Why the “your work” exclusion in CGL policies is limited in application and why damages seemingly for loss of use of “your work” may not be.

In claims arising out of construction defects and faulty workmanship, insurers are often faced with many difficult coverage questions. Not the least among these are the issues surrounding the “occurrence” and “property damage” issues, but equally important is a proper assessment of the applicability of Business Risk exclusions. On January 31, 2012, the Missouri Court of Appeals, Eastern District, rendered an opinion providing guidance as to the interpretation of the “your work” exclusion found in many commercial general liability policies.

In Cook’s Fabrication & Welding, Inc. v. Mid-Continent Cas. Co., Continental Equipment Co. hired Cook’s to install two mast radial stackers at quarries owned by LaFarge North America, Inc. Cook’s installed the stackers at two Missouri quarries owned by LaFarge. Greystone, Inc. manufactured the stackers, which were intended for use as conveyors to move rock and gravel from one location to another. After Cook’s completed installation, both stackers collapsed, causing damage including hindrances to each quarry’s ability to continue doing business while awaiting repairs. 

In 2006, LaFarge filed a products liability suit against Greystone in federal court alleging damages of lost business, business opportunities, and profits. In turn, Greystone filed a claim against Cook’s for indemnification, alleging Cook’s had negligently installed the stackers.

At the time of the stacker collapses, Cook’s was insured under a CGL policy issued by Mid-Continent. Mid-Continent initially agreed to defend Cook’s in the federal lawsuit but then withdrew its defense, having determined coverage was precluded by the policy’s “Damage To Your Work” exclusion. In April of 2008, Cook’s filed a declaratory judgment action against Mid-Continent in state court asking the court to declare any liability assigned to Cook’s in the federal suit was covered by the CGL policy.

In November of 2008, Greystone paid $380,000 to LaFarge in settlement of the federal suit. It then initiated a state-court lawsuit against Cook’s for indemnification, again alleging Cook’s negligently installed the stackers and was responsible for the damages to LaFarge. Greystone alleged the money it paid satisfied LaFarge’s damages for lost profits during the time the stackers were inoperable and under repair. Mid-Continent against declined to defend Cook’s. The trial court found for Greystone’s and ordered Cook’s to indemnify Greystone for the full amount paid to LaFarge.

Greystone then filed a cross-claim in Cook’s declaratory judgment action seeking garnishment against the Mid-Continent policy. All parties filed summary judgment motions, and the court ruled in favor of Mid-Continent. Naturally, an appeal followed.

Mid-Continent contended its “your work” exclusion barred coverage completely. The exclusion stated, “This insurance does not apply to … ‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Mid-Continent focused on the phrase “arising out of,” arguing that because all the damages at issue arose out of Cook’s work they were not covered. Cook’s and Greystone disagreed, asserting the exclusion applied only to damage to Cook’s work, not all damage arising out of Cook’s work.

The Court of Appeals agreed with Cook’s and Greystone, noting the exclusion clearly barred coverage only for damage to Cook’s work (as opposed to damages to property other than Cook’s work but which still arose out of it). Additionally, the Court compared the exclusion to the policy’s definition of “products-completed operations hazard” and concluded the interpretation urged by Mid-Continent was impermissible. The Court reasoned, “A plain reading of these two policy provisions reveals that while the PCOH definition in the instant case encompasses certain ‘“property damage”…arising out of…“your work,”’ the exclusion addresses only the portion of that same property damage which was actually caused to ‘your work.’ Both contain the same language concerning property damage arising from the insured’s work, and both clearly address property damage falling within the definition of PCOH. However, the exclusion contains the qualifying phrase ‘to your work,’ thereby removing from coverage property damage that falls within the PCOH definition, but that actually occurred to the insured’s work. Any remaining property damage meeting the definition of PCOH but occurring to property that was not the insured’s work, it follows, would be covered.” The Court further found these provisions to be unambiguous.

