Ninth Circuit Affirms Lower Court’s Determination That Business Risk Exclusions Broadly Bar Coverage For General Contractor

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General liability policies contain what are called “business risk” exclusions which generally exclude coverage for damage to: (1) “that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations”; and (2) “that particular part of any property that must be restored, repaired or replaced because Your Work was incorrectly performed on it.”  These exclusions have been interpreted by California courts to be an expression of a general principle of insurance law; that insurers are not warrantors of their insureds’ products.  (See, Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co.(1996) 45 Cal.App.4th 1, 110-111.)  Specifically, courts have repeatedly held that “the risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer.”  (Maryland Cas. Co. v. Reeder (1990) 221 Cal.App.3d 961, 972.)

In the recent case of Archer Western Contractors, Ltd. v. National Union Fire Insurance Company of Pittsburgh, Pennsylvania (March 2, 2017) 2017 WL 816891, the Ninth Circuit was asked to interpret the meaning of “that particular part” in the context of business risk exclusions in an excess liability policy issued by National Union to a general contractor, Archer Western.  The lawsuit arose from an underlying action filed by the San Diego County Water Authority against Archer Western alleging defective construction of an emergency water storage project.  That lawsuit settled for a payment of $6.6 million, $2 million of which was funded by Archer Western’s primary insurer.  National Union refused to contribute to the settlement which led to Archer Western filing suit.  National Union denied coverage for the Water Authority lawsuit based on the above business risk exclusions.  National Union argued that, because Archer Western was the general contractor, the entire project constituted “that particular part” of the property for purposes of the business risk exclusions.  Archer Western argued that this was an overbroad interpretation and that only the specific part of the project that Archer Western was working on at the time the damage occurred should be excluded.

The district court granted National Union’s motion for summary judgment and held that the business risk exclusions barred any coverage under the National Union policies because Archer Western was responsible for all the work at the project.  Archer Western appealed.

The Ninth Circuit, in an unpublished and concise ruling, affirmed the district court’s determination.  The appellate court held that California courts “have consistently adopted broad interpretations of the phrases ‘that particular part’ and ‘arises out of’ when applied to a general contractor.”  (Archer Western, supra, at *1, citing Health Net, Inc. v. RLI Ins. Co. (2012) 206 Cal.App.4th 232, 252.)  The Ninth Circuit agreed that California courts, both state and federal, construe “that particular part” to refer to the entire project on which a general contractor is performing operations.

The Ninth Circuit specifically distinguished two cases relied upon by Archer Western.  The first case, Eichler Homes, Inc. v. Underwriters at Lloyd’s, London (1965) 238 Cal.App.2d 532, was distinguished on the basis that it was a duty to defend case.  The appellate court disregarded the second case, Blackfield v. Underwriters at Lloyd’s, London (1966) 245 Cal.App.2d 271, because it was a fifty year old decision that had never been reaffirmed by any later court.  The Ninth Circuit concluded that, because courts since Eichler and Blackfield have consistently rejected those earlier courts’ restrictive reading of “that particular part,” California law is clear that the exclusions unambiguously apply to the entire project when the insured is a general contractor.

Notably, Judge Andre M. Davis, sitting by designation from the Fourth Circuit, concurred in the decision but noted that the Blackfield decision remains good law in California.  Judge Davis would have preferred that the Ninth Circuit certify the matter as a question of law for the California Supreme Court, but, recognizing that certification is to be used sparingly, he ultimately agreed with the decision.

This decision by the Ninth Circuit cannot be used as precedent, because is it unpublished.  However, pursuant to Ninth Circuit rule 36-3, the decision can be cited as persuasive authority in future cases.  This case supports the argument that the business risk exclusions in general liability policies may broadly apply to exclude coverage for general contractors for ongoing operations claims.  However, the impact of this ruling on completed operations claims is likely much more limited.  Unlike ongoing operations claims, the “Your Work” exclusion for completed operations claims normally includes the following exception: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”  In this case, Archer Western evidently did all the work itself, as there is no mention of any subcontractors performing any of the work in either the decision or any of the appellate briefing.  It is not even clear that the National Union policy contained the subcontractor exception to the exclusion.  As most general contractors utilize subcontractors extensively, and most policies include the subcontractor exception, this case may be of limited use for completed operations claims.

Finally, although the case does support a broad reading of the “that particular part” language, the concurring opinion raises a valid point in noting that there is still a split of authority on this issue in California, and until the California Supreme Court weighs in on the issue, the question of what exactly “that particular part” means for a general contractor will continue to be debatable.

Stephen L. Cope is a litigator with Musick, Peeler & Garrett in its Los Angeles office.  His full bio and contact information can be found at: