The Arkansas Court of Appeals affirmed the denial of coverage for the insured based upon the exclusion for "damage to your product." S.E. Arnold & Co. v. Cincinnati Ins. Co., 2016 Ark. App. LEXIS 625 (Ark. Ct. App. Dec. 7, 2016).
The homeowners paid the insured, S.E. Arnold & Company, over $78,000 to supply and install wood flooring in their residence. The homeowners eventually sued Arnold, alleging that the products and services as provided by Arnold had breached its contract, Arnold was negligent, and it violated applicable rules, regulations, and laws. Specifically, the homeowners alleged that the flooring as sold and installed had splinters, cupping occurred across the width of the individual pieces of flooring, and installation was in contradiction to industry standards and applicable building codes.
Cincinnati denied coverage based upon the CGL policy's exclusion for "damage to your product." The exclusion applied to "'property damage' to 'your product' arising out of it or any part of it." Arnold sued Cincinnati and both parties filed motions for summary judgment. The trial court granted Cincinnati's motion and Arnold appealed.
Arnold argued that the homeowners' complaint included one count for negligence, which was targeted more toward the work performed, rather than the product itself. There was no adjudication of these claims, so it was impossible to know whether the problems with the flooring were caused by a defective product or faulty workmanship.
Under Arkansas law, faulty workmanship was an "occurrence." Although the underlying complaint alleged problems with the installation of the flooring, which could be considered faulty workmanship, the only resulting damage was to the flooring itself, which was a product sold by Arnold. There was no uncertainty as to the effect of the damage to your product exclusion - it excluded coverage for property damage to Arnold's product arising out of it or any part of it.
The court relied upon a hypothetical. A roofing company sold defective shingles to a consumer. When the consumer's roof leaked, the water damaged the carpet and drapes in the consumer's home. While the latter damage would be covered by the roofing company's CGL policy, the insurer would not be obligated to replace the roof under the damage to your product exclusion.
Here, the homeowners alleged no damages beyond damage to Arnold's own product, which was the flooring itself. The damage to your product exclusion applied and precluded coverage, regardless of the inapplicability of the damage to your work exclusion. There was no possibility that the alleged damage would have been covered by Arnold's CGL policy in light of the damage to your product exclusion. Therefore, Cincinnati had no duty to defend or indemnify. The trial court's decision was affirmed.