Actually, the Court concluded an ambiguity would exist only under the interpretation of the exclusion advanced by Mid-Continent. “If the exclusion in fact addresses all property damage arising from ‘your work’ and ‘included in the PCOH definition,’ then the exclusion would remove coverage for all property damage included in the PCOH definition, rendering the latter provision illusory.”   

Thus, the Court held the “your work” exclusion applies not to any damage arising out of an insured’s work but only to damage specifically to the insured’s work. The exclusion, therefore, does not apply to damage to other property even if it does arise out of the insured’s work.

The Court then assessed the application of the exclusion in light of the specific damages assessed against Greystone and, as indemnitor, Cook’s.  The policy defined “your work” as “(1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations.” The Court held, “It is clear that the work or operation Cook’s performed was installation of the mast radial stackers. The materials and equipment furnished in connection with the installation would include the stackers themselves and any equipment necessary for installation. Therefore, applying the plain language of the policy, any physical damage to the stackers or related equipment Cook’s installed, or any loss of use of those items, would constitute ‘property damage’ to Cook’s’ ‘work,’ and would not be covered due to the policy exclusion.”

The more interesting issue, however, concerned LaFarge’s loss of use of other equipment and the quarry itself. Remember, the damages Greystone paid to LaFarge in settlement of the latter’s claim included the loss of production capacity and loss of use of its facilities as a result of the stacker collapse. The Court held this was “damage to property falling under the definition of PCOH, but property that is not part of the mast radial stackers or the installation thereof. This would therefore not be excluded by the ‘Damage To Your Work’ policy exclusion, rather these damages would be coverd by the PCOH definition in the policy.”

In essence, the Court determined that, while loss of use of the stackers themselves was not covered because it was damage to Cook’s work, loss of use of the quarries and other equipment used at the quarries – including profits lost – were covered because that damage was not damage to “your work,” even though the loss of use of those items was caused by the loss of use of Cook’s work.

By:  Jim Maloney

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With better internet connections and better remote network access, working from home has become commonplace.   But a recent Missouri appellate decision may cause some employers to think twice about such an arrangement. 

In Tran v. Dave’s Electric, 2011 Mo.App.Lexis 1521, the Western District Court of Appeals ruled that an employer was liable for its employee’s negligent operation of her vehicle while driving to work.   The context of the case was a cross-over accident on an icy highway.  The Dave’s Electric employee was on her way to the office for an appointment with an auditor from the Company’s workers compensation carrier.                 

Under the “going and coming” rule, an employee is generally not considered in the course and scope of employment when driving to work.   Thus, employers are rarely held liable under respondeat superior for accidents like the one in Tran.  However, the Western District found that the “special errand” exception applied because the evidence at trial was that when the roads were bad, the Dave’s Electric employee typically worked from home.  An employee’s trip may qualify as a “special errand” when it is “…undertaken to serve the employer’s purposes, at a time and in a manner dictated by those purposes; the trip must not be a routine portion of the employee’s duties, and must subject the employee to special inconvenience, hazard, or urgency.” 

The Court’s decision in Tran clearly interprets the scope of the “special errand” exception broadly.  Missouri employees are frequently called upon to traverse icy and snowy roadways.  The decision also appears to ignore the realities of today’s workplace where employees may have some task that they are allowed to complete at home, but still have other task which they are required to complete at the Company’s place of business.   In the case of the latter tasks, it seems unfair to saddle the employer with potential liability simply because it is willing to allow its employees to complete the former tasks from the comfort of their own home.        

By: Kyle Roehler (kroehler@fwpclaw.com)

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The U.S. Supreme Court’s recent holding inHosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission and Cheryl Perich, is both a win for religious freedom and a blow to workplace equality.  No. 10-553, 565 U.S. ____ (January 11, 2012), available athttp://www.supremecourt.gov/opinions/11pdf/10-553.pdf.  For the first time, the Court recognized a “ministerial exception” that bars employment discrimination suits by “ministerial” employees of religious groups.  Id. at *13.  The exception is meant to protect religious groups from government interference in the selection of their ministers.  Id. at *10.    Unfortunately for religious groups and their employees alike, the Court’s opinion only partially explains the contours of the “ministerial exception,” leaving uncertainty about which employees of religious groups are protected by federal and state employment discrimination laws, and which are not.

