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January 2010

Baker v. National Interstate Insurance Company Products - Completed Operations Exclusion Applies to Completed Services Unrelated to Any Product

"Products - Completed Operations" Exclusion Excludes Coverage for Damages Arising from the Insured's Inspection Services, which were a Work-Related "Completed Operation," Regardless of Whether those Inspection Services were Related to a Product.

___Cal.App.4th___; 10 C.D.O.S. 426

Gordon & Rees LLP attorneys David Capell and Leslie Crary appeared as Amicus Curiae on behalf of the Association of California Insurance Companies and successfully persuaded the California Second Appellate District Court of Appeal that the "products-completed operations" exclusion was unambiguous and plainly applied to an insured's completed services.     

American National Fire Insurance Company ("American") issued Four Winds Day Camp, Inc., ("Four Winds") a CGL policy.  Four Winds operates a school bus business which primarily transports school children.  It also performs inspection and mechanical services on school buses. 

The CGL did not cover "products—completed operations."  Attached to the policy was an endorsement stating the insurance did not apply to bodily injury or property damage included within the "products-completed operations hazard" as defined in the policy.  The policy defines "products-completed operations hazard" to include "all 'bodily injury' and 'property damage' occurring away from premises you own or rent and arising out of 'your product' or 'your work. . . .' 

Four Winds sold one of its buses to La Shaun Clemmons, an owner and operator of another bus business.  Clemmons later retained Four Winds to perform the state required bus inspection.  Four Winds performed the inspection and repairs to some of the bus seating.  Later Clemmons was killed after her bus was involved in an accident with a pick-up truck.  Her bus seat broke loose from the floor, ejecting her from the bus.  Her surviving family ("The Bakers") sued Four Winds alleging negligence, strict liability and breach of implied warranty.   

Four Winds tendered its defense to American, but American denied the defense tender because Four Winds's policy excluded damages arising from the "products-completed operations hazard" as Four Winds's inspection services were complete at the time of the accident.  Ultimately, a jury found against Four Winds in excess of $13 million.  Four Winds assigned its rights against American under the CGL policy in exchange for a covenant not to execute on the final judgment.  The Bakers sued American.  Following American's unsuccessful motion for summary judgment and trial, the trial court entered judgment against American.  American appealed. 

The Court of Appeal reversed.  In a matter of first impression in California, the Court of Appeal held the products-completed operations hazard excludes coverage for Four Winds's inspection of the bus (a completed operation) regardless of whether those services were related to a product.  The Court of Appeal found that the products-completed operations hazard exclusion was unambiguous and plainly applied to the Bakers' underlying lawsuit.  The exclusion provides:

"This insurance does not apply to 'bodily injury' or 'property damage' included within the 'products-completed operations hazard'."

The Court of Appeal noted the purpose of the products-completed operations hazard exclusion is to exclude the risk that the product or work, if defective, may cause bodily injury or damage to property of others after it leaves the insured's hands.  The Court of Appeal interpreted this exclusion as "advis[ing] and warn[ing] Four Winds that the 'hazard' which was excluded from the policy's coverage was the hazard arising from either its 'products,' once they were out of Four Winds's possession, or from its 'work,' once that work was completed and put to use away from its premises." 

The Court of Appeal rejected the Bakers' attempt to analogize this case to Insurance Co. of North America v. Electronic Purification Co. (1967) 67 Cal.2d 679 ("Electronic Purification").  The Supreme Court in Electronic Purification interpreted a products hazard exclusion in a CGL policy which included both "products" and "completed operations" language.  The Supreme Court ruled that the exclusion related "products" and "completed operations", "compelling the interpretation that the exclusion applied only to completed operations involving a product, and not to an insured's business activities that involved only services."  The exclusion did not apply where the insured's service was only "remotely related to a product." 

The Court of Appeal concluded Electronic Purification's holding did not apply because the "products-completed operations hazard" at issue here was different than the products hazard exclusion at issue in Electronic Purification.  The only reasonable interpretation of the "products-completed operations hazard" definition's use of the disjunctive conjunction "or" in excluding all bodily injury or property damage arising out of "your product" or "your work" makes clear that the "hazard" to be excluded is that "arising from either its 'products,' once they were out of Four Winds's possession, or from its 'work,' once that work was completed. . . ."  "[T]he policy that American issued to Four Winds cannot reasonably be interpreted, unlike the situation in Electronic Purification, to mean that 'operations' and 'products' are 'related' terms." 

The Court of Appeal also held Four Winds's inspection service of the bus constituted "work" as defined by the policy.  Four Winds received compensation for its service.  Since such work was completed at the time of the accident, the "products-completed operations hazard" applied to bar coverage.  The Court of Appeal reversed the trial court's order denying American's motion for summary judgment and entered summary judgment for American.

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This opinion is not final.  Though it has been certified for publication, it may be modified on rehearing, or granted review by the California Supreme Court.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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David C. Capell