A recent First Circuit decision, Admiral Insurance Company v. Tocci Building Corporation, No.22-1462 (1st, Cir. 2024), clarified the limits of commercial general liability (CGL) coverage. The core issue revolved around whether Tocci's commercial general liability (CGL) policy required Admiral to defend against claims of property damage caused by subcontractor errors within a larger construction project. The court examined whether damage to non-defective parts of a project, resulting from faulty subcontractor work, qualified as "property damage" caused by an "occurrence" under Massachusetts law. Although recognizing evolving interpretations, the court upheld the district court's decision that Admiral was not obligated to defend or indemnify in this case.
Background Facts
Toll JM EB Residential Urban Renewal LLC (Toll) retained Tocci Residential LLC as the construction manager for an apartment complex project. Tocci was later terminated due to poor work quality and delays. Toll sued Tocci in state court, claiming that Tocci's mismanagement caused additional costs and delays to the project. Tocci moved the case to federal court, where Toll amended its complaint, alleging breach of contract, breach of good faith, and fraud, among other claims. While the complaint did not explicitly allege negligence or property damage, it detailed instances of defective work that caused property damage including damage to sheetrock, mold formation, and damage to structural elements due to improper backfill.
Tocci sought defense and indemnity from Admiral Insurance under its commercial general liability policy, which covered property damage caused by an occurrence. After reviewing the case, Admiral denied coverage, stating the lawsuit did not involve property damage caused by an occurrence and that coverage exclusions applied. Admiral filed for a declaratory judgment to confirm it had no duty to defend or indemnify Tocci. Both parties sought partial summary judgment on Admiral's duty to defend.
In March 2022, the District Court ruled in favor of Admiral, finding it had no duty to defend Tocci because the alleged damages involved only Tocci's own project and did not meet the policy's property damage requirement. The court also ruled that the faulty workmanship did not qualify as an occurrence, as it lacked the accidental nature required for coverage.
Under Massachusetts Law Does a General Contractor's CGL Policy Cover Damages to Non-Defective Work Caused by Defective Work by Subcontractors?
The central question in this case is whether, under Massachusetts law, a general contractor's commercial general liability (CGL) policy covered damages for non-defective work due to defective work performed by subcontractors. Tocci, the general contractor, does not argue that the policy should cover the cost of replacing defective work itself, but rather seeks defense and indemnification from the insurance company in the suit levied against them by Toll. The coverage analysis has three steps, each with alternating burdens of proof:
- The insured must first show that the alleged damages fall within the scope of the CGL policy's coverage.
- If coverage is established, the insurer must demonstrate that exclusions apply.
- If exclusions apply, the insured must prove that an exception to the exclusion applies. John Beaudette, Inc. v. Sentry Ins. A Mut. Co., 94 F. Supp. 2d 77, 134-35 (D. Mass. 1999).
Here the district court stopped at the first step, finding that the subcontractor's faulty work did not qualify as "property damage caused by an occurrence." The court relied on the general purpose of CGL policies, which is to cover tort liability rather than contractual obligations. López & Medina Corp. v. Marsh USA, Inc., 667 F.3d 58, 67-69 (1st Cir. 2012). Since the damage was within the scope of Tocci's contract, the court determined that it did not meet the policy's definition of "property damage."
Additionally, the court found that faulty workmanship does not constitute an occurrence under the CGL policy. Am. Home Assur. Co. v. AGM Marine Contractors, Inc., 379 F. Supp. 2d 134, 136 (D. Mass. 2005). The court explained that faulty workmanship is a foreseeable business risk, not a fortuitous, insurable event. Id. As Tocci was responsible for the entire project as a general contractor, the court held that damage to non-defective work caused by defective subcontractor work was part of Tocci's own work product and not a circumstance that triggered Admiral's duty to defend and indemnify Tocci. While some prior court decisions align with the district court's conclusion that such damage is not covered, the appellate court hesitated to predict how the Massachusetts Supreme Judicial Court would rule, given that other state supreme courts have increasingly recognized this type of construction defects as "occurrences" covered by CGL policies.
The Policy Exclusion
The court carefully examined the property damage exclusion in the policy. Admiral argued that the exclusion in the policy denied coverage for "property damage to 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." The exclusion included property that must be restored, repaired, or replaced due to defective work.
Tocci argued that an exception to the exclusion applied if the property damage arose from work that has been completed. It asserted that this exception was applicable to the situation at hand because it sought coverage only for the resultant property damage, not for the cost of repairing or replacing the work itself. However, the court disagreed. Based on the decision in Jetline Services v. American Employers Insurance Co., 404 Ma. 706 (1989), the court reasoned that the phrase "particular part of any property" refers to the entire project for which, Tocci, as the general contractor, was responsible.
Since Tocci oversaw the entire project and managed subcontractors, the court held that the entire project fell under the exclusion. Therefore, any damage within the project, even to non-defective parts, was excluded from coverage because it arose from work done under Tocci's supervision across the entire project.
The court's decision was supported by the Massachusetts Supreme Judicial Court's (SJC) general interpretation of CGL policies as covering tort liability for physical damage to others, rather than contractual liability for economic losses due to unsatisfactory work. In Commerce Insurance Co. v. Betty Caplette Builders, Inc., 420 Mass. 87, 647 N.E.2d 1211 (Mass. 1995) , the SJC emphasized that CGL policies are meant to cover third-party damage, not defects in the insured's own work.
Although the SJC hasn't ruled directly on this issue, a Massachusetts lower court has held that property damage exclusions apply to unintended damage within a project from faulty workmanship, consistent with Commerce Insurance v. Caplette's principles. Thus, the court concluded that Admiral met its burden to show that all damages alleged in the Toll lawsuit fall within the exclusion, which excludes coverage for property damage related to work performed under the policyholder's contract.
Exception to the Exclusion
The next issue was whether Tocci could demonstrate an exception to the exclusion, specifically whether the project was completed or abandoned prior to the damage, which would fall under the "products-completed-operations-hazard" and allow coverage. Since Tocci was terminated before completing the work, the court found no grounds to consider it "abandoned" under the policy.
The court clarified that this interpretation of the exclusion doesn't mean a general contractor's CGL policy could never cover damages to non-defective work from a subcontractor's defective work. If the SJC later interprets "property damage caused by an occurrence" to include such damage, a general contractor might receive coverage if the work was completed or abandoned. The lower court's decision was affirmed.
Conclusion
This decision reinforces the boundaries of CGL policy coverage for contractors, particularly regarding claims tied to defective workmanship that affects the contractor's own project. By affirming Admiral's lack of duty to defend, the First Circuit distinguished between covered third-party property damage and excluded contractual liabilities for defective work. This case serves as an essential precedent for contractors and insurers in Massachusetts, emphasizing that coverage under CGL policies may not extend to damages arising from a contractor's own work, even when involving subcontractor errors.