Business Risk Exclusions
Those of us who represent contractors in coverage disputes have had to wrestle a lot over the past few years with so-called “business risk” exclusions, such as the “your work” and “your product” exclusions. Cynicism may be unhealthy, but the cynic in me says that insurance companies are twisting these exclusions far beyond their intended application, and that some judges (mostly the ones who used to work for defense firms or for insurance companies themselves) are letting them get away with it.
The supposed purpose of a business risk exclusion is to remove from coverage any claims based upon faulty workmanship that relate to repair of the faulty workmanship itself – not unforeseen and unexpected damage to other property. Example: I install a boiler in your house. The boiler blows up and takes out your family room. My liability carrier won’t pay for damage to the boiler (my work) – but it should pay for the consequential loss (repairing the family room).
That’s pretty much what the New Jersey Supreme Court held in Weedo v. Stone-E-Brick, 81 N.J. 233, 240 (1979), writing: “When a craftsman applies stucco to an exterior wall of a home in a faulty manner and discoloration, peeling and chipping result, the poorly-performed 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 as provided by the type of policy before us in this case.”
As another example, let’s take a look at the First Circuit’s very recent decision in Oxford Aviation, Inc. v. Global Aerospace, Inc., Docket No. 11-2208 (1st Cir. May 18, 2012). I should point out that the decision is notable not only for what it says, but because retired U.S. Supreme Court Justice David Souter sat on the panel.
Facts: Oxford repairs airplanes. Airlarr owned an airplane and hired Oxford to fix it. During the flight home from Oxford’s facility in Maine to Airlarr’s home base in Pennsylvania, one of the plane’s windows cracked. Airlarr also contends that, following Oxford’s repairs, Airlarr was left with uncomfortable seats, leaking fuel injectors, a cracked turbocharger, and an improperly installed carpet.
Oxford’s general liability carrier (Global Aerospace) disclaimed coverage for the resulting lawsuit, including any duty to defend, based upon the business risk exclusions.
But the First Circuit ruled in favor of the policyholder. As for the “your work” exclusion, the Court wrote: “[T]he your-work exclusion by its terms does not apply to ‘property damage occurring away from premises you own or rent and arising out of your product or your work,’ and Airlarr explicitly alleged that the crack [in the window] occurred in-flight.”
As for the “your product” exclusion, the Court wrote: “Neither the complaint nor the incorporated estimate sheet say that the side window was a product installed by Oxford; and Global has not suggested otherwise, beyond a half-hearted argument that ‘your product’ should be read broadly in the context of the whole agreement.”
The Court similarly dispatched the carrier’s arguments based upon the “products completed” exclusion and the “impaired property” exclusion.
Here’s what the First Circuit had to say about so-called “faulty workmanship” claims generally: “For obvious reasons (e.g., to cover consequential damages claimed by third parties), the CGL policy does not have an exclusion broadly written to exclude all claims arising from faulty workmanship. Rather, [the carrier] has crafted complex exclusions occupying several pages of text; and they have created an opportunity in some cases for a complaint to circumvent all of them. Here, at least one scenario relating to the cracked window, occurring in flight and away from Oxford’s facilities, does fall within coverage and could plausibly avoid all cited exclusions.” (Emphasis added.)
Therefore, opined the Court, although coverage was a “close call,” the duty to defend existed.
For those of you who might want more reference material on the business risk exclusions, the Fall 2011 edition of the ABA Tort Trial & Insurance Practice Law Journal (Volume 47, Issue 1) contains a great article entitled “Recent Developments in Insurance Coverage Litigation,” which contains a section captioned “Coverage Related to Faulty Workmanship Claims.” The authors review a number of different recent decisions, and cite a South Carolina case, Crossman Communities of N.C., Inc. v. Harleysville Mut. Ins. Co., Op. No. 26909 (S.C. Jan. 7, 2011), withdrawn on rehearing and superseded by 717 S.E.2d 589 (S.C. 2011), in which the Court concluded that this area of the law is an “intellectual mess.”
Hmmm. If it’s really such an “intellectual mess,” and if the policyholder gets the benefit of the doubt on questions of policy construction…shouldn’t coverage be deemed to exist in any case not involving repair to the faulty workmanship itself?
(The Journal is available through TIPS here, although for some reason they don’t have a listing for Volume 47, Issue 1 on the ABA website yet.)