Are you Covered? note pinned to boardThis is part one of a two-part series looking at how court decisions in recent years have thwarted general contractors’ reasonable expectation of coverage under their general liability policies.

In early March, the Ninth Circuit Court of Appeals issued an unpublished opinion in Archer Western Contractors v. National Union, No. 15-55648 (filed Mar. 2 2017). The opinion held that the phrase “that particular part” as used in the “Damage to Property” exclusions in a CGL policy must be interpreted broadly to encompass “the entire project on which a general contractor is performing operations.” This is not the first time the Ninth Circuit has issued an unpublished opinion interpreting “that particular part” to apply to the entirety of a project.

The Ninth Circuit in these cases ignored the plain meaning of words that the insurance industry itself has explained should be construed in the narrowest possible sense. Policyholders, particularly general contractors, should beware this worrisome trend in the courts, as it is creating the potential for a gap in ongoing operations coverage that was not meant to exist.

There are two exclusions in a standard CGL policy that use the phrase “that particular part” – exclusions j(5) and j(6), both of which are subsections of the “Damage to Property” exclusions. Exclusion j(5) bars coverage for liability because of damage to “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.” Exclusion j(6) reads “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The standard CGL policy separately states that j(6) does not apply to property damage included in the products-completed operations hazard. In other words, like j(5), it only applies to property damage from ongoing operations.

The Archer Western court relied in part on Clarendon Am. Ins. Co. v. Gen. Sec. Indem. Co. of Arizona, 193 Cal. App. 4th 1311 (2011). Without discussing the meaning of “that particular part,” the Clarendon court stated that “these faulty workmanship exclusions preclude coverage for deficiencies in the insured’s work.” Id. at 1325. But the Ninth Circuit in Archer Western actually went much further by saying that the phrase “that particular part” encompasses the entire project on which a general contractor is performing operations.” It makes this statement without regard to: (1) whether subcontractors performed some or all of the work involved, either the faulty work itself or other work subsequently damaged because of the faulty work; or (2) who owns the work damaged because of the faulty work.

It is widely accepted that CGL policies are not performance bonds, and are not intended to provide coverage for a contractor’s own bad workmanship. However, they are intended to provide coverage for consequential damage to other property caused by that bad workmanship.

Industry materials dating from the time these exclusions were introduced and approved by state departments of insurance across the country flatly contradict both the Archer Western and Clarendon courts’ interpretation of “that particular part.” Materials distributed by the Insurance Services Office (the largest insurance rating and drafting organization in the country, which drafted the language in question) to insurance companies in 1979 made clear that the exclusions only apply to the particular part on which the insured is actually working when the damage occurs. “Where the damage caused by the insured in the performance of his operations goes beyond damage to the property on which he is working, this section limits the exclusion to the particular part on which he is working.” ISO Circular “Broad Form Property Damage Explained” January 29, 1979 (emphasis added). Courts consider insurance industry materials when determining the scope of policy language (see, e.g., Maryland Cas. Co. v. Reeder, 221 Cal. App. 3d 961 (1990)). The Archer Western court apparently did not do so.

The ISO Circular attached a list of hypotheticals showing the application of coverage. Among them are “Painter is burning paint off a house with a torch and sets fire to the house.” ISO states that the claim would be “Covered except for ‘that particular part’ to which the torch was applied.” Another example given was “Serviceman working on television in owner’s home blows out picture tube while tinkering with another tube, or tips set over damaging other parts.” ISO concludes the loss would be “Covered since picture tube or other parts are not ‘that particular part’ on which operation [sic] are being performed.”

Leaving aside quaint thoughts of burning paint off a house or mending a tube television set, these examples emphasize that the “that particular part” language was intended by the insurance industry to limit the exclusion to the smallest division of a job possible. Coming back to the present day and the current CGL form, another ISO Circular from 1985 made clear that the new style form (then soon to be introduced and which contains the same standard language that Clarendon, Archer Western and other courts have interpreted) “would result in substantially the same coverage as provided in the current basic contract when amended by the Broad From Endorsement.” ISO Circular “Amended Commercial General Liability Coverage Forms Submitted” February 22, 1985 at p.6.

In our view, Clarendon is a badly reasoned and badly decided case from the California Court of Appeal Fourth District for several reasons, of which this is only one. It is interesting that it is an insurer v. insurer case that gives insurers a significant windfall and relies on underlying issues that were stipulated to by the two insurers involved. The Ninth Circuit in Archer Western, other Ninth Circuit panels and other courts have badly misconstrued, and in some cases ignored altogether, the insurance industry’s own interpretation that the phrase “that particular part” should be construed narrowly, and numerous subsequent industry commentators’ affirmation of the narrow interpretation.

While some recent decisions adopting an overly broad interpretation of “that particular part” have been “unpublished,” they are worrisome nonetheless. In pending and future lawsuits over this issue, policyholder counsel should educate the courts about the history of the phrase “that particular part” and zealously advocate for what should be an indisputably reasonable interpretation – that the exclusionary language “that particular part” be interpreted narrowly to apply to the smallest division of a job possible.