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New Jersey Court Holds Pollution Exclusion Inapplicable to Unintentional Contamination

In its recent decision in Benjamin v. State Farm Ins. Co., 2017 U.S. Dist. LEXIS 131078 (D.N.J. Aug. 17, 2017), the United States District Court for the District of New Jersey had occasion to consider the scope of the pollution exclusion under New Jersey law.

At issue in the Benjamin case was a policyholder’s right to coverage under his homeowner’s insurance for liabilities associated with a leaking underground storage tank located under his property.  Notably, the insured was unaware of the tank when it purchased the property.  It was only after the insured learned of the tank’s existence, and undertook efforts to have it excavated and removed, that he determined that the tank had leaked several years prior to his purchase of the property, resulting in soil and groundwater contamination.  The policyholder then sought coverage under several of his homeowner’s insurance policies for remedial efforts required by the New Jersey Department of Environmental Protection.

The Benjamin court addressed a number of coverage issues, including whether the insured’s liability resulted from an occurrence, the scope of the owned property exclusion, and how loss should be allocated under New Jersey law.  The court also addressed the application of the pollution exclusion, and in particular under what circumstances the exclusion applies to unintentionally created pollution.

In considering the scope of the exclusion, the court observed that New Jersey state and federal case law construing the pollution exclusion – both the qualified and absolute exclusion – have read an intentionality requirement into the exclusion.  Thus, not only is the exclusion limited to traditional environmental harm, as reflected in the Supreme Court’s decision in Nav-Its, Inc. v. Selective Ins. Co. of America, 869 A.2d 929 (N.J. 2005), but application of the exclusion has been limited to intentional industrial pollution even for exclusions not containing the “sudden and accidental” exception.  The court referred to its own prior decision in Castoro v. Hartford Accident and Indemnity Co., Inc., 2016 U.S. Dist. LEXIS 134686 (D.N.J. Sept. 29, 2016), in which it held that as a matter of public policy the exclusion did not apply to unintentional pollution caused by a “mom and pop” contracting business where the contamination was not expected or intended from the standpoint of the insured, even if the event giving rise to the contamination was expected.

Relying on this case law, the court denied the carriers’ motions for summary judgment on the basis of the exclusion, observing that the insurers failed to allege, or even attempt to demonstrate, that the insured policyholder expected or intended the pollution, particularly since he had no part in causing the release and was not even aware of the underground storage tank until long after the leak had happened.

 



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Florida Court Holds Prior Knowledge Exclusion Precludes Coverage for Malpractice Suit

In its recent decision in Farbstein v. Westport Ins. Corp., 2017 U.S. Dist. LEXIS 125990 (S.D. Fla. Aug. 9, 2017), the United States District Court for the District of Florida had occasion to consider the application of a prior knowledge exclusion in a lawyers professional liability policy.

At issue in Farbstein was Westport’s coverage obligations arising from its insured’s work associated with a real estate transaction.  The malpractice suit alleged that the insured learned just weeks prior to the deal’s closing that he had failed to negotiate a key term that had been requested by his client concerning responsibility for a pre-payment penalty clause in the mortgage existing on the property.  The insured acknowledged the mistake to his client, and admitted that there would be financial implications to the mistake, but nevertheless counseled his client to move forward with the transaction because the consequences of voiding the deal altogether could prove costlier than merely paying the penalty.  While discussing the consequences of the error with his client, the insured allegedly made reference to his professional liability policy.  On the insured’s advice, the deal closed and the client ultimately paid nearly a half million dollars extra in penalties as a result of the insured’s mistake.

Nearly one month after the closing of the deal, the insured’s professional liability policy expired, and the insured subsequently purchased a renewal claims made and reported policy from Westport. The i policy contained an exclusion applicable to any wrongful act committed prior to the policy’s inception date if the named insured “knew or could have reasonably foreseen that such WRONGFUL ACT might be expected to be the basis of a CLAIM.”  At issue in the ensuing coverage litigation was whether the insured reasonably could have expected a claim as of the inception date of the renewal policy.

In considering this question, the court acknowledged that while the duty to defend analysis is typically limited to the four corners of a complaint, extrinsic evidence sometimes can be considered for the purpose of resolving prior knowledge defenses, particularly when “the underlying complaint does not contain the facts relevant to whether the insured knew of the alleged wrongful acts prior to the inception of the policy.”  The court nevertheless observed that the malpractice suit contained specific allegations concerning the insured’s alleged conduct sufficiently demonstrating an act, error or omission committed prior to the policy’s inception, and that as such, it was not necessary to consider extrinsic facts to determine whether the insured had, in fact, committed a wrongful act.

