First Circuit Sides with Insurers in Construction Defect Suit

On November 8, 2024, the First Circuit Court of Appeals issued its decision in Admiral Insurance Co. et al. v. Tocci Building Corp. et al., No. 22-1462, 120 F.4th 933 (1st Cir. 2024). In its opinion, the First Circuit held that, under Massachusetts law, an exception to a “property damage” exclusion in a general contractor’s liability policy precluded coverage for damage to non-defective work as a result of subcontractors’ own separate, defective work on a portion of the project. The Court affirmed the district court’s decision, “albeit for different reasons,” but declined to predict how the Massachusetts Supreme Judicial Court would rule on the question.

Facts

From 2013 to 2016, Tocci Building Corporation (“Tocci”), the insured, was the construction manager on a residential construction project owned by Toll JM EB Residential Urban Renewal LLC (“Toll”). In March 2016, while the project was still under construction, Toll terminated Tocci after discovering multiple defects. Toll subsequently sued Tocci for breach of contract and related claims related to (1) damage to sheetrock resulting from faulty roof work; (2) mold for inadequate sheathing and water damage to the building; and (3) damage to the concrete slab, wood framing, and underground pipes due to soil settlement from improper backfill and soil compaction.

Tocci sought indemnity and defense from its commercial general liability insurer, Admiral Insurance Company (“Admiral”). Under the terms of the applicable policy, Admiral was legally obligated to cover Tocci’s “damages because of…‘property damage’” caused by an “occurrence.” The policy defined “occurrence” as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Although the policy extended the definition of “your work” to include the work of Tocci’s subcontractors, it contained “Damage to Property” exclusions for “‘property damage’ included in the ‘products-completed operations hazard,’” as defined by the policy.

Admiral refused to indemnify or defend Tocci and eventually brought suit, alleging: (1) breach of contract; (2) breach of the obligation of good faith and fair dealing; (3) declaratory judgment, for an order that Toll lawfully terminated Tocci for default of its obligations; (4) alter ego liability; and (5) fraud in the inducement. Although the complaint did not allege negligence or explicitly seek damages based on Tocci damaging property, it did allege instances of defective work leading to property damage. The excess insurers, Starr Indemnity & Liability Co. and Great American Assurance Co., intervened in the action.

Admiral sought summary judgment, which the district court granted. Applying Massachusetts law, the district court found that Admiral had no duty to defend or indemnify Tocci because the damage alleged did not qualify as “property damage” within the policy definition. Tocci appealed.

Analysis

In affirming the district court’s ruling, the First Circuit noted that the Massachusetts Supreme Judicial Court (“SJC”) has not expressly addressed the issue of whether a general contractor’s CGL policy covers damage to non-defective work resulting from defective work by subcontractors. Noting that state courts addressing the issue have come to varying conclusions, the Court declined to predict how the SJC would rule on the issue.

Instead of predicting the SJC’s position, the First Circuit focused on the policy exclusions, including the “Damage to Property” exclusion which provided that there was no coverage for “property damage” to:

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations; or (6) That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.

The policy further defined “your work,” in part, as “[w]ork or operations performed by you or on your behalf[,]” which extended to the work of Tocci’s subcontractors. However, the Court noted that under a policy exception excluded “‘property damage’ included in the ‘products-completed operations hazard.’” In turn, the policy defined “products-completed operations hazard” to include “all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ except … (2) [w]ork that has not yet been completed or abandoned.”

The amended complaint expressly alleged damage to sheetrock, mold, wood framing, damage to a concrete slab, and underground pipes, all resulting from defective work by Tocci’s subcontractors. The question was whether this damage qualified as “property damage” under the policy. Based on the above provisions, the First Circuit found that the express exclusion negated any coverage under the policy.

            In reaching this conclusion, the First Circuit relied on Jet Line Services, Inc. v. American Employers Ins. Co., 404 Mass. 706 (1989), which involved a claim for damage to a large underground tank that exploded, causing damage. In that case, the SJC considered whether the CGL policy in question covered the damage, where the policy expressly excluded coverage for damage to that particular part of any property…upon which operations are being performed” by the insured “at the time of the property damage arising out of such operations. In that case, the SJC rejected Jet Line’s argument that this provision should only apply to the portion of a large underground tank because that was the only portion where the employees were actively working at the time of the explosion.

Although Jet Line was not directly on point to the instant case, the First Circuit found the SJC’s broad interpretation of the policy exclusion at issue to be directly relevant. According to the Court, because Tocci was the general contractor on the entire Toll project, the complaint alleging work “incorrectly performed” referred to the entire project, which Tocci supervised.

The First Circuit also pointed to the SJC’s previous comments on the purpose and scope of CGL policies. In those cases, the SJC adopted the “business risk doctrine,” explaining that CGL policies applied to tort liability for physical damages, not contractual damages. The Tocci court noted, “[w]e concur with that approach here.”

The First Circuit further found that the policy exception for exclusion for completed operations claims did not apply because that applied only if the project was “completed and abandoned” before the damage occurred. Because Tocci was terminated during construction, it did not complete the project, and it could not show that this exception to exclusion applied.

In refusing to predict the SJC’s position, the First Circuit instead decided to “sidestep this issue by focusing on the exclusions[.]” The Court thus affirmed the district court’s ruling denying Tocci coverage.