical injury to or destruction of tangible property, including loss of its use,” the policy would not cover the loss of use of property that has not been physically damaged.

Lesson

“Loss of use” can sometimes be covered as “property damage” under general insurance liability policies.  But it all depends on how the policy language defines “property damage.”

While strictly economic losses are generally not recoverable, economic losses may be recoverable if they provide a measure of damages for property damage that is covered by the insurance policy.