Insurance Law News - February 2010

• “Products-Completed Operations Hazard” Exclusion Bars Coverage for Insured’s Operations, Regardless of Whether Operations are Related to Insured’s Products
• Insured’s Mistaken Construction of House Over Property Line Does Not Constitute “Occurrence,” or “Accident”
• “Personal and Advertising Injury” Coverage Does Not Apply to Alleged Damages Caused by Insured’s False Advertising of Its Own Products

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"Products-Completed Operations Hazard" Exclusion Bars Coverage for Insured’s Operations, Regardless of Whether Operations are Related to Insured’s Products

A commercial general liability policy’s “products-completed operations hazard” exclusion precludes coverage for bodily injuries arising out of the insured’s completed services, even if those services are not related to the insured’s products. (Baker v. Nat’l Interstate Ins. Co. (2010) 180 Cal. App. 4th 1319)

Facts

Four Winds Day Camp (“Four Winds”) sold one of its used school buses to La Shaun Clemmons. Two months later, Four Winds agreed to perform certain inspections on the bus that were mandated by law, in exchange for payment that was separate and apart from the bus sale price. As part of its inspection, Four Winds performed related maintenance work, including repairs to the bolts holding down the seats. Several months later, Clemmons was driving the bus when she was involved in a collision. The driver’s seat of the bus broke loose from the floor, and Clemmons was ejected through the windshield, causing her to sustain fatal injuries.

Clemmons’ husband, Antonio Baker, along with their sons (collectively “the Bakers”) filed a wrongful death lawsuit against Four Winds. Four Winds tendered defense of the lawsuit to its commercial general liability carrier, American National Fire Insurance Company (“American”). American’s policy excluded coverage for claims falling within the “products-completed operations hazard,” which the policy defined as including all “‘bodily injury’ and ‘property damage ‘occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work.’” Maintaining that the lawsuit fell within the “products-completed operations hazard,” American declined to defend Four Winds.

Four Winds assigned its rights under the policy to the Bakers, who filed suit against American. The trial court ruled in favor of the Bakers, finding that under the California Supreme Court’s holding in Insurance Co. of North America v. Electronic Purification Co. (1967) 67 Cal.2d 679, such exclusions only apply to the insured’s operations if they were performed on its products. The trial court thus held that the exclusion did not apply because Four Wind’s inspection services were independent of the sale of its product, the bus. American appealed.

Holding

The Court of Appeal reversed. First, it distinguished Electronic Purification on the grounds that the exclusion there was written in such a way that products and operations were meant to be interrelated, with the result that the exclusion only barred coverage for operations if they were related to the insured’s product. The Court of Appeal then noted that the American policy’s definition of the “products-completed operations hazard,” which was markedly different from the exclusion in Electronic Purification, clearly excluded bodily injury arising out of “your product” or “your work.” Focusing on the use of the disjunctive conjunction “or,” the court concluded that the exclusion applied to the insured’s “work,” regardless of whether the work was related to the insured’s “products.”

Applying that reading to the underlying action, the Court of Appeal concluded that Four Winds’ inspection of the bus in return for payment clearly fell within the exclusion. The Court reasoned that “the common understanding of ‘work’ includes a person’s services performed in return for payment of money.” Since Four Winds performed inspection services for a customer for payment, any bodily injury arising out of those completed services was necessarily excluded from coverage.

Comment

Rejecting the argument that its holding would undo decades of insurance jurisprudence based on Electronic Purification, the Court of Appeal noted that it was “not decree[ing] as a matter of law that ‘products’ and ‘completed operations’ shall no longer be considered ‘related’ elements under a CGL policy,” and that the interpretation of the exclusion will depend on the exact policy language at issue. However, as a practical matter, since the American policy contained a standardized definition of “products-completed operations” that appears in many commercial general liability today, the Baker decision will likely supplant Electronic Purification as the preeminent case on “products-completed operations” exclusions in commercial general liability policies.

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Insured’s Mistaken Construction of House Over Property Line Does Not Constitute "Occurrence," or "Accident"

An insured’s good faith but mistaken construction of a house on neighboring property does not constitute an “occurrence,” or “accident,” within the meaning of a homeowners policy. (Fire Ins. Exch. v. Superior Court (2010) 181 Cal.App.4th 388)

Facts

Kenneth and Dorothy Bourguignon owned property in the City of Big Bear adjacent to property owned by Louise Leach. In 1984, Leach granted the Bourguignons an access easement over a five-and-a-half-foot wide portion of her property that bordered the Bourguignons’ property. Later, in 1988, Leach conveyed a one-third interest in her property to her two sons.

Subsequently, the Bourguignons’ house suffered earthquake damage. In order to renovate and rebuild their house, the Bourguignons obtained Leach’s signature on an application for a “lot-line adjustment” for the five-and-half-foot easement. The City approved the application and a certificate of compliance was recorded. The Bourguignons then proceeded to construct a house which was partially located on the five-and-a-half-foot wide section of property.  

Years later, Robert and Marie Parsons negotiated to purchase Leach’s property and discovered that the “lot-line adjustment” was a cloud on title. The Parsons obtained an assignment of any rights possessed by Leach and her two sons to contest the validity of the lot-line adjustment, and the Parsons then purchased Leach’s property. Thereafter, the Parsons disputed the validity of the lot-line adjustment on the ground that Leach had previously conveyed a one-third interest in the property to her sons, who did sign the application for the lot-line adjustment.

The Bourguignons sued the Parsons for quiet title and adverse possession of the easement. The Parsons cross-complained against the Bourguignons for quiet title, declaratory relief and fraud.