The case arises out of an employment dispute at the Hosanna-Tabor Evangelical Lutheran Church and School (“Hosanna-Tabor”).  Hosanna-Tabor operates a religious elementary school, where it employs both “lay” and “called” teachers.  Id. at *2.  While “lay” teachers need not even be Lutheran, id. at *2, “called” teachers carry the title “Minister of Religion, Commissioned,” because they have completed “a significant degree of religious training followed by a formal process of commissioning.”  Id. at *16.  Both types of teachers “generally performed the same duties,” including the teaching of religious subjects; however, “lay teachers were hired only when called teachers were unavailable.”  Id. at *2. 

Hosanna-Tabor employed Cheryl Perich as a “called” teacher for more than four years.  Id.at *2-3.    In the summer of 2004, Perich developed narcolepsy, resulting in her taking disability leave for the first part of the 2004-2005 school year.  Id.at *3.  On January 27, 2005, Perich notified the school principal of her intention to return to work on February 22, as authorized by her doctor.  Id.at *3.  Hosanna-Tabor responded by asking Perich to resign, concluding “that Perich was unlikely to be physically capable of returning to work that school year or the next.”  Id.at *3.  Perich refused to resign and instead showed up for work on February 22, causing a disturbance by initially refusing to leave.  Id.at *3.  Perich also informed the school principal “that she had spoken with an attorney and intended to assert her legal rights.”  Id.at *3.  Hosanna-Tabor then fired Perich, citing her “insubordination and disruptive behavior” and her “threat[] to take legal action.”  Id. at *4.

Perich followed through with her threat to take legal action.  After Perich filed a Charge of Discrimination with the Equal Employment Opportunity Commission (“EEOC”), “[t]he EEOC brought suit against Hosanna-Tabor, alleging that Perich had been fired in retaliation for threatening to file an ADA lawsuit.”  Id. at *5 (referencing the Americans with Disabilities Act, 42 U.S.C. § 12101 et seq.).  Perich intervened in the action, adding a retaliation claim under the Michigan Persons with Disabilities Civil Rights Act, Mich. Comp. Laws § 37.1602(a).  Id. at *5.  The District Court dismissed the claims on summary judgment, citing the “ministerial exception”; however, the Court of Appeals for the Sixth Circuit reversed, saying that the exception did not apply.  Id.at *5-6.  Thereafter, the U.S. Supreme Court granted certiorari.  Id. at *6.

The Court first considered whether the “ministerial exception” exists.    It noted that “the Courts of Appeals have uniformly recognized the existence of a ‘ministerial exception,’ grounded in the First Amendment, that precludes application of [employment discrimination laws] to claims concerning the employment relationship between a religious institution and its ministers.”  Id. at 13.  The Court agreed:

Requiring a church to accept or retain an unwanted minister, or punishing
a church for failing to do so, intrudes upon more than a mere employment
decision. Such action interferes with the internal governance of the church,
depriving the church of control over the selection of those who will personify
its beliefs. By imposing an unwanted minister, the state infringes the Free
Exercise Clause, which protects a religious group’s right to shape its own
faith and mission through its appointments. According the state the power to
determine which individuals will minister to the faithful also violates the
Establishment Clause, which prohibits government involvement in such
ecclesiastical decisions.

Id. at 12-13.  The Court also noted that its prior decisions “confirm that it is impermissible for the government to contradict a church’s determination of who can act as its ministers.”  Id. at *10.  Accordingly, the Court held that a “ministerial exception” to employment discrimination laws exists.  Id. at 13.

