Baker v. National Interstate Insurance Company: California’s New Interpretation Of The Products-Completed Operations Exclusion
April, 2010
In Baker v. National Interstate Ins. Co., 103 Cal. Rptr. 3d 565 (Cal. Ct. App., 2 Dist.), an intermediate California Appellate court expressly disregarded a decision of the California Supreme Court in interpreting a “products-completed operations” exclusion in a commercial liability policy. In doing so, the court reiterated the fact-specific, policy-specific nature of all insurance coverage actions, and helped provide guidance on what can be a troublesome and often misinterpreted exclusion.
Facts
In July 2000, Four Winds Day Camp, Inc., a company primarily engaged in the business of transporting school children, sold one of its used buses to Clemmons, who owned and operated a similar business. After Clemmons purchased the bus, Four Winds agreed to perform a state-mandated routine inspection on her behalf. During the inspection, Four Winds made a number of mechanical and interior repairs to the bus, including fixing the covers and bolts on a number of the seats. While Four Winds often performed inspection and maintenance on its own fleet of vehicles, it was not ordinarily in the business of providing this service to others. Four Winds completed the inspection and the California Highway Patrol thereafter certified the vehicle as safe.
Approximately six months later, Clemmons was driving the bus when she collided with a pickup truck. During the collision, the driver’s seat of the bus broke loose from the floor and Clemmons was ejected from the vehicle and killed.
Clemmons’ family sued Four Winds, alleging negligent inspection and maintenance, strict products liability and breach of implied warranty. Four Winds tendered its defense to its commercial general liability insurer, American National Fire Insurance Company. Citing an endorsement to the CGL policy that excluded from coverage bodily injury or property damage falling within the definition of a “products-completed operations hazard”, American denied coverage. The policy defined “products-completed operations” as damages occurring away from the insured’s premises and arising from “your product” or “your work”. “Your product” was, in turn, partially defined as goods or products “manufactured, sold, handled, distributed or disposed of” by the insured. “Your work” was defined as including “work or operations performed” by the insured.
Following American’s coverage denial, Clemmons’ family secured a $13 million dollar jury verdict against Four Winds solely on the negligence count. In exchange for a covenant not to sue, Four Winds assigned its rights under the CGL policy to Clemmons’ family, who then filed suit against American for breach of contract and bad faith.
American moved for summary judgment, arguing the exclusion clearly disclaimed any coverage for the incident. The trial court denied the motion, ruling that the exclusion only applied to claims related to products liability, not those based on negligent performance of services, and that a jury question existed as to whether Four Winds’ inspection and repair of the bus was part of the sale or a separate transaction. The court empanelled a jury solely to decide whether the inspection and repairs were related to the sale. The jury found that the two acts were not related and the trial court entered judgment in favor of Clemmons’ family. American appealed.
Analysis
Because the jury conclusively determined that the maintenance and inspection was independent of the sale, the appellate court faced a single question on appeal: did inspecting and repairing the bus alone constitute operations or work under the terms of the policy so as exclude coverage?
The court first discussed the most relevant precedent, the California Supreme Court’s decision in Insurance Co. of North America v. Electronic Purification Co., 63 Cal. Rptr. 382 (Cal. 1967). Electronic Purification held that services provided by an insured that were unrelated to the sale of the insured’s products fell outside the scope of the products-completed operations exclusion. After discussing Electronic Purification at length, the court concluded that the standard wording of the products-completed operation exclusion had changed enough in the forty-plus years since Electronic Purification that the decision was not controlling. Notably, it did so despite the protestations of those filing amicus curiae briefs that doing so would undo decades of insurance law and run contrary to years of decisions that followed Electronic Purification. Announcing that it was writing on a “clean slate,” the court began the task of applying the exclusion to the facts presented.
The court first concluded that the language of the exclusion itself was clear and unambiguous. It determined that an average purchaser of insurance would easily understand that a claim falling within the definition of a “products-completed operations hazard” would be excluded from coverage. The court concluded that the lengthy definitions “your product” and “your work” were similarly straightforward.
The court then reached the heart of the matter: was it required that the insured’s work or operations have some connection to the insured’s product for the exclusion to apply? Reaching the opposite conclusion from Electronic Purification, the court said no. Rejecting an argument by Clemmons’ family that the policy was ambiguous because a reasonable insured could interpret the exclusion as only applying to operations or work with some connection to the insured’s product, the court held that the exclusion clearly applied disjunctively to the insured’s “product” or the insured’s “work”. It found the fact that each term, “your product” and “your work”, was separately defined to be conclusive. Because they were defined separately, in detail, and set forth as alternatives to one another, no reasonable layperson could conclude that “work” and “product” must be related for the exclusion to apply. Additionally, the court found persuasive a number of decisions from outside California that had reached similar conclusions in analogous cases.
Lastly, the court found that the inspection and repair of the bus fell within the definition of “your work” because it constituted services provided for a fee. Thus, the court held that the trial court erred in denying American’s motion for summary judgment and remanded the case for proceedings consistent with its opinion.
Learning Point
Baker underscores that success or failure in a coverage action is almost always rooted in the language of the policy itself. In Baker, the court distinguished—and then disregarded—the ostensibly controlling Electronic Purification decision because the policy in that case had archaic wording not in line with current coverage provisions. It did so despite the fact that the case came from a higher court and dealt with the same basic issue. Coverage actions are intensely fact-specific and policies may be different. No matter how helpful a given case may appear, it is no substitute for a thorough and accurate analysis of the policy language.
Second, Baker helps shed light on a relatively confusing area of policy interpretation. Products-completed operations risks can arise in any number of commercial contexts and, as the Baker court itself hinted at, includes perils, such as strict product liability claims, that substantially increase the insurer’s exposure under the policy. Because Baker clarifies what activities fall within the exclusion, it provides policyholders, carriers, and producers with needed guidance with regard to what risks will and will not be covered. This, in turn, allows for the selection of insurance products that better meet the customer’s coverage needs and cost goals.
Thus, while Baker was an overwhelming victory for the insurer, to the extent that it sets forth a clear, intelligible and bright-line rule regarding the relationship (or lack thereof) between the terms “products” and “work,” all parties to the insurance relationship stand to benefit.
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