Essex Insurance Co. v. BloomSouth Flooring Corp. illustrates that the “your work” exclusion does not necessarily preclude coverage under a CGL policy. 562 F.3d 399 (1st Cir. 2009). In 2000, Boston Financial Data Services (“BFDS”) retained Suffolk Construction Corporation as general contractor for a project at its office in Massachusetts. Suffolk, in turn, contracted with BloomSouth for the installation of carpet tile and related materials throughout the building. The subcontract required BloomSouth to perform minor preparation work for laying the carpet, which included testing and cleaning the concrete floor. BloomSouth contracted the installation to two other companies, one who was charged with supplying the carpet and the other with installing it. Id. at 400.
Essex issued to BloomSouth a CGL policy, which named Suffolk as an additional insured. BloomSouth’s subcontract required it to defend and indemnify Suffolk for claims against Suffolk arising out of BloomSouth’s work.
The Essex policy provided coverage for liability for “property damage,” which the policy defined as “physical injury to tangible property, including all resulting loss of use of that property” and “loss of use of tangible property that is not physically injured.” Id. The policy also contained a “business risks” exclusion, “impaired property” exclusion, and a “your product” exclusion. The business-risks exclusion excluded “risks which relate to the repair or replacement of faulty work or products” which “are a normal, foreseeable, and expected incident of doing business and should be reflected in the price of the product or service rather than as a cost of insurance to be shared by others.” Id. at 407. The impaired-property exclusion excluded damage to “property that has not been physically injured” that arises out of “a defect, deficiency, inadequacy, or dangerous condition in the insured’s product or work.” Id. Relatedly, the “your product, conclusion excluded “Property damage to ‘your product’ arising out of it or any part of it.” Id. at 409.
In late April or early May 2001, the carpet was installed. When BFDS employees moved into the building, they noticed an odor. BFDS notified Suffolk of the offensive odor. One of BloomSouth’s subcontractors removed the original carpet adhesive and re-carpeted the floor, but this remediation effort failed to correct the problem, and the odor spread to other areas of the building. The cause of the odor was indeterminate. Id. at 401-02.
BFDS presented a claim of property damage to Suffolk and demanded that Suffolk remove the carpet and eliminate the odor. Suffolk subsequently requested that BloomSouth respond to BFDS’s claim. BloomSouth refused. Suffolk ultimately paid BFDS $1,417,500.00 for remediation efforts. Suffolk, pursuant to its status as an additional insured under BloomSouth’s policy with Essex, notified Essex of BFDS’s claim and demanded that Essex defend and indemnify Suffolk. Essex denied coverage to Suffolk for BFDS’s claim. Id. at 402.
Suffolk sued BloomSouth in state court for negligence, contractual indemnity, breach of the implied warranty of merchantability, breach of express warranty, breach of contract, and contribution. Suffolk’s complaint alleged that BloomSouth was responsible for negligently and defectively providing and installing carpet, “resulting in damage to and loss of use of the building, including an alleged unwanted odor which permeated the building,” and that (2) BloomsSouth’s negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor. Id.
Essex, in turn, filed a diversity action in the U.S. District Court for the District of Massachusetts seeking a declaratory judgment against BloomSouth and Suffolk. Essex sought a declaration that it was not required to defend or indemnify either Suffolk or BloomSouth for the claims being asserted in Suffolk’s state court action or for the claims asserted by BFDS against Suffolk. Essex asserted that the business-risk exclusions relieved it of any duty to provide a defense or indemnity. Id.
The court reversed the district court’s entry of summary judgment in Essex’s favor. The court noted that, under Massachusetts law, the determination of “whether an insurer has a duty to defend” requires that “a comparison . . . be made of the facts alleged in the underlying complaint with the insurance-policy provisions.” Id. at 403. This determination requires the court to consider “what kind of losses may be proved as lying within the range of the allegations of the complaint, and then see whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy.” Id. at 403 (internal quotations marks and citations omitted).
The court concluded that the underlying allegations of Suffolk’s complaint were reasonably susceptible to the interpretation that it asserted claims of “physical injury” in the form of an allegation that odor permeated the building and that the concrete floor in the building required “bead-blasting.” Id. at 404.
The Massachusetts Supreme Judicial Court had “not determined whether the presence of a permeating odor may constitute ‘physical injury.’” Id. An allegation that an odor permeated the building “may be reasonably construed as claiming damage to property.” Id. at 405. The court rejected Essex’s contention that the odor was not pervasive or permeating because, when the carpet was removed, the odor was eliminated. The argument “impermissibly relies on extrinsic evidence, which Massachusetts law proscribes.” Id. at 406. On these conclusions, the court concluded that “odor can constitute physical injury to property under Massachusetts law, and also that allegations that an unwanted odor permeated the building and resulted in the loss of use of the building are reasonably susceptible to an interpretation that physical injury to property has been claimed.” Id.
“Suffolk’s allegation that the concrete floor required bead-blasting because of BloomSouth’s negligent and defective work and materials may also be reasonably interpreted as alleging physical injury to property, viz., the concrete substrate.” Id. at 406. The court remarked that “the import of this allegation is that BloomSouth’s carpet, or its installation, caused physical injury to BFDS’s concrete floor.” Id.
The court further held that the business-risks and impaired-property exclusions did not preclude coverage for the claim. Under the business-risks exclusion, “a distinction is drawn between ‘faulty workmanship’ claims involving only the insured’s own work product, for which a defense need not be provided, and claims for damage to the property of a third party, for which a defense is required.” Id. at 407.
The court determined that the impaired-property exclusion did not apply because the allegation that odor had permeated the building “is reasonably susceptible to an interpretation that the odor physically injured the property.” Id. at 408 (emphasis in the original). The policy defined “‘impaired property’ as tangible property, other than the insured’s product or work, that cannot be used or is less useful because it incorporates part of the insured’s product or work that is ‘known or thought to be defective, deficient, inadequate, or dangerous.’” Id. at 408. “This definition is, however, somewhat narrowed by a condition that property is ‘impaired property’ only if such property can be restored to use by (i) the repair, replacement, adjustment, or removal of the insured’s product or work, or (ii) the insured’s fulfilling the terms of its contract or agreement. Id. On this reading, the court concluded that if property “cannot be so restored, then it is not ‘impaired property.’” Id. (emphasis in original).
The court determined that “a fair reading of Suffolk’s complaint suggests the property could not be restored to use simply by repairing, replacing, adjusting, or removing BloomSouth’s product or work.” Id. (emphasis in original). “The allegations thus [fell] outside the definition of impaired property.” Id. “A legitimate reading of the complaint is that Suffolk attempted to remediate the alleged injury (odor) by installing carbon air filters and bead-blasting the concrete floor.” Id. at 409.
Finally, the court held that the “your work” exclusion had no application to the claim. “Where, as here, the complaint alleges damage to ‘real property,’ the exclusion cannot apply because it excludes coverage only for damage to goods or products ‘other than real property.’” Id. at 409. The court remarked that “Suffolk’s complaint alleged damage to ‘real property,’ specifically, BFDS’s concrete floor.” Id. at 410. “As opposed to the carpet itself . . . which BloomSouth concedes is its ‘product’ – the pre-existing building structures, including the concrete subfloor over which the carpet was to be installed, are ‘real property’ and are thus excluded from the definition of ‘product.’” Id. Finally, the court concluded that “we do not believe that an insured reasonably understand [the ‘your work’] exclusion . . . to bar coverage for property damage to third-party property such as the subfloor, that was, at all times, part of the building in which it was working in just the same way as the walls, ceilings, and windows.” Id. at 410.
