Litigation Is that Product Liability Claim Covered? This article was originally published in the June 2016 edition of Claims magazine, a PropertyCasualty360 publication. by Matthew D. Stockwell and Amanda Senske

Commercial General Liability (“CGL”) coverage for a claim that involves insurance policies broadly provide faulty products or workmanship, this defense and indemnity coverage for article addresses these critical policy claims of bodily injury and property provisions, as they are among the damage asserted against an insured. most frequently cited. Product manufacturers are frequently called upon to defend against Property damage caused claims that their products caused by an occurrence Matthew D. Stockwell bodily injury or property damage. The standard CGL policy provides Litigation Construction companies, for example, coverage for “property damage” that +1.212.858.1075 also face significant exposure for is caused by an “occurrence.” The [email protected] claims arising out of alleged faulty term “occurrence” is often defined workmanship or defective construc- as “an accident, including continuous Matthew D. Stockwell is a counsel in tion. These policyholders look to or repeated exposure to substantially Pillsbury’s Litigation practice, where he their insurance companies to provide the same general harmful conditions.” focuses on counseling and civil litigation them with a defense against any such (See CG 00 01 12 07, Sec. V, ¶ 13). in the insurance recovery and construction claims, and for indemnity in the event While that definition may seem fairly arenas. He is based in the New York office. of a judgment or a settlement. straightforward, many insurance coverage disputes alleging faulty If the policyholder is able to establish workmanship or construction defects that a claim falls within its policy’s focus on the issue of what constitutes coverage grant, the burden then an “occurrence” under a standard shifts to the insurer to prove that an CGL policy. exclusion or other policy provision operates to preclude coverage. Insurers typically contend that faulty Insurers often attempt to minimize or workmanship or defective products eliminate their exposure to products do not constitute an occurrence liability claims by citing the “your because doing so arguably shifts the product” or “your work” exclusions burden to the insured to demonstrate Amanda Senske (among others) that appear in that there is an “occurrence,” thereby Litigation standard-form CGL policies. Insurers relieving the insurer of its burden +1.212.858.1237 have also attempted to argue that the to prove that a coverage exclusion [email protected] underlying claims asserted against applies. However, courts have the policyholder do not constitute an increasingly rejected these arguments Amanda Senske is a Litigation associate “occurrence” under the CGL policy. over time. In fact, the majority view and is located in the New York office. Her is that faulty workmanship triggers practice focuses on complex commercial Although there are many reasons an occurrence if resulting property litigation matters. why an insurer may disclaim is damaged. (See, e.g., BPI, Inc. v.

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Nationwide Mut. Ins. Co., 235 W. Va. 418, 425 (Pa. Super. 2013), appeal “Your work” and “your 303, 311 (W. Va. 2015) (collecting denied, 627 Pa. 759 (2014), several product” exclusions cases)). lawsuits were filed against Indalex Most CGL policies exclude coverage alleging that windows and doors it for property damage to the insured’s Recently, courts in North Dakota, supplied to a residential construction product. (See CG 00 01 12 07, West Virginia, Connecticut, and project were defectively designed Sec. I, Coverage A, ¶ 2.k.) “Your Georgia all rejected insurers’ “no or manufactured, resulting in product” is typically defined as occurrence” arguments in the context water leakage that caused physical any goods or products, other than of construction defect cases. (See damage to the underlying plaintiffs’ real property, manufactured, sold, K&L Homes, Inc. v. Am. Family Mut. residences. Relying on Kvaerner, handled, distributed or disposed of by Ins. Co., 829 N.W.2d 724 (N.D. 2013); the insurer asserted that faulty the insured. Cherrington v. Erie Ins. Prop. & Cas. workmanship and product defects do Co., 231 W. Va. 470 (2013); Capstone not qualify as an “occurrence” under Similarly, the “your work” exclusion Bldg. Corp. v. Am. Motorists Ins. Co., the policy. The court disagreed and states that the CGL policy will 67 A.3d 961 (Conn. 2013); Taylor found that the insurer owed Indalex a not provide coverage for property Morrison Servs. v. HDI-Gerling Am duty to defend because the underlying damage to “your work arising out of Ins. Co., 746 S.E.2d 587 (Ga. 2013)). claims alleged property damage to it or any part of it and included in property other than Indalex’s product. the products-completed operations Pennsylvania is another jurisdiction hazard.” (See CG 00 01 12 07, Sec. that has recently shifted course. I, Coverage A, ¶ 2.l.) The purpose For years, courts determined An increasing number of of the “your work” exclusion is to that contractual claims of faulty prevent a liability policy from acting workmanship or product defects jurisdictions are joining the as a performance bond covering a did not constitute occurrences contractor’s work, or serving as a in Pennsylvania. See for example, majority view that faulty warranty on the quality of the work Kvaerner Metals Div. of Kvaerner U.S., itself. Instead, the liability policy is Inc. v. Commercial Union Ins. Co., 589 products and defective intended to protect the contractor Pa. 317, 322 (2006). In Kvaerner, the when its work damages someone court held that a coke oven battery construction can constitute else’s property. On the other hand, that failed to meet specifications coverage for faulty workmanship did not constitute an occurrence. “occurrences” under most does not necessarily transform a The Kvaerner decision was limited liability policy into a performance to situations where a defective CGL policies… bond, because performance bonds product did not cause damage to are broader than liability policies anything other than the product in that they guarantee completion itself, although court decisions that An increasing number of of a construction contract upon the followed Kvaerner did not recognize jurisdictions are joining the contractor’s default, and benefit this critical distinction. Nevertheless, majority view that faulty products the owner of a project rather than in 2013, a Pennsylvania appellate and defective construction can the contractor. (See U.S. Fire Ins. Co. court held that claims asserted constitute “occurrences” under v. J.S.U.B., Inc., 979 So. 2d 871, 888 against a manufacturer constituted most CGL policies, particularly (Fla. 2007)). an occurrence, and found coverage where such products or work because the underlying claims alleged cause damage to other property. In other words, the “your product” damage to persons or property other Therefore, policyholders should exclusion is utilized to avoid than the insured’s product. not assume that there is no coverage for damage to the insured’s coverage if their products or own product, but usually will not In Indalex, Inc. v. National Union Fire work cause bodily injury or exclude coverage for damage to Ins. Co. of Pittsburgh, PA, 83 A.3d property damage. other property (“third party property

