Tonicstar Ltd. v. Lovegreen Turbine Services, Inc. , 535 F.3d 790 ( 2008 )

BYE, Circuit Judge.

A cloth rag remaining in an oil refinery compressor caused several million dollars in business interruption damages. Tonics-tar Limited, one of the insurers of Love-green Turbine Services, the company who serviced the compressor, brought this declaratory judgment action claiming it had no duty to defend or indemnify Lovegreen in an action for damages brought by the owner of the oil refinery. The district court¹ granted Tonicstar’s motion for summary judgment, concluding the insurer did not owe Lovegreen a duty to defend or indemnify. We affirm.

I

Lovegreen is a service provider which is in the business of servicing turbines, generators, and compressors. Flint Hills Resources, LP, is the owner of a crude oil refinery near Rosemount, Minnesota (the Pine Bend facility). In 2003, Flint Hills hired Lovegreen to overhaul a compressor at the Pine Bend Facility. It asked Love-green to be “responsible for the disassem-bly, cleaning, inspection, repairs as necessary, ... reassembly of the compressor^ and] inspection of the gear box.” App. 147. Lovegreen worked on the compressor around the clock from September 8 through September 24. In connection with the work, a large container of cloth rags were used to wipe the compressor during the overhaul.

After Lovegreen’s work was complete, Flint Hills placed the compressor back into service. Initially, the compressor ran as designed. One week later, however, Flint Hills shut down the compressor because a charge pump at the refinery failed. When Flint Hills restarted it the same day, it vibrated excessively and created a large volume of unusual noise. Flint Hills again shut down the compressor, inspected it, and found a cloth rag and cloth fragments lodged inside. Flint Hills instructed its own employees to remove the cloth rag and fragments, repair the compressor, and place it back in operation as quickly as possible. It documented its inspection and repair with photographs and saved the cloth fragments found inside the compressor. The compressor was out of service for five days, causing Flint Hills to incur loss of business damages exceeding $6.5 million.

After returning the compressor to service, Flint Hills began pursuing Love-green’s liability insurers to recoup its damages. Lovegreen had $2 million in primary insurance coverage through Liberty Mutual Fire Insurance Company. A commercial umbrella policy issued by a syndicate of six insurers through Lloyd’s of London provided additional coverage in excess of $2 million. Liberty Mutual and five of the six subscribing Lloyd’s of London syndicate agreed to pay their share of the business loss. The holdout — Tonics-tar- — refused to pay. As a result, Flint Hills brought suit against Lovegreen raising claims of negligence and breach of contract premised on its failure to perform the overhaul in a workmanlike manner by leaving the cloth rag inside the compressor. Flint Hills claimed loss of business damages in the amount of $1.7 million (the part remaining unpaid), as well as $29,500 for the cost of repairs to the compressor.

The insurance policy issued to Love-green by Tonicstar generally provided coverage “for Bodily Injury and Property Damage arising from the rendering of or failure to render Professional Services,” App. 49, but contained several exclusions. As relevant, Exclusion D.2.f. excluded coverage for “Property Damage to ... that particular part of any property that must be restored, repaired or replaced because Your Work was incorrectly performed on it.” An exception to Exclusion D.2.f. restored coverage for “Property Damage included in the Products-Completed Operations Hazard.” Id. at 48. The policy defined Property Damage as:

1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

2. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the Occurrence that caused it.

Id. at 61. 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.

Id. at 62. Endorsement No. 1 added the following definition of Work: “The entire completed construction or the various separately identifiable parts required to be furnished under the contract documents.” Id. at 51.

After Flint Hills sued Lovegreen, Ton-icstar brought this declaratory judgment action against Lovegreen and Flint Hills asking the district court to declare Tonics-tar had no duty to defend or indemnify Lovegreen in the action brought by Flint Hills. Tonicstar moved for summary judgment arguing Flint Hills’ damages were excluded pursuant to several of the policy’s exclusions, including Exclusion D.2.f. The district court granted Tonicstar’s motion for summary judgment, concluding Exclusion D.2.f. applied. The district court further concluded the exception to Exclusion D.2.f. for property damage included in the Products-Completed Operations Hazard did not apply because such coverage excluded “Property Damage arising out of ... the existence of tools, uninstalled equipment or abandoned or unused materials.” Id. at 61. The district court concluded the cloth rag left in the compressor constituted “abandoned or unused materials.”

Lovegreen filed a timely appeal. On appeal, it contends the district court erred in three respects. First, the argument about keeping a rag out of the compressor was not part of its “work” within the meaning of the policy. Second, it is contended the district court erred in concluding the cloth rag was “abandoned or unused materials,” and Flint Hills’ loss of business damages should have been covered under the policy’s Products-Completed Operations Hazard provisions. Finally, Lovegreen argues that, even if Exclusion D.2.f. applies to exclude coverage, the exclusion does not apply to the $1.7 million in loss of business damages, but only to the $29,500 in repairs to the compressor itself.

