Standard CGL policy forms cover many claims for completed operations and product liability, unless such coverage is excluded (or not purchased). However, there has been extensive litigation over whether claims arising out of defective construction and defective products are covered by the policy in the first instance, the issue being whether they qualify as an occurrence. Whether policy exclusions operate to exclude coverage for such losses is another area of extensive litigation. This article addresses some of the most frequently disputed provisions, including policy exclusions most often cited by insurers.
Products-Completed Operations Hazard
Product liability insurance has been defined as “protection against financial loss arising out of the legal liability incurred by an insured because of injury or damage resulting from the use of a covered product or out of the liability incurred by a contractor after a job is completed.” Product liability insurance generally covers a policyholder’s liability for such injury or damage resulting from defects in goods or products manufactured or placed in the stream of commerce, if the incident takes place after the insured has transferred possession of the goods or products to others, and if the incident occurs away from the insured’s possession.
Product liability insurance is directly tied to the “products-completed operations hazard,” which can be found in CGL policies, and is intended to cover the possibility that an insured’s goods, products, or work, once relinquished or completed, may cause bodily injury or property damage other than to the product or completed work itself. Most CGL policies carry separate aggregate limits for products-completed claims. Products-completed operations coverage typically applies after a product is put to its intended use. In Gulf Coast Environmental Systems, LLC v. American Safety Indemnity Co., the court held that a regenerative thermal oxidizer system was put to use when it went “on line” and was being utilized, and rejected the insurer’s argument that the work was not completed because the machine was not functioning properly. In the construction context, the coverage usually applies after a contractor’s work has been completed. For example, in Crownover v. Mid-Continent Casualty Co., the court found that because damage to a home’s foundation and heating, ventilation, and air conditioning system became apparent after construction was completed, policy exclusions that applied only to property damage occurring while work was ongoing were not applicable, regardless of whether the work was defective when it was installed. In Allegheny Design Management v. Travelers Indemnity Co. of America, the court held that a window for a store could be put to its intended use only when the store opened for business, and because the damage was observed after construction but before the store opened, the damage did not constitute a products-completed operations hazard.
But even if the products-completed operations coverage exists, there must be bodily injury or property damage caused by an occurrence for coverage to apply. Whether or not an incident results in bodily injury or property damage caused by an occurrence is an issue that is often litigated. Moreover, there are many policy exclusions that insurers frequently cite in an attempt to minimize or eliminate coverage.
The Meaning of “Occurrence”
The primary purpose of third-party insurance is to defend and indemnify insureds against liability for claims made against them as a result of their own conduct. Courts have, however, held that such policies are not intended to provide protection against the insured’s own faulty workmanship or product because they have found them to be normal risks associated with the conduct of the insured’s business. For a number of years, insurers had success in certain jurisdictions arguing that construction defect and product liability cases did not constitute an occurrence for purposes of coverage because the damage was purportedly not unexpected.
The term “occurrence” is defined in most CGL policies as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” This definition broadly encompasses almost any situation resulting in property damage or bodily injury, unless the damage was intended or is the natural, direct result of deliberate conduct. The burden of proving an occurrence is traditionally on the insured.
The commonsense, ordinary meaning of occurrence generally applies for purposes of insurance coverage. In Newmont Mines v. Hanover Insurance Co., the court noted that the term “occurrence” is ordinarily understood to mean “something that takes place,” especially “something that happens unexpectedly and without design.” In California, for example, courts credit insurer arguments that intentional conduct cannot be considered an occurrence only when the insured actually intends to cause the injury; or the injury is the direct, natural result of deliberate conduct even when the injury is not subjectively intended.
Pennsylvania, for example, has adopted a similar formulation for what constitutes an occurrence. In Donegal Mutual Insurance Co. v. Baumhammers, the court ruled that a shooting spree by the insureds’ son that resulted in the death of five people constituted an occurrence with respect to the claims brought against the insureds for having a gun and failing to procure mental treatment for their son. The court noted that it had “established that the term ‘accident’ within insurance policies refers to an unexpected and undesirable event occurring unintentionally, and that the key term in the definition of the ‘accident’ is ‘unexpected’ which implies a degree of fortuity.”
