United States Court of Appeals
For the First Circuit
No. 11-2208
OXFORD AVIATION, INC.; JAMES HOROWITZ; LOUISE GARLLAND,
a/k/a Louise Gartland; JOEL LUSKY; MIKE GAGNON,
Plaintiffs, Appellants,
v.
GLOBAL AEROSPACE, INC.,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. D. Brock Hornby, U.S. District Judge]
Before
Boudin, Circuit Judge,
Souter,* Associate Justice,
and Stahl, Circuit Judge.
James D. Poliquin with whom Norman, Hanson & DeTroy, LLC was
on brief for appellants.
Timothy C. Bass with whom Greenberg Traurig, Thomas C. Newman,
Nicole L. Bradick and Murray, Plumb & Murray were on brief for
appellee.
May 18, 2012
*
The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
BOUDIN, Circuit Judge. Oxford Aviation ("Oxford") is a
corporation that refurbishes and repairs aircraft in Oxford, Maine.
In late 2006, Oxford contracted with Airlarr, a Pennsylvania
corporation, for Oxford to perform various repairs and
installations on Airlarr's airplane; the work was estimated to cost
close to $70,000. Airlarr picked up its airplane from Oxford's
facility in January 2007 after Oxford finished its work, and flew
it back to Pennsylvania.
In March 2010, Airlarr sued Oxford in Maine Superior
Court for breach of contract, breach of express and implied
warranties, and other state-law claims. The complaint alleged that
one of the plane's side windows cracked during the flight home due
to Oxford's "negligence and faulty performance," and also listed in
a separate paragraph a slew of "defects and other substandard
work," including uncomfortable seats, leaking fuel injectors, a
cracked turbocharger, and an improperly installed carpet. The
complaint included as an exhibit an estimate sheet representing the
specific tasks undertaken by Oxford for Airlarr.
Oxford then notified Global Aerospace ("Global")--an
insurance company that had issued Oxford a commercial general
liability ("CGL") policy--that it had been sued, and requested that
Global defend it. Global disclaimed both coverage and any duty to
defend; Oxford filed suit in state court in Maine requesting a
declaratory judgment that Global was required to defend it in
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Airlarr's suit. Oxford also alleged breach of contract and unfair
claims settlement practices, Me. Rev. Stat. Ann. tit. 24-A, § 2436-
A (2010).
Asserting diversity jurisdiction, Global removed the case
to federal district court. 28 U.S.C. § 1332 (2006). Both parties
filed summary judgment motions, Fed. R. Civ. P. 56, and the
district court granted summary judgment in favor of Global. Oxford
Aviation, Inc. v. Global Aerospace, Inc., 812 F. Supp. 2d 22 (D.
Me. 2011). Without deciding whether the claims were within the
general coverage provisions of the policy, the district court held
that no duty to defend existed because Airlarr's claims fell within
listed policy exclusions, most of which barred or limited insurance
for damage relating to the insured's repairs and work.1 Id. at 26-
27.
Oxford appealed to this court. Our review of the
district court's grant of summary judgment is de novo, and while
factual inferences are drawn in favor of Oxford, Mandel v. Bos.
Phoenix, Inc., 456 F.3d 198, 204-05 (1st Cir. 2006), the issues on
which this case turns are legal rather than factual. The main
issues--the scope of an insurer's duty to defend and the proper
interpretation of the insurance contract--are both governed by
Maine law. As various CGL policies issued by different insurers
1
The coverage provisions at issue and the five separate
exclusions relied upon by Global are discussed separately later in
this decision and reprinted in the appendix to this opinion.
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often employ standard language, precedent from other jurisdictions
may be considered where Maine law is not definitive. Cf. Baywood
Corp. v. Me. Bonding & Cas. Co., 628 A.2d 1029, 1031-32 (Me. 1993).
