AIU Ins Co v. Mallay Corp

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion
should not be published and is not precedent except under the limited circumstances
set forth in 5TH CIR. R. 47.5.4.
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________
No. 96-41017
_______________
AIU INSURANCE COMPANY,
Plaintiff-Appellee,
VERSUS
MALLAY CORPORATION,
Defendant-Appellant.
_________________________
Appeal from the United States District Court
for the Southern District of Texas
(G-95-CV-485)
_________________________
May 23, 1997
Before SMITH, BARKSDALE, and BENAVIDES, Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
Mallay Corporation (“Mallay”) appeals a summary judgment in
its insurance coverage dispute with AIU Insurance Company (“AIU”).
Finding no error, we affirm.
I.
This declaratory judgment action arises from damages to a

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turbine owned by Dow Chemical Company (“Dow”) that were caused by
Mallay during its repair of the turbine in February 1995. In the
course of the repairs, the turbine dropped out of the jaws of a
lathe and, as a result, incurred damages in excess of $91,000.
Because the repairs occasioned by the damages delayed the return of
the turbine to Dow, and because the turbine was an integral
component of Dow’s LHC-6 ethylene facility, Dow claimed an
additional $2.9 million for the loss of use of its facility. Dow
ultimately settled its claims against Mallay for $91,000 and
released Mallay of any further liability stemming from the loss of
use of the facility.
At the time of the accident, Mallay was insured by AIU under
both property insurance and comprehensive general liability (“CGL”)
policies. Each was issued using the Texas Standard Form of
insurance policy and was governed thereby. The property coverage
policy contained a “liberalization clause” by which, if the State
Board of Insurance prescribed the use of more liberal forms that
would extend or broaden the insurance coverage without additional
premium charge, such additional coverage would be applied to
Mallay's benefit. One such “ISO” form was issued by the State
Board in August 1994; both parties agree that this new form applies
to the instant case.
Mallay sought coverage from AIU under the property and CGL
policies for both the direct $91,000 in damages to the turbine and
the additional $2.49 million in consequentials alleged by Dow. AIU

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responded with a series of reservation-of-rights letters in which
it alluded to the relevant policy exclusions it deemed dispositive
of the coverage dispute. AIU subsequently denied all coverage,
save for $2,500 from the liberalization clause, and filed the
instant declaratory judgment action. Upon joint motions for
summary judgment, the district court granted AIU’s motion, awarding
Mallay only the $2,500 liberalization clause payment.
II.
We review a grant of summary judgment de novo. Hanks v.
Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5th Cir.
1992). Summary judgment is appropriate “if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law.” FED. R. CIV. P. 56(c).
A.
Mallay contends that the district court erred in failing to
find coverage under the extended coverage endorsement attached to
the property coverage policy. The endorsement insures “against all
risks of direct physical loss, except . . . V. Any property
undergoing alterations, repairs, installation or servicing,
including materials and supplies therefor, if directly attributable

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to the operations or work being performed thereon.” Mallay does
not dispute that this provision arguably excludes its claims; it
contends, instead, that the factual posture of the case precludes
such.
According to Mallay, the act of dropping the turbine from the
lather, which fall caused the damages, was not “directly attribut-
able to the operations or work being performed thereon.” Although
it is true that Rod Edwards, the Mallay employee who was working on
the turbine at the time of the accident, testified that he had
burnished the area on one end of the turbine and was using the
lathe to turn the turbine to the other end when it fell from the
lathe, the turbine was still in the process of undergoing repairs,
and the damages were directly attributable to the operations or
work being performed thereon. Edwards was in fact manipulating the
turbine to perform his work thereon, a sufficient nexus to trigger
exclusion (V) under the endorsements.
B.
Mallay asserts that the district court should have found
coverage under the comprehensive general liability policy. Mallay
does not contend that the CGL policy provides coverage for the
damages to the turbine (which damages are excluded plainly by the
“care, custody, or control” provisions of paragraph 2.j.(4)), but
rather that the policy covers the consequential damages to Dow’s
LHC-6 facility caused by the delays in returning the turbine to