II

Both the district court’s grant of summary judgment, and its interpretation of the terms of the insurance policy, are reviewed de novo. Macheca Transport Co. v. Phila. Indem. Co., 463 F.3d 827, 831 (8th Cir.2006).

We agree with the district court that Exclusion D.2.f., which excludes coverage for property damage to property which must be repaired because the insured’s work was incorrectly performed, applies. Cloth rags were part of the materials Lovegreen furnished in connection with the overhaul of the compressor. In addition, using the cloth rags to wipe the compressor during the overhaul was part of the work or operations performed by Lovegreen. As a consequence, leaving a cloth rag inside the compressor falls within the policy’s definition of work. Such conduct triggers Exclusion D.2.f. because it indicates Lovegreen’s work was incorrectly performed, and the compressor required repair as a result. Furthermore, the $6.5 million in business interruption damages Flint Hills suffered while the compressor was being repaired is excluded from coverage because the policy’s definition of property damage encompassed not only physical injury to the property affected by the defective work, i.e., the cost of the compressor repairs, but also the resulting loss of use of the property. See, e.g., TGA Dev., Inc. v. N. Ins. Co. of New York, 62 F.3d 1089, 1091 (8th Cir.1995) (interpreting a “loss of use” provision under Minnesota law, and explaining that loss of use of property resulting from defective work falls “outside the coverage” of such policies).

Lovegreen contends, however, that keeping a rag out of the compressor was not part of its “work” as defined by the policy. It relies upon the additional definition of “work” under Endorsement No. 1 which, as stated above, provided in part that “work” is “the various separately identifiable parts required to be furnished under the contract documents.” App. 51. It contends a final inspection to remove foreign material from the compressor was not part of the work it was required to furnish under the contract documents.

Even assuming arguendo a final inspection to remove foreign material was not specifically mentioned in the contract, Lo-vegreen’s argument nonetheless fails. The definition of “work” in Endorsement No. 1 does not replace the definition of ‘Tour Work” in the main body of the policy. Endorsement No. 1 specifically provides “that the following additional Definitions shall apply.” Id. (emphasis added). In other words, both the definition of “Your Work” and the definition of “Work” in Endorsement No. 1 apply. Thus, leaving a cloth rag in the compressor could constitute Lovegreen’s “work” under either definition. After all it provided a large container of cloth rags to the Pine Bend facility, the purpose of which was to wipe the compressor during the overhaul. Lovegreen then used the cloth rags during the overhaul and left one inside the compressor. This conduct clearly falls within the policy’s definition of “[w]ork or operations performed by [Love-green],” as well as “[m]aterials ... furnished in connection with such work or operations.” Id. at 62.

Lovegreen further contends the loss involved here should have been included in the Products-Completed Operations Hazard coverage, which was excepted from Exclusion D.2.f. The policy provided, however, that there was no Products-Completed Operations Hazard coverage for property damage arising out of the existence of tools, uninstalled equipment or abandoned or unused materials, and the district court concluded the cloth rag constituted abandoned or unused materials. We agree. This interpretation of the policy is consistent with the conclusion reached by the few courts which appear to have interpreted this exception for “abandoned or unused materials.” See U.S. Sanitary Specialties Corp. v. Globe Indem. Co., 204 F.2d 774, 777 (7th Cir.1953) (recognizing the provision applied to “tools, equipment and materials which on completion of an operation should have been removed by the assured from the premises where the operation occurred but which, instead, were abandoned there by the insured and later were instrumental in causing an accident.”); see also Liberty Mut. Ins. Co. v. Am. Home Assurance Co., Inc., 368 Ill. App.3d 948, 306 Ill.Dec. 733, 858 N.E.2d 530, 538-39 (2006) (concluding a temporary ramp the insured left at the worksite fell within the exception for “abandoned” materials); Shelter Mut. Ins. Co. v. DeShazo, 955 S.W.2d 234, 238 (Mo.Ct.App.1997) (adopting the reasoning from Sanitary Specialties in interpreting the “abandoned or unused materials” provision).

Finally, Lovegreen contends, even if Exclusion D.2.f. applies, it only excludes the cost of restoring the compressor to operation, that is, the $29,500 Flint Hills spent to repair the compressor, but does not exclude the $6.5 million Flint Hills lost in business while the compressor was out of service for five days. As we explained above, this policy’s definition of property damage included not only the physical injury to the property which required repairs because of incorrectly performed work, but also specifically encompassed the “resulting loss of use of that property.” App. 61. As a consequence, the exclusion of the $6.5 million in business interruption damages is “compelled by the plain words of the policfy].” TGA Development, 62 F.3d at 1091.

Ill

We affirm the judgment of the district court.

1 . The Honorable John R. Tunheim, United States District Judge for the District of Minnesota.