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State Appeals Courts Rule on ‘That Particular Part’ Exclusions

11/27/2017 Articles

Two recent cases from separate California state courts correctly interpret the phrase “that particular part” and apply it in its intended narrow sense. This is good news for contractors and is in contrast to some recent decisions by federal courts.

In Pulte Home Corp. v. American Safety Indemn. Co., 14 Cal. App. 5th 1086, (2017), American Safety Indemn. Co. (ASIC) denied a defense to general contractor Pulte under several policies it had issued to three subcontractors who worked on two projects, both of which led to construction defect lawsuits against Pulte and the subcontractors. Pulte claimed coverage for the defense of the suits under additional insured endorsements attached to each of the policies.

“That Particular Part” Exclusions

ASIC denied on multiple grounds, including that there was no potential for coverage under the subcontractors’ policies based on exclusions j(5) and j(6) – the “that particular part” exclusions. ASIC argued that under California law, the entire project is considered a general contractor’s “work.”

The court noted that “the problem with [ASIC’s] exclusionary arguments is that the record does not contain a showing by the insurer that all of the damage the homeowners were claiming was limited to the particular location where one or another of the subcontractors was performing their work, such that these policy exclusions would clearly apply.” Id. (emphasis added). Although insurance industry materials reveal that the these exclusions were to be intended narrowly, the court simply relied on the plain meaning and dictionary definitions of their words. For example, in discussing exclusion j(6), the court noted that “there was no reliable way shown of determining . . . which subcontractors’ work had been substandard or whether it had damaged its own or another’s adjacent work.” The court’s distinction between a subcontractor’s work and “adjacent work” shows the court correctly applied the words “that particular part” narrowly. 1

In Global Modular, Inc. v. Kadena Pacific, Inc., 2017 WL 3948229 (2017), the insurer (North American Capacity Ins. Co.) (NACIC) denied coverage for rain damage to modular buildings because of delays in delivery of the units, and upon which temporary roofing had to be installed, which leaked. NACIC insured Global Modular (Global), who caused the delays and who installed the temporary roofs. Kadena refused to pay Global for its work, and Global then sued Kadena. Global was found liable for the damage.

NACIC then filed a declaratory relief action and argued that exclusion j(5) (which excludes “that particular part or real property on which you . . . are performing operations”) applied because the project was not complete when the damage occurred. However, the court held that the phrase “are performing operations” applies only to damage caused during physical construction activities. While again not specifically referring to industry materials, the court noted that had “the policy drafters intended the exclusion to apply more broadly to damage to any of the insured’s work in progress, we would expect the provision to say something along the lines of ‘property damage to that particular part of real property on which your operations are not yet complete’ or even ‘property damage to your work arising out of your operations.’” The court went on to note that the drafters of the policy used such broad language in other exclusions in the policy.

NACIC’s Argument Rejected

In discussing exclusion j(6), the court rejected NACIC’s argument that the entire modular buildings themselves were the “particular part” being worked on when installing the temporary roof. (Exclusion j(6) excludes coverage for “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”) Holding that the exclusion only applies to the specific part of the insured’s work on which the insured performed faulty workmanship, the court noted that had the drafters intended the exclusion to apply to the general area of the construction project affected by the insured’s faulty work, they would have left out the prepositional phrase “on it” so that the exclusion would read “that particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed.”

It is encouraging to see California appellate courts studying the meaning of the actual policy language, and not simply accepting insurers’ broad brush straw-man arguments about what CGL policies are, or are not, intended to cover. By comparing the actual language of exclusions against each other and comprehending what each one was intended to exclude, the Global Modular and Pulte Home courts realized that each exclusion had a specific intent, and the terms of one exclusion could not be imparted to another exclusion, nor could they all be “mushed together” to make one large, catch-all type exclusion. [1]

Tyler Gerking is a partner in Farella Braun + Martel’s San Francisco office, where his litigation practice focuses on recovering insurance policy proceeds for policyholders. He can be reached at [email protected]. David Smith is an insurance and risk management consultant in Farella’s San Francisco office. He can be reached at [email protected].

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1 In a strange quirk of timing, a sister case, Pulte Home Corp. v. American Safety Indemn. Co., No. 16-cv-02567- H-AGS (USDC, Southern Dist. Cal.) was filed at the same time, involving a third project involving the same parties. That case, though, was filed in federal court and ACIC successfully argued that Georgia law governed the dispute. After only a superficial review of the facts and the policy language, the district court (in an opinion filed two weeks after the California court of appeal opinion above was filed) held that exclusions j(5) and j(6) applied broadly to the project, even describing them as “broad” exclusions. As the California court of appeal showed, however, these exclusions are actually narrow because they only apply to “that particular part” of the project on which the insured is actually performing work at the time of the damage.

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