Product Liability and Faulty Workmanship as an Occurrence
Most of the cases in which insurers had success in asserting that an event did not constitute an occurrence involved factual circumstances in which there was no bodily injury or property damage at all or there was only damage to the insured’s own work or product. Insurers, however, generally prefer to argue “no occurrence” because presenting the argument in that way arguably shifts the burden to the insured to demonstrate that there is an occurrence as opposed to the insurers having the burden of proving an exclusion applies. Insurers’ aggressive use of “no occurrence” arguments appears to have reached its peak in recent years. Indeed, courts previously amenable to these arguments have backtracked or reversed course. For example, in 2013 alone, the highest courts of Connecticut, Georgia, North Dakota, and West Virginia all decided against insurers’ “no occurrence” arguments in the context of construction defect cases. The majority of courts that have decided the issue have ruled that faulty workmanship can constitute an “occurrence” for purposes of coverage.
For example, in Westfield Insurance Co. v. National Decorating Service, the court determined that the damage to a building’s ceilings, drywall, and floors constituted property damage resulting from an occurrence. This damage was beyond the scope of work of the insured, a painting subcontractor, although the general contractor alleged that the insured was responsible for some of the damage. The court stated that, “[h]aving determined that there is ‘property damage’ resulting from an ‘occurrence’ for any damage [the insured] caused to parts of the [building] beyond the scope of its work, it follows from the undisputed facts that summary judgment [for the insured] is warranted.”
The majority rule is currently that defective products and construction defects causing damage to property or bodily injury constitute occurrences under most CGL policies. In the construction context, insurers contend that coverage for faulty workmanship will convert a CGL policy into a performance bond. But courts in the majority have rejected that argument because “[i]nterpreting ‘occurrence’ under the policy to include unexpected and unintended consequential damages caused by the subcontractors’ faulty workmanship will not convert the policy into a performance bond.” For example, the court in Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C., distinguished CGL coverage from a performance bond because, “[a] performance bond guarantees the completion of a construction contract if a contractor defaults, and unlike an insurance policy, it benefits the project owner rather than the contractor.”
In Pennsylvania, contractual claims of faulty workmanship resulting in damage to the insured’s work historically have not constituted an occurrence. For example, in Kvaerner Metals Division of Kvaerner U.S., Inc. v. Commercial Union Insurance Co., the insured entered into a contract with a steel factory to design and construct a coke oven battery. The battery failed to meet specifications, and the factory sued the insured for breach of contract. The Pennsylvania Supreme Court held that there was no occurrence. However, in Kvaerner, the only damage was to the product itself; there was no third-party property damage. Thus, Kvaerner was limited to situations where a defective product did not cause damage to anything other than the product itself. Nonetheless, insurers became emboldened by the ruling and continued to push the envelope. The result was a number of poorly reasoned decisions that nearly rendered CGL and product liability insurance illusory in Pennsylvania.
In 2007 the court in Millers Capital Insurance Co. v. Gambone Brothers Development Co. applied Kvaerner to the facts before it, holding that claims against a property developer-builder for damage caused by water leaks through vapor barriers, windows, roofs, and stucco exteriors did not involve occurrences. The court rejected the insured’s argument that the defective work was an occurrence because it caused damage to non-defective property.
In 2013, however, in Indalex Inc. v. National Union Fire Insurance Co. of Pittsburgh, the Pennsylvania Superior Court confirmed that Kvaerner, Gambone, and other similar cases did not constitute a change away from coverage for foreseeable damages recoverable in tort. In Indalex, the insured was a window and door manufacturer that had purchased product liability insurance from National Union. The insured had been sued in at least 23 underlying cases asserting claims for product liability, negligence, breach of warranty, and breach of contract. The suits alleged that the insured’s products were defectively designed or manufactured and resulted in water leakage that caused physical damage, such as mold and cracked walls, in addition to personal injury. The court held because the underlying cases “set forth tort claims based on damages to persons or property, other than the insured’s product, we cannot conclude that the claims are outside the scope of the coverage.” The Pennsylvania Supreme Court declined to review the Superior Court’s decision in Indalex.
