Why the “your work” exclusion in CGL policies is limited in application and why damages seemingly for loss of use of “your work” may not be.
In claims arising out of construction defects and faulty workmanship, insurers are often faced with many difficult coverage questions. Not the least among these are the issues surrounding the “occurrence” and “property damage” issues, but equally important is a proper assessment of the applicability of Business Risk exclusions. On January 31, 2012, the Missouri Court of Appeals, Eastern District, rendered an opinion providing guidance as to the interpretation of the “your work” exclusion found in many commercial general liability policies.
In Cook’s Fabrication & Welding, Inc. v. Mid-Continent Cas. Co., Continental Equipment Co. hired Cook’s to install two mast radial stackers at quarries owned by LaFarge North America, Inc. Cook’s installed the stackers at two Missouri quarries owned by LaFarge. Greystone, Inc. manufactured the stackers, which were intended for use as conveyors to move rock and gravel from one location to another. After Cook’s completed installation, both stackers collapsed, causing damage including hindrances to each quarry’s ability to continue doing business while awaiting repairs.
In 2006, LaFarge filed a products liability suit against Greystone in federal court alleging damages of lost business, business opportunities, and profits. In turn, Greystone filed a claim against Cook’s for indemnification, alleging Cook’s had negligently installed the stackers.
At the time of the stacker collapses, Cook’s was insured under a CGL policy issued by Mid-Continent. Mid-Continent initially agreed to defend Cook’s in the federal lawsuit but then withdrew its defense, having determined coverage was precluded by the policy’s “Damage To Your Work” exclusion. In April of 2008, Cook’s filed a declaratory judgment action against Mid-Continent in state court asking the court to declare any liability assigned to Cook’s in the federal suit was covered by the CGL policy.
In November of 2008, Greystone paid $380,000 to LaFarge in settlement of the federal suit. It then initiated a state-court lawsuit against Cook’s for indemnification, again alleging Cook’s negligently installed the stackers and was responsible for the damages to LaFarge. Greystone alleged the money it paid satisfied LaFarge’s damages for lost profits during the time the stackers were inoperable and under repair. Mid-Continent against declined to defend Cook’s. The trial court found for Greystone’s and ordered Cook’s to indemnify Greystone for the full amount paid to LaFarge.
Greystone then filed a cross-claim in Cook’s declaratory judgment action seeking garnishment against the Mid-Continent policy. All parties filed summary judgment motions, and the court ruled in favor of Mid-Continent. Naturally, an appeal followed.
Mid-Continent contended its “your work” exclusion barred coverage completely. The exclusion stated, “This insurance does not apply to … ‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Mid-Continent focused on the phrase “arising out of,” arguing that because all the damages at issue arose out of Cook’s work they were not covered. Cook’s and Greystone disagreed, asserting the exclusion applied only to damage to Cook’s work, not all damage arising out of Cook’s work.
The Court of Appeals agreed with Cook’s and Greystone, noting the exclusion clearly barred coverage only for damage to Cook’s work (as opposed to damages to property other than Cook’s work but which still arose out of it). Additionally, the Court compared the exclusion to the policy’s definition of “products-completed operations hazard” and concluded the interpretation urged by Mid-Continent was impermissible. The Court reasoned, “A plain reading of these two policy provisions reveals that while the PCOH definition in the instant case encompasses certain ‘“property damage”…arising out of…“your work,”’ the exclusion addresses only the portion of that same property damage which was actually caused to ‘your work.’ Both contain the same language concerning property damage arising from the insured’s work, and both clearly address property damage falling within the definition of PCOH. However, the exclusion contains the qualifying phrase ‘to your work,’ thereby removing from coverage property damage that falls within the PCOH definition, but that actually occurred to the insured’s work. Any remaining property damage meeting the definition of PCOH but occurring to property that was not the insured’s work, it follows, would be covered.” The Court further found these provisions to be unambiguous.
Actually, the Court concluded an ambiguity would exist only under the interpretation of the exclusion advanced by Mid-Continent. “If the exclusion in fact addresses all property damage arising from ‘your work’ and ‘included in the PCOH definition,’ then the exclusion would remove coverage for all property damage included in the PCOH definition, rendering the latter provision illusory.”
Thus, the Court held the “your work” exclusion applies not to any damage arising out of an insured’s work but only to damage specifically to the insured’s work. The exclusion, therefore, does not apply to damage to other property even if it does arise out of the insured’s work.
The Court then assessed the application of the exclusion in light of the specific damages assessed against Greystone and, as indemnitor, Cook’s. The policy defined “your work” as “(1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations.” The Court held, “It is clear that the work or operation Cook’s performed was installation of the mast radial stackers. The materials and equipment furnished in connection with the installation would include the stackers themselves and any equipment necessary for installation. Therefore, applying the plain language of the policy, any physical damage to the stackers or related equipment Cook’s installed, or any loss of use of those items, would constitute ‘property damage’ to Cook’s’ ‘work,’ and would not be covered due to the policy exclusion.”
The more interesting issue, however, concerned LaFarge’s loss of use of other equipment and the quarry itself. Remember, the damages Greystone paid to LaFarge in settlement of the latter’s claim included the loss of production capacity and loss of use of its facilities as a result of the stacker collapse. The Court held this was “damage to property falling under the definition of PCOH, but property that is not part of the mast radial stackers or the installation thereof. This would therefore not be excluded by the ‘Damage To Your Work’ policy exclusion, rather these damages would be coverd by the PCOH definition in the policy.”
In essence, the Court determined that, while loss of use of the stackers themselves was not covered because it was damage to Cook’s work, loss of use of the quarries and other equipment used at the quarries – including profits lost – were covered because that damage was not damage to “your work,” even though the loss of use of those items was caused by the loss of use of Cook’s work.