Insurance Coverage for Faulty Products and Workmanship Claims

Transcription

2016 All-Ohio Legal Forum
Insurance Coverage for Faulty Products
and Workmanship Claims
Video Replay
1.0 General CLE Hours
1.0 Insurance Law Specialization
April 27 – April 29, 2016 ♦ Cincinnati
Speaker Biography
Stacy Berliner
OSBA Certified Specialist in Insurance Coverage Law
Thacker Martinsek LPA
Columbus, Ohio
Ms. Berliner received her BA from the College of Wooster and her JD from Cleveland State University
Cleveland-Marshall College of Law. Her professional memberships include the Cleveland Metropolitan Bar
Association, Ohio State Bar Association, and Ohio Women’s Bar Association (Mentoring Committee). Ms.
Berliner is a shareholder of her firm and a litigator who represents corporate policyholders in obtaining
recovery of insurance proceeds for their liabilities and losses relating to commercial liability policies, directors
and officers liability policies, construction, property and business interruption policies, professional liability
policies, and employment practices policies. Her experience includes assisting insureds in identifying and
analyzing historical coverage, counseling clients in coverage disputes against carriers and brokers, assisting
clients in policy interpretation, risk and litigation management, policy renewals, and successfully litigating
against insurance carriers who wrongfully deny coverage. Ms. Berliner also represents employers in
employment litigation and advises employers on compliance with Title VII, ADA, ADEA, FMLA, FLSA, and
similar state and local laws. In addition, she works with clients on developing strategies to resolve complex
corporate, real estate, construction contract, and business tort matters. Ms. Berliner represents clients
regularly in both state and federal courts and also has represented clients in negotiations, mediations,
arbitrations, and other forms of dispute. For additional information, please visit www.tmlpa.com.
Insurance Coverage for Faulty
Products and
Workmanship Claims
Stacy Berliner
Cleveland, Ohio
Table of Contents
I. Can Faulty Workmanship Constitute an Occurrence? ................................................................ 3
II. What Property Damage Is Covered as a Result of Faulty Workmanship? ................................. 5
III. Faulty Workmanship in Ohio ..................................................................................................... 6
A. Occurrence . ........................................................................................................................... 6
B. Property damage must be to non-insured work or products. ............................................... 7
IV. Business Risk Exclusions ............................................................................................................ 8
A. The “your work” exclusion. .................................................................................................... 9
B. The “your product” exclusion. ................................................................................................ 9
C. The “impaired property” exclusion. ..................................................................................... 11
D. The sistership exclusion. ...................................................................................................... 13
V. Conclusion ................................................................................................................................ 13
PowerPoint Presentation.............................................................................................................. 15
Insurance Coverage for Faulty Products and Workmanship Claims • i
ii • Insurance Coverage for Faulty Products and Workmanship Claims
Insurance Coverage for Faulty
Products and
Workmanship Claims
Stacy Berliner
Cleveland, Ohio
One of the hottest issues litigated in coverage actions today is whether there is coverage for
faulty workmanship under a standard commercial general liability (“CGL”) policy. Not only is the
issue highly litigated, but a trend has emerged in favor of coverage – sometimes, to the point,
of reversing prior contrary precedent. 1 Historically, absent damage to third-party property, the
majority view had been that faulty workmanship claims are not covered under CGL policies
because they do not arise from “occurrences.” 2 Recently, five state supreme courts joined the
Ms. Berliner would like to thank Nathan Oswald of Thacker Martinsek LPA for his contributions in assisting with
this material.
1
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44, *14-15 (Ala. Mar. 28, 2014) (finding
that adopting the insurer’s reasoning would make it “guilty of issuing illusory coverage.”); Pennsylvania: Indalex v.
National Union Fire Insurance Co. of Pittsburgh Pa., No. 126 WAL 2014 (Pa. Sept. 18, 2014) (defective product may
constitute an occurrence, triggering general liability insurance coverage under Pennsylvania law); West Virginia:
Cherrington v. Erie Ins. Property & Cas. Co., 231 W.Va 470, 745 S.E.2d 508, 517 (2013) (“While we appreciate this
Court’s duty to follow our prior precedents, we also are cognizant that stare decisis does not require this Court’s
continued allegiance to cases whose decisions were based upon reasoning which has become outdated or fallen
into disfavor.”).
2
Arkansas: Essex Ins. Co. v. Holder, 372 Ark. 535, 540, 261 S.W.3d 456 (2008) (“defective workmanship standing
alone -- resulting in damages only to the work product itself -- is not an occurrence under a CGL policy such as the
one at issue here.”); Delaware: Westfield Insurance Co. Inc. v. Miranda & Hardt Contracting and Building Services
LLC, case number N14C-06-214 AL, (“An allegation of defective workmanship does not constitute an ‘occurrence’
for which the policy grants coverage or triggers plaintiff’s duty to defend or indemnify defendant in the underlying
lawsuit.”); Hawai’i: Group Builders Inc. v. Admiral Ins. Co., 123 Hawai’i 142, 148, 231 P.3d 67, 73 (Ct. App. 2010)
(“We hold that under Hawai’i law, construction defect claims do not constitute an ‘occurrence’ under a CGL
policy.”); Illinois: State Farm Fire & Cas. Co. v. Tillerson, 334 Ill. App. 3d 404, 777 N.E.2d 986, 991, 268 Ill. Dec. 63,
68 (2002) (“Where the defect is no more than the natural and ordinary consequences of faulty workmanship, it is
not caused by an accident.”); Nebraska: Auto-Owners Ins. Co. v. Home Pride Cos., Inc., 268 Neb. 528, 535, 684
N.W.2d 571 (2004) (“a standard CGL policy does not provide coverage for faulty workmanship that damages only
the resulting work product”); New Hampshire: Brown v. Concord Group Ins. Co., 163 N.H. 522, 528 (N.H. 2012) (“to
constitute an ‘occurrence,’ the damage at issue must have been to property other than [the insured’s] work
product.”); New Jersey: Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 239, 405 A.2d 788 (1979) (pre-1986 CGL policy)
(“The consequence of not performing well is part of every business venture; the replacement or repair of faulty
goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers.”);
Ohio: Westfield Ins. Co. v. Custom Agri Syst., Inc., 133 Ohio St. 3d 476, ¶19 (2012) (“claims of defective
construction or workmanship brought by a property owner are not claims for ‘property damage’ caused by an
Insurance Coverage for Faulty Products and Workmanship Claims • 1
numerous other jurisdictions to hold that faulty workmanship resulting in property damage can
constitute an “occurrence.” 3 This material explores the complex nature of these issues and the
‘occurrence’ under a commercial general liability policy.”); Heile v. Herrmann, 136 Ohio App. 3d 351, 354, 736
N.E.2d 566 (1st Dist. 1999) (“[CGL] policies do not provide coverage where the damages claimed are the cost of
correcting the work itself. . . . Here, all of the Heiles’ claims allege defective workmanship in their home [namely,
‘deterioration of the driveway, walkway, and front porch, leaking of the roof and basement, and problems with
one of the steps to the porch, a Jacuzzi tub, windows, hardwood flooring, drywall, and bathroom tile.’]”); Auto
Owners Mut. Ins. Co. v. Kendrick, 5th Dist. No. 08-COA-028, 2009-Ohio-2169, ¶45 (“Courts generally conclude that
the policies are intended to insure the risks of an insured causing damage to other persons and their property, but
that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work.”);
Pennsylvania: Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., 908 A.2d 888 (Pa.
2006) (holding that, in certain circumstances, faulty workmanship does not constitute an “occurrence” because the
resulting damage is not truly “unexpected.”)
3
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44, *14-15 (Ala. Mar. 28, 2014) (“The
policy simply does not define ‘occurrence’ by reference to [nature or location of the property damaged]”); Alaska:
Fejes v. Alaska Ins. Co., 984 P.2d 519 (Alaska 1999); Connecticut: Capstone Bldg. Corp. v. Am. Motorists Ins. Co.,
308 Conn. 760, 776, 67 A.3d 961 (Conn. 2013) (“negligent . . . may constitute the basis for an ‘accident’ or
‘occurrence’ under the plain terms of the commercial general liability policy.”); Florida: United States Fire Ins. Co. v.
J.S.U.B., Inc., 979 So. 2d 871, 885 (Fla. 2007) (“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.”); Georgia: Taylor Morrison Services, Inc. v
HDI-Gerling Am. Ins. Co., Case No. S13Q0462, — S.E.2d —, 2013 Ga. LEXIS 618 (Ga. July 12, 2013) (holding that an
“occurrence” as the term is used in a standard CGL policy, does not require damage to the property or work of
someone other than the insured); Indiana: Sheehan Construction Co. v. Continental Casualty Co., 935 N.E.2d 160,
171-72 (Ind. 2010) (“faulty workmanship may constitute an accident and thus an occurrence”); Kansas: Lee
Builders, Inc. v. Farm Bureau Mut. Ins. Co., 281 Kan. 844, 859, 137 P.3d 486, 495 (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”); Maryland: French v.