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Dow.
The CGL policy covers “property damage,” defined as “physical
injury to tangible property” or “loss of use of tangible property
that is not physically injured.” Excluded from the policy,
however, is “property damage” (1) to “personal property in the
care, custody or control of the insured” (Exclusion 2.j.(4));
(2) to “that particular part of any property that must be restored,
repaired or replaced because 'your work' was incorrectly performed
on it” (Exclusion 2.j.(6)); and (3) “to property that has not been
physically injured” and that arises out of “a defect, deficiency,
inadequacy or dangerous condition in 'your product' or 'your work,'
[except if] the loss or use . . . aris[es] out of sudden and
accidental physical injury to 'your product' or 'your work' after
it has been put to its intended use.” (Exclusion 2.m.(1)).
According to Mallay, the damage to the LHC-6 facility is a
“loss of use of property that is not physically injured” and thus
is covered “property damage.” Assuming arguendo that Mallay is
correct, it also follows that coverage under the policy is not
defeated by exclusions 2.j.(4)SSthe LHC-6 facility is not in the
case, custody or control of MallaySSand 2.j.(6)SSMallay’s work was
not performed incorrectly on the LHC-6 facility itself, but only on
a constituent part thereof (the turbine).
Mallay’s coverage claim is defeated, however, under ex-
clusion 2.m.(1). According to Mallay’s construction of the

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definition of “property damage,” the CGL policy does not cover
“loss of use of tangible property [the LHC-6 facility] that is not
physically injured” arising out of “a defect, deficiency, inade-
quacy or dangerous condition in . . . [Mallay’s work on the
turbine]” that did not arise out of “a sudden and accidental
physical injury to [Mallay’s work on the turbine] . . . after it
has been put to its intended use.” Because the loss of use of the
LHC-6 facility did in fact arise out of some defect or inadequacy
in Mallay’s work on the turbine and, although possibly sudden and
accidental, the damages to the turbine did not occur after it had
been put to its intended use in the LHC-6 facility, the CGL policy
does not provide coverage.
C.
Mallay contends that it is entitled to full coverage for the
damages to the turbine and the facility based upon the liberaliza-
tion clause and its incorporation of the 1994 ISO. AIU concedes
that the ISO does in fact apply to the instant action, but disputes
the amount of coverage that the ISO provides.
The ISO provides coverage for direct physical loss of or
damage to “Covered Property” at Mallay’s premises caused by or
resulting from any “Covered Cause of Loss.” “Covered Property”
includes, among other things, personal property of others that is
(1) in the care, custody, or control of Mallay; (2) located on the

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Mallay premises; and (3) for which a Limit of Insurance is shown in
the Declarations. It is this third requirement that is the source
of disagreement.
AIU argues (and Mallay concedes) that the original policy’s
declarations do not contain a limit of insurance pertaining to the
personal property of others specifically. In fact, under the terms
of the original policy, property of others in Mallay's care,
custody, or control was excluded from coverage (Exclusion 2.j.(4)).
Mallay counters that, although there is no insurance limit for
personal property of others, the declarations do show an insurance
limit of $594,380 (later increased to $661,851) for “Contents,” a
term defined under the Texas Standard Property Policy to include,
among other things, “stock,” which in turn includes property held
for repairs.
Even assuming arguendo that we may refer to the “Contents”
declaration of coverage limits to satisfy the “personal property of
others” coverage limit, the policy does not satisfy the limit-of-
insurance requirement, as the Texas Standard Property Policy
definition of “stock” was modified by the same ISO form under which
Mallay claims the benefit under the Standard Policy liberalization
clause. Under the new ISO definition, “stock” includes “merchan-
dise held in storage for sale, raw materials and in-process or
finished goods, including supplies used in their packing or
shipping.” Because the turbine is not within the classes of

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property encompassed by the revised ISO “stock” definition, it is
not among the “Contents” insured under the Texas Standard Policy
for which the declarations contain a limit of insurance. Thus, the
turbine is not “Covered Property” under the ISO.
D.
Thus, the only coverage to which Mallay is entitled is that
which the district court determinedSSthe $2,500 coverage under
§ A.5.b.(2) of the 1994 ISO. According to the ISO, if the insured
has a coinsurance percentage of 80% or more, it may extend the
insurance that applies to cover, among other things, the personal
property of others in its care, custody, or control. The coverage
extension is capped, however, at $2,500. In the instant case,
because Mallay has a coinsurance percentage of 80% on the policies
issued by AIU, the liberalization clause of the Standard Policy
extends the ISO coverage of $2,500 for Mallay’s custody of Dow’s
turbine. All other coverage is excluded.
AFFIRMED.

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