# FILED

January 28, 1998 Cecil W. Crowson Appellate Cou rt Clerk 

## IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

STANDARD FIRE INSURA NCE ) COMPANY, ) ) Plaintiff/Appell

ant, )

) Davidson Circuit VS. ) No. 94C-3993 ) CHESTER-O’DONLE

Y & ASSOCIATES, ) Appeal No. INC., OHIO CASUALT

Y INSURANCE ) 01A01-9508-CV-00382 COMPANY, CLARK & ASSOCIATES ) ARCHITECTS, INC., and HIGHLAND ) RIM CONSTRUCTORS, INC., ) ) Defendants/Appel

lees. )
APPEAL FROM THE CIRCUIT COURT FOR DAVIDSON COUNTY

AT NASHVILLE, TENNESSEE
THE HONORABLE BAR BARA N. HAYNES , JUDGE
For the Plaint

iff/Appellant : For the Defendants/Appell ees Chester-O’Donley & Associat es, Inc. : Arthur E. McClellan McC lellan, Pow ers, Ehmlin g & D ix John B. Link, III Nashville, Tenness ee Nashville, Tenness ee Ohio Casualty Ins

urance Company : Lewis B. Hollabaugh Lawrence B . Hammet, II Manier , Herod, H ollabaugh & Smith Nashville, Tenness ee Clark & Associates Archit ects, Inc. : Andrée Sophia B lumstein Sherrard & Roe Nashville, Tenness ee Highland Rim Constructors , Inc. : C. Geor ge Caud le Baker, D onelson, B earman & Caldw ell Chattanooga, Tennessee


## VACATED AND REMANDED

WILLIAM C. KOCH, JR., JUDGE-2- 

## O P I N I O N

T hi s appeal inv olves the scope of co verage of a mech anical sub contracto r’s commercial

general liability insu rance policy. T he general contractor, the project architect, and the subcontractor’s bondingcompany as serted various damage claims again st the subcontractor in litigation stemm

ing from the tota

l failure of the subcontra ctor’ s work. When the subcontractor call

ed upon the issuer of it s commercial

general liability

policy to defend against these claims, the insurer denied coverage and filed suit in the Circuit Court for D avidson Cou nty seeking a declaratoryjudgment con cerning th e scope of i ts policy’s coverage and its obli gation to d efend the su bcon tract or. In respo nse to the pa rties ’ motio ns for summ ar y judgment,the trial court held that the policy covered the clai ms asserted by the general contracto

r, the project a

rchitect, andthe sub contra ctor’s b ondin g compan y. The i nsurer asserts

on this ap peal that i ts policy di d not cove r these clai ms. We vacate the trial court’s order because the policy covers only one c

laim asserted

by the general contractor an d the subcontracto r’s bonding company.

I.

In March 1988 the S tate of Tennessee and A ustin Peay Stat

e University contracted with Highland Rim Constructors, Inc . to constructa new music bui lding

on Austin Peay’ s campus in Clarks ville. Clark & Associates Architects, Inc. designed the building and serv ed as the project archite ct. Hi ghl and Rim subcontr acted the mechanicalportions of the work t o Chester-O’D

onley & Associa

tes, Inc., and Cheste r-O’Donl ey, in turn, subcontrac ted the installation o

f the ductwork for the heating, ventilation, and air conditioning system to H & R Mchanical Specialties, Inc. Chester-O’Donley

also obtained a

performance

and payment

bond for its portion of the work from Ohio Casualty Company.

The new music building was substantia lly complet

ed in May 1990. Shortly after Austin Peay oc

cupied the building, se

rious problems w

ith the HVAC syste m-3-

began to manifest them

selves which could not

be remedied by

fine tuning the HVAC syste m. Highland Rim de termined that t

he problems we

re caused by de

fects in th e system’s ductwork and terminated its contract with Che ster-O’Donley because H & R Mechanical Specialties’ work failed to meet the proj ect’s specifications. Highland Rim also called upon Ohio

Casualty to pay

for removing

andreplacing the entire duct system. O

hio Casualty eve

ntually paid High

land Rim $1,425, 835.88.

In August 1991 Chester- O’Donley f iled suit in the Circu

itCourt for Davidson County against Highland Rim

, Clark & Associa

tes, H & R Mecha

nical Specialties , andothers alleging vari

ous causes of action a

rising out of the perf

ormance of its work. It eventually nonsuit

ed these claim

s in March 1994, but not

before Highland Rim, Ohio Casualty, a nd Clark& Associates had f iled counterclaim

s seeking damag es from Chester

-O’Donley . Chester-O’ Donley forwa rded these claim

s to Standard Fire Ins urance Compan y, the issuer of

its commer

cial general liabi

lity policy, and requested a defense. Standard Fire asserted tha

t its policy did

not cover theseclaims and, in March 1994, filed suit in the Circuit Courtfor Davidson County seeking adeclaratory j udgment concer ning the scope of its pol

icy’s cover

age and its obligation

to defend Cheste r-O’Donl ey. All parties sought su mmary judgments, a

nd the trial court determined that Standard Fire’ s policy covered all the pending

claims andthat Standard Fire was o bligated to provi de Chester-O’Donley with a defens e.