The Court next considered whether Perich fell within the “ministerial exception.”  The unanimous Court was “reluctant . . . to adopt a rigid formula for deciding when an employee qualifies as a minister[,]” but held “that the [ministerial] exception covers Perich, given all the circumstances of her employment.”  Id.at *15-16.  In particular, the Court cited “the formal title given Perich by the Church, the substance reflected in that title, her own use of that title, and the important religious functions she performed for the Church” in concluding that the ministerial exception applied.  Id.at *18.  Regarding the facts that “lay teachers at the school performed the same religious duties as Perich” and that “her religious duties consumed only 45 minutes of each working day,” the Court held that such facts are relevant to the analysis but not dispositive.  Id. at *18-19.  For these reasons, the Court reversed the decision of the Sixth Circuit, reinstating the District Court’s dismissal of Perich’s disability retaliation claims under the “ministerial exception.”  Id. at *22.

In a footnote to the opinion, the Court also settled a circuit split on the procedure for raising the “ministerial exception.”  “We conclude that the exception operates as an affirmative defense to an otherwise cognizable claim, not a jurisdictional bar.”  Id. at *20 n.4.  Thus, religious groups who are sued by an employee for employment discrimination must raise the “ministerial exception” at the earliest opportunity (typically in the Answer), or else it may be waived.

The Court’s decision in Hosanna-Tabor is both a win for religious freedom and a blow to workplace equality.  Addressing the tension between these two worthy objectives, the Court said:

The interest of society in the enforcement of employment discrimination
statutes is undoubtedly important.  But so too is the interest of religious
groups in choosing who will preach their beliefs, teach their faith, and
carry out their mission.  When a minister who has been fired sues her
church alleging that her termination was discriminatory, the First
Amendment has struck the balance for us.  The church must be free to
choose those who will guide it on its way.

Id. at *21-22.  Put another way, the First Amendment protects a religious group’s freedom to discriminate against “ministerial” employees, not just on the basis of religion, but also on the basis of race, color, national origin, sex, ancestry, age, disability, pregnancy, and other protected characteristics.  The tragedy of this decision for workplace equality is that the Court declined to clearly articulate a test for determining when the “ministerial exception” will apply.  This means uncertainty for all employees of religious groups, as well as their employers, who can only speculate about which employees of religious groups enjoy the protections of federal and state employment discrimination laws.   Unfortunately, the answer to this question must wait until the U.S. Supreme Court has another occasion to consider the “ministerial exception.” 

By: Luke R. Hertenstein

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The Eastern District of Missouri’s recent decision in BancorpSouth Bank v. Paramont Properties, L.L.C., 2011 Mo. App. LEXIS 899 (June 28, 2011)[1] is the only case to date interpreting the application of § 432.047.2, R.S.Mo., Missouri’s Commercial Statute of Frauds.  This case is significant because it makes it clear that in a commercial setting, a debtor may not maintain an action upon or a defense, regardless of legal theory, in any way related to a credit agreement unless the credit agreement is in writing.  In Paramont, BancorpSouth filed suit against Paramont for the deficiency owed on four promissory notes.  The Notes were secured by deeds of trusts on two developments.  The deeds of trust were foreclosed upon and the properties were acquired by BancorpSouth through its credit bids.  Two individuals executed guaranty agreements with respect to the repayment of the Notes and those guarantors were also joined as defendants in the action.

 After taking the depositions of the guarantors, BancorpSouth filed its motion for summary judgment based on § 432.047.2, R.S.Mo.  Paramont responded by asserting defenses to BancorpSouth’s claims based upon certain alleged oral promises of forbearance and modifications to the terms of the Notes, which Paramont claimed negated BancorpSouth’s right to pursue the deficiency. 

 In granting BancorpSouth’s motion for summary judgment, the trial court found, “the absence of a written credit agreement setting out the terms defendants [Paramont] rely on to support their affirmative defenses and counterclaims is fatal to those affirmative defenses, as well as to their counterclaims.”  Id. at *2-3.  The trial court found by the terms of Missouri’s Commercial Credit Statute of Frauds, § 432.047, such agreements were required to be in writing in order to be effective.  Id. at *3.  Although Paramont appealed, the judgment of the trial court was affirmed. 