Turning to the issue of the insured’s state of knowledge as of the inception date of the policy, the court observed that the prior knowledge exclusion in the Westport policy could apply based on one of two alternatives: either a subjective determination that the insured believed that a claim would be made or an objective determination that the insured reasonably should have expected a claim to be made.  The court noted that the complaint alleged that the insured had conversation he had with his client – well in advance of the policy’s inception – in which he admitted his mistake to his client and discussed the consequences of this error, which discussion included references to the attorney’s professional liability insurance.  These alleged facts, explained the court, sufficed to demonstrate a subjective knowledge on the insured’s part that a claim might be made during the policy period.  The court therefore concluded that the exclusion applied to preclude a defense and indemnity obligation.



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Massachusetts Court Holds Upholds Exclusion Applicable to Personal and Advertising Injury

In its recent decision in National Union Fire Ins. Co. v. Town of Norwood, 2017 U.S. Dist. LEXIS 116638 (D. Mass. July 26, 2017), the United States District Court for the District of Massachusetts had occasion to consider the scope of an exclusion in a general liability policy applicable to knowing violations of another’s rights.

National Union insured the Town of Norwood, which was sued by Boston Executive Helicopters (“BEH”) arising out of a permitting dispute regarding BEH’s attempts to expand its helicopter operations business.  Norwood had determined it would not consider BEH’s permit application, allegedly as a result of a complaint BEH had made to the FAA regarding Norwood’s alleged mismanagement of an airport.  BEH subsequently filed suit against Norwood, alleging that Norwood colluded with BEH’s competitors to stifle competition.  While the suit originally contained several causes of action, it was later pared down to a single cause of action alleging that Norwood retaliated against BEH in violation of the First Amendment.

National Union initially agreed to provide Norwood with a defense under a reservation of rights, but subsequently sought a declaration that it had no continuing defense obligation when the suit was amended to a single cause of action for retaliation.  National Union contended that the retaliation claim fell within an exclusion in its policies applicable to acts committed by the insured with the knowledge that such act would violate the rights of another and would inflict personal and advertising injury.

In considering the coverage dispute, the court acknowledged that under Massachusetts law, an insurer is obligated to defend an entire lawsuit so long as a single cause of action is potentially covered.  The court further observed, however, that under Massachusetts law, “the insurer is permitted to withdraw the defense” when the claimant can no longer establish a claim that would fall within the policy’s coverage.

With this in mind, the court considered the application of the knowing violations exclusion.  Norwood argued that for the exclusion to apply, National Union had to demonstrate that not only did Norwood intend the retaliatory act, but that it also intended the resulting harm to BEH.  The court agreed that knowing violations exclusions are construed in such a manner under Massachusetts law.  The court nevertheless reasoned that for a retaliation claim, the intent to cause harm is necessarily part of the cause of action since retaliatory acts are necessarily undertaken with the purpose of punishing a party.  As the court explained, “[b]ecause the conduct covered by a First Amendment retaliation claim is inherently willful, it requires intentionality and the deliberate infliction of injury.”  As such, the court concluded that the retaliation claim necessarily came within the scope of the exclusion and that National Union had no continuing duty to defend.

 

 

 

 



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Kentucky Court Holds Professional Liability Insurer Can Pay Limits and Terminate Its Defense Obligation

In its recent decision in Mt. Hawley Ins. Co. v. MESA Med. Grp., PLLC, 2017 U.S. Dist. LEXIS 111949 (E.D. Ky. July 19, 2017), the United States District Court for the Eastern District of Kentucky had occasion to address a provision in a professional liability policy permitting an insurer to “dump” its policy limits and “run” from its defense obligation.

Mt. Hawley insured MESA Medical Group under a medical professional liability policy with a $1 million limit of liability.  By endorsement agreed to by the parties after the policy was initially issued, defense costs were to treated as being outside of the policy’s limit of liability, but the endorsement expressly stated that Mt. Hawley at any time could tender the remaining policy proceeds and thereby terminate any future defense obligation it might have concerning any particular claim.  Notwithstanding this language, MESA Medical Group argued that Mt. Hawley was not permitted to tender its policy limits and avoid a defense in connection with an underlying claim as a matter of Kentucky common law.