II. T HE C HOICE OF S UBSTANTIVE L AW

This case presents

a threshold

choice of law ques

tion. Chester-O ’Donley is a Kentucky corporation whose p

rinciple place of

busin ess is i n Paduc ah, Kent ucky. It purchased its commercial general liability policy fr om Standard Fire i n Kentuc ky, and Standard Fire del ivered the pol icy to Ch ester-O ’Donley i n Kentu cky. In the absence of an enforceable choice of law clause, Tennessee courts apply the s ubsta ntive law of the state in which the policy was issued and deliv ered. See Ohio Cas. Ins. Co. v. Travelers Indem. Co. , 493 S.W.2d 465 , 467 (Tenn. 1973); Kustoff v. Stuyvesa nt Ins. Co. , 160 Tenn. 208, 212-1 3, 22 S.W.2d 356 , 358 (192 9); Hutchis on v. Tennessee1 T he se decisions embody the traditional “lex loci contractu” choice of law theory . The TennesseeSupreme Court aba ndoned a similar c

hoice of law theo

ry applica bleto tort actions, “lex loci deliciti,” beca

use it w as outm oded and increasingly irrelevant in today’s modern industrial world. See Hataway v. McKinley , 830 S.W.2d 53, 57 (Te nn. 1992). In i

ts place, the court adopted the “most significant

relationship” approach found in Restatement (Second) of Conflict of Laws §§ 6, 145, 146, & 175 (1971). The court has yet to adopt

the similar approach for contract disputes, although Restatement (Second) of Conflict of Laws § 188 embodies such an approach whe

n the parties have

not effectively chosenthe law applicab

le to their contra

ct. With specific

regard to insurance contracts, the location of the insuredrisk is givengreater weight than any other fa ctor unless the insurance covers a group of risks scattered

throughout

two or more states. See Restatement (Sec ond) of Conflict of

Laws § 193 cmt. b. Policies insuring multiple risks in two or more specific states may be treated as insuring individual risks in each state. See Restatement (Second) of Conflict of Laws § 193 cmt. f.
Were we to apply the approach in Restatement (Second) of Conflict of Laws §§ 6, 186, 187, 188, & 193 to this c ase we would reach the same result reached using the traditional lex loci contractu rule. Standard F

ire’s insurance

policy cove

red liability

in curre d by Chester-O’Donley anywhere in the United States

of America. Sinc

e it did not identify

particular risks

in specific state

s, the lo cation o f the insured risk is not of controlling importance. See Continental Ins. Co. v. Beecham, Inc. , 836 F. Supp. 1027, 1035-37 (D.N.J. 1993). Notwithstanding the fact that the project was located in Tennessee, Kentucky remains the state with the most si gnificant rela

tionship with this insurancecontract after taking into consideration the factors in Restatement (Se

cond) of Contrac

ts §§ 6 & 188(2). -4- Farmers Mut. Ins. Co. , 652 S.W.2d 904 , 905 (Tenn. Ct. App. 1983). 1 Accordi ngly, questions concerning the construction and operation of Chester -O’D onley’s commercial general liability pol icy must be decided using Ken tucky law.
Kentucky law provides little

substantive guidance i

n this case. We have been unableto find any repor

ted Kentucky

cases construing comm

ercial general li

ability policy provisions simila

r to the ones at issue i

n this case. Nonet

heless, we can a

pply Kentucky’s canons for construin g insurance po licies, a nd we may a lso inform our judgment by

reviewing decisions from other jurisdictions construing similar policy provisions. S ee Norton-Children’s Hosp., I nc. v. First Ky

. Trust Co. , 557 S.W.2d 895, 898 (Ky. Ct.App. 1977); Collins v. Kentucky Tax Comm’n , 261 S.W.2d 303 , 305 (Ky. Ct. App. 1953).

III. T HE U SE OF A S UMMARY J UDGMENT TO R ESOLVE C OVERAGE I SSUES

Tennessee’s law governs the proc edural aspects

of this case even if Kentuck y’s law governs the subst antive issues. See State ex. rel. Smith v. Early , 934 S.W.2d 655, 658 (Tenn. Ct. App . 1996); McReynolds v. Cherokee Ins. Co. , 815 S.W.2d 208 , 211-5-

(Tenn. Ct. App. 1991). Questions involving an insurance policy’s coverage and an insurer’s duty to defend re quire the interpre

tation of the insuranc

e policy in light of claims asserted against th e insured. See Drexel Che m. Co. v. B ituminous Ins. Co. , 933 S.W.2d 471, 480

(Tenn. Ct. App . 1996); American Nat’l Property &

Cas. Co. v. Gray , 803 S.W.2d 693, 695-96 (T enn. Ct. A pp. 1990). A decla ratory judgm

ent procee ding provides an approp riate vehicle for decid ing coverage quest ions. Se e Allstate Ins. Co. v. Merritt , 772 S.W.2d 911, 912 (Tenn. Ct . App. 1989).

Issues relatin g to the interpretation of written contracts involve legal rather than factual issues. See Rapp Constr. Co. v. Jay Realty Co. , 809 S.W.2d 490, 491 (Tenn. Ct. App. 1991); Taylor v. Univers al Tire Co. , 672 S.W.2d

775, 777 (Tenn. Ct

. App. 1984). Acco rdingly, is sues relat ing to the scope of co verage and an insurer ’s duty todefend likewise prese nt questions of l aw. See Pile v. Carpenter , 118 Tenn. 288, 296, 99 S.W. 360, 362 (1907); Pennsylvania Lumbermens Mut. Fire Ins. Co. v. Holt , 32 Tenn. App. 559, 566, 223 S.W.2d 203, 206 (1949). These essentially legal questions can be resolved using a summ ary judgm

ent when the releva

nt facts are not in dispute. See St. Paul Fi re & Marine Ins. Co. v. Torpoco , 879 S.W.2d 831 , 834 (Tenn. 1994); Rainey v. Stansell , 836 S.W.2d 117, 118 (Tenn. Ct. App. 1992).

