Damages Resulting From Injuries Not Covered By CGL Policies

Summary by Rebecca B. Aherne, Esq.

On December 30, 2009, the Second Appellate District filed its opinion in Baker v. National Interstate Insurance Company, holding that damages awarded the family of a bus driver as a result of negligent inspection of the bus were not recoverable under a policy which contained a products-completed operations hazard exclusion.

Factual and Procedural Background

On April 9, 2001, La Shaun Clemmons was driving a bus when she collided with a pickup truck.  She suffered fatal injuries when the driver’s seat broke loose from the floor and she was ejected through the front windshield of the vehicle.  Clemmons had purchased the bus in July 2000 from Four Winds which, in September 2000, inspected and repaired the bus.  Clemmons’ family filed a wrongful death action against Four Winds and others.  Four Winds tendered the defense of the action to American National Fire Insurance Company which had issued a CGL policy to Four Winds.  The policy covered damages resulting from bodily injury or property damage caused by accident.  The policy did not apply to bodily injury or property damage included within the products-completed operations hazard.  The products-completed operations hazard was defined as bodily injury and property damage occurring away from the insured’s premises and arising out of “your” (the insured’s) product or work, except products still in the insured’s possession and work not yet completed.  “Your product” was defined as goods or products manufactured, sold, handled, distributed or disposed of by the insured.  “Your work” included work or operations performed by the insured.  American denied coverage on the ground Four Winds did not have products or completed operations coverage.

The trial court in the wrongful death action held Four Winds negligently inspected or maintained the bus sold to Clemmons which was a substantial factor in causing Clemmons’ death. Judgment was entered against Four Winds in the amount of $9 million.  Clemmons’ heirs entered into a covenant not to execute on the judgment and accepted an assignment of Four Winds’ rights against American.  The heirs filed suit against American for breach of contract and bad faith asserting American wrongfully failed to defend and indemnify Four Winds.

The trial court found in favor of the heirs on the ground the products-completed operations exclusion did not apply because it applied only to product liability claims, not to claims for negligent maintenance or inspection services.  On appeal, the court agreed with American that the trial court wrongly interpreted the policy to provide coverage.

Judicial Holding and Analysis

The appellate court held the exclusion in the policy applied to the claim for damages arising from Four Winds’ negligent inspection of the bus sold to Clemmons.  The provision was not ambiguous.  It provided that the policy did not apply to bodily injury included within the products-completed operations hazard.  The policy defined the products-completed operations hazard to include all bodily injury arising out of the insured’s work or products.  The use of the word “or” unambiguously advised the insured that a claim alleging bodily injury arising from its product, once it was out of its possession, or its work, once it was completed, was excluded.

The heirs argued the definition of the products-completed operations hazard was ambiguous because it could be read to mean bodily injury arising out of the insured’s product or the insured’s work on its products.  The court disagreed, stating the policy contained separate definitions of “your product” and “your work” clarifying the separate nature of the insured’s products and work.  The definition of “your work” cannot be construed to mean “your work on your products.”  The insured’s work means work or operations performed by the insured.  The policy language compels the interpretation that a claim arising from Four Winds’ work and occurring in the course of an accident off its premises was not covered without regard to whether that work was or was not related to a product.

The Four Winds’ inspection services on the bus fell within the definition of “your work.”  When a person provides a service for a customer, for payment from that customer, the person is “working” or “performing an operation” in the context of his business activities.  The court rejected the heirs’ assertion that because the exclusion must be narrowly construed and because the definition of “your work” does not include the word “inspections”, the claim is not included within the exclusion for “your work.”  The “proverbial layperson” would understand the term “work” to include a business’ inspection services.  The fact that the definition of “work” did not include the word inspection did not render the policy ambiguous.

Comments and Implications

The court discussed at length the INA v. Electronic Purification Company case [(1967) 67 Cal. 2d 679], but did not rely on it, because the policy at issue in that case contained different language than the policy issued to Four Winds.  Electronic Purification Company sold, leased and installed water purification machines.  It was insured under a CGL policy which contained a “products hazard” exclusion.  The term “products hazard” was defined as 1) products manufactured, sold, handled or distributed by the named insured if the accident takes place after possession of the products has been relinquished by the insured and takes place away from the insured’s premises except goods rented to others; and 2) operations, if the accident takes place after operations have been completed and takes place away from the insured’s premises.  Electronic Purification leased one of its water purification machines, a nion generator, to a motel for use in its swimming pool.  Electronic Purification suggested that the motel hire the employees, who were to install the generator, to acid wash the pool walls.  While washing the walls, a floodlight blew out and the employees replaced it.  Due to negligence in repairing the fixture, its frame became charged with electricity and a hotel guest was fatally electrocuted when he touched the fixture.  Electronic Purification was sued.  It tendered the claim to its carrier, which rejected the tender citing the products hazard exclusion.  The Supreme Court ruled the exclusion was inapplicable.

The court ruled that even though the exclusion contained separate paragraphs for “products” and “operations”, they must be read together.  The only operations included within the exclusion were these closely related to the insured’s product and not purely service operations.  The court reasoned the “exclusion bears the heading . . . ‘Products hazard’ and begins ‘the term products hazard means’ . . . That introductory clause must refer to both the . . . ‘products’ subdivision as well as the ‘operations’ subdivision . . . Unless the subdivisions both relate to products, no reason justifies their joinder under a single heading.”  Electronic Purification’s improper replacement of the floodlight during the performance of acid washing the pool was a service covered by the policy because the acid washing was not related to the installation of the generator and thus not a “completed operation” related to a non-rented product-the only type of service encompassed within the exclusion.  Acid washing was not closely connected to the operation of installing the generator.

The court concluded:  “. . . the completed operations provision must be read to apply only to operations involving a product, it does not apply to an insured’s business if it involves services only, or if the product composes but a minimal part of the business.  Similarly, if the business of the insured may be severed into operations not related to a product, only those operations that do involve a product are subject to the completed operations exclusion.”

The Electronic Purification case has limited contemporary relevance as standard policies, like the one issued to Four Winds, now clearly provide that the hazard to be excluded is that arising from either products, once out of the insured’s possession, or from the insured’s work, once completed.  The language was changed because of the interpretation being given to the prior language by courts.

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