Pillsbury Winthrop Shaw Pittman LLP Is that Product Liability Claim Covered? damage”) caused by the insured’s Case law in recent years has worthless or had very little value and product (see, e.g., Hartford Fire confirmed that the “your work” the purchasers’ customers were not Ins. Co. v. Thermos L.L.C., 2015 U.S. and “your product” exclusions do satisfied with the product. Dist. LEXIS 156373 (N.D. Ill. Nov. 18, not preclude coverage for third 2015)). The “your product” exclusion party property damage. (See Wood Eventually, the purchaser sued the also will not negate coverage where v. Preferred Contrs. Ins. Co. Risk manufacturer for lost profits and the insured’s defective product is Retention Grp. LLC, CV 14-128-M- earnings, and the manufacturer’s incorporated into the product of DLC, 2015 U.S. Dist. LEXIS 151140, insurance company disclaimed another and causes damage to that *10 (D. Mont. Nov. 6, 2015)). For coverage, citing among other other product. example, damage to carpeting caused provisions the “your product” by a contractor’s defective installa- exclusion in the policy. However, the The “your work” and “your product” tion of windows is covered under court rejected the insurer’s position exclusions are comparable, and most CGL policies. Similarly, faulty and held that because the purchaser both are often cited by insurers materials and workmanship causing was not seeking damages for property in products liability and faulty a home to be continuously exposed damage to the manufacturer’s workmanship claims. For example, to moisture, producing damage to product, but rather for damages (lost in Thruway Produce, Inc. v. Mass. surrounding structural elements, is profits) caused by damage to third Bay Ins. Co., 114 F. Supp. 3d 81 covered. (See, e.g., Pulte Homes of parties’ property (i.e., its customers’ (W.D.N.Y. 2015), the insurer relied N.M., Inc. v. Ind. Lumbermens Ins. Co., arrows), the “your product” exclusion on both exclusions to deny coverage 367 P.3d 869 (N.M. Ct. App. 2015)). did not apply. under the policy when the insured supplied poisonous apples that were In Magnus, Inc. v. Diamond State Ins. In a majority of jurisdictions, stand- ultimately incorporated into baby Co., 101 F. Supp. 3d 1046, 1049-50 (D. ardform CGL policies cover claims food. The court, however, held that Kan. 2015), a manufacturer supplied of faulty workmanship and product the exclusions did not apply, because defective aluminum adapters to defects for damage caused to other the poisoned apples damaged “other another company, which utilized the work or other products. Although property”—the baby food. Similarly, adapters in arrows that were being insurers often cite various policy in Harleysville Worcester Ins. Co. v. sold to customers. The purchaser exclusions, these exclusions do not Paramount Concrete, Inc., 10 F. Supp. subsequently informed the manufac- necessarily apply, and policyholders 3d 252, 266 (D. Conn. 2014), the turer that it was experiencing should carefully review all of the court held that the insured’s product problems with the adapters “seizing,” underlying facts and have a complete (shotcrete), which caused a pool to or becoming permanently affixed to understanding of their policy’s crack and leak, constituted damage the arrows. As a result, the purchasers’ provisions and exclusions, as well as caused by the insured’s product, not customers could not remove the the applicable law in their respective to the insured’s product, and as a broadheads or perform “screw-off jurisdictions, in order to determine result, the “your product” exclusion functions” on blades or arrow tips. whether an underlying claim is did not apply. Consequently, the arrows became covered or at least potentially covered.

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