In addressing this argument, the court acknowledged that in the absence of specific language to the contrary, an insurer has an ongoing defense obligation, even if policy limits have been exhausted as a result of payment of a judgment, settlement or interpleader.  The court noted, however, that there is no law preventing an insured and insurer from contracting around this general rule.  As such, the court agreed that the specific language of the endorsement permitting Mt. Hawley to tender its policy limits and terminate its defense was enforceable.  The court agreed that in hindsight the endorsement may have been a bad idea for MESA Medical Group, but that “in the absence of coercion or the violation of a public policy,” which the court found lacking on both counts, it was enforceable and that Mt. Hawley could elect to terminate its defense.

 

 

 



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New York Court Holds Pollution Exclusion Applicable to Pollution Caused by Covered and Uncovered Causes

In its recent decision in Matter of Midland Ins. Co., 2017 N.Y. App. Div. LEXIS 5065 (N.Y. 1st Dep’t June 22, 2017), the Supreme Court of New York, Appellate Division, First Department, had occasion to consider the application of the absolute pollution exclusion to contamination resulting from different sources, only one of which was clearly excluded.

At issue in Midland was coverage for the insured’s liabilities under CERCLA for lead contamination of soils in a residential area in Omaha, Nebraska.  The lead was partially a result of the insured’s mining operations, but also a result of the chipping and flaking of lead based paint on the houses in the area.  While the insured did not paint the houses, or manufacture the paint used on the homes, it was jointly and severally liable for the soil contamination under CERCLA, and thus responsible for remediating the soils.

The insured argued that under New York law, chipping and flaking of lead paint is not necessarily excluded by the pollution exclusion.  Westview Assocs. v Guar. Nat’l Ins. Co., 717 N.Y.S.2d 75 (2000); Herald Sq. Loft Corp. v Merrimack Mut. Fire Ins. Co., 344 F Supp 2d 915 (S.D.N.Y. 2004).  As such, the insured argued that at the very least, the exclusion should not apply to the entirety of the cleanup costs and that the costs should be allocated between lead contamination resulting from its mining operations and lead contamination resulting from lead paint chipping and flaking.

The court agreed that under some circumstances, lead paint does not come within the exclusion.  It nevertheless concluded these cases inapplicable since “the combined effect of the lead emissions and the lead paint was soil contamination – of the same soil.”  As the court observed, any soil solely contaminated as a result of lead paint would not have come within the scope of CERCLA.  As such, the court agreed that the exclusion applied to preclude coverage for the entirety of the underlying remedial costs.



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New York Court Holds General Liability Insurer Has Duty to Defend Odor Claim

In its recent decision in Hillcrest Coatings, Inc. v. Colony Ins. Co., 2017 N.Y. App. Div. LEXIS 4519 (N.Y. 4th Dep’t June 9, 2017), the Supreme Court of New York, Appellate Division, Fourth Department, had occasion to consider coverage under a general liability for allegations of odor emanating from a recycling facility.

Hillcrest operated a glass, paper and paper recycling facility in upstate New York.  Suit was filed against it by nearby residents complaining that Hillcrest operated its facility in a negligent fashion, thereby allowing hazardous materials and other substances to be discharged into areas where plaintiffs worked and resided.  The suit also alleged that Hillcrest’s facility created a pervasive malodorous condition.

Hillcrest sought coverage for the underlying suit under its general liability policy issued by Colony.  The policy contained a hazardous materials exclusion, which like a pollution exclusion, barred coverage for bodily injury or property damage “which would not have occurred in whole or [in] part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.”  The policy defined hazardous materials as “pollutants” as well as “lead, asbestos, silica and materials containing them.”  “Pollutants,” in turn, was defined by the policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

In an ensuing coverage action, Colony maintained that its policy’s hazardous materials exclusion barred coverage for the underlying suit.  The Fourth Department, affirming the trial court’s ruling on summary judgment, held that Colony had a duty to defend since it was not clear from the face of the complaint that the allegations of odor came within the scope of the exclusion.  As the court explained, “[a]lthough many of the factual assertions in the second amended complaint allege that the odor resulted from hazardous materials, those are not the only factual allegations therein. Indeed, foul odors are not always caused by the discharge of hazardous materials.”