The trial court’s de

cision to grant th

e mot ions for summ

ary judgm

ent is not entitled to a presumption of correctness on appe

al. See McClung v. D

elta Square Ltd. Partnership , 937 S.W.2d 891, 894 (Tenn. 1996); Carvell v. Bottoms , 900 S.W.2d 23, 26 (Tenn. 1995). Rather, we must make a fresh determination concerning whether the requirement

s of Ten n. R. Civ. P. 56 have been met. See Mason v. Seaton , 942 S.W.2d 470, 472 (Tenn. 1997); Hembree v. Stat e , 925 S.W.2d 513 , 515 (Tenn. 1996). A summary

judgment

is warranted only when

there are no genuine, material factual disputes with regard to the c laim or defense asserted in the m otion and when the movingparty is entitle

d to a judgm

ent as a matter of law. See Bain v. Wells , 936 S.W.2d 618, 622 (Tenn. 1997 ); McCall v. Wilder , 913 S.W.2d 150, 153 (Tenn. 1995).

The insurance policy that Standard Fire issued to Chester-O’Donley is in the record, as are th e count erclaims agains t Chest er-O’Don ley f i led by Highl and Ri m, Clark & Associates, an

d Ohio Casualty. There are no factual disputes c

oncerning the contents of these

documents; accordingly, their interpretat ion presents questions o

f2 See 9 Lee R. Russ, Couch on Insurance 3d § 129:2 (1997) (“Couch on Insurance 3d”).

3 See 2 Rowland H. Long, The Law of Liability Insurance § 10.03[2] (1997) (“Long”); Roger C. Henderson, Insurance Protection for Prod ucts Liability and Com

pleted Operations

- What Every Lawyer Should Know , 50 Neb. L. Rev. 415, 418 (1971) (“Henderson”).

4 See 1 Eric M. Holmes & Mark S. Rhodes, Holmes’s Appleman on Insurance 2d § 1.15, at 65-66 (1996) (“Holmes ’s Appleman on Insurance 2d”); Long, § 10.03[1]; George H. Tinke r, Comprehensive General

Liability Insurance - Perspective and Overview , 25 Fed’n In s. Couns. Q. 217, 218-19 (1975) (“Tinker”).

5 See Holmes’s Appleman on Insurance 2d, § 1.15, at 65.

6 See Tinker, 25 Fed’n Ins. Counsel. Q. at 220.

7 See also Robert J. Fr anco, I nsurance Coverage for Faulty Workmanship Claims Under Commercial

General Liability Policies , 30 Tort & Ins. L.J. 785, 786 (1 995); Robert E. Keeton & (continued...) -6- law. The summary judgm ent in this case can stand only if these documents establish
as a matter of law t hat Standa rd Fire’s commercial general liability

policy covers the asserted claims as a matter of law.

IV.

C OMMERCIAL G ENERAL L IABILITY I NSURANCE P OLICIES

Commercial

general liability

insurance policies a

re designed to protec

t the insured against losses arisi ng out of business operations

. 2 These policies have been in use for over

fifty yea rs, 3 and their provisions ha ve become relatively standard over the years through r

efinements by

casualty ratin

gs bureaus. 4 In ord er to pr event overl apping coverage and to minimize gaps in coverage, 5 they combine sev era l historic forms of cover

age into an integrate

d who le wit

h coverage being broa

dly stated in a

single insuring

agreement an

d exclusions circum

scribing the broad gr

ant of coverage. 6

General liability polices are no t “all-risk” policies. See Diamond Height s Homeowners

Ass’n v. National A

m. Ins. Co. , 277 Cal. Rptr. 906, 910 (Ct. App. 1991); Bausch & Lomb, Inc. v. Utica M ut. Ins. Co. , 625 A.2d 1021, 1033 (Md. 1993). They providean insured with indem nification for damages up to policy lim its for which the insured becomes liable as a result of tort liability to a

third party. See Weedo v. StoneE-Brick, Inc. , 405 A.2d 788, 791 ( N.J. 1979); Vernon Williams & Son Constr., Inc.

v. Continental Ins. Co. , 591 S.W.2d 760, 764 (Tenn. 1 979). 7 Th e risk insured by7 (...continued)

Adam I. Widiss, Insurance Law § 4.8(a) (1988) (“Insurance La w”).

8 See Michael J. Brady, The Impaired Prope rty Exclusion: Fin

din g a Path T

hrough the Morass , 63 Def. Couns. J. 380, 380 (1996) (“Brady”); Peter J. Neeson & Phillip J. Meyer, The Comprehensive General Liability Policy and Its Business Risk Exclusions: An Overview 79-80, 91, reprinted in Reference Ha ndbook

on the Comprehensive General Liability Policy(American Bar Assoc. 1995) (“Neeson & Meyer”).

9 See also Brady, 63 Def. Counsel. J. at 380; Henderson, 50 Neb. L. Rev. a t 441; Neeson & Meyer, at 80. -7- thesepolicies is the possibility t hat the insured’s p

roduct or work will cause bo

dily injury or damage to property other than the work itself for which the insured may be found liable. 8

Exclu sio ns for “business risks” began to be included in commercial general liability policies in 1966 to make cl ear that these polic

ies did not

cover the costs of repairing or replacing the insure

d’s defective pr

oduct or faulty work. See Glens Falls Ins. Co. v. Donmac G

olf Shaping Co. , 417 S.E.2d 197, 200 (Ga. Ct. App. 1992); Vernon Williams &

Son Con str., Inc. v. Continent al Ins. Co. , 591 S.W.2d a t 765; Blaylock & Brown C

onstr., Inc. v. AIU Ins. Co. , 796 S.W.2d 146, 153 (Tenn. Ct. App. 1990); Henderson, 50 Neb. L. R ev. at 4 38. These exclusio ns are based on the premise that general liabil

ity coverage is

not intended as a guaran tee of the i nsured’s product or work. See Neeson & Meyer, at 79.

