Fifth Circuit Finds Information Contained in Arbitration Award Insufficient to Determine Insurance Coverage

In American Home Assurance Company v. Cat Tech, L.L.C., No. 10-20499 (5th Cir. Oct. 5, 2011) Ergon Refining, Inc. (“Ergon”) hired Cat Tech, L.L.C. (“Cat Tech”) to service a hydrotreating reactor at its Mississippi refinery. In the course of servicing the reactor, Cat Tech damaged several of the reactor’s components. The matter was submitted to arbitration and the arbitrators awarded Ergon almost $2 million, including damages, prejudgment interest, attorney’s fees, and an offset for the unpaid contract price. Cat Tech sought indemnification under two insurance policies: (1) a commercial general liability policy issued by American Home Assurance Company (“AHA” ), and (2) a commercial umbrella policy issued by National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“NUFIC”).

AHA and NUFIC brought action against insured servicing company seeking declaratory judgment that they did not have duty to indemnify company for damages awarded to Ergon in arbitration. The insurers argued that the “your work” exclusion found in both policies precluded coverage for damage to the reactor.

The “your work” exclusion precludes coverage for: “Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard.” This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. The policies define “your work” as “(1) [w]ork or operations performed by you or on your behalf; and (2) [m]aterials, parts or equipment furnished in connection with such work or operations.” The District Court found the insurers had no duty to indemnify Cat Tech based on that exclusion. Cat Tech appealed.

The Fifth Circuit explained that the following three categories of property damage were potentially at issue: (1) property damage to the specific parts of Ergon’s reactor upon which Cat Tech performed defective work, (2) property damage to those parts of the reactor upon which Cat Tech performed non-defective work but were nonetheless damaged, and (3) damage to other Ergon property, upon which Cat Tech did not work. The Court concluded that the “your work” exclusion precluded coverage for the first two categories, but not the third.

The court found that the arbitration award was far too vague in its description of the damage and how the damage related to Cat Tech’s work. Accordingly, the court reversed the summary judgment award and remanded the case for the District Court to conduct additional fact-finding to determine whether the damage was limited to those components upon which Cat Tech worked or instead included components unrelated to Cat Tech’s operations.

Technorati Tags:
ADR, law, arbitration