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New York’s Highest Court Applies Proximate Cause Test To Additional Insured Endorsement

In The Burlington Insurance Company v. NYC Transit Authority, et al., (N.Y. June 6, 2017), the New York Court of Appeals – New York’s highest court – held that when an insurance policy states that additional insured coverage applies to bodily injury “caused, in whole or in part” by the “acts or omissions” of the named insured, the coverage applies to injury “proximately caused by the named insured.” The Court rejected the argument that an additional insured obligation is owed under this language when the named insured is without fault. In so holding, the Court concluded that the Appellate Division “erroneously interpreted” this policy language as extending coverage to injury only causally linked to the named insured and “wrongly concluded that an additional insured may collect for an injury caused solely by its own negligence, even where the named insured bears no legal fault for the underlying harm.” Thus, the Court of Appeals rejected the notion that “caused, in whole or in part” equates to “but for” causation. The Court also rejected the First Department’s conclusion that the phrases “arising out of” and “caused by” do not “materially differ.”

Burlington concerned coverage for an underlying matter arising out of a project in which New York City Transit Authority (“NYCTA”) contracted with Breaking Solutions, Inc. (“BSI”) to provide equipment and personnel and for BSI to perform tunnel excavation work on a New York City subway. BSI purchased CGL insurance from Burlington with an endorsement that afforded additional insured coverage to NYCTA, MTA and the City as additional insureds “. . . only with respect to liability for ‘bodily injury’ , ‘property damage’. . . caused, in whole or in part, by” 1. Your acts or omissions; or 2. The acts or omissions of those acting on your behalf.”

During the policy period, an MTA employee fell off an elevated platform as he tried to avoid an explosion after a BSI machine touched a live electrical cable that was buried in concrete at the excavation site. Suit was filed against the City and BSI asserting claims under New York’s Labor Law, as well as for general negligence and loss of consortium. Burlington assumed the defense of BSI and accepted the City’s tender under a reservation or rights. The City impleaded NYCTA and MTA, asserting claims for indemnification and contribution based on a lease of certain transit facilities. NYCTA tendered its defense to Burlington as an additional insured.

Burlington initially accepted NYCTA’s defense subject to a reservation of rights. However, discovery revealed that the BSI machine operator could not have known about the location of the cable or the fact that it was electrified and, the trial court, as a result, dismissed the plaintiff’s claims against BSI with prejudice. Thereafter, Burlington settled the underlying case, disclaimed coverage to NYCTA and MTA and commenced a subrogation and coverage action against NYCTA and MTA. The trial court granted Burlington’s motion for summary judgment, concluding that NYCTA and MTA were not additional insureds. The Appellate Division reversed, concluding that “the act of triggering the explosion . . . was a cause of [the employee’s] injury” within the meaning of the policy.”

On appeal to the Court of Appeals, NYCTA and MTA argued that “caused, in whole or in part” means “but for causation.” The Court disagreed and sided with Burlington, concluding that there was no coverage obligation because, “by its terms, the policy endorsement is limited to those injuries proximately caused by BSI [the named insured].” The Court reasoned that not all “but for” causes result in liability and “[m]ost causes can be ignored in tort litigation.” In contrast, “’proximate cause’ refers to ‘legal cause’ to which the Court has assigned liability.” The Court acknowledged that “but for BSI’s machine coming into contact with the live cable, the explosion would not have occurred and the employee would not have fallen or been injured,” but “that triggering act was not the proximate cause of the employee’s injuries.” As such, BSI was not at fault and the plaintiff’s injury was “due to NYCTA’s sole negligence in failing to identify, mark, or de-energize the cable.”

In reaching its conclusion, the Court discussed the amendment of the ISO form in 2004 to replace the “arising out of” language with “caused, in whole or in part,” noting that the change was “intended to provide coverage for an additional insured’s vicarious or contributory negligence, and to prevent coverage for the additional insured’s sole negligence.”

 

 



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Second Circuit Holds Pollution Exclusion Applicable to Sewage-Related Claims

In its recent decision in Cincinnati Inc. Co. v. Roy’s Plumbing, Inc., 2017 U.S. App. LEXIS 9729 (2d Cir. May 31, 2017), the United States Court of Appeals for the Second Circuit, applying New York law, had occasion to consider the application of a pollution exclusion to a case involving the release of sewage.