Accordi ngly, general liability polices are not inten d ed to cover the insur ed’s contractual liability for e conomic loss because it s w ork was not that for which the damaged person bargained. See Glens Falls In s. Co. v. Donmac Golf S

haping Co. , 417 S.E.2d at 200; Knudson Constr. Co. v . St. Paul Fire & M

arine Ins. Co. , 396 N.W.2d 229, 234 (Minn. 1986); Weedo v. Stone-E-Brick, Inc. , 405 A.2d at 791. 9 As the New Jersey

Supreme Cour

t noted in one of the sem

inal cases construin

g general liability policies: “The policy in question does not cover the a ccident of faulty workmanship but rather faulty workmanship which causes an accident.” Weedo v. Stone-E-Brick, Inc. , 405 A.2d at 796.

V.

G ENERAL R ULES OF C ONSTRUCTION-8- Insurance contracts are subj ect to the sa me rules of construction and enforcement

as contracts generall y. See McKimm v. Bell , 790 S.W .2d 526, 52 7 (Tenn. 1990); Hurley v. Tenne ssee Farmers M ut. Ins. Co. , 922 S.W.2d 887 , 892 (Tenn. Ct. App. 1995). Inthe absence of fraud or mistake, they should be interpreted

as written, see Allst

ate I ns. Co. v. Wi

lson , 856 S.W.2d 706 , 708 (Tenn. Ct.App. 1992), and their terms should be given their natural and ordinary meaning. See Tata

v. Nichols , 848 S.W.2d 649, 650 (Tenn. 1993); Drexel Chem. C o. v. Bituminous Ins. Co. , 933 S.W.2d at 477. Because insurers are strictly accou

ntable for the

language in thei r contracts, am

biguous language will b

e construed against t

he insurer and in favor of the insured

. See Harrell v. M innesotaMut. Life Ins. Co. , 937 S.W.2d 809 , 814 (Tenn. 1996).

Insurance policies should be construed as a whole in a reasonable and logical
manner. See English v. Vi rginia Sur. Co. , 196 Tenn. 426, 430 , 268 S.W.2d 338, 340 (1954); Setters v. Perm

anent Gen. Assurance Corp. , 937 S.W.2d 950 , 953 (Tenn. Ct. App. 1996). The essenti

al components

of a general liabil

ity insurance pol

icy include (1) the declarations,

(2) the insuring agr

eements and def

initions, (3) the exc

lusions, (4) the conditions, and (5) the endorsements. When coverage questions a

rise, these components

should be construed in the above order to avoid confusion and error. See Tinker, 25 Fed’n Ins. Coun sel Q. at 222; Long, § 10 .04.

The insuring ag reement sets the out er limits of an in surer’s contra ctual l iabili ty. If coverage cannot be

found in the insuring agr

eement,it will not be

found elsewhere in the pol icy. Exclusions help define and shape the

scope of coverage,

but they must be readin terms of the

insuring agreem

ent to which they

apply. Exclus

ions can only decrease co v erage; they cannot increas e it. See Stanford Ranch, I nc. v. Maryland Cas. Co. , 89 F.3d 618, 626 (9t h Cir. 1996); Continental Cas. Co. v. Pittsburgh Corning Corp. , 917 F.2d 297, 300 (7 th Cir. 1990); Marmone v. Liber ty Mut. Ins. Co. , 695 A.2d 341, 344 (N.J. S uper . Ct. App. Div. 1997); 13 John A. Appleman & Jean Appleman, Insurance Law and Practice § 7387, at 175 (197 6).

Exclusions should also be read se riatim. Ea

ch exclusion reduces

coverage and operates independen tly with reference to the in suring agreement. See Trinity-9-

Universal Ins. Co. v. Br

oussard , 932 F. Supp. 130 7, 1310 (N. D. Okla. 1996); Hartford Accident &

Indem. Co v. A.P. Beale & Sons, Inc. , 644 N.Y.S. 2d 442, 443 (App. Div. 1996). Exclusions should not be construed broadly

in favor of the insurer,
nor should they be construed so narrowly as to defeat their intended pu rpose. See Midland Ins. Co. v. Home Indem

. Co. , 619 S.W.2d 387, 389 (Tenn. Ct. App. 1981). Once an insurer has esta blished that an exclusi

on applies, the burde

n shifts to the insured to demonstrate

that its claim f

its with in an exception to the exclusion. See Just v. Land Reclamation, Ltd. , 445 N.W.2d 683, 688 (Wis. Ct. App . 1989), rev’d on other grounds , 456 N.W.2d 570 (Wis. 1990).

VI. S TANDARD F IRE ’ S P OLICY L ANGUAGE

We tu rn first to the insuring a greement of S tandard Fire’s policy to establis h the outer boundarie s of coverage. Then, we will exam

ine the exclusions fr

om coverage relied on by Stan dard Fire to limit the scop e of its policy’s coverage.

