Appellate Court Rules Against Commercial General Liability Insurer Asserting "Work Product" Exclusion
March, 2009
In Nova Casualty Company v. Central Mutual Insurance Company, 59 A.D.3d 777 (3d Dep't 2009), commercial general liability ("CGL") carrier Nova Casualty Company ("Nova") brought a declaratory judgment action against its insured, contractor Ryan Bennett (the "contractor" or "Bennett"), seeking a declaration that Nova was not required to indemnify or defend Bennett in a suit filed by homeowners James and Joan Catlett (the "Catletts" or homeowners) and their insurer, Central Mutual Insurance Company ("Central Mutual"), arising from a fire caused by the contractor's work. Nova contended that the loss was excluded under two separate exclusions of the CGL policy, "work product" and "spray painting."
The homeowners hired the contractor to perform work at their home in Columbia County. The work consisted of applying a protective sealant to the cedar siding of the Catlett's home. The sealant solution was applied to the home using a spraying device and paint brushes. During the course of the work, drop cloths were used to catch excess solution that dripped from the siding. The drop cloths and other equipment were then stored inside the rear of the home in an enclosed porch. The home subsequently caught fire, causing significant damages, and the homeowners alleged that the cause of the fire was the contractor's drop cloths.
The Catletts were insured under a homeowners policy issued by Central Mutual. The homeowners alleged that the chemicals in the sealant present on the drop cloths spontaneously combusted, causing the fire. Central Mutual reimbursed the homeowners for the damages and brought an action in subrogation against the contractor. Despite initially disclaiming the Insured's defense, Nova ultimately defended the contractor in Central Mutual's underlying action. However, Nova continued to deny indemnification for the loss by asserting the policy's "work product" and "spray painting" exclusions.
Central Mutual and its insured homeowners moved for summary judgment, arguing that the exclusions did not apply to the underlying facts and that Nova was obligated, pursuant to the terms and conditions of the policy, to indemnify the contractor in Central Mutual's underlying action. Id. The Supreme Court, Columbia County, agreed and granted the Defendant's Motion. Nova then appealed the lower court's interpretation of the exclusions and argued that the court's grant of summary judgment was premature and deprived Nova the opportunity to perform meaningful discovery.
In affirming the lower court's decision, the Appellate Division, Third Department, began its analysis by reasserting the well settled maxim that "to gain the benefit of an exclusion clause in an insurance policy, the insurer has the burden of demonstrating ‘that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.'" Id., citing Continental Cas. Co. v. Rapid-American Corp., 80 N.Y.2d 640, 652 (1993) and RJC Realty Holding Corp. v. Republic Franklin Ins. Co., Utica Natl. Ins. Group, 2 N.Y.3d 158 (2004).
The Third Department reviewed Nova's reliance on the "work product" exclusion. Nova argued that this provision removes responsibility for damage "to that specific part of real property on which work is being performed ... if the ‘property damage' arises out of such work." Id. The Court determined that the "work product" exclusion "exists to exclude coverage for business risks, including claims that the insured's product or completed work [was] not that for which the damaged person bargained." Id., citing Basil Dev. Corp. v. General Acc. Ins. Co., 89 N.Y.2d 1057, 1058 (1997).
The Third Department clarified that the homeowner's claim did not allege that its damages were based on the quality of the contractor's work, but that its damages directly resulted from the contractor's negligence in the storage of the materials and equipment. In finding the exclusion inapplicable, the Court opined that the work product exclusion is "clearly not intended to exempt from coverage under a general commercial liability policy physical damage caused by the negligence of an insured." Id.
The Third Department then reviewed the spray painting exclusion, which excludes coverage for "bodily injury and property damage arising out of [s]pray [p]ainting [o]perations." Id. In analyzing the exclusion, the Court noted that the Nova policy did not provide a definition of the term "spray painting operations" nor did it specify that "operations" included the application of nontraditional painting materials such as sealants. Id. After reviewing the uncontroverted testimony, the Court opined that sealants, as opposed to paint, are not covered by the express wording of the policy and the exclusion was, at best, ambiguous. Id. The Court also found that the record was devoid of any evidence that would lead to a finding that the fire resulted directly from either the spraying or the brushing of the sealant and as such, the "spray painting operations" exclusion could not apply. Id.
The Court noted that the interpretation of the exclusion as argued by Nova, if accepted, would operate to effectively exclude any and all of the work performed on the home, clearly contrary to the homeowner's "reasonable expectations as a businessperson seeking insurance coverage for injuries resulting from the operation of his [painting] business." Id., citing Kramarik v. Travelers, 25 A.D.3d 960, 962 (2006). Finally, the Court held that Nova failed to show how, during the time since the fire and through the course of the proceedings, it was prevented from obtaining "relevant evidence" on the issues raised in the summary judgment motion. Id.
Learning Point:
The Nova decision exemplifies the heavy burden that the courts place on an insurer to demonstrate that a policy exclusion is not only stated in clear and unambiguous language, but also applies to the underlying facts and circumstances of a particular loss.
For more information contact Matthew J. Vinciguerra at mvinciguerra@clausen.com.
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