First Circuit Court of Appeals Rules That Standard Commercial General Liability Policy Excludes Coverage for Downstream Property Damage When General Contractor’s Scope of Work Covers Entire Building
It is well-accepted that standard commercial general liability policies exclude coverage for construction contractors’ own defective work. That is, for example, a roofer who fails to properly seal penetrations when reroofing a home will not be afforded insurance coverage for the cost of correcting its mistakes (i.e., sealing the penetrations or redoing the job entirely). But what about the downstream – no pun intended – impacts of those mistakes: e.g., water damage to the home’s interior? Are those covered? In classic lawyer-speak, the United States First Circuit Court of Appeals says, “it depends.”1
The basic facts are these. For three years, Tocci Building Corp.,2 served as the general contractor responsible for building an apartment complex on land owned by an entity named Toll JM EB Residential Urban Renewal, LLC. By Toll’s account, the project was a disaster. It alleged, among other things, that Tocci’s and its subcontractors’ defective work caused property damage to other, non-defective work. More particularly, it claimed that faulty roofing work led to damaged drywall, inadequate sheathing caused a mold outbreak, and improper backfill cracked a concrete slab and caused other damage. To stem the losses caused by Tocci’s allegedly poor work, Toll terminated the parties’ contract and sued Tocci for damages.
Tocci tendered Toll’s claims to its CGL carrier, Admiral Insurance Co., and demanded that Admiral defend and indemnify it in the Toll litigation. Admiral denied Tocci’s claim on the grounds that Toll had not alleged “property damage caused by an occurrence,” as those terms were defined under Tocci’s policy, and that in any event, the policy’s standard “Damage to Property” exclusion eliminated any coverage that arguably applied. It then filed suit seeking a declaration that it had no duty to defend or indemnify Tocci.
The trial court granted summary judgment in favor of Admiral on the grounds that Toll had not alleged that it suffered covered “property damage” arising out of Tocci’s work. Tocci appealed this ruling to the First Circuit.
The First Circuit affirmed, but on different grounds. Rather than focusing on whether Toll’s allegations fell within the scope of Tocci’s insuring agreement, the court instead based its holding on the policy’s standard “Damage to Property” exclusion. That exclusion provides, in relevant part, that there is no coverage for “property damage” to:
[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.
Thus, the question for the court was whether the damaged drywall, mold growth, and cracked concrete slab constituted property damage to part of the project on which Tocci’s work was incorrectly performed. The court answered in the affirmative because the scope of Tocci’s work included the entire apartment complex, not just parts disparate from the alleged property damage. In contrast, if Tocci had been retained to work only on parts of the building not subject to Toll’s claims, the exclusion likely would not have applied. For example, if Tocci’s work had been limited to the apartment’s roof, there likely would have been coverage for damage to the apartment’s Interior caused by the allegedly negligent roofing work.
So what does this pedantic insurance analysis mean for those who build things and the owners who hire them? Well, maybe not a lot, at least in Massachusetts state courts. This is because the First Circuit’s ruling applies only to federal cases under First Circuit jurisdiction. In contrast, it is up to the Massachusetts Supreme Judicial Court to decide how Massachusetts law would interpret the relevant policy provisions. But assuming the SJC is persuaded by the First Circuit’s analysis, contractors and owners will need to find other ways to protect themselves. Owners, for example, may insist on seeing proof that their contractors have the financial resources to fix costly mistakes not covered by insurance. They also might demand that contractors procure performance bonds, which would cover the owner’s completion costs if a contractor is unable to correct the deficient work. Contractors have fewer options, but of course, they control their own work. Accordingly, they can prevent against uncovered claims by working carefully and seeking guidance from the project’s engineer before proceeding improvidently. Upstream contractors also can contractually shift these risks through broad indemnity and additional insured provisions.
We will provide a further update if the SJC elects to weigh in on this important issue, but in the meantime, be careful out there!