Assurance Co. of Am., 448 F.3d 693, 706 (4th Cir. 2006) (“under Maryland law, a standard 1986 commercial
general liability policy form . . . does not provide liability coverage to a general contractor to correct defective
workmanship performed by a subcontractor. We also hold that, under Maryland law, the same policy form
provides liability coverage for the cost to remedy unexpected and unintended property damage to the contractor’s
otherwise nondefective work-product caused by the subcontractor’s defective workmanship.”); Minnesota:
Wanzek Construction v. Employers Ins. Co. 679 N.W.2d 322 (Minn. 2004) (upholding coverage for insured general
contractors for property damage arising out of the defective work of their subcontractors); Mississippi: Architex
Ass’n v. Scottsdale Ins. Co., 27 So. 3d 1148, 1162 (Miss. 2010) (“the term ‘occurrence’ cannot be construed in such
a manner as to preclude coverage for unexpected or unintended ‘property damage’ resulting from negligent acts
or conduct of a subcontractor, unless otherwise excluded or the insured breaches its duties after loss.”); North
Dakota: K & L Homes, Inc. v. American Family Mut. Ins. Co., 2013 N.D. 57, 829 N.W.2d 724, ¶26 (N.D. 2013) (“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.”); Pennsylvania: Indalex v. National Union Fire Insurance Co. of Pittsburgh Pa.,
No. 126 WAL 2014 (Pa. Sept. 18, 2014) (defective product may constitute an occurrence, triggering general liability
insurance coverage under Pennsylvania law); South Carolina: Crossmann Cmtys. of N.C. v. Harleysville Mut. Ins. Co.,
395 S.C. 40, 50, 717 S.E.2d 589 (S.C. 2011) (“negligent or defective construction resulting in damage to otherwise
non-defective components may constitute ‘property damage,’ but the defective construction would not.”);
Tennessee: Travelers Indem. Co. of Am. v. Moore & Assocs., 216 S.W.3d 302, 308 (Tenn. 2007) (“construing
‘accident’ in a manner that does not cover the insured’s negligence would render a CGL almost meaningless.”);
Texas: Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007) (“‘claims for damage caused by
an insured’s defective performance or faulty workmanship” may constitute an ‘occurrence’ when ‘property
damage’ results from the ‘unexpected, unforeseen or undesigned happening or consequence’ of the insured’s
negligent behavior.’”); West Virginia: Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508, 521 (W. Va. 2013)
(“defective workmanship causing bodily injury or property damage is an ‘occurrence’ under a policy of commercial
general liability insurance.”); Wisconsin: Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, 48 (Wis. 2004)
2 • Insurance Coverage for Faulty Products and Workmanship Claims
application of business risk exclusions. 4
I. Can Faulty Workmanship Constitute an Occurrence?
The standard CGL policy provides coverage for “property damage” that is caused by an
“occurrence.” Courts are split as to whether faulty workmanship constitutes an “occurrence”
and, thus, covered under a CGL policy. The term “occurrence” is generally defined as “an
accident, including continuous or repeated exposure to substantially the same general harmful
conditions.” The term “accident” is not defined in the policies. Courts have interpreted the term
“accident” to require some sense of fortuity or unexpected, unforeseen event from the
insured’s perspective. The primary inquiry then becomes what was foreseeable by the insured.
Some jurisdictions hold (and the position argued by most insurers) that unless there was
damage to third-party property, damage to the insured’s own work or product was not
unexpected or fortuitous, and that a contrary result would convert CGL policies into
performance bonds or warranties for a contractor’s goods or services. 5 These jurisdictions have
justified the presumption of foreseeability on the insured’s ability to control its and its
subcontractors’ work; therefore, the insured stands in the best position to assume the risk of
negligence. Insured contractors in these jurisdictions must be particularly carefully to select
competent subcontractors. 6
Conversely, policyholders argue that the proper inquiry is not whether the policyholder’s
actions (i.e., performing the construction work) are intended or expected, but whether the
resulting damage is expected or intended. Recently, a number of jurisdictions held that
unexpected and unforeseen consequences of faulty work, whether damage to the insured’s
own work or product, or the work or product of others, is accidental and therefore within a CGL
(“faulty workmanship of a subcontractor can give rise to property damage caused by an ‘occurrence’ within the
meaning of a CGL policy.”)
4
For purposes of this material, we will focus on the post-1986 policy language.
5
Arkansas: Essex Ins. Co. v. Holder, 372 Ark. 535, 540, 261 S.W.3d 456 (2008) (“our case law has consistently
defined an ‘accident’ as an event that takes place without one’s foresight or expectation -- an event that proceeds
from an unknown cause, or is an unusual effect of a known cause, and therefore not expected. . . . Faulty
workmanship is not an accident; instead, it is a foreseeable occurrence”); Hawai’i: Burlington Ins. Co. v. Oceanic
Design & Constr. Inc., 383 F.3d 940, 948 (9th Cir. 2004) (predicting Hawai’i law) (“In Hawaii, an occurrence ‘cannot
be the expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.’ . . . If Oceanic
breached its contractual duty by constructing a substandard home, then facing a lawsuit for that breach is a
reasonably foreseeable result.”) (internal citations omitted); Illinois: State Farm Fire & Cas. Co. v. Tillerson, 334 Ill.
App. 3d 404, 409 (Ill. App. Ct. 2002) (“Where the defect is no more than the natural and ordinary consequences of
faulty workmanship, it is not caused by an accident.”); New Hampshire: High Country Assocs. v. New Hampshire
Ins. Co., 139 N.H. 39, 43, 648 A.2d 474 (N.H. 1994) (“the fortuity implied by reference to accident or exposure is
not what is commonly meant by a failure of workmanship.”); Pennsylvania: Kvaerner Metals Div. of Kvaerner U.S.,
Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 333 (2006) (“The key term in the ordinary definition of ‘accident’ is
‘unexpected.’ This implies a degree of fortuity that is not present in a claim for faulty workmanship.”).
6
Kentucky: Cincinnati Ins. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69, 75 (Ky. 2010) (“It will also encourage
contractors to choose their subcontractors more carefully instead of having to seek indemnification from the
subcontractors after their work fails to meet the requirements of the contract.”); New Jersey: Weedo v. Stone-EBrick, Inc., 81 N.J. 233, 239, 405 A.2d 788 (1979) (“The insured-contractor can take pains to control the quality of
the goods and services supplied.”) (pre-1986 CGL policy).
policy’s coverage grant. 7 These courts have been unwilling to presume that insured contractors
foresee faulty workmanship – the insured had no intention to do a bad job. Moreover,
policyholders argue that if faulty workmanship is not an occurrence, it would render certain
business risk exclusions superfluous. 8
It matters to some courts that the faulty workmanship was performed by a subcontractor. The
insured contractor has less ability to control subcontractors’ work than the insured’s own work,
and some courts realize that it is unrealistic to believe that the insured can effectively manage
the risk of negligence by simply giving care to the selection of subcontractors. 9 Accordingly, a
compromise position refuses to find an occurrence in the insured’s faulty work, but may find an
occurrence in the faulty work of the insured’s subcontractors.10
7
Connecticut: Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 308 Conn. 760, 776, 67 A.3d 961 (Conn. 2013)
(“because negligent work is unintentional from the point of view of the insured, we find that it may constitute the
basis for an ‘accident’ or ‘occurrence’ under the plain terms of the commercial general liability policy.”); Florida:
United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 888 (Fla. 2007) (“We hold that faulty workmanship that is
neither intended nor expected from the standpoint of the contractor can constitute an ‘accident’”); Indiana:
Sheehan Construction Co. v. Continental Casualty Co., 935 N.E.2d 160, 170 (Ind. 2010) (“if the faulty workmanship
is ‘unexpected’ and ‘without intention or design’ and thus not foreseeable from the viewpoint of the insured, then
it is an accident within the meaning of a CGL policy.”); Tennessee: Travelers Indem. Co. of Am. v. Moore & Assocs.,
216 S.W.3d 302, 309 (Tenn. 2007) (“the determination of whether an ‘accident’ has occurred under the terms of a
CGL requires us to determine whether damages would have been foreseeable if the insured had completed the
work properly.”); West Virginia: Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508, 520 (W. Va. 2013) (“Nor
can it be said that Pinnacle deliberately intended or even desired the deleterious consequences that were
occasioned by its subcontractors’ substandard craftsmanship.”); Wisconsin: Am. Family Mut. Ins. Co. v. Am. Girl,
Inc., 673 N.W.2d 65, ¶38 (Wis. 2004) (“No one seriously contends that the property damage to the 94DC was
anything but accidental (it was clearly not intentional), nor does anyone argue that it was anticipated by the
parties.”).
8
Ohio: Acme Constr. Co., Inc. v. Continental Nat. Indem. Co., 8th Dist. No. 81402, 2003-Ohio-434, ¶ 13 (finding that
cases holding that there is no occurrence for faulty workmanship ignored the policy exclusions).
9
Florida: United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 890 (Fla. 2007) (“it is as a practical matter very
difficult for the general contractor to control the quality of the subcontractor work. Only if the contractor has a
supervisor at the elbow of each subcontractor at all times can quality control be relatively assured--but this would
