Written by: C. Michael Johnson, Esq.

The 10th Circuit, just added its authority to a judicial trend of very narrowly construing key business risk exclusions in the CGL Policy: Exclusions j (5) & (6). MTI, Inc., v. Employers Ins. Co, Of Wausau, 2019 WL 321423 (10th Cir. 1/25/19).

As part of a renovation effort, MTI employees removed all 64 corroded anchor bolts that were used to stabilize a wooden structure referred to as Tower 1. Because the adhesive applicator had not yet arrived on the project site (to be applied before replacing with new anchor bolts) MTI did not immediately install new anchor bolts or replace rusted bolts to safely stabilize the Tower. Knowing that it had removed all anchor bolts MTI did not do anything to install temporary support to ensure the stability of the tower. During the night high winds struck the tower, causing it to lean and several structural components to break. Due to the extent of the structural damage, removal and replacement of the tower was determined to be the only viable option and MTI was sued for those damages. Wausau declined coverage and MTI negotiated a settlement and sued Wausau.

Exclusions j (5) & (6) exclude property damage to “that particular part of real property” [j. (5)] on which the insured is “performing operations” and [j.(6)] that must be repaired or replaced because “your work was incorrectly performed on it.”

The district court ruled the damage fell within the exclusions and granted judgment for Wausau. On appeal the 10th Circuit first reviewed cases around the country that either broadly or narrowly construed these exclusion. Then the 10th Circuit ruled that the terms “that particular part of the real property” in exclusions j (5) & (6) must be narrowly construed and because one reasonable construction is that the exclusions applied only to the specific elements of real property being actually replaced by MTI’s work (i.e. just the anchor bolts), that narrow construction was to be applied. Hence, the 10th Circuit ruled all damage to the tower itself (materially caused by the lack of stabilization due to removal of all anchor bolts) was not excluded real property damage.

In this case, where MTI had control over the entire tower and decisions on how to implement the bolt replacement stabilization project for the tower – the very purpose of MTI’s work being to stabilize the tower from falling over – the 10th Circuit’s construction of exclusions j (5) & (6) strains commonsense. MTI’s work in removing “all anchor bolts,” which had the singular purpose of stabilizing the structure from falling over, seems to fit squarely within the exclusions as the Tower was the real property upon MTI was performing operations and the Tower’s stabilization was the fundamental purpose of MTI’s work. When MTI made a decision not to reinstall all or some of anchor bolts or otherwise brace the structure when it did not receive the adhesive applicator on time at the project site, the performance of MTI’s operations had the immediate effect of causing the tower to lack stabilization resulting in the loss.

Based on the facts of this case and the authority of the 10th Circuit, MTI, Inc. will have immediate impact on courts around the country. Expect insured’s to argue CGL exclusions j (5) & (6) have no exclusionary application to the real property being worked on and that the exclusions are limited to the very specific elements being installed or modified regardless of how directly integral those elements are to the integrity, safety or protection of the real property and regardless of the purpose of the work being performed by the insured.