• Court Interprets Exclusions in Commercial Liability Policy
  • June 26, 2003 | Author: Robert L. Smith
  • Law Firm: Leonard, Street and Deinard, [incorporation phrase format]Professional Association - Minneapolis Office
  • The Minnesota Supreme Court recently issued a decision interpreting two exclusions contained in a contractor's commercial general liability (CGL) policy and discussing the "business risk doctrine."

    The case, Thommes v. Milwaukee Insurance Company, 641 N.W.2d 877 (Minn. 2002), involved a contractor that was hired to clear and grub land for a commercial development project. While performing its work, the contractor accidentally cleared and grubbed approximately one-half acre of adjoining land damaging grass and a number of trees, shrubs and other plants. The owners of the adjoining land brought suit against the contractor for the damage done to their property. The contractor tendered defense of the suit to its commercial general liability ("CGL") insurance carrier. The insurance carrier declined to either defend or indemnify the contractor contending that two exclusions in the contractor's CGL policy excluded the damage to the adjoining land.

    The two exclusions upon which the insurance carrier relied in denying coverage were exclusions 2j(5) and 2j(6). Exclusion 2j(5) states that the insurance does not apply to property damage to "[t]hat particular part of real property on which you [the contractor] or any contractors or subcontractors working directly or indirectly on your [the contractor's] behalf are performing operations, if the 'property damage' arises out of those operations." 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 [the contractor's] work was incorrectly performed on it."

    The Minnesota Supreme Court, in deciding that neither of the exclusions were sufficient to deny coverage, discussed the "business risk doctrine" that had been articulated in earlier Minnesota Supreme Court cases, including Bor-Son Bldg. Corp. v. Employers Commercial Union Ins. Co., 323 N.W.2d 58 (Minn. 1982), and Knutson Constr. Co. v. St. Paul Fire & Marine Ins. Co., 396 N.W.2d 229 (Minn. 1986). Under the "business risk doctrine," the courts have generally recognized that the risk that a contractor's work will not meet contractual standards is a business risk not covered by CGL policies. However, harm to a third-party caused by defective work is generally covered by CGL policies. While the "business risk doctrine" was discussed at length, the court also noted that parties are free to enter into any contract that they wish, and the express language of the insurance policy at issue must not be overridden by the general "business risk doctrine."

    The court examined exclusion 2j(5) and decided that it did not apply because it was ambiguous and ambiguous language is generally construed against the insurance company, who is the party that drafted the policy. According to the court, it was unclear whether the language, "that particular part of real property," as used in the policy, included the property of third parties, and it was unclear whether the word, "operations," as used in the policy, included work performed on the property of third parties.

    With respect to exclusion 2j(6), the court again found the language to be ambiguous. According to the court, exclusion 2j(6) applies to "incorrect" work, and it was unclear that the contractor's work was incorrect, which denotes faulty or defective work. The contractor's work was not faulty or defective, it was simply performed on the wrong property. As such, the court felt that there were competing interpretations of the exclusion that should be resolved in favor of the contractor.