be prohibitively expensive.”); West Virginia: Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508, 520 (W. Va.
2013) (“It goes without saying that the damages incurred by Ms. Cherrington during the construction and
completion of her home, or the actions giving rise thereto, were not within the contemplation of Pinnacle when it
hired the subcontractors alleged to have performed most of the defective work. Common sense dictates that had
Pinnacle expected or foreseen the allegedly shoddy workmanship its subcontractors were destined to perform,
Pinnacle would not have hired them in the first place.”).
10
Utah: Great Am. Ins. Co. v. Woodside Homes Corp., 448 F. Supp. 2d 1275, 1281 (D. Utah 2006) (“Utah case law
indicates that an insured’s own faulty or negligent work is not fairly characterized as an occurrence under a
commercial general liability policy. . . . But it appears that no court has yet applied Utah law to [determine] . . .
whether faulty work by a subcontractor is an occurrence from the standpoint of an insured employing that
subcontractor. . . . Given the Utah Supreme Court’s focus on the acts of the insured when determining whether
there has been an occurrence, it follows that the negligent acts of Woodside’s subcontractors can be considered
an occurrence from Woodside’s ‘point of view.’”). Mississippi Architex Ass’n v. Scottsdale Ins. Co., 27 So. 3d 1148
(Miss. 2010) (concluding that an “accident” depends on whether injury resulted from a chain of events that was set
in motion by the insured without intervention from a third-party, but that merely hiring a subcontractor is
insufficient to conclude that the subcontractor’s faulty work is not an “accident” from the standpoint of the
insured).
II. What Property Damage Is Covered as a Result of Faulty
Workmanship?
The standard form definition of “property damage” makes no reference to the nature,
ownership, or location of property damaged.11 Instead, “property damage” is defined as
“[p]hysical injury to tangible property including all resulting loss of use of that property.”
Notwithstanding, jurisdictions have taken varying positions regarding what property damage is
within the scope of an “occurrence” in a CGL policy.
Jurisdictions that deem faulty workmanship to be foreseeable – and therefore not an
“accident” – have no need to determine whether damage to the insured’s property is “property
damage.” However, those same jurisdictions often still hold that “property damage” to noninsured’s property is not foreseeable and may constitute an “occurrence.” 12 In other words,
there is coverage for damage to other’s property caused by the insured’s faulty workmanship,
but there may not be coverage for damage to the insured’s work or product.
Courts that interpret “occurrence” as potentially including the insured’s work product,
however, often distinguish between costs to repair or replace the faulty work itself – which may
not covered – and costs to repair or replace damage to some other aspect of the insured’s work
11
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44, *14-15 (Ala. Mar. 28, 2014) (“If some
portion of the Owners policy seeks to affect coverage by references to the nature or location of the property
damaged, it is not the provision in the policy for coverage of occurrences. The policy simply does not define
“occurrence” by reference to such criteria.”); Connecticut: Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 308
Conn. 760, 776 n.17, 67 A.3d 961 (Conn. 2013) (“The commercial general liability policy does not define occurrence
by reference to the ownership of damaged property.”); Florida: United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So.
2d 871, 889 (Fla. 2007) (“the definition of ‘property damage’ in the CGL policies does not differentiate between
damage to the contractor’s work and damage to other property.”); North Dakota: K & L Homes, Inc. v. American
Family Mut. Ins. Co., 2013 N.D. 57, 829 N.W.2d 724, ¶27 (N.D. 2013) (“the damage to the home [of which the
insured was the general contractor] is stated as including cracks, unevenness, and shifting, all of which would fall
within ‘physical injury’ to ‘tangible property’ for purposes of the CGL policy”); Texas: Lamar Homes, Inc. v. MidContinent Cas. Co., 242 S.W.3d 1, 10 (Tex. 2007) (“The policy defines ‘property damage’ as ‘[p]hysical injury to
tangible property, including all resulting loss of use of that property.’ On its face, this definition does not eliminate
the general contractor’s work. The home and its component parts are clearly ‘tangible property.’”).
12
Georgia: Am. Empire Surplus Lines Ins. Co. v. Hathaway Dev. Co., 288 Ga. 749, 752 (Ga. 2011) (“[an] occurrence
can arise where faulty workmanship causes unforeseen or unexpected damage to other property.”); Nebraska:
Auto-Owners Ins. Co. v. Home Pride Cos., Inc., 268 Neb. 528, 535, 684 N.W.2d 571 (2004) (“although a standard
CGL policy does not provide coverage for faulty workmanship that damages only the resulting work product, if
faulty workmanship causes bodily injury or property damage to something other than the insured’s work product,
an unintended and unexpected event has occurred, and coverage exists.”) New Hampshire: Brown v. Concord
Group Ins. Co., 163 N.H. 522, 528 (N.H. 2012) (“to constitute an ‘occurrence,’ the damage at issue must have been
to property other than [the insured’s] work product.”); New Jersey: Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 240
(N.J. 1979) “When a craftsman applies stucco to an exterior wall of a home in a faulty manner . . . the poorlyperformed work will perforce have to be replaced or repaired by the tradesman or by a surety. On the other hand,
should the stucco peel and fall from the wall, and thereby cause injury to the homeowner or his neighbor standing
below or to a passing automobile, an occurrence of harm arises which is the proper subject of risk-sharing”); Ohio:
Westfield Ins. Co. v. Custom Agri Systems, Inc., 133 Ohio St. 3d 476, ¶13 (2012); (Indiana Ins. Co. v. Alloyd Insulation
Co., 2d Dist. No. 18979, 2002 Ohio 3916, ¶27-28) (“‘Coverage analysis largely turns on the damages sought. If the
damages are for the insured’s own work, there is generally no coverage. If the damages are consequential and
derive from the work the insured performed, coverage generally will lie. The underwriting intent is to exclude
coverage for the contractor’s business risks, but provide coverage for unanticipated consequential damages.’”).
product, which may be covered.13
The Supreme Court of South Carolina identified the “the critical phrase” of determining
“property damage” to be whether there exists “‘physical injury,’ which suggests the property
was not defective at the outset, but rather was initially proper and injured thereafter.” 14 In a
prior case from the Supreme Court of South Carolina,
a homeowner brought a suit against a builder. . . . The homeowner established that
a subcontractor negligently applied stucco to the side of her house and, as a result,
progressive damage ensued as water seeped into the home. . . . We held that the
costs of replacing the defective application of the stucco were not covered by the
builder's CGL policy, but the damage caused by the continuous moisture
intrusion . . . did fall within the CGL's expansive definition of an occurrence.
Id. at 48. The stucco in that case had not suffered a “physical injury” and therefore was not
“‘property damage’ under the terms of the policy. The stucco was not ‘injured.’” Id. at 49. It had
just been misapplied, which allowed damage to occur to other parts of the insured’s work
product, the building. “[T]he damage to the remainder of the project caused by water
penetration due to the negligently installed stucco did constitute ‘property damage.’” Id.
III. Faulty Workmanship in Ohio
A. Occurrence .
The occurrence issue was partially answered by the Ohio Supreme Court. In response to
certified questions from the United States Court of Appeals for the Sixth Circuit, the Ohio
Supreme Court in Westfield Ins. Co. v. Custom Agri Sys., Inc. 2012-Ohio-4712, 133 Ohio St. 3d
13
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44, *13 (Ala. Mar. 28, 2014) (“we may
conclude that faulty workmanship itself is not an occurrence but that faulty workmanship may lead to an
occurrence if it subjects personal property or other parts of the structure to ‘continuous or repeated exposure’ to
some other ‘general harmful condition,’ and, as a result of that exposure, personal property or other parts of the
structure are damaged.”); Connecticut: Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 308 Conn. 760, 784, 67 A.3d
961 (2013) (“a claim ‘in which the sole damages are for replacement of a defective component or correction of a
faulty installation’ was not within the policy’s definition of property damage. . . . Without more, this alleged defect
is the equivalent of the ‘mere inclusion of a defective component’ . . . and no ‘property damage’ has occurred.”)
(internal citations omitted); Florida: United States Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 889 (Fla. 2007)
(“there is a difference between a claim for the costs of repairing or removing defective work, which is not a claim
for ‘property damage,’ and a claim for the costs of repairing damage caused by the defective work, which is a claim
for ‘property damage.’”); Maryland: French v. Assurance Co. of Am., 448 F.3d 693, 706 (4th Cir. 2006) (“under
Maryland law, a standard 1986 commercial general liability policy form . . . does not provide liability coverage to a
general contractor to correct defective workmanship performed by a subcontractor. We also hold that, under
Maryland law, the same policy form provides liability coverage for the cost to remedy unexpected and unintended
property damage to the contractor’s otherwise nondefective work-product caused by the subcontractor’s
defective workmanship.”); South Carolina: Crossmann Cmtys. of N.C. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 49,
