United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 06-3503

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Tonicstar Limited, *

*

Appellee, *

*

v. * Appeal from the United States

* District Court for the

Lovegreen Turbine Services, Inc., * District of Minnesota.

*

Appellant, *

*

Flint Hills Resources LP, *

*

Defendant. *

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Submitted: May 17, 2007

Filed: August 1, 2008

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Before BYE, BEAM, and SMITH, Circuit Judges.

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BYE, Circuit Judge.

A cloth rag remaining in an oil refinery compressor caused several million

dollars in business interruption damages. Tonicstar Limited, one of the insurers of

Lovegreen Turbine Services, the company who serviced the compressor, brought this

declaratory judgment action claiming it had no duty to defend or indemnify Lovegreen
1

The Honorable John R. Tunheim, United States District Judge for the District

of Minnesota.

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in an action for damages brought by the owner of the oil refinery. The district court1

granted Tonicstar's motion for summary judgment, concluding the insurer did not owe

Lovegreen a duty to defend or indemnify. We affirm.

I

Lovegreen is a service provider which is in the business of servicing turbines,

generators, and compressors. Flint Hills Resources, LP, is the owner of a crude oil

refinery near Rosemount, Minnesota (the Pine Bend facility). In 2003, Flint Hills

hired Lovegreen to overhaul a compressor at the Pine Bend Facility. It asked

Lovegreen to be "responsible for the disassembly, cleaning, inspection, repairs as

necessary, . . . reassembly of the compressor[, and] inspection of the gear box." App.

147. Lovegreen worked on the compressor around the clock from September 8

through September 24. In connection with the work, a large container of cloth rags

were used to wipe the compressor during the overhaul.

After Lovegreen's work was complete, Flint Hills placed the compressor back

into service. Initially, the compressor ran as designed. One week later, however, Flint

Hills shut down the compressor because a charge pump at the refinery failed. When

Flint Hills restarted it the same day, it vibrated excessively and created a large volume

of unusual noise. Flint Hills again shut down the compressor, inspected it, and found

a cloth rag and cloth fragments lodged inside. Flint Hills instructed its own employees

to remove the cloth rag and fragments, repair the compressor, and place it back in

operation as quickly as possible. It documented its inspection and repair with

photographs and saved the cloth fragments found inside the compressor. The

compressor was out of service for five days, causing Flint Hills to incur loss of

business damages exceeding $6.5 million.
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After returning the compressor to service, Flint Hills began pursuing

Lovegreen's liability insurers to recoup its damages. Lovegreen had $2 million in

primary insurance coverage through Liberty Mutual Fire Insurance Company. A

commercial umbrella policy issued by a syndicate of six insurers through Lloyd's of

London provided additional coverage in excess of $2 million. Liberty Mutual and five

of the six subscribing Lloyd's of London syndicate agreed to pay their share of the

business loss. The holdout – Tonicstar – refused to pay. As a result, Flint Hills

brought suit against Lovegreen raising claims of negligence and breach of contract

premised on its failure to perform the overhaul in a workmanlike manner by leaving

the cloth rag inside the compressor. Flint Hills claimed loss of business damages in

the amount of $1.7 million (the part remaining unpaid), as well as $29,500 for the cost

of repairs to the compressor.

The insurance policy issued to Lovegreen by Tonicstar generally provided

coverage "for Bodily Injury and Property Damage arising from the rendering of or

failure to render Professional Services," App. 49, but contained several exclusions.

As relevant, Exclusion D.2.f. excluded coverage for "Property Damage to . . . that

particular part of any property that must be restored, repaired or replaced because

Your Work was incorrectly performed on it." An exception to Exclusion D.2.f.

restored coverage for "Property Damage included in the Products-Completed

Operations Hazard." Id. at 43. The policy defined Property Damage as:

1. Physical injury to tangible property, including all resulting loss of

use of that property. All such loss of use shall be deemed to occur

at the time of the physical injury that caused it; or

2. Loss of use of tangible property that is not physically injured. All

such loss shall be deemed to occur at the time of the Occurrence

that caused it.
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Id. at 61. The policy defined Your Work as:

1. Work or operations performed by you or on your behalf; and

2. Materials, parts or equipment furnished in connection with such

work or operations.

