The pages that follow discuss the provisions and exclusions of the current CGL form, CG 00 01 04 13, that are involved in faulty work or products claims, and survey some court decisions that have interpreted these provisions and exclusions.

Topics covered:

Introduction

Damage to your product exclusion

Products claims and the courts

Damage to your work exclusion

Other relevant policy provisions

Conclusion

Introduction

In 1986, the Insurance Services Office (ISO) issued commercial general liability (CGL) coverage forms that reworded and rearranged exclusions from the 1973 comprehensive general liability policy that dealt with faulty work and products exposures; the current CGL forms contain the same exclusions. The wording of the exclusions on both the 1986 edition and the current edition of the commercial general liability coverage forms is the same (although the definitions of “your product” and “your work” are different).

Exclusion (k) on the CGL form pertains to property damage to the named insured's product arising out of it or any part of it. Exclusion (l) pertains to property damage to the named insured's work arising out of it or any part of it and included in the products-completed operations hazard. Exclusion (l) does not apply if the damaged work or the work out of which the damage arises was performed on the named insured's behalf by a subcontractor.

Damage to Your Product Exclusion

The aim of this exclusion is, simply, to prevent insurance coverage under the CGL form for damage to the named insured's own products. It may seem strange that an insurance policy that provides liability insurance to insureds even needs such an exclusion since no one can be liable to himself. But, the reason for the exclusion stems mainly from the definition of “your product”. The definition is analyzed on the Public Liability A.2 pages (see Commercial General Liability Definitions). But, there are at least two important points to note here.

First, the named insured's product, by definition under the CGL form, does not include real property. The fact that the product definition now refers to other than real property stems from the fact that under earlier editions of the CGL policy, there was no distinction made between real and personal property. As a result, this led some insurers to deny coverage for damage to a building that the insured had erected, claiming that the building was a product of the named insured, and this stance, of course, led to many legal disputes. In order to clarify the situation, the 1986 edition of the CGL form defined “your product” as “any goods or products, other than real property, ….” Thus, any property that is real property is not going to be affected by the “your product” exclusion.

However, a case from the Supreme Court of Nebraska shows how a court's interpretation of “your product” is the final word on what that phrase means and how the “your product” exclusion can apply. The case is Chief Industries, Inc. v. Great Northern Insurance Company, 683 N.W.2d 374 (2004).

The insured in this action (Chief) brought a suit against the liability insurer (Great Northern) for a declaratory judgment that the insurer owed a duty to defend and indemnify the insured in a claim against the insured arising out of the collapse of grain bins. Chief had entered into a contract with ARASCO to manufacture, sell, and supervise the construction of 16 grain bins and related equipment in Saudi Arabia. A few years after the bins were constructed, they collapsed and ARASCO sued Chief. Chief notified its insurer, Great Northern, of the lawsuit and after an investigation, the insurer denied coverage. The denial was based on the your products exclusion. Chief filed a declaratory judgment action and after rulings against the insured, the case eventually ended up in front of the Nebraska Supreme Court.

The Supreme Court noted that Chief argued the your product exclusion did not apply because component parts of the silos were manufactured by third parties and not by Chief, so these parts were not the named insured's products. However, the court said although the components were not manufactured by Chief, the policy definition of “your product” includes products manufactured, sold, handled, or distributed by the named insured; since Chief sold, distributed, and handled the component parts, the definition was met.

And, in an interesting finding, the court stated that the damage to the silo was excluded since the silo was the named insured's product. Now, when it comes to “your product”, it may appear to be quite simple to separate real property from personal property. Black's Law Dictionary (Sixth Ed.) defines real property as “land, and generally whatever is erected or growing upon or affixed to land”. Personal property is defined as “everything that is the subject of ownership, not coming under the denomination of real estate”. However, in this case, the Supreme Court of Nebraska found that a silo that was most definitely erected and affixed to land was a product of the insured.

On the other hand, in Dublin Building Systems v. Selective Insurance Company, 874 N.E.2d 788 (2007), a court of appeals in Ohio declared that buildings constituted real property. The insurer was attempting to deny coverage for mold damage to a building built by the insured based on the damage to your product exclusion. The appeals court noted the definition of your product in the general liability policy specifically excluded real property. The court rejected the insurer's contention and said that real property is generally recognized as including both land and the structures affixed thereto.

The second point to note is that the parts of the definition relevant to this article make the case that other parties may receive or handle the named insured's product, or may rely on a warranty or representation concerning the product and so, a question about liability may arise.