717 S.E.2d 589 (2011); Tennessee: Travelers Indem. Co. of Am. v. Moore & Assocs., 216 S.W.3d 302, 309 (Tenn.
2007) (“We do not think that the mere inclusion of a defective component, where no physical harm to the other
parts results therefrom, constitutes ‘property damage’ within the meaning of the policy”). Compare West Virginia:
Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508, 522 (W. Va. 2013) (“Ms. Cherrington has demonstrated
that she has sustained ‘property damage’ as a result of the allegedly defective construction and completion of her
home. As either allegedly defective work, itself, or as a direct consequence thereof . . . Ms. Cherrington has
asserted a claim for “‘property damage’ . . . caused by an ‘occurrence’” under Pinnacle’s CGL policy.”).
14
Crossmann Cmtys. of N.C. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 49 (2011).
476 (2012) held that claims of faulty construction/workmanship, standing alone, are not claims
for “property damage” caused by an “occurrence.” The underlying lawsuit involved the alleged
faulty construction of a steel grain bin, which did not cause damage to any other property.
PSD Development, L.L.C (“PSD”) was a property owner that hired Younglove Construction, LLC
(“Younglove”) to construct a feed-manufacturing plant in Sandusky, Ohio. Part of the plant
required a steel grain bin, which Younglove subcontracted Custom Agri Systems, Inc.
(“Custom”) to build. PSD sued Younglove alleging breach of contract and related causes of
action because the grain bin was allegedly defectively constructed. Apparently, the defective
grain bin did not cause any property damage to any other PSD property or Younglove’s
construction of the plant. Younglove then filed a third-party complaint against Custom, for
contribution and indemnity and seeking damages to replace/repair the defective bin and
consequential damages as a result of the defective bin. Custom sought coverage from its CGL
insurer, Westfield Insurance Company (“Westfield”).
Westfield filed a declaratory judgment action and argued that none of the claims against
Custom sought compensation for “property damage” caused by an “occurrence” and,
therefore, that none of the claims were covered under the CGL policy. The Ohio Supreme Court
held that this defective workmanship claim did not constitute “property damage” caused by an
“occurrence.” Specifically, the Ohio Supreme Court focused on doctrine of fortuity which it
claimed is “[i]nherent in the plain meaning of ‘accident.’” 15
Policyholders and the dissent have criticized the Custom Agri opinion and similar holdings for
being too broad. They argue that the Court improperly blended the occurrence argument with
the business risk exclusions (i.e., the “your work” or “your product” exclusions). 16 “The question
posed by the federal court concerns the initial grant of coverage; it does not relate to any
possible exclusions.” 17 “This distinction is sometimes overlooked, and has resulted in some
regrettably overbroad generalizations about CGL policies.” 18 Instead, the focus should be on
whether the construction defect was intentionally caused or accidental.
B. Property damage must be to non-insured work or products.
Nonetheless, the Ohio Supreme Court limited the Custom Agri holding to claims involving
damage to the insured’s product only. 19 The Ohio Supreme Court held that construction defects
are “occurrences” if there is consequential damage to other property. “In other words, the
policies do not insure an insured’s work itself; rather, the policies generally insure
15
Id. at ¶ 13. (“[i]nsurance coverage is bottomed on the concept of fortuity. Applying this rule in the construction
context, truly accidental property damage generally is covered because such claims and risks fit within the
statistical abstract. Conversely, faulty workmanship claims generally are not covered, except for their
consequential damages, because they are not fortuitous.”)
16
Ohio: Custom Agri, 133 Ohio St. 3d at ¶ 35, quoting Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 268 Wis. 2d 16, 673
N.W.2d 65 (2004); North Dakota: K & L Homes, Inc. v. American Family Mut. Ins. Co., 2013 ND 57, 829 N.W.2d 724,
¶ 9 (N.D. 2013) (“in interpreting an insurance policy, we will first examine the coverages provided by the policy
before examining a policy’s exclusions”).
17
Custom Agri, 133 Ohio St. 3d at ¶ 27.
18
Id. at ¶ 30
19
Id. at ¶ 11. (“all the claims against which Westfield is being asked to defend and indemnify Custom related to
Custom’s work itself.”)
consequential risks that stem from the insured’s work.” 20
IV. Business Risk Exclusions
After a court has made its initial determination as to whether there is “property damage”
caused by an “occurrence,” courts, then, turn to examine whether any exclusions apply to
preclude coverage. Courts consistently recognize that the business risk exclusions exist to
prevent CGL policies from becoming performance bonds and warranties of the insured’s work. 21
Some courts have articulated that the risk of poor performance is just the cost of doing
business and not the proper subject of insurance. 22
20
Id. at ¶ 18, relying upon Essex Ins. Co. v. Holder, 370 Ark. 465, 261 S.W.3d 456 (2008) (holding that “defective
workmanship standing alone—resulting in damages only to the work product itself—is not an occurrence under a
CGL policy.”); see also Cincinnati Ins. Cos. v. Motorists Mut. Ins. Co., 2014-Ohio-3864, 2014 Ohio App. LEXIS 3793,
18 N.E.3d 875, 880-881 P*16 (Ohio Ct. App., Medina County 2014) (“Nationwide’s complaint sought damages
caused by the fire, not damages caused directly by G&S’ allegedly defective work. In other words, the complaint
did not exclusively seek to recover damages stemming from G&S’s work in installing the lighting. Rather, it sought
damages from the consequential risks that stemmed from the work of G&S. Accordingly, we cannot say that
Motorists’ duty to defend is negated by Westfield.”); Younglove Construction v. PSD Development, LLC, 2010 U.S.
Dist. LEXIS 73450 (N.D. Ohio 2010) (finding coverage for damage to other’s property, not the insured’s work),
quoting Heile v. Hermann, 136 Ohio App. 3d 351, 353 (Hamilton App. 1999) (stating that CGL policies “do not
insure an insured’s work itself; rather, the policies generally insure consequential risks that stem from the
insured’s work”); Beaverdam Contracting, Inc. v. Erie Ins. Co., 2008 Ohio 4953 (Allen App. 2008) (“Courts have
generally concluded that [CGL] policies are intended to insure risks of an insured causing damage to other persons
and their property, by they are not intended to insure the risks of the insured causing damages to the insured’s
own work.”); Forrest Constr., Inc. v. The Cincinnati Ins. Co., 2013 U.S. App. LEXIS 722 (6th Cir. Jan. 13, 2013)
(applying Tenn. Law) (finding that language in complaint implied that there was damage other than to insured’s
product placing insurer on notice that underlying plaintiffs were alleging property damage).
21
Georgia: Controlled Blasting v. Ranger Ins. Co., 225 Ga. App. 373, 375 (Ga. Ct. App. 1997) (“the contractor bears
the business risk ‘to replace or repair defective work’ . . . This type of risk is not covered . . . and the ‘business risk’
exclusions in the policy make this clear.”); Idaho: Bingham Mech., Inc. v. CNA Ins. Co., 2014 U.S. Dist. LEXIS 46028
(D. Idaho Mar. 31, 2014) (“[The insurer] relies on ‘business risk exclusions’ . . . ‘[G]eneral liability policies are not
warranties of the insured’s work.’”); Indiana: United Capitol Ins. Co. v. Special Trucks, 918 F. Supp. 1250, 1257 (N.D.
Ind. 1996) (“the rationale behind the types of exclusions at issue in this case is that liability insurance is not
intended to act as a warranty or to serve as a performance bond.”); Louisiana: Math Constr. Co. v. Dupuy, 897 So.
2d 677, 682 (La. App. 2004) (“[The ‘your work’ and ‘your product’ exclusions are based] on the principle that
general liability policies are not intended to serve as performance bonds.”); Massachusetts: Dorchester Mut. Fire
Ins. Co. v. First Kostas Corp., 49 Mass. App. Ct. 651, 654 (Mass. App. Ct. 2000) (“General liability coverage is not
intended as a guarantee of the insured’s work, and for that reason, general liability policies contain ‘business risk’
exclusions.”); Mississippi: Lafayette Ins. Co. v. Peerboom, 813 F. Supp. 2d 823, 829 (S.D. Miss. 2011) (“the nature
of . . . business risk exclusions [indicates that a] CGL policy is not a performance bond”); New York: Tradin Organics
USA, Inc. v. Md. Cas. Co., 325 Fed. Appx. 10, 11 (2d Cir. 2009); North Carolina: Breezewood of Wilmington Condos.
Homeowners’ Ass’n v. Amerisure Mut. Ins. Co., 335 Fed. Appx. 268 (4th Cir. 2009) (“such business risks are the
purpose of performance bonds, not liability insurance policies.”); Washington: Big Constr., Inc. v. Gemini Ins. Co.,
2012 U.S. Dist. LEXIS 71350, *24 (W.D. Wash. May 22, 2012) (“[The] ‘business risk’ exclusions [are] designed to
prevent the commercial general liability policy from being considered a performance bond, product liability
insurance, or malpractice insurance.”).
22
Delaware: Brosnahan Builders, Inc. v. Harleysville Mut. Ins. Co., 137 F. Supp. 2d 517, 527 n.9 (D. Del. 2001) (“the
cost of not performing well is a cost of doing business and not considered part of the risk sharing scheme for which
general liability policies are written”).
A. The “your work” exclusion. 23
There are really two “your work” exclusions. 24 The first applies to ongoing work – that is, work
that is not included in the “products-completed-operations-hazard” – and excludes coverage
for “property damage” to “that particular part of any property that must be restored, repaired
or replaced because ‘your work’ was incorrectly performed on it.” The second applies to
completed or abandoned work and excludes coverage for “‘property damage’ to ‘your work’
arising out of it or any part of it.” This exclusion does not apply if the insured purchased
