Illinois Court Holds Junk Fax Claim Not Within Products Coverage

In its recent decision in Windmill Nursing Pavilion v. Cincinnati Ins. Co., 2013 IL. App. (1st) 122431, the Appellate Court of Illinois, First District, had occasion to consider the scope of products-completed operations coverage as it relates to a Telephone Consumer Protection Act violation.

In an underlying lawsuit, Windmill Nursing Pavilion (“Windmill”) brought a class action against Unitherm, Inc. for sending unsolicited faxed advertisements to Windmill and the class members. Cincinnati Insurance Company insured Unitherm under consecutive commercial general liability and umbrella liability policies.  The renewal policies contained a modification that barred coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any action or omission” that violated the Telephone Consumer Protection Act of 1991 (“TCPA”).

Windmill, Unitherm, and Cincinnati eventually settled the class action lawsuit for $7 million. Cincinnati agreed to provide a $3 million settlement fund (the combined general aggregate and umbrella limits under the first general liability and umbrella policies issued to Unitherm), but denied coverage under its renewal policies with the TCPA exclusion.  Windmill brought a declaratory judgment action against Cincinnati seeking recovery of the remaining amount. Windmill argued that the TCPA exclusion in the renewal policies was invalid, as Cincinnati failed to provide proper notice at the time of renewal.  Windmill argued that in the alternative, it was entitled to coverage under the initial policies’ products/completed operations aggregate limits, in addition to the general aggregate limits, as its faxes should be considered its “work” or “product.”

Cincinnati countered that the “products-completed operations hazard” did not apply because fax advertisements did not constitute Unitherm’s “work” or “product.” Cincinnati further took the position that the “products-completed operations hazard” was not an independent and supplemental limit of the available coverage for Windmill’s claims because the general limit of the policy meant the “sum total” of available coverage. The circuit court granted judgment in favor of Cincinnati and Windmill appealed.

On appeal, the court first analyzed whether the TCPA exclusion in the renewal policy was valid. The court applied Ohio law, stating that modifications in the terms of a renewal policy are valid only if the insurer provided adequate notice of the modifications to the insured. The court found that Cincinnati indeed provided sufficient notice to Unitherm since forms containing the exclusion were separately attached in the quote and binder materials, on individual pages, and the exclusion was clearly worded in large, bold, capital letters. Thus, the court agreed that there was no coverage under the renewal policies.

 The court next analyzed whether there was separate coverage available under the original policies pursuant to the “products-completed operations hazard” coverage.  The court agreed with the circuit court’s determination, concluding that the faxed advertisements did not constitute Unitherm’s “products,” “goods,” or “work” under the policy because Unitherm was not in the business of selling the advertisements themselves.  Among other things, the court agreed that the faxes did not pertain to any representations or warranties made by Unitherm with respect to its products. Thus, the court held that the faxed advertisements did not come within the products-completed operations hazard coverage such that additional policy limits were triggered.

Montana Court Addresses Business Risk Exclusions

In its recent decision in Lukes v. Mid-Continent Cas. Co., 2013 U.S. Dist. LEXIS 17979 (D. Mont. Feb. 11, 2013), the United States District Court for the District of Montana had occasion to consider the application of the business risk exclusions, in particular exclusions j(5) and (6), to allegations of construction defects.

The insured, Bernie Rubio, was alleged to have been hired to design and construct a single-family residence in 2006.  The complaint specifically alleged that the insured subcontracted out the installation of siding, and that the claimant took possession of the home in 2007.  Claimant alleged that the siding warped and pulled away from the house, which allowed for water intrusion and resulting exterior and interior damage.  Among other things, the complaint alleged that the insured or its subcontractor failed to install proper flashing, which also allowed for water intrusion.

Rubio was insured under a general liability policy issued by Mid-Continent.  Mid-Continent disclaimed coverage to Rubio on the basis of its policy’s business risk exclusions, specifically j(5) and (6), which barred coverage for:

j.    "Property damage" to: . . . .

(5) That 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;" or

(6) That particular part of any property that must be restored, repaired, or replaced because "your work" was incorrectly performed on it.

While the court agreed that these exclusions are generally considered unambiguous under Montana law, their application was not certain under the alleged facts.

In considering j(5), the court appeared to have limited its application to work being performed at the time the complaint was filed rather than at the time the property damage occurred.  As such, the court cursorily held the exclusion inapplicable because “Rubio is no longer performing operations on any part of the [claimant’s] home.”

By contrast, the court found j(6) inapplicable because of an exception to the exclusion applicable to property damage included in the products-completed operations hazard.  The policy defined products-completed operations hazard as:

a.   Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1)       Products that are still in your physical possession; or

(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:

(a) When all of the work called for in your contract has been completed.

(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.

(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

The claimant, suing as Rubio’s assignee, argued that j(6) did not apply, at least for duty to defend considerations, because the complaint did not allege when the property damage occurred, thus leaving open the possibility that the damage at least started while the home was still being constructed.  For instance, the allegation of failure to install flashing left open the possibility that water intrusion commenced during the construction process and prior to the completion of construction.  The court found this argument persuasive, explaining:

Here, the Amended Complaint does not unequivocally state that the damage to the Lukes' home only occurred after work was completed. Some of the damage may have occurred before the house was completed. Thus, some part of the Lukes' claims may not be included in the products-completed operations hazard.  (Emphasis supplied.)

This possibility, concluded the court, was sufficient to at least trigger Mid-Continent’s duty to defend.  Whether Mid-Continent had a duty to indemnify, however, was subject to a finding of actual property damage occurring outside of the products-completed operations hazard.