Id. at 62. Endorsement No. 1 added the following definition of Work: "The entire

completed construction or the various separately identifiable parts required to be

furnished under the contract documents." Id. at 51.

After Flint Hills sued Lovegreen, Tonicstar brought this declaratory judgment

action against Lovegreen and Flint Hills asking the district court to declare Tonicstar

had no duty to defend or indemnify Lovegreen in the action brought by Flint Hills.

Tonicstar moved for summary judgment arguing Flint Hills' damages were excluded

pursuant to several of the policy's exclusions, including Exclusion D.2.f. The district

court granted Tonicstar's motion for summary judgment, concluding Exclusion D.2.f.

applied. The district court further concluded the exception to Exclusion D.2.f. for

property damage included in the Products-Completed Operations Hazard did not apply

because such coverage excluded "Property Damage arising out of . . . the existence

of tools, uninstalled equipment or abandoned or unused materials." Id. at 61. The

district court concluded the cloth rag left in the compressor constituted "abandoned

or unused materials."

Lovegreen filed a timely appeal. On appeal, it contends the district court erred

in three respects. First, the argument about keeping a rag out of the compressor was

not part of its "work" within the meaning of the policy. Second, it is contended the

district court erred in concluding the cloth rag was "abandoned or unused materials,"

and Flint Hills' loss of business damages should have been covered under the policy's

Products-Completed Operations Hazard provisions. Finally, Lovegreen argues that,

even if Exclusion D.2.f. applies to exclude coverage, the exclusion does not apply to
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the $1.7 million in loss of business damages, but only to the $29,500 in repairs to the

compressor itself.

II

Both the district court's grant of summary judgment, and its interpretation of the

terms of the insurance policy, are reviewed de novo. Macheca Transport Co. v. Phila.

Indem. Co. , 463 F.3d 827, 831 (8th Cir. 2006).

We agree with the district court that Exclusion D.2.f., which excludes coverage

for property damage to property which must be repaired because the insured's work

was incorrectly performed, applies. Cloth rags were part of the materials Lovegreen

furnished in connection with the overhaul of the compressor. In addition, using the

cloth rags to wipe the compressor during the overhaul was part of the work or

operations performed by Lovegreen. As a consequence, leaving a cloth rag inside the

compressor falls within the policy's definition of work. Such conduct triggers

Exclusion D.2.f. because it indicates Lovegreen's work was incorrectly performed, and

the compressor required repair as a result. Furthermore, the $6.5 million in business

interruption damages Flint Hills suffered while the compressor was being repaired is

excluded from coverage because the policy's definition of property damage

encompassed not only physical injury to the property affected by the defective work,

i.e., the cost of the compressor repairs, but also the resulting loss of use of the

property. See, e.g., TGA Dev., Inc. v. N. Ins. Co. of New York, 62 F.3d 1089, 1091

(8th Cir. 1995) (interpreting a "loss of use" provision under Minnesota law, and

explaining that loss of use of property resulting from defective work falls "outside the

coverage" of such policies).

Lovegreen contends, however, that keeping a rag out of the compressor was not

part of its "work" as defined by the policy. It relies upon the additional definition of

"work" under Endorsement No. 1 which, as stated above, provided in part that "work"
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is "the various separately identifiable parts required to be furnished under the contract

documents." App. 51. It contends a final inspection to remove foreign material from

the compressor was not part of the work it was required to furnish under the contract

documents.

