Summary
holding that faulty workmanship does not constitute property damage
Summary of this case from Fontaine Bros., Inc. v. Acadia Ins. Co.Opinion
Civil Action No. 01-10461-DPW
September 10, 2002
MEMORANDUM AND ORDER
Plaintiff Amtrol, Inc. ("Amtrol") brings this diversity action against its insurers, defendants Tudor Insurance Co. ("Tudor") and Employer's Insurance of Wausau ("Wausau"), alleging breach of the respective insurance contracts (count I), breach of the implied covenant of good faith and fair dealing (count II), violations of Mass. Gen. Laws ch. 93A §§ 9, 11 (counts III and IV), and insurance bad faith (count V), in addition to its request for a declaratory judgment against Tudor (count VI).
Amtrol's allegations are based on the refusal of the defendants to reimburse it for its costs of defense and settlement with respect to a class action lawsuit brought by a class of Massachusetts purchasers and installers of Amtrol Hot Water Makers, as well as the costs of repair and replacement of defective products that experienced leaks. Tudor has filed six counterclaims seeking declaratory judgments regarding Tudor's duties to defend and/or indemnify Amtrol.
Before me are cross motions for summary judgment. Plaintiff moves for summary judgment on its breach of contract (count I) and Mass. Gen. Laws ch. 93A (counts III and IV) claims. Tudor moves for summary judgment with respect to coverage under the policy (count I) and on its counterclaims III and V. Wausau moves for summary judgment with respect to the breach of contract claim (count I).
Tudor's third counterclaim seeks a declaration that Tudor is not required to reimburse Amtrol for the amounts paid in settlement of the underlying action. Tudor's fifth counterclaim seeks a declaration that it is not required to reimburse Amtrol for its costs claimed for repair and replacement of defective units.
Although Wausau styles its motion as a motion for summary judgment, rather than for partial summary judgment, it does not mention any count other than the first. Therefore, I treat it as a motion for partial summary judgment with respect to count I.
I. BACKGROUND
Plaintiff Amtrol, a Rhode Island corporation with its principal place of business in West Warwick, RI, manufactures and sells residential water heaters under the brand name Hot Water Maker ("HWM"). Defendants Tudor and Wausau, incorporated in New Hampshire and Wisconsin respectively, are both insurance companies who have issued commercial general liability ("CGL") policies to Amtrol covering different periods at issue in this action.A. The Policies
Wausau issued Amtrol a CGL policy numbered 1526-06-060288, effective November 8, 1995 through December 23, 1996 ("the Wausau policy"). Tudor issued Amtrol two separate CGL policies. The first, numbered GLO0001117, was effective December 23, 1996 — December 23, 1997; the second, number GLO0001436, was effective December 23, 1997 — December 23, 1999 ("the Tudor policies").
All three policies are standard form CGL policies written on an occurrence basis and are substantially similar in all relevant respects. The policies provide coverage for liability incurred "because of 'bodily injury' or 'property damage.'"Wausau policy, § I.A.1.a; Tudor policies, § I.A.1.a (collectively the "Policies"). Coverage applies to "property damage" "only if (1) the . . . 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory;' and 2) the . . . 'property damage' occurs during the policy period." Policies, § I.A.I.b. "Occurrence" is defined by the standard form policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Wausau policy, § V.9; Tudor policies, § V.11. Property damage is defined as "a. Physical injury to tangible property, including all resulting loss of use of that property. . . . or b. Loss of use of tangible property that is not physically injured." Wausau Policy, § V.12; Tudor policies, § V.15.
There are particular differences with respect to level of coverage, self-insured retention levels, etc. I will discuss those differences as they become relevant.
The Bodily Injury and Property Damage Liability coverage portion of the Wausau policy provides in relevant part:
I. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies . . . But:
(1) The amount we will pay for damages is limited as described in LIMITS OF INSURANCE (SECTION III): and
b. This insurance applies to 'bodily injury' and 'property damage' only if:
(1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' . . . and
(2) The 'bodily injury' or property damage' occurs during the policy period.
Wausau policy, § I, Coverage A.I.
The same coverage section contains a list of enumerated exclusions. Among those that defendants believe to be relevant to the instant case are the business risk exclusions of product damage and impaired property (Exclusions k and m, receptively) and the voluntary withdrawal or sistership exclusion (Exclusion n). Wausau and Tudor policies, § I.A.2.
The business risk exclusions provide: This insurance does not apply to:
k. 'Property damage' to 'your product' arising out of it, or any part of it,
Exclusion n provides: This insurance does not apply to:
n. Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement adjustment, removal or disposal of:
a. 'Your product';
b. 'Your work'; or
c. 'Impaired property';
If such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.
Wausau Policy, § I.A.2.n.
The Tudor policies include a self-insured retention endorsement, by which the insured is responsible for the first portion of liability up to a certain amount per occurrence and the insurance policy covers liability in excess of that amount per occurrence up to the policy's limit of $1,000,000 per occurrence. Tudor policy, Self-Insured Retention Endorsement. The self-insurance retention amount was $100,000 in the first Tudor policy and $50,000 in the second. Id.
