Opinion ID: 2166307
Heading Depth: 2
Heading Rank: 2

Heading: Scope of Coverage Under Kenway's Commercial General Liability Policy

Text: There are two steps to our determination as to scope of coverage under Kenway's CGL policy. First, we must determine whether the circumstances surrounding the damage to the Turners' property falls within the definition of occurrence as set out in the policy. If it does, we must then determine whether either of the business risk exclusions operates to preclude coverage.
Kenway's CGL policy, under Section ICoverages, indicates BCC will provide coverage for property damage which the insured becomes legally obligated to pay[.] The policy goes on to say that [t]his insurance applies to . . . property damage only if the property damage is caused by an occurrence that takes place in the coverage territory; and occurs during the policy period. The policy, in Section V  Definitions, defines occurrence as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. The term accident is not defined in Kenway's CGL policy. BCC argues the Court of Appeals erred in finding the intentional acts committed by McComas qualified as an occurrence under the CGL policy. BCC notes that McComas, an employee of Kenway, was acting within the scope of his employment when he intentionally knocked down the Turners' residence. Thus, BCC argues McComas is an insured. As McComas believed he was supposed to tear down the entire property, the resulting damage was neither unintended nor unexpected from his point of view. Further, BCC suggests this result was foreseeable from Kenway's perspective as the Allens sent McComas out to the site without proper instructions and without proper supervision. Under these circumstances, BCC argues the damage did not result from an accident. BCC's argument that we view this issue from the perspective of McComas is without merit. If this claim had sought recovery from McComas, then we would consider whether he had been acting within the scope of his employment and thus was an insured under the policy. However, this case does not involve a claim of liability against McComas. Rather, the claim is against Kenway. As a corporation, Kenway can act only through its officers. Thus, we must consider whether the damage to the Turners' property was intended or expected from the perspective of the Allens, Kenway's officers. In Brown Found., this Court recognized that occurrence is to be broadly and liberally construed in favor of extending coverage to the insured. 814 S.W.2d at 278. Further, this Court adopted the majority rule when it concluded that if injury was not actually and subjectively intended or expected by the insured, coverage is provided even though the action giving rise to the injury itself was intentional and the injury foreseeable. Id. In rejecting reliance on the foreseeability standard, this Court in Brown Found. reiterated its belief that it is inappropriate to inject tort principles into the construction of insurance contracts. Id. at 279. See also Fryman v. Pilot Life Ins. Co., 704 S.W.2d at 206 (principles of tort law and criminal law have no application in contract interpretation). BCC, citing Fryman , stresses the fortuitous aspect of the meaning of accident. In Fryman , this Court stated, An accident is generally understood as an unfortunate consequence which befalls an actor through his inattention, carelessness or perhaps for no explicable reason at all. Id. Further, [t]he result is not a product of desire and is perforce accidental. Id. This Court went on to recognize [c]onversely, a consequence which is the result of plan, design or intent is commonly understood as not accidental. Id. Stated another way, an accident denotes something that does not result from a plan, design, or intent on the part of the insured. Stone v. Kentucky Farm Bureau Mut. Ins. Co., 34 S.W.3d 809, 812 (Ky.App. 2000). The damage to the Turners' property was unexpected and unintended by the insured. It was not the plan, design, or intent of the insured. Therefore, the fortuity requirement in the definition of accident is satisfied. Kenway correctly notes that there was no evidence presented to support a claim that the Allens expected or intended the damages that occurred. Instead, the evidence, when taken in a light most favorable to the Allens, supports the conclusion that McComas had been informed that he was to assist Jody Allen in a partial teardown involving only the carport, and that he was to meet Jody Allen at the Turner's property. Thus, the evidence does not support a claim that it was the Allens' plan, design, or intent that McComas begin demolition on his own without waiting for Jody Allen to arrive, or that McComas demolish the residence in total. Nor does the evidence support a finding that the Aliens actually and subjectively intended the damage to the Turners' property. Under these circumstances we conclude the definition of accident has been met. Further, as we have found this to be an accident, it satisfies the definition of occurrence as set out in the policy.