A. The Insuring Agreement

The insuring agreement in Coverage A of Standard Fire’s policy provides succinctly

that “[w] e will pay those sums that the

insured becomes legally

obligated to pay as dama

ges because of ‘b

odily injury ’ or ‘propert

y damage ’ to which this insurance applies.” The ins uring agreeme

nt also states that the policy covers bodily injury and property damage that occur within the policy period and that are c a used by an “occurrence” that takes place within the coverage territo

ry. The present dispute
concerns whether an “o

ccurrence” has caused “propert y damage;”

there is no dispute that th e claims a rose du ring th e polic y period and wit hin th e cover age terr itory.
Standard Fire’s policy defines “property dam age” as
a. Physical injury to t angible property , including all resulting loss of use of

the property; or b. Loss of use of tangible pro perty that is not physically i

njured.10 See Herbert J. Baumann, Broad Form Property Liability Coverage 125, reprinted i n

Reference Handbook on the Comprehensive General Liability Policy(American Bar. Assoc. 1995) (“Baumann”).

11 See Donald S. Malecki & Arthur L. Flitner, Commercial Gene ral Liability

8 (3d ed. 1990) (“Malecki & Flitner”).

12 See Baumann, at 126 n.29. -10- Italso defines an “occurrence” as “an accident, including continuous or repeat e d expo sure to subst antial ly the sa me genera l harmful condit ion.” Ac cordin gly, Standard Fire’s policy

covers only the s

ums its insured be

comes legally

obligated to pay for physical injury to tangib le property or for

the loss of use of tang

ible property that is not injured.

The “physical i

njury” requir

ement was added to the

standard policy l

anguage in 1973 10 to reinforce that these policies cover only visible harm or im

pairment 11 or actual physical loss to

tangib le prop erty. 12 Thus, in circum stances that do not

involve personal injuries, these pol icie s do not cover econom ic loss without som

e sort of physical injuryto tangible personal p roperty that is n

ot owned by the

insured or that is not part of the insu red’s work. S ee Gulf Ins. Co. v. L.A. Effects Group, Inc. , 827 F.2d 574, 577 (9th Cir. 1987); Transcontinental Ins. Co. v. Ice Sys. Of America, Inc. , 847 F. Supp. 947, 950 (M.D. Fla. 1994); Hommel v. Ge orge , 802 P.2d 1156, 1158 (Colo. Ct. App. 1990).

Additional construction expenses, lost pr ofits, or dimin ution in value of the project caused by the insu

red’s defective

work are the

sort of economi

c losses that do not f it within the definition of “property damage.” See SLA Property Management

v. Angelina Cas. Co. , 856 F.2d 69, 72-73 (8th Cir. 1988) ; Wyoming Sawmills, Inc. v. Transportation Ins. Co

. , 578 P.2d 1253, 1256 (Or. 1978). On facts simi lar to those i n this case, one intermediate appellate court held that the inclusion of defe ctiv e energy storage units that con

t ributed to the failur

e of an HVAC sy

stem was not “property damage” beca

use the defective un

its did not cause physical in jury to the HVAC system. A

ccordingly, the

court held that the c

laims for the costs to repair the HVAC system, t

he lost rent, the los

t productivity of the workers in the building, and the excessive electrical consumption were not covered by the contractor’s general liability policy. See Diamond

State Ins. Co. v. Chester-Jensen Co

. , 611 N.E.2d 1083,13 Highland Rim and Ohio Casualty

also request the court to address the policy’s “completed operations hazard” exclusion. We decline to do so fo r tw o reasons. First, Standard Fire has not basedits denial of coverage on this exclusion, and second, the language of an exclusion cannot add coverage to a policy w

hen the coverag

e is not provided in

the insuring clause. Consideration of the “completed operations hazard” exclusion adds nothing to the resolution of the parties’ dispute. -11- 1091-92 (Ill. App. Ct.1993); see also Bituminous C as. Corp. v. Gust

K. Newberg Constr. Co. , 578 N.E.2d 1003, 1009-10 (Ill. App.Ct. 1991); Sentry Ins. Co. v. S & L Home Heating Co. , 414 N.E.2d 1218, 1221-22 (Ill. App. Ct. 1980).

B. The Exclusions Claimed by Standard Fire

In addition to the language in its policy’s insuring agreement, Standard Fire also relies on

two exclusions to suppor t its position that its policy does not cover the damage claims assert

ed by Highland

Rim, Clark &

Associ ates, an d Ohio C asualt y. 13 Theseexclusions are com monly known as the “im

paired property

” exclusion and the “sistership” e

xclusion.
The Impaired Property Exclu sion

The “impaire

d property” exc

lusion in Standard Fir

e’s policy st

at es that the coverage in the polic

y does not apply

to: “Property damage” to “impaired property” or property that has not been physically injured, arising out of: (1) A defect, deficie

ncy, inade

qu acy or dangerous condition in “y

our product” or “

your work”; or (2) A delay or failur

e by you or anyone

acting on your behalf to perform a co ntrac t or agreemen t in accordance with i

ts terms. This exclusion does not apply to the loss of use o f other property aris ing out of sudden and accidental physical injury to “ your pro duct” or “your work” after it has been put to its intended use. The policy defines “impaired property ” as14 See Br ady, 63 Def . Counsel J. at 381; Male

cki & Flitner, a

t 49-50; Tinker, 25

Fed’n Ins. Counsel Q., at 264. -12-

tan gible property, othe

r than “your

product” or “y

our work”, that cannot be used or is less useful because: a. Itincorporates “

your product” or

“your work” that is known or thought to be defective, de ficient, inadequate or danger

ous; or b. You ha ve failed to fulfill the terms of a

contract or agreement; if such proper ty can be restor ed to us e by: a. Th e rep air, replacem ent, adjustm

ent or removal

of “your produc

t” or “your

work”; or b. Your

fulfilling the terms of the c ontract or agreement.