coverage for “products-completed operations.” 25 The second exclusion frequently contains an
exception for work performed on the insured’s behalf by a subcontractor. The exclusions
eliminate coverage for the insured’s faulty work but not for damage to third-party property that
results from the insured’s faulty work. 26
B. The “your product” exclusion.
The “your product” exclusion removes coverage for property damage to “your product arising
out of it or any part of it.” Once again, the exclusion does not remove coverage for damage to
other property,27 including damage to other of the insured’s products. 28
23
These exclusions were first incorporated into the Standard CGL policy in 1986. Many scholars and courts credit
these exclusions for the growing trend among courts finding that faulty workmanship is an occurrence. They
reason that if claims for faulty workmanship do not qualify as an occurrence, there would be no reason for the
“your work” exclusion to exist. Texas: Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d at 248 (Tex. 2007);
Wisconsin: Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65, ¶ 78 (Wis. 2004).
24
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44 (Ala. Mar. 28, 2014); Ohio: Ohio Cas.
Ins. Co. v. Hanna, 9th Dist. Nos. 07CA0016-M, 07CA0017-M, 2008-Ohio-3203, ¶ 26-28.
25
Alabama: Owners Ins. Co. v. Jim Carr Homebuilder, LLC, 2014 Ala. LEXIS 44, *21 (Ala. Mar. 28, 2014) (“Simply put,
the ‘your work’ exclusion applies if and only if the Policy’s declarations fail to show any coverage for ‘productscompleted operations.’”).
26
New York: Tradin Organics USA, Inc. v. Md. Cas. Co., 325 Fed. Appx. 10, 11 (2d Cir. N.Y. 2009) (“Exclusions like
the ‘Your Product’ exclusion here are ‘intended to exclude coverage for damage to the insured’s product, but not
for damage caused by the insured’s product to persons or property other than the insured’s own product.’”); Ohio:
Ohio Cas. Ins. Co. v. Hanna, 9th Dist. Nos. 07CA0016-M, 07CA0017-M, 2008-Ohio-3203, ¶ 29 (“Quality’s out-ofplumb installation . . . caused damage to third-party property. . . . [T]herefore . . . neither ‘your work’ exclusion
applies”).
27
New York: Tradin Organics USA, Inc. v. Md. Cas. Co., 325 Fed. Appx. 10, 11 (2d Cir. 2009) (“Exclusions like the
‘Your Product’ exclusion here are ‘intended to exclude coverage for damage to the insured’s product, but not for
damage caused by the insured’s product to persons or property other than the insured’s own product.”); Ohio:
Parker Hannifin Corp. v. Steadfast Ins. Co., 445 F. Supp. 2d 827, 833 (N.D. Ohio 2006) (“[the ‘your product’
exclusion states a] limitation of coverage for property damage to the insured’s product, but not to damages to
other property caused by that product.”).
28
Ohio: Westfield Ins. Co. v. Custom Agri Sys., Inc. 2012-Ohio-4712, 133 Ohio St. 3d 476 (2012); Ferro Corp. v. BlawKnox Food & Chem. Equip. Co., 8th Dist. No. 80804, 2002-Ohio-5472, ¶36 (“While under the clear terms, damages
to the liner itself fall under the ‘your product’ exclusion, the terms of the exclusion do not, however,
clearly exclude coverage for damage to the insured’s product caused by another of its product.”);Younglove
Construction v. PSD Development, LLC, 2010 US Dist. LEXIS 73450 (N.D. Ohio 2010) (finding that consequential
damages are not excluded from coverage); Holub Iron & Steel Co. v. Mach. Equip. & Salvage Co., 1986 Ohio App.
LEXIS 7540 *2 (Ohio pp. 1986) (“For instance, if a contractor negligently installs a roof which must be removed and
replaced, he must bear the cost of removing the faulty roof and installing a new one but the insurance will pay for
any damage allowed or caused to the underlying building or its contents.”); see also Hartzell, 168 F. Supp. 2d at
Courts that interpret the exclusion typically face issues of whether a product is “your product.”
Policies usually define “your product” as including products that are manufactured, sold,
handled, distributed, or disposed of by the insured. 29 It does not matter if someone other than
the insured owns the product when the damage occurs.
Often, courts consider an insured’s product that was incorporated into another product. Some
courts view damage to the composite product as entirely excluded, at least when the insured’s
product cannot be separated from the composite product.30 Other courts find coverage to the
extent the damage to the composite product exceeded the value of the insured’s product.
These courts find the result equitable especially when the value of the insured’s product is
slight compared to the value of the composite product.31
Another issue arises when an insured’s product has been altered by someone other than the
insured. Some courts find that an insured’s product stopped being “your product” when
another person altered it, for instance by cutting and shaping it, or by applying expertise to
install it.32 While other courts require a greater degree of transformation and inquire whether
798 (“on its face, the ‘damage to your product’ provision only excludes coverage for the property damage to the
insured’s product arising out of the insured’s product. The exclusion does not preclude coverage for property
damage to the property of a third party arising out of the insured’s product.”)
29
North Dakota: Scottsdale Ins. Co. v. Tri-State Ins. Co., 302 F. Supp. 2d 1100, 1104 (D.N.D. 2004) (“it appears that
the exclusion refers to a product ‘manufactured, sold, handled, distributed, or disposed of’ by the insured,
regardless of when the property damage occurred or who the owner was at the time.”).
30
Oregon: Sec. Nat’l Ins. Co. v. GloryBee Foods, Inc., 2011 U.S. Dist. LEXIS 27267, *8 (D. Or. Mar. 15, 2011)
(construing “your product” to include not only the insured’s product, peanuts, but the ultimate food product that
incorporated the peanuts); California: Anthem Electronics, Inc. v. Pacific Employers Ins. Co., 302 F.3d 1049, 1052
(9th Cir. 2002) (finding that loss of use of scanners incorporating defective circuit boards constituted property
damage); Illinois: Pittway Corp. v. American Motorist Ins. Co., 56 Ill App. 3d 338, 341-42 (2d Dist. 1977) (“a
component is so intertwined with the entire mechanism that the defect necessarily results in damage to the
complete product the component will be deemed to have caused property damage.”); Ohio: Transamerica Ins. Co.
v. S.A.I. Mktg. Co., 1985 Ohio App. LEXIS 8036, 12-13 (Cuyahoga App. June 13, 1985) (“Allegations that the
insured's allegedly defective part caused damage or failure for an assembly incorporating it can constitute claims
for ‘property damage’ or ‘physical injury’"), citing U.S. Fidelity & Guarantee Co. v. Nevada Cement Co., 561 P.2d
1335 (1977); Thomas J. Lipton, Inc. v. Liberty Mutual Ins. Co., 314 N.E.2d 37 (N.Y. 1974); Goodyear Rubber & Supply
Co., Inc. v. Great American Ins. Co., 471 F.2d 1343 (9th Cir. 1973); Bundy Tubing Co. v. Royal Indemnity Co., 298
F.2d 151 (6th Cir. 1961); Aetna Casualty & Surety Co. v. General Time Corp., 704 F.2d 80 (2nd Cir. 1983); Moraine
Materials Co., Inc. v. Ohio Casualty Ins. Co., 1979 Ohio App. LEXIS 10887 (Montgomery App. Dec. 12, 1979)
(pouring of the defective concrete into the entire wall made it impossible to separate the good from the bad and
therefore there was "physical damage" to the wall as a whole.)
31
New York: Sturges Mfg. Co. v. Utica Mut. Ins. Co., 37 N.Y.2d 69, 72-73 (N.Y. 1975) (“When one product is
integrated into a larger entity, and the component product proves defective, the harm is considered harm to the
entity to the extent that the market value of the entity is reduced in excess of the value of the defective
component”); Ohio: Parker Hannifin Corp. v. Steadfast Ins. Co., 445 F. Supp. 2d 827, 833 (N.D. Ohio 2006) (“the
disparity between the costs of actual damage to homes and furnishings and the (potentially miniscule) cost of
actual gasket repair, renders it both fair and efficient to classify the repaired/replaced product as [not the insured’s
product]”).
32
Pennsylvania: Imperial Casualty & Indem. Co. v. High Concrete Structures, Inc., 858 F.2d 128, 134-135 (3d Cir.
1988) (“In this case, High Steel’s steel was changed by being cut and shaped into beveled washers just as the paint
in Pittsburgh Plate Glass was changed by being baked onto venetian blinds. In each instance, the purchaser created
a new product having a value in excess of the value of the product supplied by the insured, and suffered damage
[*135] to more than just the insured’s product.”); South Dakota: Firemen’s Ins. Co. v. Bauer Dental Studio, Inc., 805
F.2d 324, 325 (8th Cir. 1986) (“The completed product in this case consisted of not only the dental crown as
manufactured by Bauer but also the professional services of Dailey in properly inserting the crown. The integration
the nature of a product has changed.33
C. The “impaired property” exclusion.
The impaired property exclusion removes coverage for “impaired property” or property that is
not physically injured arising out of a defect in the insured’s product or work, or a delay or
failure by the insured to perform in accordance with the terms of a contract. The exclusion
contains an exception for any loss of use caused by a sudden accident after the insured’s
product is put to its intended use. 34
Impaired property” is defined term in a standard CGL policy as property that can be restored to
use by repairing, replacing, adjusting or removing the insured’s product or work. Accordingly,
the exclusion only applies when the third-party property can be restored to use by the repair or
replacement of the insured’s product. If the third-party property was damaged or cannot be
restored to use simply by repairing or replacing the insured’s product, this exclusion does not
preclude coverage. 35 Courts find that property cannot be “restored to use” when: (1) the
insured’s product or work is inextricably incorporated into the impaired property; 36 or (2) the