 In its analysis, the Eastern District of Missouri cited § 432.047.2, R.S.Mo., which provides that, “[a] debtor may not maintain an action upon a defense, regardless of legal theory in which it is based, in any way related to a credit agreement unless the credit agreement is in writing, provides for the payment of interest or other consideration, and sets forth the relevant terms and conditions.”  Id. at *4.  A “credit agreement” is defined as, “an agreement to lend or forebear repayment of money, otherwise extend credit, or to make any other financial accommodation.”  Id.  The court found there was no dispute that the agreement upon which Paramont based its affirmative defenses was a credit agreement.  The court further found that under the terms of § 432.047, in order to be enforceable, the credit agreement clearly had to be in writing, which it was not.  The court further noted that by passing § 432.047, it demonstrated the legislature’s intent to eliminate all claims and defenses relating to a credit agreement if that credit agreement is not in writing. 

 Based on this recent ruling, all commercial credit agreements must be in writing in order to be effective.  This will protect banks from claims based upon certain alleged oral promises.  It should be noted this only applies to commercial transactions.

 Submitted by:  Abbey Gentle

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            The recent decision of the Western District Court of Appeals in Tillotson v. St. Joseph Medical Center (WD 72948, June 14, 2011) has generated a great deal of discussion in the workers’ compensation world.  However, the Tillotson decision does not make new law.  The decision does clarify the application of existing law to a particular type of fact situation. 

           What has excited comment is the court’s holding that the prevailing factor standard does not apply to the need for treatment.  This is not new law.  For an injury to be compensable, the work activity must be the prevailing factor in causing the disability and resulting medical condition.  This is the only area where the prevailing factor applies.  Where there is a compensable injury, the employer must provide whatever treatment is reasonably necessary to cure and relieve of the effects of the injury. 

          In evaluating this case, it is important to remember how the issues were framed to the Court.  First, the parties agreed that a compensable injury occurred, resulting in a meniscus tear.  The employer initially paid for treatment, up until the point when total knee replacement was recommended.  The parties also agreed that a total knee replacement was reasonably necessary to relieve the claimant’s painful condition. 

          A 2008 decision by the Eastern District, Gordon v. City of Ellisville, 268 S.W.3d 454 (Mo.App. 2008), seems to have contributed to the confusion by using the phrase:  “prevailing factor in causing his need for . . . surgery.”  Id., 459.  In the Gordon case, the claimant was thought to have sustained a rotator cuff tear.  When the surgery was performed, no evidence of an acute injury was found and, therefore, no compensable injury existed.

          In Tillotson, the claimant did sustain a compensable injury, a meniscus tear to the knee.  The claimant also had preexisting arthritis of the knee.  The physicians all agreed that repairing a meniscus tear in a patient with severe arthritis would make the overall condition worse.  The only way to relieve the claimant’s pain was with a total knee replacement surgery.  The witnesses for both sides agreed that performing the total knee replacement was reasonable.  The employer refused to pay for the surgery, on the grounds that the meniscus tear was not the prevailing factor in the need for the knee replacement and the Commission agreed.

            The Western District reversed the denial of benefits, holding that, since the total knee was reasonably required to treat the meniscus injury, the employer must provide it.  “The fact that the medication or treatment may also benefit a non-compensable or earlier injury or condition is irrelevant,” citing to the 2006 decision in Bowers v. Highland Dairy, 188 S.W. 3d 79 (Mo.App. 2006).

            In summary, the Tillotson decision does not effect a change in the existing law, but does clarify the process for analyzing whether an employer is responsible for providing certain treatment.  1.  Was the work activity the prevailing factor in causing the injury?  If the answer to this question is in the affirmative, there is a compensable injury.  The next step is:  2.  What treatment is reasonably necessary to cure and relieve the effects of the compensable injury?

 By Anne Wickliffe

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