The 10th Circuit Court of Appeals recently weighed in on the debate over the
meaning of the phrase "that particular part" in the "damage to
property" exclusion in standard commercial general liability (CGL)
policies. Despite the seeming precision of the phrase, the court found that it
was ambiguous.
One of the so-called business risk exclusions, the "damage to
property" exclusion, narrows coverage for certain types of property damage
claims. A principal source of disagreement among courts has been the words
"that particular part," which is found in paragraphs j(5) and j(6) of
the exclusion.
j. Damage To Property
"Property damage" to:
. . .
(5) That particular part of any real property on which you or any
contractors or subcontractors working directly or indirectly on your behalf
are performing operations, if the "property damage" arises out of
those operations; or
(6) That particular part of any property that must be restored,
repaired or replaced because "your work" was incorrectly performed
on it.
A September 2013 IRMI Expert Commentary article by Craig Stanovich,
"Broad
Form Property Damage—A Look Back," recounts the drafting history of
the phrase "that particular part" in the damage to property
exclusion. The phrase originally was included in a separate broad form property
damage endorsement and was intended to limit the scope of the exclusion in
pre-1985 general liability policies for property damage to property in the
insured's care, custody, or control.
The 1985 edition of the standard Insurance Services Office, Inc. (ISO), CGL
policy incorporated the phrase into the damage to property exclusion, where it
has remained since. According to Mr. Stanovich, ISO's explanation of that
language, expressed in a 1979 memorandum titled "Broad Form Property
Damage Coverage Explained," made clear that the addition of the words
"that particular part" was intended to "precisely
define the extent to which damage to property on which the insured is actually
working is excluded.… The intent … [is] to exclude only damage to the
particular property on which the insured is working."1
Thus, the intent of adding the phrase to j(5) and j(6) of the damage to
property exclusion was to exclude only damage to the specific unit of
property on which the insured was actually working, or which must
be restored, repaired, or replaced because the insured's actual work on
it was incorrectly performed.
Prior Court Decisions
On its face, the phrase does not seem particularly confusing. In practice,
however, courts have adopted three different views of what it means.
Some courts, consistent with the drafting history of the exclusion, have
recognized that the phrase "that particular part" is limiting and
narrows the scope of the exclusion to bar coverage only for property damage to
those specific portions of a project on which the insured was actually
performing defective work. See, e.g., Fortney & Weygandt, Inc.
v. American Mfrs. Mut. Ins. Co., 595 F.3d 308, 311 (6th Cir. 2010) (the
words "that particular part" are "trebly restrictive, straining
to the point of awkwardness to make clear that the exclusion applies only to
building parts on which defective work was performed, and not to the building
generally").
The court in Gore Design Completions, Ltd. v. Hartford Fire Ins.
Co., 538 F.3d 365 (5th Cir. 2008), reached a similar conclusion.
Considering the insurer's argument for a broad construction of exclusion
j(6), the court found that, "[the insurer's] reading of the exclusion
reads out the words 'that particular part.' If work on any part of a
property would leave an insured exposed for damages to the entire property, the
exclusion should state: 'Property damage to property that must be restored,
repaired or replaced because your work was incorrectly performed on any part of
it." Id. at 372; see also, Mid-Continent Cas. Co. v. JHP
Dev., Inc., 557 F.3d 207 (5th Cir. 2009) ("The plain meaning of the
exclusion … is that property damage only to parts of the property that were
themselves the subjects of the defective work is excluded.… The narrowing
'that particular part' language is used to distinguish the damaged
property that was itself the subject of the defective work from other damaged
property that was either the subject of nondefective work by the insured or
that was not worked on by the insured at all.").
On the other hand, a number of courts have construed the exclusion broadly
to mean that there is no coverage for damage to any part of a project that is
within the scope of an insured's work, even if the insured's defective
work related only to a particular portion of the project. In Lafayette Ins.
Co. v. Peerboom, 813 F. Supp. 2d 823 (S.D. Miss. 2011), the insured had
been hired to excavate beneath the home, install hydraulic jacks at various
locations below the foundation, and raise the structure up several feet. During
this operation, the house fell, causing damage to the entire structure.
The court held that the damage to property exclusion barred coverage for
damage to the entire home. While the court noted that other courts had narrowly
construed the exclusion as barring coverage only for certain portions of a
structure damaged during construction operations, it found that, in this case,
the insured's work consisted of raising the elevation of the entire home
and, therefore, "that particular part" of the home on which the
insured was working, was the entire home. In reaching this conclusion, the
Lafayette court noted that the purpose of the business risk exclusions
generally is to exclude coverage for an insured's faulty workmanship.
Similar results were reached in other cases. See, e.g., Jet Line Servs.,
Inc. v. Am. Empls. Ins. Co., 404 Mass. 706 (Mass. 1989) (damage to entire
storage tank excluded); American Equity Ins. Co. v. Van Ginhoven, 788
So.2d 388 (Fla. App. 2001) (damage to entire pool excluded); Vinsant Elec.
Contractors v. Aetna Cas. & Surety Co., 530 S.W.2d 76 (Tenn. 1975)
(holding damage to entire switchboard excluded and stating "[w]e cannot so
construe this provision as to limit the exclusion to the precise and isolated
spot upon which work was being done").
Other courts considering the exclusion have held that it is ambiguous,
finding both constructions reasonable. In Roaring Lion LLC v. Nautilus Ins.