This exclus ion was first i nclude d in commer cial ge neral l iabili ty policies in 1966 and was later am

ended and refined in

1973, 1986, and 1990. 14 It narrows coverage for claims involving t

he reduced usefulness or impairment of property other than the insured’s. See Hamlin, Inc . v. Hartford Ac

cident & Indem. Co., 86 F.3d 93, 96 (7th Cir. 1996); Franco, 30 Tort & Ins. L.J. at 800. The ex clusion targets situations where a defecti ve product, after

being incorporated i

n to the pr operty of another, must be replac

ed or removed at gre

at expense thereby

causing loss of

use of the pro perty.

The effect of th

e “impair ed property” e

xclusion is to bar cove

ragefor loss of
use claims (1) when the loss was caused solely by the insured’ s failure to provide work of the quality or

performance

capabil ities c alled for by the contract and (2) when there has been no physical injury to property other than the insured’s work itself. The exclusion does no t apply if there

is damage

to property other

than the i nsur ed’s work, see Imperial Cas. & Indem. Co. v. High Concrete Structures, Inc. , 858 F.2d 128, 136

(3d Cir. 1988); Transcontinental Ins. Co. v. Ice Sys. of Am., Inc. , 847 F. Supp. at

950, or if the insure

d’s work cannot be

repaired or

replaced without causing physical injury to other pro perty. See Oscar W. L arson Co. v. Unite

d Capitol Ins. Co. , 845 F. Supp. 445, 448-49 (W.D.Mich. 1993); Action Auto Stores, Inc. v. United Capitol Ins. Co. , 845 F. Supp. 417, 425-26 (W.D.Mich. 1993); E lco I ndus. v. Liberty Mut. Ins. Co. , 361 N.E.2d 589, 591 (Ill . App. Ct. 1977).-13- Several texts have illustrat ed applications of the

“impaire d property” exc

lusio n works using heating and ventil ation system

s. One text

gives the following

example: [S]a y th at the insured installs a heating and ventila tion system in a new

building. If the

system lat

er proves to be defective, resulting in the loss of use of the building

while the system is being repaired or replaced, the insure r can cite the portion o f

the exclusion relating to “impaired proper ty” in denying covera ge for a resulting lo ss-of-use claim against i

ts insured. Malecki& Flitner, at 52. An other text provides a sim ilar, although m

ore detailed, example: Th e completion of an office tower for DEVCORP was

delayed by WARMCO’s delay in com pleting its co ntra ct for the installation of hea ting, ventilation and air conditioningsystems. When WARMCO informed GENERALand DEVCORP t hat the he atin g system was completed

and ready for

use, it was determined that defects in the heating system prevented the hea ti ng system fr

om generating

sufficient heat to meet th e specifications. As a result, the office tower

couldnot be occupied while repairs were made

andDEVCORP suff

ered additional dela

ys and substantial lost rental income. DEVC ORP brought an actionagainst GENER

AL and WARMCO and

GENERAL cross-claimed

again st WARM CO. Are the cl aims covered by WARMCO’s CGL poli cy? Under this exclusion, ther

e is n o cove rage for the claims against WARMCO because WAR MCO’s failure

to perform resulted in delay and loss of use of property that had not been physically injured. JosephG. Blute, Analyzing Liability I nsurer Coverage for Co

nstruction Industry Property Damage Claims , av ai lable in WEST LAW, 7 No.3 Coverage 1, 32 (American Bar Assoc. 1997).
The Sistership Exclusion

T he “ sistership” exclusion in Standard Fire’ s policy withdra ws coverage for claims involving

[d ]amages claimed for any loss, cost or expense incurr e d by you or others for the los s of use, withdraw al, recall,15 See Tinker, 25 Fed’n Ins. Counsel Q. at 264.

16 See Malecki & Flitner, at 52; Jean E. Maes s, A nnotation, Validity and Construction of “Sistership” Clause of Products Liability Insurance Policy E xcep ting From Coverage Cost of Product Recall or Withdrawal of Product From Market , 32 A.L.R. 4th 630, 631 (1984). -14- inspection, repai r, rep laceme nt, ad justme nt, re mo val or disposal of: (1) “Your product”; (2) “Your w

ork”; or (3) “Impaired property”; if such product, work, or property is withdrawn or recalled from the market or from use by any person or or

ganization because of a kno wn or su specte d defec t, defic iency, inadequacy or da

ngerous condition in it. This provision first a ppeared in comm ercial general li

ability policies in 1966 15 and takes its name from

the occurrences in the aircraft industry whereenormous loss-ofuse claims resulte

d from the grounding of all ai

rplanes of the sam

e type because one airplane crashed, a nd i ts “sisterships” were suspected of

having a comm

on defect. See Arcos Corp. v. A

merican Mut. Liab

. Ins. Co. , 350 F. Supp. 380, 383, 3 84-85 (E.D. Pa. 1972); Paper Machinery C orp. v. Nelson Foundry

Co. , 323 N.W.2d 1 60, 163-64 (Wis. Ct. App. 1982). 16

The exclusion is designed to shieldinsurers from

liability for th

e costs associated with una nticipated produ ct recalls. See Forest City Dillon, Inc. v. Aetna Cas. & Sur. Co. , 852 F.2d

168, 173 (6th Cir. 1988); Paper Machinery C orp. v. Nelson Foundar y Co. , 323 N. W.2d at 164. It does not apply to claims involving losses resul ting from the failure of the insu red’s product or work, see Imperial C as. & Indem. Co. v. High Concrete Structures, Inc. , 858 F.2d at 136 n.9, or to claims that

are not based on the withdr awal or recall of the insured ’s own product or work. See Imperial Cas. & In

dem. Co. v. H

igh Concrete Structures, In c. , 858 F.2d at 137; FitnessEquip. Co. v. P

ennsylvania Gen. Ins. Co. , 493 So. 2d 1337, 1343(Ala. 1985).

