National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

The coverage dispute arose out of a pro se law suit brought by Carol Murphy, a local farmer who alleged that  dozens of state officials and other defendants (80 in all) had conspired to take away her animals by pursuing animal cruelty charges against her for failing to provide them with proper food, care and shelter.  Among the defendants was Dr. Robert Patterson,  who had examined the animals and testified about their condition at an Animal Possession hearing.

Patterson tendered the defense of Murphy's suit to Centennial, which had insured him under a Veterinarian's Professional Liability policy.  Centennial denied that testifying at a public hearing involved rendering "veterinary professional services" and commenced an action for declaratory relief in federal court.  Although Murphy's suit was soon thereafter dismissed with prejudice, Centennial's efforts to withdraw its coverage litigation as moot were denied by the U.S. District Court were denied owing to the fact that Dr. Patterson had incurred the cost of engaging his own defense counsel.  In 2006, the District Court ruled that Centennial owed coverage for the insured's defense costs ($121--hey, this is Maine) and DJ fees ($3036).  Centennial appealed.

On April 23, 2009, the First Circuit issued its opinion, affirming the lower court's finding of coverage.  Crucially, the court found that the conduct giving rise to Patterson's claimed liability was not just his public testimony but the examination and care for Murphy's animals that formed the basis for his testimony.  As a result, the court found that these actions involved his special training as a veterinarian and were properly the subject of coverage for "professional veterinary services” within the policy’s definition of a covered “veterinary incident.”

The court also observed that the policy would be triggered by the underlying complaint’s allegation that Dr. Patterson had committed libel and slander despite the fact that such allegations were apparently limited to various media outlets that were named as co-defendants in the Complaint. Furthermore, despite the fact that Centennial suggested that any covered libel or slander must occur in connection with the furnishing of professional veterinary services, the First Circuit observed that such events were unlikely to occur in the course of treating an animal and must therefore reasonably be given broader applicability to testimony that the insured was giving in the course of his special expertise and training as a veterinarian.

Finally, despite the fact that the underlying suit alleged that the statements were made with fraudulent intent, the First Circuit held that an exclusion to the policy for making knowingly false statements did not apply since allegations in a pro se Complaint characterizing Dr. Patterson’s actions as “criminal” for which he was “guilty” did not necessarily mean what they stated and might result in an ultimate determination that the insured was merely negligent.

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.
 

National Union denied coverage under an express exclusion for any claim “… alleging fraud, dishonesty, or criminal acts or omissions …”. New Fed responded with an argument that in order to rely on the fraud exclusion, the insurer must first prove that the insured intended to harm the injured party. The First Circuit rejected this argument, finding there was no legal basis for New Fed’s proposed rule and, moreover, found that even if there were such a requirement “it would likely be satisfied here” because the broker who falsified the credit reports “had to know that a false credit report was likely to lead to overpayment and loss.” The final conclusion: New Fed’s claim fit squarely within the fraud and dishonesty exclusion, so the insurer had no duty to defend or indemnify New Fed.
 

In 2006, U.S. District Court Judge Rya Zobel (who some will recall as the author of the original “manifestation” trigger opinion in Eagle Picher) ruled that Century Indemnity could be liable for the insured’s entire cost of cleaning up a polluted MGP site near Boston Harbor despite the fact that its policies had only been in effect for a brief period of the overall time when pollution occurred. The crucial issue presented by the Boston Gas appeal is whether the First Circuit will take an independent view of “pro rata” versus “all sums” or will feel constrained to affirm Judge Zobel in light of rulings of the Massachusetts Appeal Court in Rubenstein v. Royal Ins. Co., 44 Mass. App. Ct. 842, 694 N.E.2d 381 (1998), review denied (Mass. 1999) and Chicago Bridge & Iron Co. v. Certain Underwriters at Lloyds, 59 Mass. App. Ct. 646, 797 N.E.2d 424 (2003), further appellate review denied (Mass. 2004) adopting a theory of “joint and several” liability.

Massachusetts is among those jurisdictions whose highest state court has never addressed the issue of allocation. This is not for lack of opportunity. In both Chicago Bridge and Rubenstein, the insurers sought further appellate review but their requests were denied by the Supreme Judicial Court.  The court’s inaction on issues of allocation may reflect the fact that it is perfectly content with the analysis adopted by the Appeals Court.   Alternatively, as insurers might prefer, it may reflect the court’s view that neither case presented an appropriate vehicle decide this momentous issue,  given the inadequate factual record in Rubenstein and the peculiar issues of Illinois law and London Market insurance wordings considered in Chicago Bridge.

The key question presented by Boston Gas will be whether the panel feels constrained to follow the rulings of the Appeals Court or is free to make its own determinations with respect to this issue. In the complex dance between state and federal courts considering insurance issues, federal courts are bound to follow state law but are not necessarily bound to adopt the rulings of intermediate appellate courts if there are sufficient Erie “data points” that suggest to the federal court’s satisfaction that the state’s highest court would take a different view. Thus it was that between 1985 and 1990, Massachusetts insurers suffered with the Appeals Court’s declaration in Shapiro v. Public Service Mutual that pollution exclusions were ambiguous, a situation that remained unrectified until the Supreme Judicial Court weighed in in 1990 with Hazen Paper and Belleville.

On the other hand, recent coverage history is replete with cases in which state and federal courts took contradictory views of the same issues. Illinois, in particular, has been a problem in this regard as the Illinois Supreme Court and the Seventh Circuit took opposite views of the trigger of coverage in the Eljer sequence of cases. More recently, the Illinois Supreme Court concluded that TCPA claims trigger Coverage B under the CGL policy a few months after the Seventh Circuit declared that they obviously did not.

Although the First Circuit and Massachusetts courts have enjoyed a more cordial relationship over the years than other state and federal courts, it remains to be seen whether the First Circuit, even if it decides to ignore Rubenstein and Chicago Bridge, would adopt the insurer’s position in this case. Much may depend on which Judge writes the opinion. The senior jurist on the panel, Leonard Boudin, described the policyholder’s “joint and several” position as “crazy” although it also appeared that he had not yet read Chicago Bridge or Rubenstein. On the other hand, Judge Selya seemed entirely comfortable with adopting a theory of “joint and several” liability insofar as the insurer could not show that the injury occurring during its policy was somehow divisible from the overall environmental loss giving rise to the claims against Boston Gas. The third jurist, Judge Gelpi, who was only appointed to the U.S. District Court in Puerto Rico in 2006 and manifested a clear lack of understanding concerning Erie principles, gave no indication as to his views on the substantive coverage issues.

Apart from allocation, Boston Gas may also yield an interesting ruling concerning the effect of “owned property” exclusions in such cases. Massachusetts courts, like many states, ignore the owned property exclusion insofar as work is undertaken on the insured’s property to prevent or remediate off-site contamination. In this case, the U.S. District Court essentially gave an “all or nothing” instruction to the jury with the result that, having found that some of the work was necessary to remediate off-site property, the jury refused to limit the insured’s award in any respect for certain tasks that solely concerned property damage on the insured’s property. The issue on appeal, therefore, is whether even in cases where there is off-site damage, some portion of indemnity should be subject to the exclusion for tasks that are solely attributable to on-site contamination and in no way related to the prevention or remediation of off-site pollution.