At issue in Roy’s Plumbing was coverage for a lawsuit alleging that the insured negligently performed inspection work and construction of a sewer refurbishment in the Love Canal area.  This allowed for pressure to build in the sewage system causing sewage and toxic “Love Canal materials” to be released from the sewers and onto the homes and properties of nearby residents.  On motion for summary judgment, the United States District Court for the Western District of New York held that the total pollution exclusion in Cincinnati’s general liability policies was unambiguous and applied to all aspects of the underlying claim, including the allegations of release of raw sewage.

The Second Circuit affirmed, holding that it had “no doubt that sewage is generally recognized in the industry or government to be harmful or toxic to persons,” and thus a pollutant for the purpose of the exclusion.  The court also rejected the insured’s argument that the allegations in the underlying suit relating to pressure fell outside of the exclusion, noting that the pressure described was merely the mechanism allowing for the pollutants to escape the sewer, and not a separate form of property damage in and of itself.

In addition to these arguments, the insured argued on appeal that if the pollution exclusion applied to sewage-related claims, then as a plumber, the coverage under its general liability policies essentially would be negated for most damages due to plumbing work.  The court rejected this assertion, noting that under New York law, the pollution exclusion only applies to traditional environmental harm, citing to Belt Painting Corp. v. TIG Ins. Co., 742 N.Y.S.2d 332 (2d Dep’t 2002), aff’d, 763 N.Y.S.2d 790 (2003).  The court concluded that this limitation on the exclusion “eliminates the overbreadth” complained of by the insured.



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Washington Supreme Court Applies Efficient Proximate Cause Test to Pollution Exclusion

In its recent decision in Xia v. ProBuilders Specialty Ins. Co. RRG, 2017 Wash. LEXIS 443 (Wash. Apr. 27, 2017), the Supreme Court of Washington had occasion to address the concept of efficient proximate cause as it relates to the application of a pollution exclusion.

At issue in Xia was ProBuilders’ coverage obligation under a general liability policy for an underlying claim involving a hot water heater in a new home constructed by its insured.  An exhaust vent for the heater had not been properly installed, thus allowing for carbon monoxide to be released directly into the home and causing injury to the home purchaser.  ProBuilders denied coverage to its insured on the basis of its policy’s pollution exclusion, as well as on the basis of another exclusion not at issue on appeal.

The Court began its analysis by looking to its prior case law concerning the pollution exclusion, in particular its decisions in Cook v. Evanson, 920 P.2d 1223 (1996), Kent Farms, Inc. v. Zurich Ins. Co., 969 P.2d 109 (1998), and Quadrant Corp. v. American States Insurance Co., 110 P.3d 733 (2005).  Through these decisions, the Court limited application of the pollution exclusion to traditional environmental harms or to harms inflicted on persons as a result of pollutants acting as pollutants.

In Kent Farms, the Court held that the exclusion was inapplicable where an individual was injured as a result of being sprayed by diesel fuel whereas in Quadrant, the Court held the exclusion applied to a claim involving alleged injuries resulting from decking sealant.  The Court harmonized these cases by noting that in Kent Farms, the claimant was not injured as a result from the diesel fuel acting as a pollutant, but instead from the force and impact of the spray. By contrast, in Quadrant, the claimant was injured as a result of the toxicity of the sealant.  As the Court noted:

As discussed in Quadrant, the facts in Kent Farms did not result in a pollutant acting as a pollutant in such a way that would trigger the pollution exclusion. If the diesel fuel in Kent Farms had been replaced with water, for example, the liquid would still have struck, choked, and engulfed the victim just as surely as the diesel fuel—albeit with less severe consequences. As this court noted, the toxic nature of the pollutant was not central to the event that triggered coverage under the insurance policy. Id.

With this context in mind, the Court agreed that the underlying claim in Xia, involving injuries as the result of exposure to carbon monoxide, could come within the pollution exclusion.  The Court nevertheless observed that per the rule of efficient proximate cause, when a “covered peril” sets in motion a causal chain, the last link of which is an “uncovered peril,” then there is coverage under the policy.  The Court reasoned that this analysis should apply in the context of a general liability policy if a covered “occurrence” gives rise to a loss that might otherwise be excluded.  The Court noted, however, that there are limitations to this rule:

… the efficient proximate clause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” … It is perfectly acceptable for insurers to write exclusions that deny coverage when an excluded occurrence initiates the causal chain and is itself either the sole proximate cause or the efficient proximate cause of the loss.