For example, the definition declares that the named insured's product means any goods manufactured, sold, handled, distributed, or disposed of by others trading under the named insured's name. If a retailer is selling the named insured's product and that product deteriorates or falls apart on the store shelves, the retailer will, of course, want reimbursement for losses it may suffer. The named insured cannot look to his CGL form to pay for the retailer's claims since exclusion (k) applies to property damage to the named insured's product arising out of it. If the product causes bodily injury to someone or damages another's property, the exclusion is not applicable; but, damage to the product itself is not covered under the CGL form.

Another example is the fact that the definition includes warranties or representations made at any time with respect to the fitness, quality, durability, performance, or use of the named insured's product. The named insured dealing with the retailer in the previous paragraph, and trying to find coverage for the damaged product, may say his product came with a warranty of quality and it failed, so there is a valid products claim. This is not correct. If a claim is based on a product warranty or representation, there still has to be bodily injury or property damage to property other than the named insured's product for the CGL form to respond. If a claim is based on the fact that the named insured's product did not live up to its warranties or the representations made about it, and the only damage is to the product itself, there is no general liability coverage.

Note also that the definition of “your product” includes the providing of or failure to provide warnings or instructions; but, this does not change the fact that damage to the product itself is not covered. For example, the named insured could sell chain saws for cutting up trees or shrubs but fail to provide instructions on how to use the saws. If someone buys a chain saw and tries to cut up concrete blocks, ruining the saw, and a products claim is then made, this is excluded. If the user of the saw injures himself or damages his property, that is a proper basis for a products claim.

Products Claims and the Courts

The meaning of goods or products “handled” by the named insured sometimes causes problems. The meaning of that wording was called into question in Todd Shipyards Corp. v. Turbine Services, Inc.,674 F.2d 401 (5th Cir. 1982). Here, a federal court of appeals determined that a turbine upon which a subcontractor had performed repair work was not the subcontractor's product. The trial court had held that the damage to product exclusion applied because the insured had handled, i.e. touched, the component parts. The court of appeals interpreted the term “handled” more narrowly to mean to trade in or deal. A similar interpretation was made in the Pennsylvania case of Friestad v. Travelers Indemnity Company, 393 A.2d 1212 (Pa. Super. 1978).

A decision by a Wisconsin court of appeals also tries to clarify just what is meant by “products handled by the named insured”. In Holsum Foods Division of Harvest States Cooperatives v. The Home Insurance Company, 469 N.W.2d 918 (Wisc. App. 1991), a food manufacturer was deemed to be manufacturing a product when it cooked, jarred, and packaged ingredients provided by a customer, as opposed to merely providing a service to that customer. Thus, a claim based on damage to the final package was excluded since the finished jars of ingredients were a “product” of the named insured.

The United States district court in Oregon provided another example of judicial thinking as to what the term “product” entails. In Spring Vegetable Company v. Hartford Casualty Insurance Company, 801 F. Supp. 385 (Oregon 1992), the court stated that the injury to product exclusion barred coverage of damage to potatoes grown by a third person but processed in a negligent manner by the named insured; once the potatoes were in the possession of the insured for processing purposes, they became the product of the insured.

And, in a case from Texas (in which the Spring Vegetable decision was mentioned), the United States District Court for the Southern District of Texas said that title to a product is not an element of the policy definition of the insured's product. This case is Hi-Port, Inc. v. American International Specialty Lines Insurance Company, 22 F.Supp.2d 596 (1997).

Here, the insured contractor blended antifreeze. It was supplied the basic feed stocks for the antifreeze by the customer and then the insured blended this with other chemicals in accordance with the customer's proprietary formula and blending procedure. The resulting antifreeze was then packaged and distributed by the insured. A customer complained that a silicate gel had fallen out of the antifreeze and wanted the insured to recall the antifreeze. The insured did so and then asked the insurer to reimburse it for the recall expense. The insurer denied coverage based on a number of exclusions, one of these being the damage to your product exclusion. When it addressed the your product exclusion, the district court said that the fact that title to the feedstock and resulting antifreeze remained in the customer's hands did not preclude the material from meeting the policy definition of the insured's product which stated that the insured's product included goods or products handled or distributed by the insured. And, because the antifreeze met the policy definition, the exclusion applied.

Damage to Your Work Exclusion

The purpose of this exclusion is to prevent the CGL coverage form from guaranteeing the quality of the named insured's work. If there is damage to the named insured's work, the CGL form will not cover that damage. But, if the work injures someone or damages another's property, then the CGL form will respond to a claim. An example of this thinking can be found in the case of Weedo v. Stone-E-Brick, 405 A.2d 788 (N.J. 1979).