Despite decisions such as Indalex, some insurers are still taking the position that faulty products and faulty workmanship do not constitute an occurrence under CGL policies. For example, a jury in California awarded $55 million to a policyholder in its dispute with AIG over product liability insurance, including $46 million in punitive damages. Before the trial, AIG argued in an unsuccessful motion for summary judgment that the alleged failure of the insured’s (Victaulic Company) product did not constitute an occurrence based on the faulty workmanship doctrine.
The “Your Work” and “Your Product” Exclusions
Most CGL policies exclude liability for property damage to the insured’s product. In other words, where the insured’s own product damages itself, that damage will not be covered. This exclusion is designed to prevent the insurer from warranting the insured’s product, but generally it will not preclude coverage for third-party property damage that the insured’s product causes. For example, in Hartford Fire Insurance Co. v. Thermos L.L.C., the underlying complaint against Thermos alleged that its bottles leaked and had the potential of causing damage to property other than Thermos’s own bottles. As a result, the court denied the insurer’s motion for judgment on the pleadings, finding that the “your product” exclusion did not apply.
Typically, the “your product” exclusion also will not apply where the insured’s defective product is incorporated into the product of another and causes damage to that other property. In Harleysville Worcester Insurance Co. v. Paramount Concrete, Inc., the court held that the insured’s shotcrete that caused a finished pool to crack and leak constituted damage caused by the insured’s product, not to the insured’s product; therefore, the exclusion for damage to “your product” did not operate to preclude coverage for the underlying claim. Similarly, in Thruway Produce, Inc. v. Mass. Bay Insurance Co., the “your work” and “your product” exclusions did not apply where poisoned apples supplied by the insured were incorporated into baby food that was sold to consumers, because the defective apples damaged other property.
Similar to the “your product” exclusion, the “your work” exclusion prevents a CGL policy from acting as a performance bond covering an insured’s own work or serving as a warranty on the quality of the work or product itself; instead, the policy is designed to protect the insured when the “work” damages someone else’s property. As explained by the court in Jessco, Inc. v. Builders Mutual Insurance Co., the primary purpose of the “your-work” exclusion is to prevent liability policies from warranting an insured’s own faulty workmanship, which is frequently considered a normal risk. But in a majority of jurisdictions, the exclusion does not withdraw coverage for any and all work done by the insured or its subcontractors and does not exclude coverage for damage to a third party’s work.
“Sistership” or “Recall” Exclusion
The “sistership” or “recall” exclusion precludes coverage for losses related to recall, repair, and replacement of a product when it is suspected or known that the product is defective. The exclusion is intended to protect insurers from having to pay for what is essentially preventive maintenance of the insured’s own product. It does not, however, bar coverage for damages that have already taken place and were caused by defects in the insured’s product.
Commonly known as the “sistership exclusion,” the exclusion gets its name from a practice in the airplane industry of grounding and recalling similar planes, or “sister ships,” after plane crashes stemming from a design defect, in order to investigate and correct any common defect. The sistership exclusion was developed by insurance companies “to make clear that, while they intended to pay for damages caused by a product that failed, they did not intend to pay for the costs of recalling products containing a similar defect that had not yet failed.”
While courts have interpreted the recall/sistership exclusion narrowly, it has been held to bar coverage for economic loss sustained by the insured solely to replace or repair its own defective product or work. Generally, it applies only where the insured actually withdraws products from the market. And, in contrast, the exclusion will not apply where damages due to the insured’s defective product or work have been suffered by third parties.
A recent decision from the Eighth Circuit is instructive on this principle. In Netherlands Insurance Company v. Main Street Ingredients, LLC, Company A manufactured dried milk and sold that dried milk to Company B, which then sold the milk to Company C. Company C used the dried milk in oatmeal products. In 2009, the Food and Drug Administration determined there was Salmonella bacteria on surfaces used to prepare the dried milk at Company A’s facility, as well as other unsanitary conditions. Company A issued a voluntary recall, leading to Company C recalling its oatmeal product.