Even assuming arguendo a final inspection to remove foreign material was not

specifically mentioned in the contract, Lovegreen's argument nonetheless fails. The

definition of "work" in Endorsement No. 1 does not replace the definition of "Your

Work" in the main body of the policy. Endorsement No. 1 specifically provides "that

the following additional Definitions shall apply." Id. (emphasis added). In other

words, both the definition of "Your Work" and the definition of "Work" in

Endorsement No. 1 apply. Thus, leaving a cloth rag in the compressor could

constitute Lovegreen's "work" under either definition. After all it provided a large

container of cloth rags to the Pine Bend facility, the purpose of which was to wipe the

compressor during the overhaul. Lovegreen then used the cloth rags during the

overhaul and left one inside the compressor. This conduct clearly falls within the

policy's definition of "[w]ork or operations performed by [Lovegreen]," as well as

"[m]aterials . . . furnished in connection with such work or operations." Id. at 62.

Lovegreen further contends the loss involved here should have been included

in the Products-Completed Operations Hazard coverage, which was excepted from

Exclusion D.2.f. The policy provided, however, that there was no ProductsCompleted Operations Hazard coverage for property damage arising out of the

existence of tools, uninstalled equipment or abandoned or unused materials, and the

district court concluded the cloth rag constituted abandoned or unused materials. We

agree. This interpretation of the policy is consistent with the conclusion reached by

the few courts which appear to have interpreted this exception for "abandoned or

unused materials." See U.S. Sanitary Specialties Corp. v. Globe Indem. Co., 204 F.2d

774, 777 (7th Cir. 1953) (recognizing the provision applied to "tools, equipment and

materials which on completion of an operation should have been removed by the
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assured from the premises where the operation occurred but which, instead, were

abandoned there by the insured and later were instrumental in causing an accident.");

see also Liberty Mut. Ins. Co. v. Am. Home Assurance Co., Inc., 858 N.E.2d 530,

538-39 (Ill. App. Ct. 2006) (concluding a temporary ramp the insured left at the

worksite fell within the exception for "abandoned" materials); Shelter Mut. Ins. Co.

v. DeShazo, 955 S.W.2d 234, 238 (Mo. Ct. App. 1997) (adopting the reasoning from

Sanitary Specialties in interpreting the "abandoned or unused materials" provision).

Finally, Lovegreen contends, even if Exclusion D.2.f. applies, it only excludes

the cost of restoring the compressor to operation, that is, the $29,500 Flint Hills spent

to repair the compressor, but does not exclude the $6.5 million Flint Hills lost in

business while the compressor was out of service for five days. As we explained

above, this policy's definition of property damage included not only the physical

injury to the property which required repairs because of incorrectly performed work,

but also specifically encompassed the "resulting loss of use of that property." App.

61. As a consequence, the exclusion of the $6.5 million in business interruption

damages is "compelled by the plain words of the polic[y]." TGA Development, 62

F.3d at 1091.

III

We affirm the judgment of the district court.

BEAM, Circuit Judge, dissenting.

Lovegreen contracted with Flint Hills Resources (FHR or Flint Hills) to be

"responsible for the disassembly, cleaning, inspection, repairs as necessary [of the

compressor] and reassembly of the compressor . . . [and] inspection of the gear box."

This was the "work" agreed upon and was "Your [Lovegreen's] Work" as defined in

the coverage clauses of the insurance policy at issue here. In completing this work
2

If ambiguous, "it [should] be construed against [Tonicstar], as drafter of the

contract." Progressive Specialty Ins. Co. v. Widness, 635 N.W.2d 516, 518 (Minn.

2001) (citing Current Tech. Concepts, Inc. v. Irie Enters., Inc. 530 N.W.2d 539, 543

(Minn. 1995)).

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(and it was clearly a completed operation contemplated by the insurance contract

language), Lovegreen negligently left a cleaning rag inside the compressor which act

led to property damage, i.e., loss of use of the compressor, a covered loss. The court

majority's conclusion to the contrary is error. Thus, I dissent.

