Noting the inconsistent treatment given to the “Damage To Property” exclusions commonly found in standard commercial general liability coverage forms, the United States Court of Appeals, Tenth Circuit, applying Oklahoma law, has held that the phrase “that particular part” in the exclusion is ambiguous.
In MTI, Inc. v. Employers Insurance Company of Wausau, No. 17-6206, — F.3d —, 2019 WL 321423 (10 Cir. 2019), an insured contractor, MTI, Inc. (MTI) was retained by Western Farmers Electrical Cooperative (WFEC) to remove and replace anchor bolts on a cooling tower owned by WFEC. MTI removed the anchor bolts from the tower, but did not immediately replace them with new bolts, and failed to provide any temporary support to ensure the stability of the tower. The following day, high winds caused the tower to lean and several structural components to break. It was later determined that, due to the severity of the damage, the tower must be completely removed and replaced. WFEC looked to MTI to pay for the resulting costs.
MTI filed a claim for coverage with its CGL insurer, Employers Insurance Company of Wausau (Wausau). Wausau, however, disclaimed coverage based on the policy’s “Damage To Property” exclusion, typically found as exclusion (j) within form CG 00 01. Specifically, Wausau disclaimed coverage under paragraph (5) of the exclusion (which bars coverage for property damage to “[t]hat particular part of real property on which you … are performing operations, if the ‘property damage’ arises out of those operations”) and based on paragraph (6) of the exclusion ( which bars coverage for property damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it”). MTI thereafter commenced suit against Wausau seeking coverage in connection with WFEC’s claim. The trial court granted summary judgment to Wausau because it found both exclusions applied to bar coverage for the damage to the cooling tower.
The primary issue for the appellate court in MTI to decide was whether the phrase “that particular part” within the paragraphs j(5) and j(6) of the “Damage To Property” exclusion included, in this instance, the entire tower, or merely the anchor bolts MTI was retained to remove and install. The court found that both interpretations of the phrase were reasonable, stating:
The phrase “that particular part” could be read to refer solely to the direct object on which the insured was operating [i.e., the anchor bolts]. Alternatively, it could apply to those parts of the project directly impacted by the insured party’s work [i.e., the entire tower]. We agree with those courts that have held the former interpretation is a reasonable one, although we acknowledge that the latter is also reasonable.
The court held that because both readings are permissible, the exclusion was facially ambiguous and therefore must be read in a manner favorable to the insured. As a result, the court found that the exclusions applied only to the cost of replacing the anchor bolts, and that the insured would expect, and therefore be entitled to, coverage for the cost of replacing the entire tower.
In its analysis, the court recognized that these specific exclusions have received inconsistent treatment from state and federal courts throughout the nation. See, e.g., Roaring Lion, LLC v. Nautilus Ins. Co., No. CV 11-2-M-DWM-JCL, 2011 WL 3956132, at *5-7 (D. Mont. July 15, 2011) (collecting cases). The court also noted that, notwithstanding its holding, the application of the phrase “particular part” within the exclusions will vary based on the facts and circumstances of each case, since, for example, cases have held these exclusions to apply to bar coverage for an entire structure, but only when the entire structure falls within the scope of the insured’s work. An insurance professional should therefore remain diligent in identifying the exact work the insured was retained to perform to determine whether the property damage alleged falls within the scope of these exclusions.