Seized Rollers: Product, Other Property, and a Voluntary Recall
Northline Conveyor Components, Inc. manufactures idler rollers and belt cleaners for bulk terminals. In January it shipped 1,200 rollers at $86 each to Kestrel Bulk Terminals for a ship-loader retrofit. Within 90 days the roller seals failed, rollers seized, and the scoring scarred Kestrel's $190,000 conveyor belt. The ship loader was down six days while the belt was replaced, and Kestrel claims $520,000 in demurrage and lost throughput. Northline also ran a voluntary field campaign replacing all 3,400 rollers it had sold in the prior 18 months, at a cost of $240,000, including the 1,200 at Kestrel. Northline's CG 00 01 has $1M each occurrence, a $2M general aggregate, a $2M products-completed operations aggregate, and a $25,000 per-occurrence deductible applied to damages only. Defense is outside limits.
1. Is the $240,000 field replacement campaign, or the cost of the 1,200 Kestrel rollers, covered?
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No. Two exclusions converge, and both must be identified.
First, exclusion k. (Damage to Your Product) bars property damage to "your product" arising out of it or any part of it. The rollers are Northline's product, so their own destruction or replacement cost is outside Coverage A.
Second, the recall exclusion (Recall of Products, Work or Impaired Property) bars damages claimed for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of the insured's product, the insured's work, or impaired property, when the product is withdrawn or recalled from the market or from use because of a known or suspected defect, deficiency, inadequacy or dangerous condition. Northline's campaign is a textbook voluntary recall, and the exclusion does not require a regulator to order it - a business decision to pull the product for a suspected seal defect is enough.
The recall exclusion also means no coverage for the labor to reach and swap rollers in the field, even where the roller itself is cheap and the labor is not.
What responds is a product recall or product contamination policy, which is written on a different trigger and typically reimburses recall expense, sometimes with a waiting period and a sublimit. Northline should also check the Kestrel purchase order for a repair-or-replace warranty, since performing under a warranty is a contractual obligation rather than insured property damage.
2. Kestrel claims $190,000 for the scarred conveyor belt. Covered or excluded?
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Covered. The belt is not Northline's product, and it is not "impaired property" because it was physically injured. Exclusion m. reaches only tangible property that is not physically injured and whose loss of use results from incorporating the insured's product or work - or from the insured's failure to perform a contract - where the property could be restored by repairing, replacing or removing that product or work. A belt that has to be scrapped is damaged property, not impaired property.
The analysis also has to clear the other candidates:
- Exclusion k. does not apply; the belt is not "your product."
- Exclusion l. does not apply; Northline sold components, not installation work, and the belt was not its work.
- Exclusion j.(6) applies to property that must be repaired because "your work" was incorrectly performed on it, but it does not reach property damage within the products-completed operations hazard, and a failure occurring 90 days after shipment away from Northline's premises is in that hazard.
So the belt is damage to other property arising out of Northline's product, subject to the $1M occurrence limit and the $25,000 deductible. This is the coverage the products-completed operations aggregate exists to fund, and it is the reason the CGL still matters to a component manufacturer.
3. How should the $520,000 lost-throughput claim be handled, and how do the limits and aggregates apply if a second products claim of $400,000 arrives in the same policy year?
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Split it by cause. Kestrel's terminal was not physically injured, but the definition of property damage includes loss of use of tangible property that is not physically injured. Exclusion m. bars that loss of use where it arises because property incorporates the insured's product and could be restored by repairing or replacing it - which describes the time the loader would have been down to swap rollers. It does not describe the six days lost to replacing the belt. The outage here was driven by the physically damaged belt, so the demurrage attributable to the belt replacement is covered; any portion attributable solely to roller replacement is not. On these facts the six-day outage is belt-driven, so the whole $520,000 is supportable, subject to proof. Expect the carrier to argue allocation, and document the sequencing.
Limits for the first occurrence: $190,000 + $520,000 = $710,000, less the $25,000 deductible = $685,000 paid. Products-completed operations aggregate remaining: $2,000,000 - $685,000 = $1,315,000. The general aggregate is untouched, because products-completed operations claims are charged only to their own aggregate.
Second claim: $400,000 less the $25,000 deductible = $375,000 paid, leaving $940,000 of products-completed operations aggregate and a $1M occurrence limit still intact. Defense costs erode neither aggregate.