The insurer's duty to defend is ordinarily broader than
its duty to indemnify. Penney v. Capitol City Transfer, Inc., 707
A.2d 387, 389 (Me. 1998). In Maine, the insurer must defend so
long as the claims in the complaint create even a remote
possibility of coverage. Me. Bonding & Cas. Co. v. Douglas
Dynamics, Inc., 594 A.2d 1079, 1081 (Me. 1991). The complaint need
only "disclose[] a potential for liability within the coverage and
contain[] no allegation of facts which would necessarily exclude
coverage." Travelers Indem. Co. v. Dingwell, 414 A.2d 220, 227
(Me. 1980). The duty to defend exists even if only one of the
claims stated satisfies this test. Mitchell v. Allstate Ins. Co.,
36 A.3d 876, 881 (Me. 2011).
Although the district court largely bypassed the issue of
initial coverage and relied primarily on the exclusions, Oxford
Aviation, 812 F. Supp. 2d at 26, Global argues on appeal that lack
of coverage also negates any duty to defend. Coverage provisions
broadly delineate the risk or risks insured against; the exclusions
carve out exceptions that qualify coverage. Global is entitled to
defend a judgment on any adequately preserved ground that supports
that judgment even if the district judge ignored or rejected that
ground. Haley v. City of Boston, 657 F.3d 39, 53 (1st Cir. 2011).
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The policy at issue insured Oxford for liability based on
claims arising between May 14, 2006, and May 14, 2007, and Oxford
asserts coverage under two of the four coverage provisions.
Coverage A, the principally relevant one of the two, applies to
claims for "bodily injury or property damage . . . resulting from
your aviation operations." It applies only if the injury or damage
"is caused by an occurrence and takes place in the coverage
territory." Property damage is defined to include "[p]hysical
injury to tangible property, including all resulting loss of use of
that property," and an "[o]ccurrence means an accident, including
continuous or repeated exposure to substantially the same general
harmful conditions."2
Global argues that Coverage A does not apply because
Airlarr's complaint cannot be read to allege "property damage" that
is caused by an "occurrence." Some courts have read the commonly
used terms "property damage," "accident" or "occurrence" to exclude
faulty workmanship by the insured entity, while others have looked
instead to exclusions, common in CGL policies and present in
Global's policy here, that are specifically directed to faulty
workmanship. Am. Home Assurance Co. v. AGM Marine Contractors,
2
The other provision, Coverage D, applies to "loss to aircraft
. . . occurring while such aircraft is in the care, custody or
control of the insured for safekeeping, storage, service or
repair." Because Coverage A extends to some harms even after the
aircraft has been restored to the owner, its coverage turns out to
be more important in analyzing this case.
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Inc., 467 F.3d 810, 812-13 (1st Cir. 2006) (describing case law);
see also Sheehan Constr. Co. v. Cont'l Cas. Co., 935 N.E.2d 160,
167-69 (Ind. 2010). Neither party has cited a Maine case directly
in point.
Perhaps common parlance might not describe an
uncomfortable seat (one of the problems alleged by Airlarr) as an
"accident," but a sudden unintended crack in a plane window fits
comfortably within that term. In all events, Maine construes
coverage terms like "accident" or "occurrence" generously, Me. Mut.
Fire Ins. Co. v. Gervais, 715 A.2d 938, 941 (Me. 1998); Vigna v.
Allstate Ins. Co., 686 A.2d 598, 600 (Me. 1996), in contrast to
courts that rely on such terms to exclude coverage for faulty
workmanship, e.g., Lyerla v. AMCO Ins. Co., 536 F.3d 684, 689 (7th
Cir. 2008); Essex Ins. Co. v. Holder, 261 S.W.3d 456, 460 (Ark.
2008) (per curiam).
Thus, in Peerless Insurance Co. v. Brennon, 564 A.2d 383
(Me. 1989), builders sued for faulty construction asked the insurer
to defend and it refused, saying there was no duty to defend
because "the damages were not caused by an 'occurrence'" and also
because certain exclusions applied. Id. at 384. In deciding
whether or not a duty to defend existed, the Maine court focused
its analysis exclusively on the applicability of the exclusions,
and termed that "[t]he principal question" in the case. Id. at
385.