Under Endorsement No. 12, Appendix at 39, Lovegreen was a named insured

under the insurance policy in force here. Liberty Mutual was the primary underwriter

under the contract. A six-member syndicate organized by Lloyd's of London provided

bumbershoot (umbrella) coverage above the limits of the primary policy, which limits

were exceeded in this case. There can be no dispute that Lovegreen was negligent and

that the loss was in excess of $6.5 million. Liberty Mutual and five of the six

members of the syndicate recognized their coverage obligations and agreed to pay a

contractually designated share of the loss. Tonicstar, on the other hand, refused to do

so and now mounts a convoluted and unsupportable coverage defense involving

unrelated and incongruent portions of the policy, which defense the district court and

the court majority adopt, at least in part.

Liberated from Tonicstar's misdirecting hyperbole, the policy language

applicable to this loss is relatively straightforward.2

 In consideration of the premium

paid, Lovegreen purchased "Products-Completed Operations Hazard" coverage under

the policy. Item 3, Limits of Insurance, Appendix at 52. The Products-Completed

Operations Hazard

includes all Bodily Injury and Property Damage occurring away from

premises you own or rent and arising out of Your Product or Your

Work except:
3

A policy endorsement provides an additional "Your Work" definition that

states that work is "the various separately identifiable parts required to be furnished

under the contract documents." Endorsement No. 1. This, of course, would not place

an errant cleaning rag among the parts required by the work agreement.

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a. products that are still in your physical possession; or

b. work that has not yet been completed or abandoned.

Policy, § IV.J.l.a-b. Neither a. nor b. above are pertinent to the facts of this case. 

"Your Work," in turn, is defined, in relevant part, as

 1. Work or operations performed by [Lovegreen] or on [Lovegreen's]

behalf; and

2. Materials, parts or equipment furnished in connection with such

work or operations.

Policy, § IV.N.1-2.3

 In this environment, this can only mean, as the contract specifies,

the disassembly, cleaning, inspection, repair and reassembly of the compressor or

furnishing materials, parts or equipment in connection with these specified

obligations. By clear language and any reasonable implication therefrom, the agreed

upon work did not include negligently leaving a cleaning rag alien to the effective use

of the compressor within the machine. One strains to understand how an exotic item

such as this piece of cloth can possibly be defined as "materials, parts or equipment

furnished [to Flint Hills] in connection with such [contract-specific] work or

operations."
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"Property Damage" is 

1. Physical injury to tangible property [the compressor], including all

resulting loss of use of that property [the compressor]. . . . ; or

2. Loss of use of tangible property that is not physically injured.

Policy, § IV.K.1-2. Accordingly, absent other policy language to the contrary,

Lovegreen's negligence in completing its work led to loss of use of the compressor,

a species of property damage insured under the Products-Completed Operations

Hazard.

But, posits Tonicstar,

This hazard does not include Bodily Injury or Property Damage

arising out of:

a. the transportation of property, unless the

injury or damage arises out of a condition

in or on a vehicle created by the loading or

unloading of it;

b. the existence of tools, uninstalled

equipment or abandoned or unused

materials.

Policy, § IV.J.3.a-b.

Tonicstar and the court majority contend the above J.3.b. language excludes the

loss of use damages claimed by Flint Hills from the completed operations coverage

because the errant cleaning rag was "abandoned or unused material[]."
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The problem with this slippery slope is that the lost rag was not "abandoned or

unused material[]," and the language of b. and case precedent establish such an

interpretation.

The majority cites in support of its contentions U.S. Sanitary Specialties Corp.

v. Globe Indemnity. Co., 204 F.2d 774 (7th Cir. 1953). This particular case, however,

runs almost wholly in the opposite direction.

A Sanitary Specialties salesman had placed, but did not remove, a circle of wax

on the courthouse floor as a sales tool to be used in selling Sanitary's floor wax to

county officials. The next day after the sale, Annie Peek slipped on this spot and fell.