In that case, the New Jersey supreme court said: “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. The happenstance and extent of the latter liability is entirely unpredictable—the neighbor could suffer a scratched arm or a fatal blow to the skull from the peeling stonework. Whether the liability of the businessman is predicated upon warranty theory or, preferably and more accurately, upon tort concepts, injury to persons and damage to other property constitute the risks intended to be covered under the CGL.”

Another example of the intent behind the your work exclusion is the North Carolina case of Western World Insurance Company v. Carrington, 369 S.E.2d 128 (N.C. App. 1988). In this case, a court of appeals said that “since the quality of the insured's work is a business risk that is solely within his own control, liability insurance generally does not provide coverage for claims arising out of the failure of the insured's work to meet the quality or specifications for which the insured may be liable as a matter of contract.”

Besides noting the intent of the exclusion, there are some other facets about this exclusion that merit mention.

The damage to your work exclusion pertains to the named insured's completed operations, not work in progress. This is shown by the wording in the exclusion: property damage to your work arising out of it or any part of it and included in the products-completed operations hazard. Products-completed operations hazard is a defined term and for more information on it, see Commercial General Liability Definitions. But, suffice it to say that the definition emphasizes that the term deals with all bodily injury or property damage occurring away from the premises of the named insured and arising out of the named insured's work except work that has not yet been completed or abandoned. As to when the work has been completed, the definition goes on to state that the work will be deemed completed at the earliest of the following times: when all of the work called for in the contract has been completed; when all of the work to be done at the job site has been completed if the contract calls for work at more than one job site; or, when that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project. Note that work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

This 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. So, for example, if, in the Weedo case noted previously, the stucco work had been done for the insured contractor by a subcontractor, and the stucco peeled or chipped, a claim over the poor work would be covered by the CGL form. The insured may have hired the subcontractor and may be ultimately held legally responsible for the subcontractor's work, but when it comes to the your work exclusion, the CGL form considers the insured and the subcontractor as two separate entities. The insured will not be penalized because the subcontractor performed faulty work. Moreover, the exclusion is not going to apply to the named insured's liability for damage to a subcontractor's work out of which the damage to other property arises. For example, if a subcontractor's faulty work causes an entire building to burn down and the named insured general contractor is sued for the loss to the building, the named insured's CGL form will cover his liability for the entire amount of the loss, even the subcontractor's faulty work. On the other hand, if the loss had originated in work performed by the named insured, he would be covered only for damage to work performed by subcontractors; there is no coverage for damage to any work performed by the named insured.

The Supreme Court of Tennessee addressed this subcontractor exception in The Travelers Indemnity Company of America v. Moore & Associates, Inc., 216 S.W.3d 302 (2007).

In this case, the insurer brought an action against its insured contractor for a declaratory judgment that it owed no duty to defend or indemnify the insured in a claim against the insured for faulty window installation. The insured was the general contractor for the construction of a hotel and hired a subcontractor to provide and install the hotel windows. After completion of the construction, the tenant made a claim against the insured alleging poor and negligent design and implementation of the window installation resulting in water and moisture penetration. When the case got to the Tennessee Supreme Court, the court concluded that the entire hotel met the definition of “your work” because the entire construction project was performed by the named insured; therefore, all damages to the hotel would be excluded. However, the your work exclusion contained a subcontractor exception that provided that any damages arising out of the work performed by a subcontractor fall outside the exclusion and are covered by the CGL form. So, damages resulting from the subcontractor's faulty installation of the windows were not excluded form coverage, even if those damages affected the named insured's work.

Other Relevant Policy Provisions

Parts of exclusion (j) on the current CGL forms are appropriate for this discussion on faulty work and products claims.

(J)(5) excludes property damage to that particular part of real property on which the insured is performing operations if the damage arises out of those operations. For example, if the insured starts a fire while soldering plumbing pipes and the building burns down, any coverage for the resultant claim based on the faulty work of the insured would not include the particular part being worked on at the time of the loss. Now, since the term “that particular part” is not defined, disputes can arise over the scope of that phrase and, indeed, it has been subject to judicial scrutiny. But, in the final analysis, the use of the word “particular” indicates that the exclusion should be applied narrowly (even if some courts do not accept this idea). So, in the example, the exclusion should apply only to the portions of pipe being soldered together. The faulty work of the insured will not be covered with respect to the damage to the pipes being soldered together, but the damage to the rest of the plumbing system and the building should not be excluded.