Co., 2011 U.S. Dist. LEXIS 100666 (D. Mont. July 15, 2011), the insured
had been hired to build a cabin, and one of its subcontractors incorrectly
poured the foundation of the cabin, which caused significant damage to the
entire structure, including the collapse of the framing. The insurer argued
that the damage to property exclusion barred coverage for all damage to the
cabin, and the insured argued that the exclusion barred coverage only for the
damage to the foundation. The court noted that the insurer's argument
"overlooks the exclusions' opening reference to 'that particular
part,'" yet held that, in the absence of a definition of that phrase,
it could be read broadly to encompass the entire cabin, or narrowly to
encompass only the foundation. As a result, the court found the exclusion
ambiguous and construed it strictly against the insurer.
The 10th Circuit Weighs in
The 10th Circuit leaped into the fray over the meaning of the exclusion in a
recent decision in MTI, Inc. v. Employers Ins. Co. of Wausau, 913 F.3d
1245 (10th Cir. 2019). In that case, the insured had been hired to repair
corroded anchor bolts in a cooling tower—a large wooden structure that was
attached to a foundation using anchor bolts. After the insured had removed all
of the corroded bolts, but before it had installed the new bolts, the tower was
struck by high winds, causing several structural components to break, requiring
the entire tower to be replaced. The insurer denied coverage for the claim,
arguing that the cost of replacing the cooling tower was excluded under the
damage to property exclusion. The district court, applying Oklahoma law, held
that the claim was excluded under both j(5) and j(6) of the exclusion.
On appeal, the 10th Circuit Court of Appeals reversed. Noting that the
exclusion has "received inconsistent treatment from a number of other
state and federal courts," the 10th Circuit found that the exclusion was
ambiguous because it was susceptible to the following two reasonable
interpretations.
[I]t is the responsibility of the insurer desiring to limit liability to
employ clear language. Wausau has failed to do so in this case. The phrase
"that particular part" could be read to refer solely to the direct
object on which the insured was operating. Alternatively, it could apply to
those parts of the project directly impacted by the insured party's work.
We agree with those courts that have held the former interpretation is a
reasonable one, although we acknowledge that the latter is also
reasonable.
Having found the exclusion ambiguous, the court applied the doctrine of
contra proferentem and construed it in favor of the insured,
holding that it applied only to the anchor bolts, not the entire tower.
In finding the exclusion ambiguous, the court recognized that the phrase
"that particular part" was "narrowing language" and, as a
result, found reasonable the insured's interpretation that the exclusion
applied only to the anchor bolts on which the insured was working. Despite the
narrowing nature of the words, the court also found reasonable the
insurer's interpretation that the exclusion applied to the entire
structure. In so finding, however, the court did not reference any particular
language in the exclusion supporting that position. Rather, the court simply
noted that other courts had found the exclusion to apply to "those parts
of the project directly impacted by the insured's work."
In particular, the 10th Circuit relied on two decisions to support its
finding that a broad construction of the exclusion was reasonable. In the
first, William Crawford, Inc. v. Travelers Ins. Co., 838 F. Supp. 157
(S.D.N.Y. 1993), the court considered the exclusion as it applied to property
damage to a 7,000 square foot apartment that the insured had been hired to
renovate. After discovering that some of the plaster walls were not drying
properly, the insured placed a number of electric fans in the apartment to help
resolve the issue. One of the fans ignited, causing a fire, which caused fire
damage to the entrance area and smoke damage to other parts of the
apartment.
The court rejected the argument that the exclusion applied only to the
portion of the apartment where the insured was performing work at the time of
the fire and found that all of the property damage was excluded. In so holding,
the court did not attempt to explain how the phrase "that particular
part" could be given effect if the exclusion barred coverage for damage to
the entire property; instead, the court merely cited other courts that had
rejected a narrower reading of the exclusion and noted that the insured had not
proffered any contrary authority.
The second case relied on by the 10th Circuit, Jet Line Services, Inc.
v. American Employers Ins. Co., 404 Mass. 706 (Mass. 1989), addressed
coverage for damage to a petroleum storage tank that exploded while the insured
was cleaning it. The exclusion at issue in that case barred coverage for damage
"to that particular part of any property … upon which operations are being
performed [by the insured] at the time of the property damage arising out of
such operations." The insured argued that the exclusion applied only to
the bottom of the tank where it was performing cleaning operations at the time
of the explosion.
The court rejected the insured's argument, holding that damage to the
entire tank was excluded because, in the court's view, the phrase
"that particular part of any property … upon which operations are being
performed" referred to the entire tank because the insured was hired to
clean the entire tank. The court does not reconcile this holding with the fact
that the insured was actually performing operations on only a portion of the
tank at the time of the explosion. This raises the question of what meaning
does "that particular part" have if the exclusion bars coverage for
all damage to property within the insured's scope of work.
Rather than answering this question, the court simply relied on decisions
from other courts where the exclusion was construed broadly and concludes that
"[w]here, as here, the insured was retained to perform work on an entire
unit of property, and not just a portion of it, the applicability of the
exclusion to damage to the entire unit is even more apparent than in cases in
which the insured was retained to work on only a part of the unit."
Although the 10th Circuit in MTI, Inc., acknowledges that the
phrase "that particular part" must have a meaning and that other
courts have recognized that it is limiting in nature, it nonetheless credits as
reasonable the conclusion of other courts that interpreted the exclusion
broadly. The broad construction of the exclusion, however, does not appear to
ascribe any meaning at all to the words "that particular part."
Indeed, if those words were omitted, such that the exclusion barred coverage
for "property damage to any real property on which you … are performing
operations" and "property damage to any property that must be
restored, repaired, or replaced because 'your work' was incorrectly
performed on it," would the scope of the exclusion be any different than
how the courts in William Crawford, Inc., and Jet Line Services,
Inc., construed it? Neither the 10th Circuit, nor the courts on which it
relied, attempt to answer this question.
As a result, the latest circuit court decision to weigh in on the meaning of
the "that particular part" does little to help clear up the confusion
surrounding the "damage to property" exclusion.