Peek sued Sanitary and its salesman for damages and Sanitary tendered the claim to

Globe Indemnity who denied coverage. Sanitary brought suit against Globe seeking

a determination of coverage under the policy. The district court and the Seventh

Circuit first determined that the underlying allegations fell within the ProductsCompleted Operations Hazard in Globe's policy. Id. at 776. But then, the courts

further determined that Sanitary Specialties had not purchased such coverage. Id. at

777. On appeal, Sanitary argued that the exclusion announced in J.3.b., (i.e., that "'the

existence of tools, uninstalled equipment and abandoned or unused materials'" was

"except[ed]" from Globe's Products-Completed Operations Hazard) permitted it to

seek coverage under another hazard in Globe's policy that it had purchased. Id. at

776-77. The Seventh Circuit rejected this contention. In doing so, it noted that the

"exception to completed operations" articulated by Sanitary "refers only to tools,

equipment and materials which on completion of an operation should have been

removed by [Sanitary] from the premises where the operation occurred but which,

instead, were abandoned there by [Sanitary] and later were instrumental in causing

an accident." Id. at 777 (emphasis added). The court noted that the wax was not

abandoned and unused material. Neither was Lovegreen's cloth, and while it

gradually caused the compressor to malfunction, it did not cause a later premises
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accident involving FHR or anyone else. Had the used cleaning rag at issue here been

left on the floor by Lovegreen, later causing a slip, trip or fall, actionable damages

arising from this act would have been excluded under the Products-Completed

Operations Hazard under the Seventh Circuit's interpretation. The occurrence

activating Lovegreen's completed operations coverage was the negligent act of leaving

the rag inside the compressor when completing the work it was hired to do. And, of

course, Lovegreen was not hired to leave a deviant piece of cloth inside the

compressor it was employed to service. 

The other cases cited by the court are likewise unhelpful, indeed they reenforce

the proper interpretation of the exclusion from the Products-Completed Operations

Hazard. Liberty Mutual Insurance Co. v. American Home Assurance Co., Inc., 858

N.E.2d 530, 533 (Ill. App. Ct. 2006), involved a temporary ramp the insured left at the

work site over which Ms. Palcowski, the underlying claimant, tripped and fell. Shelter

Mutual Insurance Co. v. DeShazo, 955 S.W.2d 234 (Mo. Ct. App. 1997) (per curiam),

dealt with a dispute over the collapse of a deck DeShazo had earlier completed at a

residence in Christian County, Missouri. The case proves nothing about whether a

negligently placed cleaning rag can serve to displace completed operations coverage.

Like Sanitary Specialties, DeShazo did not purchase completed operations coverage

and, as a result, attempted to place the deck collapse outside that particular hazard.

In support, DeShazo's expert engineers opined that two pieces of uninstalled

equipment caused the collapse, arguing that this was the "uninstalled equipment"

mentioned in the J.3.b. clause set forth above. Id. at 237. The Missouri Court rejected

this argument, adopting the Sanitary Specialties definition and finding the loss to be

within the Products-Completed Operations Hazard that had not been purchased by

DeShazo. Id.
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Finally, Tonicstar argues that a general exclusion found in section V.D.,

Appendix 62, as modified by Endorsement No. 9, Appendix at 43, removes Flint Hills'

property damage from coverage. The cited policy language says 

V. Exclusions

This insurance does not apply to:

. . . 

D. 2. Property Damage to

. . . 

f. That particular part

of any property that

must be restored,

repaired or replaced

because Your Work

was incorrectly

performed on it.

Appendix at 43, 62. Unfortunately for Tonicstar, the Endorsement further states

"paragraph f. does not apply to Property Damage included in the ProductsCompleted Operations Hazard." And, of course, Flint Hills' property damage (loss

of use in this case) fell within the Products-Completed Operations Hazard purchased

by Lovegreen. Tonicstar's fellow syndicate members were correct. The property

damage sustained by Flint Hills represents a covered loss under the insurance policy.

The court's determination to the contrary is error. Indeed, if the Products-Completed

Operations Hazard does not provide risk abatement under the facts and circumstances

of this case, it is difficult to envision what benefit an insured receives in return for the

substantial premium that insurers such as Tonicstar collect for their purported

coverage.

The district court should be reversed. Accordingly, I dissent.

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