of Bauer’s product and Dailey’s workmanship created . . . a product separate and distinct from the crowns initially
manufactured by Bauer. * * * Because the final product was not solely the work of the insured, the property
damage is not excluded”); Washington: Aetna Cas. & Sur. Co. v. M&S Indus., 64 Wn. App. 916, 922-23 (Wash. Ct.
App. 1992) (concluding that plywood had been altered because someone other than the insured “cut the panels
into different sizes, cut notches and holes into them so spacers could be attached, added metal support bars and
latches, and applied a sealer” to make the plywood a component of concrete molds).
33
Florida: Liberty Mut. Fire Ins. Co. v. MI Windows & Doors, Inc., 131 So. 3d 15, 17 (Fla. App. 2013) (“[the key is
whether the alteration] ‘fundamentally change[d] the nature and function [of the product]’”); Texas: Nat’l Union
Fire Ins. of Pittsburgh v. Puget Plastics Corp., 735 F. Supp. 2d 650 (S.D. Tex. 2010) (rejecting a “composite product”
argument because plastic water chambers installed in water heaters were not “modified . . . so radically as to
change the nature of the product.”).
34
Modern Equip. Co. v. Cont’l W. Ins. Co., 355 F.3d 1125, 1129 (8th Cir. 2004).
35
Georgia: Gentry Machine Works, Inc. v. Harysville Mutual Ins. Co., 621 F. Supp. 2d 1288, 1296 (M.D. Ga. June 30,
2008) (finding that where repair and replacement of defective pedestals could not restore boilers to use, the
“impaired property” exclusion did not apply); Ohio: The Burlington Ins. Co v. PMI America, Inc., 862 F. Supp. 2d 719
(S.D. Ohio March 23, 2012) (insurer failed to meet burden demonstrating that kiln could be restored to use by
repair, replacement, or removal of insured’s work); Florida: Transcontinental Ins. Co. v. Ice Sys. of Am., 847 F. Supp.
947, 950 (M.D. Fla. 1994) (“if the complaint alleges or otherwise establishes damage to other property, Exclusion
M [the impaired property exclusion] will not apply.”); Kansas: Am. Mercury Ins. Group v. Urban, 2002 U.S. Dist.
LEXIS 998, *33 (D. Kan. Jan. 21, 2002) (“The effect of this ‘impaired property’ exclusion is to bar coverage for ‘loss
of use’ claims (1) when the loss was caused by the insured’s poor workmanship or faulty materials; and (2) when
there has been no physical injury to property other than the insured’s work itself.”); Louisiana: Stewart Interior
Contrs., L.L.C. v. MetalPro Indus., L.L.C., 969 So. 2d 653, 664 (La. App. 4 Cir. 2007) (“The [impaired property]
exclusion precludes coverage for damage to property that has not been physically injured or for which only loss of
use is sought”); Maine: Oxford Aviation, Inc. v. Global Aero., Inc., 680 F.3d 85, 91 (1st Cir. 2012) (“The [impaired
property] exclusion aims ‘in essence to preclude coverage for loss of use claims arising from faulty work or
products when there is no physical injury to the property.’”); Oklahoma: Emplrs Mut. Cas. Co. v. Grayson, 2008 U.S.
Dist. LEXIS 43255, *16 (W.D. Okla. May 30, 2008) (“‘Impaired property’ is property damaged, because of a loss of
use and not a physical injury, resulting from its inclusion of the insured’s defective product”); Washington: Indian
Harbor Ins. Co. v. Transform LLC, 2010 U.S. Dist. LEXIS 94080, *21 (W.D. Wash. Sept. 8, 2010) (“Impaired property
exclusions do not apply when there is physical injury to tangible property.”).
36
California: Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847, 866 (Cal. App.
1st Dist. 2000) (“it is fanciful to suppose that the nut clusters composed of congealed syrups and diced nuts or the
boxed cereal product containing the nut clusters could be somehow deconstructed to remove the injurious
damage caused by the insured’s property or work extends beyond it such that correcting the
insured’s property or work cannot rectify the damage. 37
The impaired property exclusion contains a significant exception. The 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. Some courts construe the
exception narrowly and conclude that “loss of use” means that the property must actually or
effectively be unusable for its intended purpose. 38 Perhaps the most frequently litigated aspect
of the exception, however, is whether an injury is “sudden and accidental.” Many courts have
determined that the phrase includes a temporal aspect – the injury must occur at once,39 or at
least faster than the normal rate of physical deterioration. 40 Courts also conclude that
“accidental” imposes a requirement that the injury be unexpected and unintended. 41 Some
courts have found the phrase to be ambiguous. 42
splinters”); Connecticut: Harleysville Worcester Ins. Co. v. Paramount Concrete, Inc., 2014 U.S. Dist. LEXIS 43889,
*40-41 (D. Conn. Mar. 31, 2014); Illinois: Fireman’s Fund Ins. Co. v. Amstek Metal, LLC, 2008 U.S. Dist. LEXIS 75879,
*34-35 (N.D. Ill. Aug. 27, 2008) (“It thus appears that a broken spring pack cannot be restored to use by ‘repair,
replacement, adjustment or removal’ of Amstek’s wire, as required to satisfy the ‘Impaired Property’ exclusion.”);
Oregon: Sec. Nat’l Ins. Co. v. GloryBee Foods, Inc., 2011 U.S. Dist. LEXIS 27267, *9 (D. Or. Mar. 15, 2011) (“The
parties intended the [impaired property] exclusion to apply to damage claims related to products of others only
when the insured’s product was not inextricably incorporated into such product”).
37
Michigan: Action Auto Stores v. United Capitol Ins. Co., 845 F. Supp. 417, 426 (W.D. Mich. 1993) (“The Court finds
that no evidence has been presented that any damage done to property surrounding the containment system can
be remedied by the repair, replacement, or adjustment of defendant’s [underground storage tanks]”).
38
Iowa: Modern Equip. Co. v. Cont’l W. Ins. Co., 355 F.3d 1125, 1130 (8th Cir. 2004) (“The racks’ collapse did not
prohibit the freezer from operating as a freezer. . . . [H]ad the racks collapsed in a position that prohibited ingress
or egress from the warehouse area, while not literally inoperable, we would consider the warehouse to be
inoperable in a practical sense.”).
39
Illinois: Sokol & Co. v. Atl. Mut. Ins. Co., 430 F.3d 417, 424 (7th Cir. 2005) (concluding that “gradual deterioration”
is not sudden); Minnesota: St. Paul Fire & Marine Ins. Co. v. Futura Coatings, 993 F. Supp. 1258, 1264 (D. Minn.
1998) (“Here, the alleged cracking and peeling of the Futura coating was not sudden and accidental, but became
apparent only as time passed after application.”); Ohio: Hartzell Indus. v. Federal Ins. Co., 168 F. Supp. 2d 789, 801
(S.D. Ohio 2001) (“‘sudden and accidental’ includes . . . a temporal aspect (i.e., the physical injury to the insured’s
product must appear suddenly)”); Texas: Nat’l Union Fire Ins. of Pittsburgh v. Puget Plastics Corp., 735 F. Supp. 2d
650, 674 (S.D. Tex. 2010) (rejecting argument that injury was sudden and accidental when it was not immediate).
40
North Dakota: Ind. Lumbermens Ins. Co. v. PrimeWood, Inc., 1999 U.S. Dist. LEXIS 23490, *15 (D.N.D. Jan. 8,
1999) (“Even if a temporal element requirement is presumed, the relative rate of the yellowing of the doors here is
“sudden” in comparison to the normal rate of yellowing to be expected.”)
41
Ohio: Hartzell Indus. v. Federal Ins. Co., 168 F. Supp. 2d 789, 801 (S.D. Ohio 2001) (“‘sudden and accidental’
includes . . . an element of surprise (i.e., the physical injury must be ‘unexpected or unintended’ from the
standpoint of the insured”).
42
North Dakota: Ind. Lumbermens Ins. Co. v. PrimeWood, Inc., 1999 U.S. Dist. LEXIS 23490, *15 (D.N.D. Jan. 8,
1999) (“this Court is inclined to generously construe the phrase ‘sudden and accidental’ in favor of the insured.”);
Wisconsin: Just v. Land Reclamation, Ltd., 155 Wis. 2d 737, 746 (Wis. 1990) (“We conclude that the phrase ‘sudden
and accidental’ is susceptible to more than one reasonable meaning, including abrupt and immediate as
Bituminous claims as well as unexpected and unintended as the property owners claim.”).
D. The sistership exclusion.
This exclusion (also known as the recall exclusion) precludes coverage for damages claimed for
any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall,
inspection, repair, replacement, adjustment, removal or disposal of: (1) Your Product; (2) Your
Work; or (3) Impaired Property; if such product, work or property is withdrawn or recalled from
the market or from use by any person or organization because of a known or suspect defect,
deficiency, inadequacy or dangerous condition in it. This exclusion precludes coverage for the
withdrawal of products that have not yet failed.43 To the extent that third-party property was
damaged, this exclusion is not applicable. 44
V. Conclusion
The recent and dramatic shifts by courts support policyholders’ arguments that faulty
workmanship is covered under a CGL policy. However, because of the jurisdictional split on
whether faulty workmanship is covered under a CGL policy and the cases are typically fact
specific, this area of law will likely continue to be heavily litigated.
43
Pennsylvania: Forest City Dillon, Inc. v. Laminators, Inc., 852 F.2d 168, (6th Cir. 1988) (applying Pennsylvania law)
(“Insurance companies subsequently developed the ‘sistership’ clause to make clear that, while they intended to
pay for damages caused by a product that failed, they did not intend to pay for the costs of recalling products
containing a similar defect that had not yet failed.”)
44
Illinois: Indus., Inc. v. Liberty Mutual Ins. Co., 414 N.E.2d 41 (Ill. App. 1980) (exclusion does not apply to damage
caused by the incorporation of defective pins into engines because, with the incorporation of pins, the property
damage at issue took place prior to the subsequent recalls.); Ohio: Parker Hannifin Corp. v. Steadfast Ins. Co., 445
F. Supp. 2d 827 (August. 9, 2006) (finding that costs for repair or for those that failed to perform should be
recovered).
INSURANCE COVERAGE FOR
FAULTY PRODUCTS AND
WORKMANSHIP CLAIMS
By Stacy Berliner
AGENDA
Positions
 Trends
 Policy Language- Stage 1