Subsequently, Company C sued Companies A and B under several theories, including strict products liability. Company B’s insurer defended it under a reservation of rights but then filed a declaratory judgment action, asserting it owed no duty to defend or indemnify Company B for the claims asserted by Company C. Among other arguments, the insurer contended that the recall and “your product” exclusions applied.
The recall exclusion precluded coverage for
[d]amages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of: . . . “[y]our product” . . . if such product . . . is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
The court rejected the insurer’s argument, finding that the damages were not for the recall issued by Company A, but rather for damage caused to Company C. The court also found that the “your product” exclusion did not apply, because Company B was not seeking indemnity for property damage to its dried milk, but for property damage to Company C’s oatmeal, and Company B did not manufacture, sell, handle, distribute, or dispose of Company C’s oatmeal. The court reasoned Company C manufactured a new product using Company B’s product, which, once combined, was an inseparable ingredient.
The majority of states recognize standard form CGL policies cover claims of faulty workmanship and product defects for damage caused to other work or other products. Policyholders must be mindful that insurers often cite various policy exclusions that may not necessarily apply. Once the policyholder has met its burden in establishing that an event constituted an occurrence, the insurer then has the burden to show that any policy exclusions apply. In the products liability and construction defect context, insurers will typically cite the “your work” and “your product” exclusions. Insurers also frequently cite the sistership exclusion when denying coverage. There are many other exclusions that insurers may rely on. Policyholders should carefully review all of the facts in the underlying claim and understand their policy provisions and exclusions, as well as the applicable law in their jurisdiction, to determine whether coverage is actually excluded or limited.
Keywords: litigation, insurance, coverage, occurrence, product liability insurance, construction insurance, your product exclusion, your work exclusion, “sistership” exclusion, “recall” exclusion, products-completed operations coverage
Joseph D. Jean is a partner and Matthew D. Stockwell is counsel with Pillsbury Winthrop Shaw Pittman LLP in New York City.
 Joseph D. Jean, a partner with Pillsbury Winthrop Shaw Pittman LLP, leads the New York office’s Insurance Recovery and Advisory Group. He focuses on property and business interruption insurance for commercial property owners in the education, pharmaceutical, manufacturing, mining, retail, and multifamily housing industries and has represented clients on some of the nation’s largest and most important catastrophic property losses. Matthew D. Stockwell, counsel, is also based in New York and also practices in the Insurance Recovery and Advisory Group, focusing his practice on representing policyholders in insurance coverage and construction litigation.
 Home Warranty Corp. v. Caldwell, 777 F.2d 1455, 1457 (11th Cir. 1985).
 70 N.Y. Jur. 2d Insurance § 1678.
 161 A.2d 69, 83 (N.J. 1960). The court stated, “We see no rational doctrinal basis for differentiating between a fly in a bottle of beverage and a defective automobile. The unwholesome beverage may bring illness to one person, the defective car, with its great potentiality for harm to the driver, occupants, and others, demands even less adherence to the narrow barrier of privity.”
 See 1966 CGL Form Exclusion (m).
 See Patrick J. Wielinski, Insurance for Defective Construction, ch. 1 (International Risk Management Institute, Inc. 2d ed. 2005).
 See, e.g., Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317 (2006).
 Product Liability Insurance, Glossary of Insurance & Risk Management Terms (International Risk Management Institute, Inc.).
 Avemco Ins. Co. v. Aerotech, Ltd., 677 F. Supp. 35, 40 (D. Mass. 1987).
 Ohio Cas. Ins. Co. v. Reed, 2006 U.S. Dist. LEXIS 56625 (S.D. Ind. Aug. 11, 2006).
 See, e.g., Gulf Coast Envtl. Sys., LLC v. Am. Safety Indem. Co., 2015 U.S. Dist. LEXIS 75551 (S.D. Tex. June 11, 2015).
