Eighth Circuit Addresses Business Risk Exclusions

In its recent decision in Spirtas Co. v. Nautilus Ins. Co., 2013 U.S. App. LEXIS 10031 (8^th Cir. May 20, 2013), the United States Court of Appeals for the Eighth Circuit, applying Missouri law, had occasion to consider application of a general liability policy’s business risk exclusions to the insured’s faulty workmanship.

The insured, Spirtas, was hired to demolish the Seneca Bridge in Illinois. The demolition plan called for explosives to be detonated on the bridge that would allow for the span to fall in one piece into the river below.  Once in the river, workers would cut the span into pieces and remove them by crane.  It was expected that the river portion of the work would take sixteen hours in total, during which time barge traffic on the river would have to be halted.  The explosives, however, did not detonate as planned.  Among other things, the span did not fall into the river in a single piece.  Spirtas was required to employ divers to identify portions of the bridge and remove them from the river.  Ultimately, the entire process took significantly longer than anticipated at a far greater cost than anticipated.  Spirtas sought recovery of those extra costs from Nautilus, its general liability insurer.

Nautilus disclaimed coverage for these costs, relying on its policy’s business risk exclusions, including exclusion j(5) applicable to “property damage” to “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.”  Spirtas argued that its operations were performed on the bridge, not the river, so that any costs relating to work in the river would not be subject to the exclusion.  The Eighth Circuit rejected Spirtas’ characterization of its work, explaining:

Here, however, the work was being performed on both the bridge and the river. According to the plan, the bridge span was supposed to fall into the river. That happened, albeit in a disorganized manner, when the charges detonated. At all times the work occurred on the river and the bridge … Therefore, both the bridge and river were the "particular part of real property" on which Spirtas's operations occurred.

While Nautilus’ policy contained a specific exception to the j(5) exclusion for mistaken demolition of property, the court concluded that this exception applied only to instances where Spirtas demolished the wrong property, not when its planned demolition of intended property was performed negligently.

The court also considered the application of exclusion j(6) applicable to “property damage” to [“t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”  The court summarily agreed that this exclusion applied since Spirtas’ claim involved correction of demolition work to the bridge and river that was incorrectly performed in the first instance. 

Finally, the court agreed that coverage was precluded based on exclusion (m) of the Nautilus policy applicable to:

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy, or dangerous condition in 'your product' or 'your work'; or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

The court agreed that Spirtas’ work encompassed not only the bridge itself, but also the river since a significant portion of Spirtas’ work was intended to be performed in the river.  As such, the court concluded that the bridge and the river qualified as “impaired property” to which the exclusion applied.