The “Damage to Property” exclusion in the standard commercial general liability policy excludes coverage for “property damage” to:
(5) [t]hat particular part of 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) [t]hat particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
Because the phrase “that particular part” is not defined in the standard CGL policy, the applicability of the exclusion often hinges on how broadly the court interprets the phrase. As highlighted recently by the Seventh Circuit Court of Appeals in West Side Salvage, Inc. v. RSUI Ind. Co., ___ F.3d ___, 2017 WL 6422107, certain courts have interpreted the phrase and thus the exclusion narrowly to apply only to property damage caused by work on the particular piece of property that is damaged, while others, including Illinois courts, have interpreted the phrase more broadly to apply to property damage caused by poor workmanship.
ConAgra hired West Side Salvage to fix a hot grain bin, and the grain bin exploded while West Side Salvage was performing its work, causing extensive damage to the grain bin. West Side Salvage was found liable for the explosion and sued its excess carrier RSUI for coverage. RSUI reserved its rights and ultimately argued that coverage was excluded by the “Damage to Property” exclusion in West Side Salvage’s excess policy. The Seventh Circuit agreed.
Rejecting the district court’s reliance on the Missouri Supreme Court’s narrow interpretation of the exclusion, the Seventh Circuit concluded that under Illinois law, “[t]he exclusion [ ] do[es] not exclude coverage for damage done only to the precise area of the property being worked on. Rather, the exclusion[ ] appl[ies] to property damage caused by poor workmanship.” 2017 WL 6422107, at *4 (quoting Pekin Ins. Co. v. Willett, 301 Ill.App.3d 1034, 235 Ill.Dec. 350, 704 N.E.2d 923, 926 (1998)). In other words, “ the exclusion does not apply only to the precise area of the property being worked on if the work performed was poor.” Id. The court thus concluded that it was immaterial whether West Side Salvage was only working on the grain (and not the grain bin) when the explosion occurred. Id.
The Seventh Circuit went a step further, however, and observed in general that holding otherwise “would undermine the basic premise of the damage-to-property exclusion: that general liability policies are not intended to protect the insured from the normal risks of its business.” Id. Accordingly, the court concluded that the exclusion applied because “[t]he damage that West Side caused was one of the normal risks associated with its business of remedying hot grain bins before they explode.” Id. (citing Auto–Owners Ins. Co. v. Chorak & Sons, Inc., No. 07 C 4454, 2008 WL 3286986, at *4 (Ill. App. Ct. 2008) (noting that the insured was asking the insurer to provide coverage for damage that was the result “of the normal risks associated with” the activity the insured was performing and holding that the damage-to-property exclusion applied to bar such coverage)).
In general, the West Side Salvage decision highlights the importance choice-of-law determinations can play in insurance-coverage cases. But, more importantly, the decision illustrates that the applicability of the “Damage to Property” exclusion may hinge on which state’s law governs the interpretation of the phrase “that particular part.” In fact, West Side Salvage argued that Iowa law should govern the applicability of the exclusion but failed to demonstrate that a conflict existed between Illinois and Iowa law, leaving the court to apply the law of the forum state.
If you have questions regarding the Seventh Circuit’s decision, how different courts have interpreted the “Damage to Property” exclusion, or any other insurance-coverage issues, please contact Dale O. Thornsjo, Lance D. Meyer, or one of the other members of our Firm’s Insurance Coverage Practice Group at (952.831.6544).