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Further, the court quoted favorably from a dissent in a
prior Maine case (whose majority decision Peerless overruled),
suggesting that at least certain kinds of harm from faulty
workmanship could come within the coverage of a CGL policy and even
avoid its exclusions:
If . . . a contractor performs unsatisfactory
work, repair or replacement of the faulty work
is a business expense for which insurance
coverage is not provided. Conversely, if the
faulty work causes an accident resulting in
physical damage to others, coverage is
afforded and the exception to exclusion (a)
[liability assumed by the insured under a
contract] preserves coverage even if the claim
is based upon a quasi-contractual warranty
theory.3
We conclude that at least the damage to the plane's side window is
within this coverage provision of the policy, and if the duty to
defend in this case is negated, this would have to be because of
the exclusions.
In determining the duty to defend, the five exclusions
invoked by Global must be read against the complaint's allegations
of harm and asserted causes of action, and Global bears the burden
of demonstrating their applicability. Patrons Oxford Ins. Co. v.
Harris, 905 A.2d 819, 827 n.6 (Me. 2006). Much of the damage may
have occurred during the period when Oxford had possession of the
3
Peerless Ins. Co., 564 A.2d at 386 (emphases added) (quoting
Baybutt Constr. Corp. v. Commercial Union Ins. Co., 455 A.2d 914,
923 (Me. 1983) (Wathen, J., dissenting); accord Mass. Bay Ins. Co.
v. Ferraiolo Constr. Co., 584 A.2d 608, 610 (Me. 1990).
-7-
plane and so be barred by exclusion (j)(4), which excludes from
coverage "[p]roperty damage to . . . [p]ersonal property in the
care, custody or control of the insured."4
But while uncomfortable seats and an improperly installed
carpet almost surely had to occur while Oxford was in control of
the plane, the in-flight crack in the window as alleged in the
complaint just as surely falls outside that exclusion. And it is
enough to preserve the duty to defend--so far as this exclusion is
concerned--that the exclusion cannot apply to the cracked window
since the crack occurred when Airlarr had reclaimed the plane.
Thus, we need not tarry over other listed harms in Airlarr's
complaint, such as the leaking fuel injectors or cracked
turbocharger.5
We turn then to four exclusions that focus primarily on
excluding or limiting insurer coverage for so-called "business
risk"; these are included in CGL policies "for the express purpose
of excluding coverage for risks relating to the repair or
4
Oxford argues that Global has waived exclusion (j) because
Global raised it for the first time in its cross-motion for summary
judgment, and not as an affirmative defense in its answer or its
denial of coverage letter to Oxford. We need not resolve this
issue because the exclusion proves not to defeat the duty to
defend.
5
Whether the insurer can limit or escape its duty to defend
once that duty arises (e.g., because the triggering claim
disappears in mid-suit) is not an issue before us and we express no
view on such matters beyond noting that Maine law does not appear
friendly to such attempts. E.g., N. E. Ins. Co. v. Young, 26 A.3d
794, 799 (Me. 2011); Penney, 707 A.2d at 388-89.
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replacement of the insured's faulty work or products, or defects in
the insured's work or product itself." Russ et al., Couch on
Insurance 3d § 129.16 (2005). They reflect the CGL insurer's
intention to leave such coverage to separate professional liability
insurance, such as lawyers' malpractice coverage. See 1325 N. Van
Buren, LLC v. T-3 Grp., Ltd., 716 N.W.2d 822, 838-39 (Wis. 2006).
The four relevant exclusions, which are fully set forth
in the appendix to this decision, may be (incompletely) summarized
as follows. The district court addressed only the last three.
-"Your work" (exclusion (j)(6)): "That
particular part of any property that must be
restored, repaired, or replaced because your
work was incorrectly performed on it."
-"Your product" (exclusion (k)): "Property
damage to your product arising out of it or
any part of it."
-"Products-completed operations hazard"
(exclusion (l)): "Property damage to your work
arising out of it or any part of it and
included in the products-completed operations
hazard."
-"Impaired property" (exclusion (m)):
"Property damage to impaired property or
property that has not been physically injured,
arising out of:
(1) A defect, deficiency, inadequacy or
dangerous condition in your product or your
work; or
(2) A delay or failure by you or anyone acting
on your behalf to perform a contract or
agreement in accordance with its terms."