But such an exclusion, explained the Court, cannot overcome the efficient proximate cause rule.  The Court reasoned that the non-standard pollution exclusion in ProBuilders’ policy applicable to any harm “regardless of the cause of the pollution and whether any other cause of said bodily injury, property damage, or persona injury acted jointly, concurrently, or in any sequence with said pollutants or pollution” was improperly broad since it would have circumvented the efficient proximate cause rule.  The Court, therefore, held that this causation language was unenforceable.

With this in mind, the Court turned to the question of what was the efficient proximate cause of the underlying claim.  The Court observed that the underlying suit alleged that the carbon monoxide resulted from the improper installation of the hot water heater’s venting, which in and of itself would be a covered “occurrence” under ProBuilders’ policy.

ProBuilders’ argued that the Court’s application of the efficient proximate cause rule would essentially negate the pollution exclusion, since all acts of pollution can be traced to an accident or an instance of negligence that could qualify as an “occurrence” under a general liability policy.  The Court did not agree, observing that when the pollution event is the first step in the chain of causation leading to the injury, such as application of flooring sealant, then the pollution exclusion will apply.  The Court further reasoned that ProBuilders could have drafted a more specific exclusion applicable to the occurrence giving rise to the pollution, such as an exclusion applicable to installation of home fixtures of hot water heaters, which would have avoided the efficient proximate cause rule.

In summing up its decision, the Court explained:

Pollution exclusion clauses are an important tool for insurers to avoid liability stemming from loss caused by pollutants acting as pollutants where the insured has paid no premiums for such coverage. However, emphasis must be given to the phrase “caused by.” The efficient proximate cause rule continues to serve the underlying purpose of insurance policies and applies just as effectively to these facts as it has in prior cases. We hold that the efficient proximate cause of Xia’s loss was a covered peril: the negligent installation of a hot water heater. Although ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide in Xia’s home, ProBuilders breached its duty to defend in the face of an alleged covered occurrence that was the efficient proximate cause of the loss.

The Court therefore held that ProBuilders improperly breached its duty to defend, and did so in bad faith.



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Third Circuit Finds Coverage for Faulty Workmanship Claim

In its recent decision in Travelers Prop. Cas. Co. of Am. v. USA Container Co., 2017 U.S. App. LEXIS 6602 (3rd Cir. Apr. 18, 2017), the United States Court of Appeals for the Third Circuit, applying New Jersey law, had occasion to consider the scope of coverage afforded under a general liability policy for property damage resulting from faulty workmanship.

Travelers’ insured, USA Container, was hired by Meelunie B.V./Amsterdam, a corn syrup distributor, to arrange for the transfer of corn syrup from rail cars to drums, so that the product could be shipped overseas.  USA Container subcontracted out a portion of the work requiring heating of the syrup so that it could be transferred from the rail cars.  The subcontractor accidentally overheated the product, thereby damaging it.  As a result, Meelunie’s overseas customers rejected the product.  Meelunie eventually sold the product at a reduced rate and then asserted a claim against USA Container for lost revenue. Travelers, denied coverage for the claim on the basis that it did not fall within the policy’s insuring agreement and on the additional grounds that various business risk exclusions applied.

Travelers argued that the damage to the corn syrup was not the result of an “occurrence,” citing to the seminal New Jersey Supreme Court decision Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (N.J. 1979), in which the Court held that an insured’s defective work does not qualify as an occurrence under a general liability policy.  The Third Circuit observed, however, that the New Jersey Supreme Court’s more recent decision in Cypress Point Condominium Ass’n v. Adria Towers, L.L.C., 143 A.3d 273 (N.J. 2016) limited the scope of Weedo and ultimately concluded that faulty workmanship causing damage to otherwise non-defective work can constitute an occurrence under a general liability policy.  The Third Circuit, therefore, rejected Travelers argument that the damage to the corn syrup caused by USA Container’s subcontractor was not an occurrence.

Travelers further argued that its policy’s business risk exclusions applied to bar coverage; in particular, exclusion j(6) applicable to “that part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it” and exclusion n, applicable to product recalls.  With respect to exclusion j(6), the Third Circuit concluded that the syrup was not “restored, repaired, or replaced,” but instead sold at a discount, causing loss to Meelunie.  The court further found that the product recall exclusion had no application since Meelunie was able to sell it, albeit at a discounted price.  As such, the court held that neither of the exclusions applied and that Travelers was responsible for insuring any damages ultimately paid by USA Container to Meelunie.

 

 



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