The “Work Product” Exclusion Does Not Bar Subrogation Claim

Homeowners (“H”) hired defendants (“D”) to apply a protective sealant to the cedar wood siding of the exterior of their home.  Drop cloths used by D, and containing sealant, were stored on-site and allegedly caused a fire by spontaneous combustion.  The fire substantially destroyed H’s home.  Their carrier (“C”) paid under their homeowner’s policy and brought a subrogation against D for improper disposal of combustible material.

D’s carrier (“N”) denied coverage and claimed they had no responsibility to indemnify under the liability policy.  “N” ultimately agreed to defend D but under a reservation of rights.  “N” brought a declaratory judgment action against its insureds (“D”), also naming as a defendant the subrogating carrier (“C”).

Among other things, the policy excluded any damage “to that specific part of real property on which work is being performed… if the ‘property damage’ arises out of such work.”  This provision is commonly called the “work product exclusion” and “exists to exclude coverage for business risks, including claims that the insured’s product or completed work [was] not that for which the damage person bargained.” N took the position that there was no liability coverage for the damage to H’s house allegedly caused by the improper disposal of drop cloths by its insured.

The Court disagreed with the denial and found there was liability coverage, and the appellate court affirmed. [1]  The subrogation claim did not allege there was a problem with the “quality” of the work done by D; rather, the claim was that the home was damaged by fire due to negligent cleanup and storage of materials.  The work product exclusion does not exempt coverage for damage caused by the negligence of an insured.  Rather, the exclusion only bars coverage for “economic loss because the product or completed work is not what the damaged person bargained for.

Bottom Line:  Beware “the work product” exclusion.  It is not uncommon for a liability carrier to deny a claim or issue a reservation of rights on the grounds that the policy does not cover “work” done by its insured.  However, a tort claim, wherein negligent work causes damage to a third party is not the same thing as a claim that the insured simply didn’t do a good job and might fall outside the exclusion.

[1]   Nova Casualty Company v. Central Mutual, et al., (3rd Department No.: 505429; February 5, 2009)

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