The your-work exclusion listed first above fails to
negate the duty to defend. Conceivably, the cracked side window is
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a "particular part" of property "on" which Oxford performed work.
The estimate sheet indicates that Oxford was to "Proseal®" the
windshield and windows of the airplane.6 Cf. Gore Design
Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365 (5th Cir.
2008). But the your-work exclusion by its terms does not apply to
"property damage occurring away from premises you own or rent and
arising out of your product or your work," and Airlarr explicitly
alleged that the crack occurred in-flight.
The your-product exclusion, listed second, similarly
fails to negate the duty to defend. The district court properly
said that this exclusion "applies to the alleged defects in the
products that Oxford Aviation sold and installed in Airlarr's
aircraft." Oxford Aviation, 812 F. Supp. 2d at 26. Neither the
complaint nor the incorporated estimate sheet say that the side
window was a product installed by Oxford; and Global has not
suggested otherwise, beyond a half-hearted argument that "your
product" should be read broadly in the context of the whole
agreement.
6
"Proseal®" is the trademark of a company whose website
proclaims that "Pro-Seal has developed over 180 exotic products to
deal with water and fluid contaminant problems" and whose products
include both sealants and films. See www.prosealproducts.com (last
visited Apr. 25, 2012). The estimate sheet also lists as tasks to
"Install Tinted window inserts," although the pricing is TBD, and
to replace a pilot storm window (which no party has argued is the
same as the side window).
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The third-listed exclusion--for products-completed--
applies to property damage (1) to your work, (2) that arises out of
your work or any part of your work, and (3) that is included in the
products-completed operations hazard, defined separately as
"property damage occurring away from premises you own or rent and
arising out of your product or your work." The exclusion focuses
on liability relating to completed operations or work, and like
the other exclusions, aims to "discourage[] the performance of
careless work" by the insured. Russ et al. § 129.17.
However, the first condition of the exclusion is that the
damage in question be "to your work" and the cracked window is not
alleged to be, nor is there any indication that it was included in,
Oxford's work. True, the promise to "Proseal®" the window may
imply application of a sealant around the window, or perhaps a
film--Global is silent on the matter--but the complaint is not (or
not only) seeking damages for injury to the film or sealant, but
also or instead for the loss of the cracked window itself, which
Oxford neither furnished nor installed. Nor is there any
indication that the Prosealing had anything to do with the crack.
If Oxford is at fault at all, conceivably (which is all
that matters for the duty to defend) the crack's origin lay in
Oxford's performance of heavy duty tasks listed in the estimate
that could have weakened the window or frame leading to the in-
flight crack. Work on other parts of the plane can hardly convert
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the entire plane into Oxford's "work" where the contract assigned
only particular tasks, a view reinforced by construing any
ambiguities in the scope of the term "your work" against the
insurer. York Ins. Grp. of Me. v. Van Hall, 704 A.2d 366, 369 (Me.
1997).7
The final exclusion, sometimes known as the "impaired
property" exclusion, has as its subject (1) property that has not
been physically injured and (2) property that is latently impaired
because, as the "impaired property" definition indicates, it
incorporates defective work or a defective product of the insured
(e.g., a defective part was installed in the engine) or the
contract was not performed (e.g., the insured failed to inspect one
of the engines).8
7
So, too, does case law reject such a reading. E.g., Hartford
Casualty Co. v. Cruse, 938 F.2d 601 (5th Cir. 1991); Todd Shipyards
Corp. v. Turbine Servs., Inc., 674 F.2d 401 (5th Cir.), cert.
denied, 459 U.S. 1036 (1982); Auto-Owners Ins. v. Home Pride Cos.,
684 N.W.2d 571, 579 (Neb. 2004).
8
The impaired property definition reads:
Impaired property means tangible property, other than
your product or your work, that cannot be used or is less
useful because:
(a) It incorporates your product or your work that
is known or thought to be defective, deficient,
inadequate or dangerous; or
(b) You have failed to fulfill the terms of a
contract or agreement;
if such property can be restored to use by:
(c) The repair, replacement, adjustment or removal
of your product or your work; or
(d) Your fulfilling the terms of the contract or
agreement.