As noted previously, a CGL policy covers all risks not expressly excluded by its terms. See Brown Found., 814 S.W.2d at 278. Thus, having concluded the damage to the Turners' property fell within the CGL policy, we must now consider whether the coverage is precluded under either of the exclusions relied on by BCC. These exclusions are known as the business risk exclusions. The purpose of the business risk exclusions in CGL policies is to allocate the risk between the insured and insurer as it relates to damages arising out of the insured's business. The business risk exclusions are intended to distinguish between contract liability and tort liability. See Thommes v. Milwaukee Ins. Co., 641 N.W.2d 877, 881 (Minn.2002). These exclusions are based on the apparently simple premise that [a CGL policy] is not intended as a guarantee of the quality of an insured's work product. Schauf, 967 S.W.2d at 77. Thus, the risk that the product provided or the work performed will not meet contract requirements is a risk not covered under the policy. Thommes, 641 N.W.2d at 880. See also Standard Constr. Co., Inc. v. Maryland Cas. Co., 359 F.3d 846, 852-53 (6th Cir.2004). Exclusion 2j(5) Exclusion 2j(5) states that coverage does not apply to property damage to [t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations[.] BCC argues that exclusion 2j(5) applies and precludes coverage. BCC reasons that McComas, the insured, was performing operations on the residence when the damage occurred. Citing Schauf, BCC asserts that the exclusion applies to that part of real property on which the insured is performing operations, not on which the insured did perform operations, will perform operations, or has contracted to perform operations. 967 S.W.2d at 80. Relying on this principle, BCC argues the coverage is not determined based on the contract. In effect, BCC argues that it is immaterial whether McComas was operating outside the scope of the contract. Exclusion 2j(5) has been considered by several cases. In Schauf, the insured had signed a subcontract to paint, stain, or lacquer, all surfaces inside and outside of a house. 967 S.W.2d at 76. Schauf, who had just finished spraying lacquer on the kitchen cabinets, was running lacquer thinner through his sprayer when the generator caused a fire that resulted in extensive damage throughout the house. Id. The Missouri Supreme Court concluded the phrase that particular part of real property was subject to more than one interpretation: (1) it could mean only the cabinets; or (2) it could mean the entire area Schauf was scheduled to work. Id. at 80. The court interpreting the clause so as to strictly construe the exclusion, found it applied to the kitchen cabinets. Id. In this fashion the court narrowly applied the plain language of the exclusion while giving effect to the purpose of the business risk exclusion. Id. at 80-81. In the Thommes case, the Minnesota Supreme Court also reached the conclusion that the clause was ambiguous. 641 N.W.2d at 883. In Thommes , the insured had contracted to clear and grub a piece of property for the purposes of development. Id. at 879. As the result of a mix-up, the insured's employees cleared and grubbed the property adjacent to that which they had contracted to work on. Id. Milwaukee Insurance claimed the phrase should be read so as to apply to any real property upon which the insured performs operations, including that of third parties. Id. at 883. Thommes argued the clause should be interpreted so as to only apply to the real property it was supposed to have performed operations under the contract. Id. Recognizing that the phrase that particular part of real property and the term operations were not defined in the policy, and that two interpretations had been presented within the plain meaning of the language, the court found an ambiguity existed. Id. As we consider the application of exclusion 2j(5) to the case sub judice, we begin by noting that the insured in this case against whom the claim was brought is Kenway and not McComas. As with Thommes, supra , we note that the phrase that particular part of real property and the term operations are not defined in the CGL policy. The Aliens suggest that from their perspective, operations should be limited to the carport. BCC argues operations should be determined from the perspective of McComas, and real property should extend to any real property upon which operations are occurring. Given that the policy contains terms that are not defined, and given that each party has suggested a reasonable interpretation in light of the plain meaning of the words used, we conclude the policy is ambiguous. In keeping with the principle that [a]n ambiguous policy is to be construed against the drafter, and so as to effectuate the policy indemnity[,] we conclude exclusion 2j(5) does not operate to preclude coverage. Exclusion 2j(6) Exclusion 2j(6) states that the insurance does not apply to property damage to that particular part of any property that must be restored, repaired, or replaced because your work was incorrectly performed on it. BCC argues that exclusion 2j(6) applies to bar coverage. In support of its claim, BCC points out that McComas performed operations on the residence itself. Based on these operations, the residence will have to be repaired or replaced. Further, BCC argues the phrase your work includes warnings and instructions. BCC argues that the Allens' failure to instruct and supervise McComas led to the damage that must be repaired. For these reasons, BCC argues exclusion 2j(6) applies. In Standard Constr. Co., Inc. v. Maryland Cas. Co ., the court concluded exclusion 2j(6) was directed at the manner of insured's work. 359 F.3d at 851. In that case the insured, believing it had a contract right to do so, dumped debris from road construction on private property. Id. at 848. In fact, the contract was not valid. Id. In concluding exclusion 2j(6) did not apply, the court reasoned that it could be interpreted so as to apply to the manner of dumping rather than the location. Id. at 851. As there was no allegation the manner of dumping was improper, the exclusion did not operate to bar coverage. Id. Exclusion 2j(6) was also considered in the Thommes case. In that case, the court concluded the exclusion could be interpreted in two ways: (1) applying to work performed on the wrong property; or (2) applying only to the manner of work with location playing no part. 641 N.W.2d at 883-84. The insured in Thommes cleared and grubbed land adjacent to that which it had contracted to do the work on. Id. at 879. The court noted that under the second interpretation exclusion 2j(6) would not apply because there had been no allegation that the work was performed in a faulty manner. Id. at 884. The above cases provide insight into the applicability of exclusion 2j(6) to the case sub judice. BCC argues the exclusion applies both because McComas, as an insured, performed work on the residence, and because the Aliens failed to instruct and supervise McComas. BCC's first argument fails because Kenway and not McComas is the insured for purposes of the Turners' claim. The later argument is also without merit for purposes of summary judgment. The evidence, when viewed in a light most favorable to the Aliens, supports the conclusion that McComas was instructed that he would be performing a partial teardown involving only the carport, and that he was to meet Jody Allen at the Turners' property. Turning to the language of exclusion 2j(6), we find that it is subject to multiple interpretations. As in the Thommes case, the plain meaning of the language could be interpreted as: (1) applying to work performed properly but in the wrong location, thus requiring repair or replacement; or (2) applying only to the manner of work that was performed. 641 N.W.2d at 883-84. Under the second interpretation exclusion 2j(6) would not apply because there had been no allegation that McComas's work on the carport was faulty in any manner. Id. at 884. See also Standard Contr. Co., Inc. v. Maryland Cas. Co., 359 F.3d at 851. Once again, in keeping with the principle that [a]n ambiguous policy is to be construed against the drafter, and so as to effectuate the policy indemnity[,] we conclude exclusion 2j(6) does not operate to preclude coverage. This conclusion is supported by the holding in Employers Mut. Cas. Co. v. Pires, 723 A.2d 295 (R.I.1999). As interpreted in Pires , exclusion 2j(6) would apply only if the damage to the residence occurred during a necessary stage in the partial teardown of the carport. Exclusion 2j(6) would not preclude coverage if the damage resulted from an accident. 723 A.2d at 299. As the damage in this case was neither expected nor intended from the perspective of the insured, it qualifies as an accident. Thus, exclusion 2j(6) would not operate to preclude coverage.