The United States Court of Appeals for the Eighth Circuit recently held that an insurer had no duty to defend or indemnify where the insured service provider’s own abandoned materials caused the property damage at issue. Tonicstar Ltd v. Lovegreen Turbine Servs., No. 06-3503 (8th Cir. Aug. 1, 2008).

In Tonicstar, a crude oil refinery retained the insured service provider to overhaul a compressor. During the overhaul, the insured used a large container of cloth rags to wipe the compressor. A rag left inside the compressor subsequently led to a pump failure, causing the compressor to be out of service for five days while being repaired. The refinery sought recovery from the insured and the insured’s liability insurer for both the cost of repairing the compressor and lost business damages in excess of $6.5 million.

The insurer filed suit seeking a declaratory judgment that it had no duty to defend or indemnify under its policy. The district court granted summary judgment in favor of the insurer and the insured appealed.

The policy at issue provided coverage for property damage arising from the rendering of or failing to render professional services, but contained a “Your Work” exclusion 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.” The policy defined “Your Work” as: “Work or operations performed by you or on your behalf” and “Materials, parts or equipment furnished in connection with such work or operations.”

The Eighth Circuit found that the cloth rags themselves as well as the act of leaving a rag inside the compressor fell within the policy’s definition of “Your Work.” The court therefore held that the “Your Work” exclusion applied since the compressor had to be repaired because the insured’s work was “incorrectly performed on it.”

An exception to the “Your Work” exclusion restored coverage for “Property Damage” included in the “Products-Completed Operations Hazard.” However, the “Products-Completed Operations Hazard” itself excluded coverage for “Property Damage arising out of … the existence of tools, uninstalled equipment or abandoned or unused materials.”

The court found that the rag that damaged the compressor constituted “abandoned or unused materials” and thus the property damage did not fall within the Products-Completed Operations Hazard coverage. Accordingly, the court held that the Products-Completed Operations Hazard exception did not apply, and the “Your Work” exclusion thus precluded coverage.

Finally, the court found that the policy’s definition of property damage encompassed not only physical injury to the property affected by the defective work, but also the resulting loss of use of the property. The court therefore held that the $6.5 million in business interruption damages as well as the cost of repairing the compressor constituted “property damage” falling within the “Your Work” exclusion. Accordingly, the Eighth Circuit affirmed the trial court’s order granting summary judgment to the insurer. 

The opinion is available here.