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Vol. 8 - Issue 2
February 6, 2019


The Fab Four Corners: The Most Unique Products-Completed Ops. Case I’ve Ever Seen

Northland Casualty Company v. Mulroy, No. 13-232 (D. Mont. Jan. 11, 2019) involves coverage for property damage caused by beetle infestation of logs used to build a log home.  With peculiar facts like that, an initial response may be that the decision is of little value beyond log homes.  But, in fact, the decision offers an interesting look at whether property damage comes within the products-completed operations hazard.  And, based on the court’s analysis, the decision can have applicability to all sorts of claims.

The court described the facts as follows:  “Joseph S. Mulroy hired Duane Keim’s company, Northwest Log Homes, LLC, to build a log home near Trego, Montana.  Among other responsibilities, Keim was to build and stain the log component of the home.  He also partially remodeled a guest home using logs. Keim purchased logs from a log broker, and he did not treat the logs for insects. Several years later, Mulroy noticed signs of an active wood-boring powderpost beetle infestation in both the main home and the remodeled guest home. The infestation caused substantial damage to both structures, and it remains ongoing.”

Mulroy sued Keim.  Keim sought coverage from Northland Casualty Company under a commercial general liability policy.  Northland provided a defense under a reservation of rights.  Mulroy and Keim -- without Northland’s consent -- settled the claim.  Keim admitted liability and assigned his rights, under the Northland policy, to Mulroy.  Following a damages hearing, the court awarded $208,824.58 in damages for remediation costs and $120,000 for loss of value.

At issue in the coverage action is whether Northland had a duty to indemnify Keim for the damages.  Northland argued that, for various reasons, it did not.  Of note here, Northland (acknowledging that the property damage and occurrence requirements were met) argued that coverage was precluded by exclusion j(6). 

Exclusion j.(6) precludes coverage for “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.”  Exclusion j(6) does not exclude coverage if the “property damage” falls under the “products-completed operations hazard.”  In relevant part, the “products-completed operations hazard”: a. Includes all . . . “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 . . . .”

Step 1, the court concluded that exclusion j.(6) – without regard to an exception -- applied: “In the underlying action, Mulroy alleged—and the state court found—that Keim was negligent in failing to chemically treat the logs for insects. The use of the untreated logs constitutes Keim’s ‘work,’ which was ‘incorrectly performed,’ causing ‘property damage’ to Mulroy’s home and guest house. Thus, upon a first read, the ‘unambiguous language’ of the policy excludes coverage for remediation of at least a ‘particular part’ of Mulroy’s property unless the PCOH provision applies.”

However, a second step was required.  Did the “products-completed operations hazard” exception apply?  The court explained that it did: “The applicability of the PCOH provision depends on timing; if the damage occurred after Keim completed its work, then the PCOH provision is in play, and Northland cannot rely on exclusion j(6).  Northland argues that the provision does not apply because Mulroy’s property damage occurred when the logs were selected and placed, well before Keim finished the project.  Mulroy counters that the property damage did not occur until several years after the home was finished, when he noticed beetle holes throughout the logs. Mulroy argues that although the beetles were present in the logs at the time of construction, they were ‘dormant,’ and that the ‘emergence, spread, and active re-infestation occurred after Northwest’s work was completed.

Here, the PCOH provision encompasses Mulroy’s property damage, and exclusion j(6) is inapplicable.  Property damage does not occur until there is ‘physical injury to or loss of use of tangible property.’ (citation omitted)  A ‘physical injury’ is ‘a physical and material alteration resulting in a detriment.’ (citation omitted)  In this instance, although the beetles were dormant in the logs at the time the home was built, the integrity and appearance of the home did not suffer until the later infestation.  The use of untreated logs created the right conditions for the later property damage, but the damage did not occur at the time of construction.”

Ultimately the court concluded that no coverage was owed on account of the “your work” exclusion.  However, claims involving latent property damage are not unusual.  So, despite it involving beetles, Northland Casualty Company v. Mulroy provides guidance on the treatment of latent property damage vis-à-vis the applicability of the “products-completed operations hazard.”


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