Massachusetts Court Finds Coverage For Sick Building Claims
In a wide ranging opinion with significant negative implications for the ability of insurers to contest construction defect claims in Massachusetts, the First Circuit has ruled in Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750 (1st Cir. April 16, 2009), that a federal district court erred in granting summary judgment to a liability insurer for claims arising out of the discharge of fumes from defectively-installed carpet tile and related materials throughout the plaintiff’s building.
In 2000, Boston Financial Data Services ("BFDS") retained Suffolk Construction Corporation as general contractor for a tenant improvement project at its offices in Massachusetts. In undertaking the project, Suffolk subcontracted with BloomSouth for the installation of carpet tile and related materials throughout the building. This work included testing and cleaning the concrete floor. BloomSouth itself subcontracted out the installation to two other companies. One was charged with supplying the carpet and the other with installing it.
After the work was completed, however, BFDS employees began to complain that their offices smelled like a "locker room" and alleged headaches or other ill effects. In an effort to eliminate the source of the odors, one of BloomSouth's subcontractors scraped up the original carpet adhesive and re-carpeted the floor. That effort failed to correct the problem, however, and the problem spread to other areas of the building.
After further voluntary efforts to remediate the problem failed, BFDS ultimately hired other contractors to repair the problem, at a cost of $1,417,500 and brought suit against Suffolk Construction and BloomSouth. The Complaint alleged that 1) 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 (2) BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor. Money was spent on, among other things, "the installation of carbon air filters to the ventilation system in the building," and "removal of the existing carpet tile and adhesives, bead-blasting of the concrete floor and replacement of the carpet tile and related materials."
The defendants both sought coverage under a CGL policy that Essex had issued to BloomSouth. Essex disclaimed any duty to defend, citing the absence of property damage and the applicability of its “business risk” exclusions. A U.S. District Court in Boston agreed. BloomSouth appealed.
As a preliminary matter, the First Circuit declared that the suit against BloomSouth sought recovery for "property damage." The First Circuit ruled that the resulting “locker room” smell had resulted in physical injury to tangible property, rejecting the insurer’s contention that “property damage” required tangible injury to the physical structure itself. The court also concluded that “bead blasting” to the concrete floor to eradicate the carpeting had resulted in physical injury to the concrete substrate despite the insurer’s argument that the bead blasting was part of the replacement process for the defective carpet.
Having found “property damage,” the First Circuit further concluded that Essex had failed to establish that these claims were subject to the business risk exclusions in its policy. To begin with, the court declared that its finding of physical injury to tangible property precluded the application of the “impaired property” exclusion apart from the fact that it was not clear that the property in question could be restored to use merely by repairing, replacing, adjusting or removing its product or work.
For similar reasons, the court held that the “your product” exclusion did not apply since there were allegations of property damage beyond the carpeting installed by the insured. The court ruled that the preexisting building structures, including the concrete sub-floor over which the carpet had been installed, were “real property” and thus excluded from the definition of “product” in Exclusion K. The First Circuit declared that the lower court’s conclusion that the sub-floor had become the insured’s product “stretches too far the contours of what an insured might reasonably understand.”
There is much to be concerned about here. Outside the context of asbestos, few courts in the past have found that mere unhealthful conditions inside a building suffice to constitute “property damage” under liability policies. The pastiche of out of state cases and first party case law relied on by the First Circuit may now yield a road map that insureds will follow to find coverage for “sick building” claims or other cases where there has been a loss of functionality of the plaintiff’s property but not enough to satisfy a “loss of use” requirement.
This idea of "loss of functionality" as property damage is emerging as a synthesis of first and third party insurance law that is now appearing in both types of cases. For a first party example of what I'm talking about, have a look at the New Jersey Appellate Division's opinion this week in Wakefern v. Liberty Mutual, declaring that food spoilage losses after the 2003 electrical blackout resulted from "physical damage" to the electrical grid even though the grid itself had merely shut down due to a cascade of failures and not due to physical injury to the system itself. The court ruled that such nuanced distinctions between physical damage and a loss of functionality were beyond the reasonable expectations or understanding of supermarkets that had paid good money for coverage and expected to be reimbused for spoiled lettuce.
The BloomSouth opinion also echoes the growing influence of the “reasonable expectations” doctrine in Massachusetts insurance jurisprudence. It appears that the cumulative weight of a decade’s work of dicta and footnotes has now embedded this principle as an accepted fixture of our case law even in the absence of a single Supreme Judicial Court case that has squarely considered and adopted it as a rule of contract interpretation.