Occurrence
Property Damage
Ohio
 Policy Language – Stage 2



Business Risk Exclusions
Examples
POSITIONS
Insurer View

No coverage for faulty
workmanship under
CGL policies
Policyholder View

Coverage for faulty
workmanship
resulting in property
damage under CGL
policies
POSITIONS

Insurer Arguments against Coverage





Defect is a natural and ordinary consequence of
faulty workmanship
CGL policies are not intended to be a performance
bond
These are contractual claims not liability claims
The consequence of not performing well is part of
every business venture
This is a business expense
POSITIONS

Policyholder Arguments for Coverage
The damage was unintended and unforeseen
There is coverage unless the defect was intended
 The CGL policy makes no distinction between tort
and contractual damages
 Adopting the insurer’s reasoning would make the
coverage illusory


TRENDS
Five State Supreme Courts held that faulty
workmanship resulting in property damage can
constitute an “occurrence”
 Reason for trend?

Different Facts
 Different Allegations
 Revisions to Standardized Policies

POLICY LANGUAGE
POLICY LANGUAGE

The standard CGL policy provides coverage for
“property damage” that is caused by an
“occurrence.”
OCCURRENCE

Definition:
“an accident, including continuous or repeated
exposure to substantially the same general harmful
conditions.”
 “accident” is not defined.
 Courts require fortuity or unexpected, unforeseen
event from the insured’s perspective.


Inquiry: Is it foreseeable from the insured
standpoint?
OCCURRENCE
Insurer



Policyholder
Presumption of
foreseeability on the
insured’s ability to control
its and its subcontractors’
work
Damage to insured’s own
work/product would convert
CGL policies into
performance bonds or
warranties for a contractor’s
goods or services
Only third-party property
damage can be unexpected
or fortuitous



Coverage if resulting
damage was not foreseen
from insured’s perspective
Unexpected and
unforeseen consequences
of faulty work – even
damage to insured’s own
work or product - is
accidental and covered
If faulty workmanship is
not an occurrence, it would
render certain business
risk exclusions superfluous
OCCURRENCE

Compromise Position over subcontractors
Refuses to find an occurrence in the insured’s faulty
work, but may find an occurrence in the faulty work
of the insured’s subcontractors
 Reasoning: Insured has less control over
subcontractors’ work

PROPERTY DAMAGE

Defined as
“[p]hysical injury to tangible property including all
resulting loss of use of that property.”
 What is physical injury? Tangible property?


General Rule:

There is coverage for damage to other’s property
caused by the insured’s faulty workmanship, but
there may not be coverage for damage to the
insured’s work or
product.
OHIO
Westfield Ins. Co. v. Custom Agri Sys., Inc. 2012Ohio-4712, 133 Ohio St.3d 476 (2012)
 Held that claims of faulty workmanship,
standing alone, are not claims for “property
damage” caused by an “occurrence.”
 Focused on doctrine of fortuity
 Damage only to insured’s product/work
 Coverage for consequential damages
 Dissent

BUSINESS RISK EXCLUSIONS
Your Work
 Your Product
 Impaired Property
 Sistership

YOUR WORK

Excludes coverage for
On-going: “property damage” to “that particular part
of any property that must be restored, repaired or
replaced because ‘your work’ was incorrectly
performed on it.”
 Completed: “‘property damage’ to ‘your work’ arising
out of it or any part of it.”


Eliminates coverage to the insured’s faulty work
but not for damage to third-party property that
results from the insured’s faulty work

Subcontractor exception
YOUR WORK

1986 ISO Subcontractor Exception to Your Work
Exclusion
1973: Courts don’t separate a subcontractor’s faulty
workmanship from that of the general contractor
 1986: Consequential damages caused by a
subcontractor’s faulty workmanship are considered
differently than property damage caused by a general
contractor’s work - constituted ‘property damage’
caused by an ‘occurrence.


Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d
at 248 (Tex. 2007); Am. Family Mut. Ins. Co. v. Am. Girl,
Inc., 673 N.W.2d 65, ¶78 (Wis. 2004).
EXAMPLE 1





Condo association filed suit against developer.
The developer served as the general contractor on the
condominium project and hired the subcontractors to
perform all the construction work.
Plaintiff alleges that subcontractors improperly
installed the roof, flashing, gutters, EIFS façade.
Plaintiff alleges that faulty workmanship allowed
water infiltration and caused damage to interior
structures, common areas and unit owners’ property.
Is there coverage under developer’s CGL policy?
EXAMPLE 1 (CONT.)




The Court held that the faulty workmanship
constituted an “occurrence,” because it could not
“reasonably believe[] that the subcontractors either
expected or intended for their faulty workmanship to
cause ‘physical injury to tangible property.’”
“[T]he consequential damages here amount to
‘property damage’ and an ‘occurrence.’”
The damages caused by the subcontractors’ faulty
construction clearly constituted “physical injury to
tangible property”
Your Work Exclusion did not apply because of the
exception, which stated “[t]his 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.”

Condominium Association, Inc. v. Adria Towers, LLC,
(“Cypress”)
YOUR PRODUCT
Excludes property damage to “your product
arising out of it or any part of it.”
 Does not remove coverage for damage to other
property, including damage to other of the
insured’s products
 Your Product – broadly defined
 Incorporation Issues



If so incorporated into larger product that it cannot
be separated, is it your product?
Altered Issues

Has the nature of the product changed?
EXAMPLE 2






The insured manufactured gaskets that were
incorporated into Zenith televisions.
Several Zenith television sets caught on fire and
damaged owners’ homes.
Zenith determined that the gaskets were defective
and caused the fires.
Zenith repaired as many televisions sets containing
the insured’s gaskets as possible, incurring millions of
dollars in costs.
Zenith brought suit against the insured to recover
the repair and replacement costs, and the insured
settled the claim for $3 million.
The insured’s carrier, Steadfast, refused to pay the
amount of the settlement under the “your product”
exclusion.
EXAMPLE 2 (CONT.)



Insured subsequently filed a declaratory judgment
action against Steadfast.
Steadfast contended that the repairs were made to
the defective gaskets themselves, and therefore all of
those costs were barred by the “your product”
exclusion.
The court disagreed, concluding that the disparity
between the costs of actual damage to homes and
furnishings and the comparatively miniscule costs for
gasket repair made it “both fair and efficient to
classify the repaired/replaced product as the Zenith
televisions,” rather than the insured’s defective
gasket. As such, the “Your Product” exclusion did not
apply.

Parker Hannifin v. Steadfast Insurance Company, 445 F.
Supp. 2d 827 (N.D. Ohio 2006)
IMPAIRED PROPERTY

Excludes coverage for:


Property that is not physically injured arising out of
a defect in the insured’s product or work, or a delay
or failure by the insured to perform in accordance
with the terms of a contract.
“Impaired property” defined as property that can
be restored to use by repairing, replacing,
adjusting or removing the insured’s product or
work.
IMPAIRED PROPERTY



The exclusion only applies when the third-party
property can be restored to use by the repair or
replacement of the insured’s product
If the third-party property was damaged or cannot be
restored to use simply by repairing or replacing the
insured’s product, this exclusion does not preclude
coverage
Sudden and Accidental Exception
 for any loss of use caused by a sudden accident after the
insured’s product is put to its intended use.

