Source: https://www.lexology.com/library/detail.aspx?g=88dd3c21-7ed1-489a-88bc-537d243669fb
Timestamp: 2019-04-19 06:50:15+00:00

Document:
On January 25, 2019, the U.S. Court of Appeals for the Tenth Circuit, applying Oklahoma law, held that the phrase “that particular part” is ambiguous and may refer to either the distinct component upon which an insured works or to all parts ultimately impacted by that work. MTI, Inc. v. Employers Ins. Co. of Wausau, No. 17-6206, 2019 WL 321423 (10th Cir. Jan. 25, 2019). Interpreting the phrase narrowly in favor of the insured, the Tenth Circuit held that the exclusion extends only to the distinct components upon which work was performed.
Western Farmers Electrical Cooperative (WFEC) owned cooling towers in Oklahoma, which were serviced by MTI, Inc. (MTI). After a 2011 inspection revealed that anchor bolts in MTI’s Cooling Tower 1 (Tower 1) were corroded, MTI and WFEC agreed to a repair contract for MTI to install new anchor castings. On May 23, 2011, MTI employees removed 64 corroded anchor bolts in Tower 1 but did not immediately install new anchor bolts. The next day, high winds caused structural damage to the tower, necessitating its removal and replacement. WFEC demanded that MTI pay the cost of removing and replacing the entire tower, which totaled more than $1.4 million.
That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it.
MTI subsequently filed suit against Wausau in Oklahoma state court for breach of contract, which Wausau removed to the Western District of Oklahoma. On Wausau’s motion for summary judgment, the district court held that the alleged property damage fell within the scope of exclusions j(5) and j(6) and, consequently, entered judgment in favor of Wausau. MTI appealed.
The Tenth Circuit, relying on out-of-state authority, adopted the reasoning of those jurisdictions that interpret the exclusions narrowly to apply only to the distinct component upon which work was performed. Specifically, the Tenth Circuit noted that “the phrase ‘that particular part’ could be read to refer solely to the direct object on which the insured was operating. Alternatively, it could apply to those parts of the project directly impacted by the insured party's work.” Id. at *3. Because the court deemed both readings permissible, the Tenth Circuit held that the exclusions were “facially ambiguous” and construed them strictly and narrowly in a manner favorable to MTI, the insured party. As a result, the court determined that the “particular part” on which MTI was “performing operations” and upon which work was “incorrectly performed” was the anchor bolts, which constitute “distinct component parts” of the tower. The Tenth Circuit reasoned that MTI performed work incorrectly by removing the anchor bolts without promptly replacing them or bracing the structure. Accordingly, the court concluded it was “objectively reasonable that MTI would expect coverage for the cost of replacing the entire tower, including all of its operational elements[.]” Id. at *4.
With this decision, the Tenth Circuit, interpreting Oklahoma law, joined those courts that interpret the damage to property exclusions j(5) and j(6) to extend only to the particular area of property on which the insured was working. See, e.g., Fortney & Weygandt, Inc. v. Am. Mfrs. Mut. Ins. Co., 595 F.3d 308, 311 (6th Cir. 2010) (holding that “that particular part” applies only to building parts on which the defective work was performed, and not to the building generally); Mid-Continent Cas. Co. v. JHP Dev., Inc., 557 F.3d 207, 215 (5th Cir. 2009) (finding “that particular part” language is used to distinguish the damaged property that was itself the subject of the defective work from other damaged property that was either the subject of non-defective work by the insured or that was not worked on by the insured at all).
This holding conflicts with holdings from other jurisdictions, such as the Seventh and Eighth Circuits, which broadly interpret the exclusion to extend beyond the specific area of the property being worked on to other parts of the property damaged by the defective work. See, e.g., W. Side Salvage, Inc. v. RSUI Indem. Co., No. 16-3928, 2017 WL 6422107 (7th Cir. Dec. 18, 2017); Spirtas Co. v. Nautilus Ins. Co., 715 F. 3d 667, 673 (8th Cir. 2013); William Crawford, Inc. v. Travelers Ins. Co., 838 F. Supp. 157 (S.D. N.Y. 1993). Following the MTI decision, insurers should carefully consider jurisdiction and choice of law when determining how to apply the j(5) and j(6) property damage exclusions.

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