 772 F.3d 197, 213 (5th Cir. 2014).
 572 F. App’x 98, 101 (3d Cir. 2014).
 Policyholders purchasing product liability insurance must ensure that the products-completed operations hazard is not excluded by endorsement (See ISO Endorsement CG 21 04).
 General Refractories Co. v. First State Ins. Co., 94 F. Supp. 3d 649, 663 (E.D. Pa. 2015) (citing Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 233 (3d Cir. 2002)).
 Hartford Fire Ins. Co. v. Thermos L.L.C., 2015 U.S. Dist. LEXIS 156373 (N.D. Ill. Nov. 18, 2015) (citing U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 934 (Ill. 1991)).
 See, e.g., Dreis & Krump Mfg. Co. v. Phoenix Ins. Co., 548 F.2d 681, 688–89 (7th Cir. 1977); Webster Cty. Solid Waste Auth. v. Brackenrich & Assocs., 217 W. Va. 304, 311 (2005); L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 366 S.C. 117, 121–22 (2005).
 Liberty Mut. Fire Ins. Co. v. J M Smith Corp., 602 F. App’x 115, 120 (4th Cir. 2015).
 State ex rel. Nationwide Mut. Ins. Co. v. Wilson, 778 S.E.2d 677, 683 (W. Va. 2015).
 Nat’l Union Fire Ins. Co. v. Ready Pac Foods, Inc., 782 F. Supp. 2d 1047, 1053 (C.D. Cal. 2011).
 784 F.2d 127, 135 (2d Cir. 1986).
 See, e.g., Delgado v. Interinsurance Exch. of Auto. Club of So. Cal., 47 Cal. 4th 302, 310–16 (2009) (stating that “insured’s unreasonable belief in the need for self-defense does not turn the resulting purposeful and intentional act of assault and battery into ‘an accident’”); see also State Farm Gen. Ins. Co. v. Frake, 197 Cal. App. 4th 568, 579–80 (2011) (intentionally striking groin of friend during “horseplay” not an “occurrence,” even though resulting injuries were neither expected nor subjectively intended). But see State Farm Fire & Cas. Co. v. Superior Court (Wright), 164 Cal. App. 4th 317, 325 (2008) (“occurrence” requirement satisfied because even though insured intended to throw a boy into a pool, insured had not intended for him to land on concrete steps).
 Donegal Mut. Ins. Co. v. Baumhammers, 595 Pa. 147 (2007).
 Donegal Mutual Insurance, 595 Pa. at 152.
 Donegal Mutual Insurance, 595 Pa. at 158. See also Reggie Constr., Ltd. v. Westfield Ins. Co., 2014 Ohio App. LEXIS 3703, at *13 (Ohio Ct. App. Sept. 2, 2014) (“Inherent in the plain meaning of ‘accident’ is the doctrine of fortuity. Indeed, the fortuity principle is central to the notion of what constitutes insurance.”).
 K&L Homes, Inc. v. Am. Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. 2013); Cherrington v. Erie Ins. Prop. & Cas. Co., 231 W. Va. 470 (2013); Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 67 A.3d 961 (Conn. 2013); Taylor Morrison Servs. v. HDI-Gerling Am. Ins. Co., 746 S.E.2d 587 (Ga. 2013).
 K&L Homes, Inc., 829 N.W.2d at 736.
 2015 U.S. Dist. LEXIS 159140, at *21 (N.D. Ill. Nov. 25, 2015).
 Westfield Insurance Co., 2015 U.S. Dist. LEXIS 159140, at *5.
 See, e.g., Ameron Int’l Corp. v. Am. Home Assurance Co., 2011 U.S. Dist. LEXIS 61486, *16–18 (C.D. Cal. June 6, 2011).
 Cypress Point Condo. Ass’n, Inc. v. Adria Towers, L.L.C., 441 N.J. Super. 369, 382 (App. Div. 2015) (citing U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 887–88 (Fl. 2007)). See also Greystone Constr. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1288–89 (10th Cir. 2011) (“Interpreting a CGL policy so as to provide coverage for a subcontractor’s faulty workmanship does not transform the policy into a performance bond. . . . Unlike insurance, the performance bond offers no indemnity for the contractor; it protects only the owner. And even if the CGL policy does share some characteristics of a performance bond, that alone is an insufficient reason to ignore the plain language and intent of the policy.”)