And, even though this can be considered a loss due to the faulty work of the insured, exclusions (k) and (l) are not applicable. Remember, exclusion (k) applies to the named insured's product and, a product, by definition on the CGL form, does not include real property. Plumbing pipes are part of the building and so, is real property. But, even if the pipes were somehow considered the products of the named insured, exclusion (k) would not apply since the damage arose out of the soldering and not out of the pipes. As for exclusion (l), that is for completed operations only and this damage was done while the insured was on the job.

Exclusion (j)(6) is derived from the faulty workmanship exclusion found in the broad form property damage part of the old broad form comprehensive general liability endorsement. This exclusion, (j)(6), denies coverage for property damage to that particular part of any property that must be restored or repaired because the insured's work was incorrectly (faultily) performed on it. This may sound similar to the your work exclusion, but it is not applicable to completed operations as is exclusion (l). This is so because of the exception to exclusion (j)(6) that states that the exclusion does not apply to property damage included in the “products and completed operations hazard.” As noted previously, this phrase is defined on the CGL form as including property damage arising out of the named insured's work except for work that has not as yet been completed or abandoned. In other words, exclusion (j)(6) is not meant to apply to completed work.

There is a court decision concerning exclusion (j)(6) that merits mention due to its discussion of faulty workmanship and exclusions on the general liability policy. In Houston Building Service, Inc. v. American General Fire and Casualty Company, 799 S.W.2d 308 (Tex. App. 1990), a problem arose when the plaintiff's employees negligently applied linseed oil to wooden doors and door frames leading to a complaint that the oil caused discoloration and that the doors were sticky; the owner of the building asked Houston Building Service to pay for the damage. Houston Building made a claim to its insurer but American General declined to pay, citing, among other things, exclusion (j)(6) as support for its decision; subsequently, Houston Building sued for coverage under its policy.

After reviewing the facts, the policy, and the law, the Texas court of appeals declared that “Texas case law supports American General's assertion that provisions such as (j)(6) exclude coverage for damage to the insured's work or product as a result of faulty workmanship; the insured did not contract for indemnification for property damage caused by its own defective workmanship.” As for the exception in (j)(6) to property damage included in the products and completed operations hazard, the court looked over the definition of that term and decided that Houston Building was working on the premises under an ongoing service contract and, therefore, the work was not completed at the time of damage; so, the exception did not apply.

Another court ruling discussing completed operations (and in which the Houston Building Service decision is mentioned), is Goodwin v. Wright, 6 P.3d 1 (2000). Here, Goodwin was injured while operating a dump truck designed to haul and dump heavy dirt loads; the trailer bed is raised and lowered by a hydraulic cylinder ram. On the day of the accident, a newly-installed hydraulic cylinder ram failed on the way up and the truck bed dropped suddenly. Goodwin was injured when he bounced up and down inside the truck cab.

The cylinder that failed came from the insured (Eastside Machine) which had remanufactured the rebuilt dump truck cylinder. Eastside had a general liability policy but did not purchase products-completed operations coverage. When Goodwin sued Eastside, its insurer (Western National Assurance Company) denied coverage, saying that the claim was a completed operations claim, and so, was not covered. Goodwin obtained a default judgment against Eastside and then served a writ of garnishment on Western National. The insurer then moved for summary judgment and the trial court granted the motion. Goodwin appealed.

In affirming the trial court ruling, the court of appeals of Washington, Division 1, discussed when a job is deemed to be completed. The court said that as a general rule, a contract or operation is deemed completed when the work contracted for or undertaken has been finished and put to its intended use. Work that may need correction or service but which is otherwise completed will be treated as complete. The assertion by Goodwin that Eastside's work was incomplete because a critical operation was omitted (that is, a lock ring between cylinder stages was either not installed or was improperly welded) was rejected by the court; the idea that an operation negligently performed cannot be a completed operation is rejected. This was not a situation where the insured had an on-going service contract (like in the Houston Building case). So, the work of the insured was finished; the insured was paid for the work; the object worked on by the insured was put to its intended use; this was a completed operations claim; and, since the insured had not purchased completed operations insurance, there was no coverage for Goodwin's claim.

Conclusion

There is one main guiding principle to be followed when analyzing the your product and your work exclusions. The exclusions are meant to apply to damage to the named insured's work and product; insurance coverage for bodily injury or damage done to the property of others is not affected by these exclusions.