The removal of def

ective products th at failed after t heir installation does not
come within the

sistership exclusion

of the insured’s ge

neral liability

policy because there has be e n no general withdrawal of similar products from the general marketplace. See Forest City Dillon, Inc. v. Aetna Cas. & Sur. Co. , 852 F.2d at 173- 74; Marathon Plastics, Inc. v. International Ins

. Co. , 514 N.E.2d 479,

487 (Ill. App.-15-

Ct. 1987). Based upon

the undisputed facts,

the “sistership

” exclusion does not app

ly in this case because t

here is noevi dence of a general recall of sim

ilar products or materials from the marketplace.

VII.

S TANDARD F IRE ’ S O BLIGATION TO D EFEND THE C LAIMS

A GAINST C HESTER -O’D ONLEY

All that remains is to determine whether Standard Fire has a d uty to defend Chester-O’Donley

with regardto the c laims made by Highl and Rim, O hio Cas ualty, andClark & Associates. This duty is measure d by the factual allegations in the counterclaims

. See First Nat’l B ank v. South

CarolinaIns. Co. , 207 Tenn. 520, 523 , 341 S.W.2d 569, 570

(1960); Drexel

Chem. Co. v. Bituminous Ins. Co

. , 933 S.W.2d at480; I. Appel Corp. v

. St. Paul Fire &

Marine Ins. Co. , 930 S.W.2d 550, 552 (Tenn. Ct. App. 1996). An ins

urer’s duty

to defend is trigger

ed when its policy arguably, as opposed to distinctly, c

overs the claim

s being made, s ee Hamlin, Inc. v. Hartford Accident & Indem. Co. , 86 F.3d at 94; O’Banon v. Aet na Cas. & Sur. Co. , 678 S.W.2d 390, 392 (Ky. 1984); Dempster Bros. Inc. v. U.S.F.&G. , 54 Tenn. App. 65, 71, 388 S.W.2d 153, 156 (1964), and continues until the facts and the law establish that the claimed loss is not covered

. See James Graham Brown Fou nd., Inc. v. St. Paul Fire & Marine I

ns. Co. , 814 S.W.2d 273, 279 (Ky. 1991).

A. The Claims of Clark & Associates

In its counterclaim, Clar

k & Associates asser

ts that it issued a cer

tificate of substantial completion for the ne w musi c buildin g based on Chester-O’Do nley’s assertions that th e m echanical systems in the bui lding, includin g the HVAC ductwork, had been constructed in accordance with the contract. It seeks to recover $500,000representing dam ages for (1) Chest

er-O’Donley ’s negligent or fr audulent-16-

misrepresenta

tions, (2) the time r

equired to discover a

nd correct the defe

ctivework, (3) its lo ss of i ncome because the rate of compensation for its remedial work was less than its regular ra

te, and (4) the inj uries to its business re putation and good will.

Noneof Clark & Associa tes’ claims

involve physical d

amage to tangibl

e proper ty. Rather, they amount to econom

ic losses stemmin

g from ChesterO’Donley’s breach of contrac t. Accordingly , based on the undispute d facts i n the
record, Standard Fire’ s policy does not co ver the claims

asserted by Cla

rk & Associates.

B.

The Claims of Highland Rim and Ohio Casualty
Highland Rim all eges i n its coun tercl aim that Chester-O’D onley failed to pro vide a mechanical

system in a

ccordance with it

s subcontract. It a

sserts tha t Chester-O’Donley

breachedits s ubcontract and that H ighland Rim was

required to replace and rework substant ial portions of th

e mechan ical system

s provided by Cheste r-O’Donl ey. As a result, Hig hlandRim sought dam

ages for (1) the

liquidated d amages it w as required to pay the State, (2) th

e “additional da

mages as a res

ult of delays caused by the de

fective work,”

(3) impairme

nt of its reputation w

ith the State of Tennessee and the b

usiness community, and (4) potential damages stemming f

rom the State’s claims for subs tantial delay a

nd disruption in its use of

the music building.

For its part, Ohio Casualty asserted in its counterclaim that it had been required to pay Highland Rim

$1,425,835.88after Chester-O’Donley was declared in defau

lt of its subcontract. A

ccording to its counter

claim, these

funds were used to

complete Chest er-O’Don

ley’s work and to correct defects or nonconforming work as determined by

the project arc

hitect.