 Cypress Point, 441 N.J. Super. at 382 (citing Ribeira & Lourenco Concrete Constr. v. Jackson Health Care Assocs., 603 A.2d 976 (N.J. App. Div. 1992)).
 589 Pa. 317, 322 (2006).
 Kvaerner, 589 Pa. at 333.
 Kvaerner, 589 Pa. at 336.
 941 A.2d 706, 713 (Pa. Super. Ct. 2007).
 See also Ryan Homes, Inc. v. Home Indem. Co., 647 A.2d 939 (Pa. Super. Ct. 1994) (holding that an entire home constitutes a general contractor’s work product).
 Indalex Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 83 A.3d 418 (Pa. Super. Ct. 2013).
 Indalex, 83 A.3d at 419.
 Indalex, 83 A.3d at 419–20.
 Indalex, 83 A.3d at 419–20.
 Indalex, 83 A.3d at 425.
 Indalex Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 99 A.3d 926 (Pa. 2014).
 Sue Reisinger, “AIG Subsidiaries Get Slammed With Punitives Following Contentious Trial,” Corp. Couns., Nov. 16, 2015.
 See CG 00 01 12 07, § I, Coverage A, ¶ 2.k.
 See, e.g., Sony Comput. Entm’t Am., Inc. v. Am. Home Assurance Co., 532 F.3d 1007, 1019 (9th Cir. 2008).
 See, e.g., Tradin Organics USA, Inc. v. Md. Cas. Co., 325 F. App’x 10, 11 (2d Cir. 2009).
 2015 U.S. Dist. LEXIS 156373 (N.D. Ill. Nov. 18, 2015).
 10 F. Supp. 3d 252, 266 (D. Conn. 2014).
 114 F. Supp. 3d 81 (W.D.N.Y. 2015).
 Feaster v. Mid-Continent Cas. Co., 620 F. App’x 300, 302 (5th Cir. 2015); Harleysville Worcester Ins. Co. v. Paramount Concrete, 2015 U.S. Dist. LEXIS 104869 (D. Conn. Aug. 7, 2015).
 472 F. App’x 225, 229 (4th Cir. 2012).
 See, e.g., McNeilab, Inc. v. N. River Ins. Co., 645 F. Supp. 525, 541 (D.N.J. 1986).
 See, e.g., Arcos Corp. v. Am. Mut. Liab. Ins. Co., 350 F. Supp. 380, 384 n.2 (E.D. Pa. 1972), aff’d mem., 485 F.2d 678 (3d Cir. 1973).
 See Forest City Dillon, Inc. v. Aetna Cas. & Sur. Co., 852 F.2d 168, 173 (6th Cir. 1988).
 See, e.g., Sokol & Co. v. Atl. Mut. Ins. Co., 430 F.3d 417, 424 (7th Cir. 2005).
 See, e.g., Elco Indus., Inc. v. Liberty Mut. Ins. Co., 90 Ill. App. 3d 1106, 1110 (1977).
 See, e.g., Parker Hannifin Corp. v. Steadfast Ins. Co., 445 F. Supp. 2d 827, 834 (N.D. Ohio 2006).
 745 F.3d 909, 911 (8th Cir. 2014).
 Main Street Ingredients, 745 F.3d at 917–18.
 Main Street Ingredients, 745 F.3d at 919.
 Main Street Ingredients, 745 F.3d at 919.
 Main Street Ingredients, 745 F.3d at 918.
 Main Street Ingredients, 745 F.3dat 918. See also Thruway Produce, Inc. v. Mass. Bay Ins. Co., 114 F. Supp. 3d 81 (W.D.N.Y. 2015) (where defective apples themselves were not recalled, but baby food into which the apples were incorporated was recalled, the recall exclusion did not apply).