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The exclusion aims "in essence to preclude coverage for
loss of use claims arising from faulty work or products when there
is no physical injury to the property." Russ et al. § 129.21
(emphasis supplied); see also Corn Plus Co-op v. Cont'l Cas. Co.,
516 F.3d 674, 679 (8th Cir. 2008); Transcon. Ins. Co. v. Ice Sys.
of Am., Inc., 847 F. Supp. 947, 950 (M.D. Fla. 1994). Without the
exclusion, the insurer might become liable for loss of use of the
plane resulting from faulty maintenance, for the policy elsewhere
defines "property damage" to include "all resulting loss of use."
In such instances, the origin of the harm is defective
performance by the insured and the impact is usually only upon the
insured and its client, so the CGL insurer generally treats this
loss of use as a matter for professional liability coverage rather
than general liability coverage. The tenor is very much that of
the your-work, your-product, and products-completed exclusions.
While the exclusion could bar a loss of use claim resulting from
the damaged window, it does not bar a claim for the loss of the
window itself and so does not negate the duty to defend with
respect to the cracked window.
This is a curious case. Reading the complaint against
the exclusions, one must agree with the district judge that the
underlying liability is only to Airlarr; that the alleged property
damage to Airlarr, if proved as charged, likely traces back to
defective work by Oxford; and that such damage to the insured's
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client resulting from such a cause is what the business-risk
exclusions taken together hope to cabin, limit and usually
preclude.
But for obvious reasons (e.g., to cover consequential
damages claimed by third parties), the CGL policy does not have an
exclusion broadly written to exclude all claims arising from faulty
workmanship. Rather, Global has crafted complex exclusions
occupying several pages of text; and they have created an
opportunity in some cases for a complaint to circumvent all of
them. Here, at least one scenario relating to the cracked window,
occurring in flight and away from Oxford's facilities, does fall
within coverage and could plausibly avoid all cited exclusions.
If Airlarr proves its case, it seems unlikely that there
will be much, if any, indemnification since most of the claimed
injuries appear likely to be covered by exclusions. But the duty
to defend is triggered by any realistic possibility of any damage
that might be within coverage and outside the exclusions and the
damaged window creates that prospect. This alone answers Oxford's
request that we certify questions in this case to the Maine SJC in
light of a recent decision there, Mitchell v. Allstate Ins. Co., 36
A.3d 876, 881 (Me. 2011).
As for Oxford's request for attorney's fees on the ground
that Global "lacked a good faith basis" in refusing to defend
Oxford and unduly delayed providing a defense, we deny the request.
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The potential for coverage here is a close call: it focuses on one
claim and a close parsing to preserve the possibility of liability.
Concerning the alleged delay, Oxford's initial request was sent to
the wrong address and Global responded promptly once it received
the demand.
The decision of the district court so far as it rejected
a duty to defend is vacated and the matter is remanded for entry of
a judgment consistent with this decision. The motion to certify a
state law question is denied. Each side shall bear its own costs
on this appeal.
It is so ordered.
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APPENDIX
Coverage A
COVERAGE A - BODILY INJURY AND PROPERTY DAMAGE LIABILITY
1. Insuring Agreement.
(a) We will pay those sums that the insured becomes legally
obligated to pay as damages because of bodily injury or property
damage to which this insurance applies resulting from your aviation
operations. We will have the right and duty to defend any suit
seeking those damages. We may at our discretion investigate any
occurrence and settle any claim or suit that may result. . . .
(b) This insurance applies to bodily injury and property damage
only if:
(1) The bodily injury or property damage is caused by an
occurrence and takes place in the coverage territory, and
(2) The bodily injury or property damage occurs during
the policy period. . . .
2. Exclusions.
This insurance does not apply to:
. . .
(j) Property damage to:
. . .