The definition of

“ property dam

age” in Standard F

ire’s policy

limits the policy’s coverage to phys ical injury to

ta ngible property and to th e loss of use of tangible property other

than the insured’s

work that has not bee

n physically injured. The “impaired proper ty” exclusion in Stand ard Fire’s policy narrows the loss-of-use-17-

coverage by excluding loss- of-use claims based solely on t

he i nsured’s failure

to providethe work or products called for in the contract

. When read togethe r, these provisions exclude coverage when there has been no physic al inju ry to tangible property other than the insured’s work.
Highland Rim’s cl aims based on

(1) its paym

ent of liquidated dam

ages to the state, (2) the damage

to its business reputat

ion, and (3) the State’ s claims of dela y and disruption

of its occupation and use of the building are not covered by StandardFire’s policy. These claims

involve economic

losses stemm

ing from Chester-O’Do nley’s breach of contract, and t

hey do not involve

physical injury to tangible property other than Chester-O ’Don ley’s work. Using the same

reasoning, the port

ion of Ohio Casualty’s c

laim based on the funds it was required to pay Highland Rim to correct Cheste r-O’Donl ey’s defec tive wo rk is no t cover ed by Sta ndard F ire’s po licy.

There is, however, some evidence in the record thatthe failure of the HVAC system may have caused some physicalinjury to tangible property other than ChesterO’Donley’s work. Standard F ire concedes in its

brief that a portion

of thefunds paid by Ohio Casualty

were used to

repair “inconsequentia

l damages to wa

ll[s], ceilings andother parts of the business necessitated by the rem

oval of the [HVAC] system.” Thesedamages may be covered because, as w e hav e alread y pointed out, physical injury to other tang ible prop erty not part of the insu red’s work necessarily resulting from the repair or replac

ement of the ins

ured’s work is not

excluded by

the “impaired proper ty” exclusion. See Oscar W. L arso n Co. v. Un ited Capitol Ins. Co. , 845 F. Supp. at 448-49; Action Auto Stores, Inc. v. United Capitol Ins. Co. , 845 F. Supp. at 425-26; Elco Indus. v. L

iberty Mut. Ins. Co. , 361 N.E.2d at 59.

Noneof the claim

s asser ted in High land Rim’s and Ohio Casua lty’s
coun tercl aims are covered b y Standard Fir e’s policy exc

ept for the claim

based on physical injury to portions of the building that were notwithin the scope of ChesterO’Donley’s work. Claim s based on physica

l injury to th

e building caused by t

he repair or replaceme

nt of the d efective d uctwork in stalled b y Chester-O’Don ley’s subcontractor

may be cove

red by Standard Fire’s policy. The record does not permit determining the

existence or extent

of these injuries.-18- The proper course is to v acate the order denying Standar

d Fire’s mot

ion for summary judgment

and to remand the case with directions to enter an order finding that C lark & Associates’ claims and all the claims of H ighland Rim and

Ohi o Casual ty, except for their c laims based on da

mage to the

building caused by

the repair

or replacement

of the d efectiv e ductw ork, are not cov ered by St andard Fire’s p olicy. On remand,the trial courtmay determine that these claim s are likewise not covered if the undisputed evidence demonstrates either that the re pair or replacem

ent of the defective ductwork did not damage the other porti ons of the building or tha t this damage was truly “inconsequential.”

Since Standard Fire’ s policy argua bly covers one of the cl aims made

by Highland Rim and Ohio Ca

sualty, we fi

nd that Standard Fir

e has a duty

to defend Cheste r-O’Donl ey. Accordingly, we affirm the trial court’ s orderand rem and the
casefor further proce

edings consistent with

this opinion. Should the

trial court later conclude that other portions of

the building were not

physically d

amaged by t

he repair or replaceme

nt of the defective

ductwork or that thi s damage wa s truly “inconsequential,” the court may then find th at O hio Casualty no lon ger has a duty to pro vide Chest er-O’D onle y a defe nse wi th reg ard to this claim.

VIII. E STOPPEL TO D ENY C OVERAGE
Chester-O’Donley

and Clark & Associ

ates also a ssert that Standar d Fire should be estopped to deny coverage because a claim consultant told them that he believed thatthe policy m

ight cover Highland R

im’s claim

that it had to perform

substantial work on the “mechani

cal system

” and Clark & Assoc

iates’ claim

for lost income. We findlittle merit with this argument for two reas o ns. First, an insur er’s duties to defend and indemnifyarise from the terms of its policy, not from later statements of its agents. See Kentucky Farm Bureau Mut. Ins. Co. v. Cann , 590 S.W.2d 881 , 883- 84 (Ky. Ct. App. 1979). Second, we have determined as a matter of law that Standard Fire’s policy does not cover any of Clark & Associates’ claims and that it may cover onlythose claims as serted by Highl and Rim relati

ng to physical inj ury to the portions-19-

of the building not within

the scope of Chester- O’Donley’ s work that resulte d from the repair or repl

acement of the

defective ductwor

k.

IX.

We vacate the

order finding thatStandard Fire’ s policy provides c overage for Chester-O’D

onley with rega

rd to all the

claims asserted by Highland Rim, Clark & Associates, and Ohio Casualty . We rem and thecasewith directions to enter an order finding that Standard Fire must provide a de

fenseonly with regar

d to the Highland Rim’s and Ohio Casualty’s claims based on physica l damage to port ions of the building not within the

scope of Chester O’D

onley’s work

that resulted from

the repair or replace m ent of the defectiv e ductwork and to tak

e any other act

ions consistent

with this opinion. We tax the costs of this appeal in equal proportions to Standard Fire Insurance C ompany and it

s surety, Clar

k & Associates Arch

itects, Inc., Highland Rim Constructors, Inc., Chester-O’ Donley & Assoc iates, Inc., a

nd Ohio Casualty Insurance Company for which execution, if necessary, may issue.

____________________________ WILLIAM C. KOCH, JR., JUDGE

CONCUR:

__________________________________ __ HENRY F. TODD, PRESIDING JUDGE MIDDLE SECTION

__________________________________ __ SAMUEL L. LEWIS, JUDGE