Cargo Coverage under CGL Form

 

September 21, 2015

 

Artisan and Truckers Casualty Company filed a complaint for declaratory judgment asking the court to declare that Artisan did not have a duty to defend or indemnify its insured in an underlying lawsuit. This case is Artisan and Truckers Casualty Company v. Hanover Insurance Company, Case No. 14–cv–05051, 2015 WL 5081458 (Aug. 27, 2015).

 

Hanover insures Access America Transport. Access entered into a broker-carrier agreement with Star Way (Artisan's insured), and pursuant to that agreement, Star Way agreed to transport two backhoes belonging to CNH America. Star Way accepted the shipment and the backhoes were loaded onto a truck. The backhoes were then reportedly stolen from the premises of Star Way before they could be delivered to the customer. Hanover paid CNH for the loss and in exchange, CNH assigned its claims to Hanover. Hanover then sued Star Way and Star Way sought coverage from Artisan.

 

In filing a declaratory judgment action, Artisan said there was no coverage under the CGL form since the policy does not provide cargo coverage. Hanover disagreed.

 

The United States District Court, N.D. Illinois, Eastern Division noted that both Artisan (and Star Way, the insured) and Hanover believed that the theft of the backhoes constituted property damage for the purposes of CGL coverage. The court did not agree. The court said the great weight of authority holds that theft does not constitute loss of use. Therefore, the court ruled, neither Hanover nor Star Way met the burden of proving that the claim fell within the CGL coverage for property damage. This alone was sufficient for the court to grant Artisan's motion for summary judgment.

 

However, the court did note that even if coverage was established, there were two exclusions in the policy that would apply.

 

The first exclusion is the damage to your work exclusion. Artisan argued that the work at issue is the transportation of the backhoes and the damage at issue arose out of that work. Hanover countered that the exclusion is meant to protect against faulty workmanship and the term “work” does not apply to Star Way's activities. The court acknowledged that “work” usually involves workmanship and is used in the context of construction projects. However, the court said, it does not follow that work means only workmanship and necessarily excludes transportation or delivery of a product. Work is defined in the dictionary as physical or mental effort or activity directed toward the production or accomplishment of something. In this instance, the theft of the backhoes arose out of Star Way's activity directed toward accomplishing the delivery of the backhoes and so, the exclusion would apply.

 

The second exclusion is the impaired property exclusion. Artisan argued that this exclusion applied because the cargo loss resulted from the failure to perform a contract to transport the backhoes. The court pointed out that the underlying complaint provided that damage to property not physically injured arose out of Star Way's failure to perform in accordance with the terms of the broker-carrier agreement. Thus, said the court, even if Hanover had established that theft of the backhoes was covered as property damage, the impaired property exclusion would apply.

 

The court granted Artisan's motion for summary judgment.

 

Editor's Note: This case is presented for the interesting point made by the U.S. District Court that theft of property does not constitute loss of use. It is hard to explain how a piece of property that is missing through theft is available for use; put another way, if the property is gone, there is in fact a loss of use since the property obviously cannot be used.

 

“Property damage“ is defined in the CGL form at issue here as physical injury to property or loss of use of tangible property that is not physically injured. Two backhoes are definitely tangible property and in this instance there is a loss of use since they are gone. However, the ruling of the court stands.