The Bourguignons tendered defense of the cross-complaint to their homeowners insurer, Fire Insurance Exchange (“Fire Insurance”). Fire Insurance refused to defend the Bourguignons asserting, among other things, that the Bourguignons’ alleged liability to the Parsons did not arise from an “occurrence,” or “accident,” as required by the policy.

Thereafter, the Bourguignons sued Fire Insurance for breach of contract and bad faith. Fire Insurance moved for summary judgment, claiming that the Bourguignons’ intentional act of building over the lot line was not the result of an “accident.” The trial court denied Fire Insurance’s motion, and Fire Insurance filed a petition for writ of mandate in the Court of Appeal.

Holding

The Court of Appeal granted the petition for writ of mandate and ordered the trial court to enter summary judgment in favor of Fire Insurance. The Court held that the undisputed facts showed the Bourguignons intended to build their house where they did. Even if the Bourguignons believed that they owned the five-and-half-foot strip of land and believed that they had the legal right to build on it, their act of construction “was intentional and was not an accident even though they acted under a mistaken belief that they had the right to do so.” According to the Court, the Bourguignons’ “mistaken belief in their legal right to build does not transform their intentional act of construction into an accident.”

Comment

Following prior California decisions, the Court of Appeal held that where an insured commits an act based on a mistaken belief that his conduct is legal, such act does not constitute an “accident.” Here, the Bourguignons constructed the house based on a mistaken belief that they owned the five-and-a-foot strip of property and had the right to build there. That was not an “accident.”

One justice dissented, arguing that the Bourguignons’ alleged liability should be deemed to arise from an “accident.” According to the dissenting justice, while the Bourguignons may have intended to build a house, they did not necessarily intend to build the house on their neighbors’ property. Under such circumstances, the Bourguignons’ alleged liability could have arisen from an “accident.”

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"Personal and Advertising Injury" Coverage Does Not Apply to Alleged Damages Caused by Insured’s False Advertising of Its Own Products

A general liability insurer had no duty to defend a suit alleging damages caused by the insured’s false advertising of its own products, because the suit fell outside the scope of “personal and advertising injury” coverage and because a “nonconformity exclusion” in the policy applied. (Total Call International, Inc. v. Peerless Insurance Company (2010) 181 Cal.App.4th 161)

Facts

Total Call International (“Total Call”) provides telecommunications products and services including pre-paid phone cards. Peerless Insurance Company (“Peerless”) issued a general liability policy to Total Call that provided coverage for damages because of “personal and advertising injury,” which the policy defined as including “[o]ral or written publication, in any manner, or material that slander or libels a person or organization or disparages a person’s or organization’s goods, products or services.” The policy also contained a “nonconformity exclusion” that eliminated coverage for personal and advertising injury “arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [Total Call’s] advertisement.”

Two competitors filed a federal court lawsuit against Total Call alleging claims for false and deceptive advertising under the Lanham Act and violation of California’s unfair competition law. The competitors alleged that Total Call sold pre-paid phone cards that provided significantly less minutes than the actual minutes advertised by Total Call. The competitors alleged that Total Call’s false advertising damaged the reputation of the competitors and the phone card industry as a whole. The competitors further alleged that they lost market share because consumers were misled to ignore the competitors’ phone cards and to buy Total Call’s falsely advertised phone cards.

Total Call tendered defense of the federal court lawsuit to Peerless. However, Peerless denied a defense to Total Call on the ground that the competitors’ claims against Total Call fell outside the policy’s coverage for “personal and advertising injury” and were barred by the policy’s “nonconformity exclusion.”

Total Call then filed suit against Peerless alleging causes of action for breach of contract and bad faith. However, the trial court dismissed Total Call’s lawsuit against Peerless, finding that underlying federal court lawsuit against Total Call was not potentially covered under the Peerless policy.

Holding

The Court of Appeal affirmed the trial court ruling, for two reasons.

First, the Court held that the false advertising claims against Total Call did not fall within the scope of the policy’s “personal and advertising injury” coverage. The Court noted that the policy’s insuring clause covered defamation, trade libel and product disparagement, all of which required an injurious false statement that specifically referred to the derogated person or product. The Court then examined the competitors’ complaint and found it did not allege that any of Total Call’s false advertising specifically referred to the competitors or their products. The Court rejected Total Call’s argument that references in the complaint to damaged reputation were sufficient to trigger a duty to defend, stating that “[t]he fact that the third party complaint mentions an element of a covered claim does not trigger the duty to defend when the facts known to the insurer, viewed as a whole, establish that no such claim is potentially asserted.”

Second, the Court held the “nonconformity exclusion” eliminated coverage because the false advertising concerned the price or quality of Total Call’s own phone cards. The Court rejected Total Call’s argument that the “nonconformity exclusion” was ambiguous, and could be reasonably construed as barring coverage only for claims by consumers, and not claims by competitors. The Court held that the language of the exclusion contained no suggestion it was limited to consumer claims. The Court also relied on cases from outside California that had construed nonconformity exclusions to preclude competitor claims.

Comment

Total Call International confirms that “personal and advertising injury” coverage is triggered by the offense committed rather than the damages that are alleged. In evaluating the duty to defend, insurers should carefully review the complaint and extrinsic evidence to determine if any of the enumerated “personal and advertising injury” offenses are alleged. If none of the “personal and advertising injury” offenses are alleged, the insurer has no duty to defend.

Total Call International also establishes the “nonconformity exclusion” as a defense under California law to claims brought by consumers or competitors that arise out of puffing in the insured’s advertising about the quality, price or performance of its goods.

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