Many courts have determined that the phrase includes a
temporal aspect – the injury must occur at once.
EXAMPLE 3
Insured manufactured parts for boilers, including
a part known as the “pedestal.”
 Pedestal was welded to the top of the boiler and
served as the main rear hinge for the rear boiler
doors.
 Customers complained and the insured replaced
the pedestals and repaired other damage
associated with the failure of the pedestals.
 Customers had loss of use of boilers during
repairs.
 Insured seeks coverage for the cost of the repairs
and loss of use.

EXAMPLE 3 (CONT.)

Held that the impaired property exclusion precluded
coverage for
Damage to pedestals
 Costs of inspecting the potentially defective pedestals
 Damages to the boiler or its parts directly caused by the
repair of the pedestals


But business risk exclusions did not preclude
coverage for property damage to the boilers caused by
the pedestal failure but unrelated to the pedestal
repair. - where repair and replacement of defective
pedestals could not restore boilers to use, the
“impaired property” exclusion did not apply.

Gentry Machine Works, Inc. v. Harleysville Mut. Ins. Co.,
621 F.Supp.2d 1288 (M.D. Ga. 2008)
RIP AND TEAR COSTS
Insurer

Policyholder
Damage during the
repair process is a
foreseeable
consequence of
defective
workmanship, which
is not property
damage as defined by
the policy.

Coverage for the
removal of nondefective
work/products is
necessary and
unintentional in order
to replace defective
product/work.
EXAMPLE 3 (CONT.)
No coverage for Rip and Tear:
 The Gentry Court held that physical damage to
parts connected to a defective product — that is,
parts that must be destroyed or damaged in the
replacement process — are treated like the
defective product itself and not covered.

EXAMPLE 4
Insured sold defective concrete mix component to
a contractor that used it to build a retaining wall.
 Wall began to fail. The wall contained both
defective concrete and correctly comprised
concrete, with the result that the entire retaining
wall—both the part that was correct and the part
that was defective, had to be removed.
 Owner sued contractor and insured, concrete mix
manufacturer, for costs to repair and replace the
wall.
 Does insured/concrete manufacturer’s insurer
have to pay for the removal and replacement of
the entire wall?

EXAMPLE 4 (CONT.)
The court held that because it was impossible to
remove the defective concrete without disturbing
the rest of the structure, the incorporation of the
defective concrete into the wall constituted
property damage for which there was coverage.
 “Moraine is not seeking to recover for the
defective concrete, but is seeking to recover the
expenses of removing the wall, which became
defective in its entirety by the incorporation
therein of Moraine’s defective cement.”


Moraine Materials Co., Inc. v. The Ohio Casualty Ins.
Co., 1979 WL 208510 (Ohio App. Dec. 12, 1979); see
also Bundy Tubing Co. v. Royal Indem. Co., 298 F.2d
151 (6th Cir. 1962).
U.S. METALS, INC. V. LIBERTY MUTUAL
GROUP, INC., 2014 WL 465892 (5TH CIR.
SEPT. 19, 2014).






U.S. Metals agreed to manufacture and sell flanges to
Exxon.
The flanges were welded to pipes by a subcontractor.
Once welded, the flange/pipe were attached to two
new NRD (nonroad diesel project) facilities owned by
Exxon.
During pre-use testing, Exxon discovered a leak in
one of the flanges.
U.S. Metals had subcontracted the project 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.
SEPT. 19, 2014).
The two new Exxon 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 of
the new refineries and the facilities were not yet
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 $6.3 million.

GROUP, INC., 2014 WL 465892 (5TH CIR. SEPT.
19, 2014).
Liberty Mutual




Liberty Mutual declined coverage
under Your Product and Impaired
Property Exclusion.
Exxon’s property was not physically
injured by the defective flanges.
The loss of use arises from a “defect,
deficiency, inadequacy, or
dangerous condition” in U.S.
Metals’ product or work.
The exception does not apply
because there is no
evidence/allegation that the flanges
were put to their intended use; and
there was no sudden and accidental
physical injury. There was only
defective manufacturing.
U.S. Metals




U.S. Metals conceded Your Product
Exclusion bars coverage for removal
and replacement of the defective
flanges themselves BUT
Exclusion (m) does not apply
because there was physical injury to
Exxon’s property, i.e. Exxon had to
remove and replace other property
(i.e. the pipes that the flanges were
welded to) in order to restore use.
The exception applies because the
flanges suddenly and accidentally
failed during pressure testing,
which led to the loss of use of the
refineries.
Exclusion (m) is ambiguous
SEPT. 19, 2014).

The District Court found that Exclusions (k) and
(m) preclude coverage.
Your Product Exclusion precluded coverage for
repair/replacement of flanges
 Impaired Property Exclusion precluded loss of use of
the units that could be restored by the removal and
repair of the flanges.

PHYSICAL INJURY IS AMBIGUOUS


US Metals:
Physical injury to units when defective flanges
attached

There was physical injury to surrounding welds, insulation,
and piping because those components were useless when
flanges welded to them.
Liberty:
 Physical injury requires change in property from
satisfactory to unsatisfactory state

REPLACEMENT IS AMBIGUOUS

US Metals:

Limits definition of “impaired property” to that which
could be restored to use by replacing the flanges
alone. Because replacement also required destroying
3rd party work, the Exxon units were not “impaired
property” falling within exclusion.


If any other part needs to be replaced, the units were not
impaired property.
Liberty:

Replacement includes all steps necessary to
substitute non-defective flanges for the defective ones
–removing welds joined to piping, the insulation
covering the flanges and gaskets were all part of the
replacement process.
SEPT. 19, 2014).

Fifth Circuit certified questions to the Texas
Supreme Court, which were accepted.
Are the terms “physical injury” (in Exclusion (m))
and/or “replacement” (in the definition of “impaired
property”) ambiguous?
 If yes, is U.S. Metal’s interpretation reasonable?
 If “physical injury” is unambiguous, does it occur at
the moment when the defective flanges were
irreversibly attached to Exxon’s property or does
“physical injury” only occur when there is an
alteration in the color shape or appearance of Exxon’s
property due to the defective flange that was
irreversibly attached?

SISTERSHIP

Excludes coverage for


damages claimed for any loss, cost or expense
incurred by you or others for the loss of use,
withdrawal, recall, inspection, repair, replacement,
adjustment, removal or disposal of: (1) Your Product;
(2) Your Work; or (3) Impaired Property; if such
product, work or property is withdrawn or recalled
from the market or from use by any person or
organization because of a known or suspect defect,
deficiency, inadequacy or dangerous condition in it.
This exclusion precludes coverage for the
withdrawal of products that have not yet failed.
EXAMPLE 5
In Shade Foods, the insured sold chopped
almonds to General Mills that used the almonds
to make nut clusters for its cereal product.
 General Mills advised Shade Foods that it found
wood splinters in the nuts.
 General Mills then shut down production and
recalled the cereal.

EXAMPLE 5 (CONT.)


The Shade Foods Court found third party property
damage holding that “[w]hile the distinction may
sometimes be a fine one to draw, we see no difficulty
in finding property damage where a potentially
injurious material in a product causes loss to other
products into which it is incorporated.”
Based on the irreversible incorporation of the nuts
into the nut clusters, the court held that “the wood
splinters in the diced roasted almonds caused
property damage to the nut clusters and cereal
products in which the almonds were incorporated.”

Shade Foods, Inc. v. Innovative Products Sales &
Marketing, Inc., 78 Cal. App. 4th 847 (First Dist. 2000).
EXAMPLE 6
The insured, Sokol, was a food products
manufacturer that supplied sealed packets of
peanut butter to its customer, Continental Mills,
for inclusion in boxes of Continental’s cookie mix.
 After the packets were sealed into the boxes and
shipped to retailers, the peanut butter was found
to be rancid.
 Continental retrieved the boxes, replaced the
peanut butter with packets from a different
supplier and reshipped the mixes. Continental
sought payment of approximately $75,000 from
Sokol.

EXAMPLE 6 (CONT.)
The court found that there was no third party
property damage as the rancid peanut butter was
contained in separate packets that did not affect
the other food products in the mix boxes.
 The appellate court rejected Sokol’s argument
that Continental’s need to open the boxes
constituted third party property damage and
further rejected the argument that Continental
suffered a loss of use of its mixes by the delay in
getting the cookie mix to market.


Sokol and Company v. Atlantic Mutual Insurance
Company, 430 F.3d 417 (7th Cir. 2005)
ALLEGATIONS IN COMPLAINT

Coverage is highly dependent upon allegations:


If underlying complaint merely alleged failure to
comply with contractual obligations and implied
warranties resulting in monetary damages, is there
coverage?
The issue is not whether the cause of action is
one for contract or tort but whether the damages
may be characterized as contractual in nature or
whether they are consequential property damage.
CONCLUSION

Important Factors to Determine Coverage
Jurisdiction
Consequential Damages
 Facts, Facts, Facts


INSURANCE COVERAGE FOR
FAULTY PRODUCTS AND
WORKMANSHIP CLAIMS
Stacy RC Berliner, Esq.
P: 216.456.3860
sberliner@tmlpa.com

Insurance Coverage for Faulty Products and Workmanship Claims

Transcription

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