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Vol. 3, Iss. 12
August 20, 2014

The Philosophical “Products Hazard” Case


There is just something about the Third Circuit’s decision in Allegheny Design Management, Inc. v. Travelers Indemnity Company, No. 13-4263 (3rd Cir. July 11, 2014), addressing whether property damage comes within the “products-completed operations hazard,” that has a certain chicken and egg feel to it. It is easy to see the coverage issue as a philosophical debate, with not implausible arguments on both sides. [Although the parties certainly did not see it that way.] If nothing else the case is definitely one of the more interesting ones to address whether certain property damage comes within the “products-completed operations hazard.”

The facts are simple. ADM was the general contractor on the construction of a Finish Line retail store inside a mall in Las Vegas. ADM hired Elite Glass and Mirrors to install all glass required for the project and Gold Star Cleaning Company to do the final cleaning of the glass within the store.

On October 23, 2011, Gold Star began cleaning the newly installed glass. Damage to the glass was discovered before Gold Star finished cleaning it. Either Gold Star or Elite caused the damage. On October 26th the Finish Line store opened for business. ADM submitted a claim to Travelers, under its Commercial General Liability policy, for the damage to the glass. Travelers denied coverage. ADM filed suit against Travelers. The federal District Court granted Travelers’s motion for summary judgment. The case went to the Third Circuit.

The court decided not to address whether the “property damage” was caused by an “occurrence” and instead turned to exclusion j.(6): “That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” However, the exclusion does not apply to “‘property damage’ included in the ‘products-completed operations hazard.’”

Thus, ADM argued that the exclusion did not apply, because the damage to the glass came within the “products-completed operations hazard,” since the glass had been put to its intended use by Finish Line. “Once the glass was installed in the storefront, it urges, it was put to its intended use because Finish Line had begun stocking, inventorying and moving into the store.”

The Third Circuit disagreed: “The District Court found, and we agree, that the damage to the glass occurred before the glass was put to its intended use. The purpose of the glass was clearly to serve as a window through which potential customers could survey items for sale. Accordingly, ADM’s work (the glass) was only put to its intended use by Finish Line when the store opened for business—two days after the damage was first noticed. The glass was not put to its intended use before the store was open to the public. For this reason, the damage did not constitute a products-completed operations hazard.”

It’s an interesting decision. Sure, the glass windows serve the purpose of enabling potential customers to survey items for sale inside. And nothing was for sale before the store opened for business. But the glass also served a security function. Would the stocking of inventory have begun if the glass windows had not been installed? I tend to doubt it.

Curiously, the court noted that, even if the “property damage” came within the “products-completed operations hazard,” coverage would have been precluded under exclusion j.(5): “Neither party disputes that the damage to the glass was caused by the operations of one of ADM’s two subcontractors. This squarely falls under Exclusion 5, which bars from coverage property damage to the part of real property ‘on which ....subcontractors working ....on your behalf are performing operations, if the ‘property damage’ arises out of those operations.’” Perhaps the court declined going this route as it preferred the more interesting and philosophical one.

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