(4) Personal property in the care, custody or control of
the insured . . . or
(6) That particular part of any property that must be
restored, repaired or replaced because your work was
incorrectly performed on it. . . .
Paragraph (j)(6) of exclusion (j) does not apply to property damage
included in the products-completed operations hazard.
(k) Property damage to your product arising out of it or any part
of it.
(l) Property damage to your work arising out of it or any part of
it and included in the products-completed operations hazard.
This exclusion (l) does not apply if the damaged work or the work
out of which the damage arises was performed on your behalf by a
subcontractor.
(m) Property damage to impaired property or property that has not
been physically injured, arising out of:
(1) A defect, deficiency, inadequacy or dangerous
condition in your product or your work; or
(2) A delay or failure by you or anyone acting on your
behalf to perform a contract or agreement in accordance
with its terms.
This exclusion (m) does not apply to the loss of use of other
property arising out of sudden accidental physical injury to your
product or your work after it has been put to its intended use.
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. . .
COVERAGE D - HANGARKEEPERS' LIABILITY
1. Insuring Agreement.
(a) We will pay those sums that the insured becomes legally
obligated to pay as damages because of loss to aircraft . . .
occurring while such aircraft is in the care, custody or control of
the insured for safekeeping, storage, service or repair. We will
have the right and duty to defend any suit seeking those damages.
We may at our discretion investigate any loss and settle any claim
or suit that may result. . . .
(b) This insurance applies to damages because of loss to aircraft
only if:
(1) The loss takes place in the coverage territory; and
(2) The loss occurs during the policy period.
2. Exclusions.
This insurance does not apply to:
. . .
(e) Loss to your work arising out of it or any part of it.
(f) Loss to aircraft while in flight.
. . .
SECTION V - DEFINITIONS
. . .
Impaired property means tangible property, other than your product
or your work, that cannot be used or is less useful because:
(a) It incorporates your product or your work that is
known or thought to be defective, deficient, inadequate
or dangerous; or
(b) You have failed to fulfill the terms of a contract or
agreement;
if such property can be restored to use by:
(c) The repair, replacement, adjustment or removal of
your product or your work; or
(d) Your fulfilling the terms of the contract or
agreement.
. . .
Loss means an accident resulting in direct damage to tangible
property, including continuous or repeated exposure to
substantially the same general harmful conditions. Loss includes
any resulting loss of use.
. . .
Occurrence means an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.
. . .
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Products-completed operations hazard includes all bodily injury and
property damage occurring away from the premises you own or rent
and arising out of your product or your work except:
(1) Products that are still in your physical possession;
or
(2) Work that has not yet been completed or abandoned.
Your work will be deemed completed at the earliest of the following
times:
(1) When all of the work called for in your contract has
been completed.
(2) When all of the work to be done at the site has been
completed if your contract calls for work at more than
one site.
(3) When that part of the work done at a job site has
been put to its intended use by any person or
organization other than another contractor or
subcontractor working on the same project.
Work that may need service, maintenance, correction,
repair or replacement, but which is otherwise complete,
will be treated as completed.
This hazard does not include bodily injury or property damage
arising out of:
(1) The transportation of property, unless the injury or
damage arises out of a condition in or on a vehicle
created by the loading or unloading of it;
(2) The existence of tools, uninstalled equipment or
abandoned or unused materials.
[]Property damage means:
(a) 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
(b) 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.
. . .
Your product means:
(a) Any goods or products, other than real property, manufactured,
sold, handled, distributed or disposed of by:
(1) You . . . and
(b) Containers (other than vehicles), materials, parts or equipment
furnished in connection with such goods or products.
Your product includes:
(c) Warranties or representations made at any time with respect to
the fitness, quality, durability, performance or use of your
product; and
(d) The providing of or failure to provide warnings or
instructions.
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. . .
Your work means:
(a) Work or operations performed by you or on your behalf; and
(b) Materials, parts or equipment furnished in connection with such
work or operations.
Your work includes:
(c) Warranties or representations made at any time with respect to
the fitness, quality, durability, performance or use of your work;
and
(d) The providing of or failure to provide warnings or
instructions.
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