B. The Underlying Action
From approximately September 1995 through August 1996, Amtrol implemented design features and manufacturing processes for certain HWMs that it manufactured (the "Affected Units") that it had not employed previously nor did subsequently. In mid-1996, Amtrol began receiving complaints, a disproportionate number from individuals in Massachusetts, that certain of the Affected Units had developed leaks in various locations in their coil assemblies causing hot water to leak from the units. By the second half of 1996, Amtrol recognized a relationship between the leaks and the design features or manufacturing processes it had employed, and had already begun to modify those design features and manufacturing processes.
During this period, Amtrol provided a written warranty to all purchasers of its HWMs providing inter alia that the HWM tank assembly "shall be free of leaks during normal use and service for" at least five years. Pursuant to the warranty, Amtrol undertook to repair and/or replace the relevant coil assembly or the entire HWM in the affected units in which leaks had developed. According to Amtrol's records, repair and replacement costs were incurred during each of the time periods covered by each of the policies. Amtrol reports repair or replacement of hundreds of faulty units.
The waiver provides two different time periods for the waiver. For residential owners, the HWM is warranted for as long as the original purchaser owns the home in which the HWM is installed. If the purchaser is a business or the HWM is used for a commercial, industrial, or residential rental property application, the warranty lasts for five years.
On February 16, 1999, Amtrol was served with a verified class action complaint in a case filed in Essex County Superior Court, entitled Ken's Oil Burner Service, Inc. et. al. v. Amtrol, Inc., No. 99-0265 (the "Underlying Action"). The complaint, brought by a class of Massachusetts purchasers and installers of Amtrol HWMs, alleged that Amtrol provided "defective" and "dangerous" products that had caused property damage and posed a risk of personal injury. Because a TRO hearing was scheduled for February 18, 1999 Amtrol promptly retained Foley, Hoag Eliot LLP ("Foley Hoag") to defend the action.
After being notified of the claim by Amtrol, Wausau and Tudor agreed to defend under numerous reservations of rights to disclaim coverage. In a letter to Amtrol dated March 9, 1999, Wausau cited exclusions k and n as applicable and also disclaimed coverage of Counts IV through VII alleging violations of Massachusetts Consumer Protection Act (Mass. Gen. Laws chs. 93A, 231) relief assertedly because those counts entailed allegations of intentional acts.
In a letter dated May 19, 1999, Tudor agreed to continued representation of Amtrol by Foley Hoag under the condition that it would reimburse Amtrol at a blended rate of $130/hr. with Amtrol responsible for the difference. Tudor also disclaimed any costs of representation incurred prior to May 3, the date Tudor claims it received notification of the claim. Finally, Tudor reserved its rights under several exclusions including: A (expected or intended injury), B (contractual liability), K (damage to your product), L (damage to your work), M (damage to impaired property or property not physically injured), N (recall of products), and R (punitive or exemplary damages). On that basis it completely disclaimed coverage of counts IV through VII as intentional acts, coverage of breach of warranty based on exclusion K, coverage of a recall based on exclusion N, and treble damages under exclusion R. (Id.)
Amtrol contends that no such agreement was made and that Mike Daigle, the consultant who allegedly made the agreement on behalf of Amtrol, was not authorized to act on behalf of Amtrol.
Amtrol contends that it notified AON, the insurance broker through which Amtrol purchased the disputed policies, of the claim and instructed it to notify all relevant carriers by letter dated February 17, 1999. See Geiger letter, 1/25/00, p. 2 (Stips. Ex. 10); Amtrol letter 2/17/99 (Stips. Ex. 7), Pickrel Aff. ¶¶ (Stips. Ex. 3).
Amtrol filed an answer to the complaint on October 8, 1999. The parties to the Ken's Oil action reached a settlement which is memorialized in a confidential settlement agreement and final release. After completion of a stipulation of dismissal, the parties signed a letter of agreement dated March 27, 2000, thus finalizing the terms of the Settlement Agreement.
Counsel for Amtrol has made repeated demands to defendants Wausau and Tudor for indemnification and defense costs in connection with the underlying action. Defendants maintain that the Policies do not cover Amtrol's expenses to remedy the leaking units. To date, neither Wausau nor Tudor has paid Amtrol any sums of money in connection with its claims under the Policies nor have they reimbursed Amtrol for defense costs incurred in the underlying action. On December 12, 2000, Amtrol's counsel sent Wausau and Tudor formal demand letters pursuant to Mass. Gen. Laws ch. 93A, § 9 that set forth the legal and factual basis for the claims and notifying them of its allegation of unfair and deceptive settlement practices under Mass. Gen. Laws ch. 176D and 93A. Wausau and Tudor both replied to Amtrol asserting that they continued to dispute the basis for the claim and for the alleged 93A violation.
In early 2001, Tudor filed a declaratory judgment action against Amtrol and Wausau in the District of Rhode Island seeking a declaration of no-coverage for the underlying claims. That action was transferred to me after the Rhode Island court held it improperly filed, and I dismissed it as duplicative of the instant action.
II. STANDARD OF REVIEW
Summary judgment is appropriate when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). All facts are to be viewed, and all inferences drawn, in the light most favorable to the nonmoving party. Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997). On cross-motions for summary judgment, "the court must consider each motion separately, drawing inferences against each movant in turn. . . . Summary judgment is appropriate when there is no dispute as to any material fact and only questions of law remain . . ." Id. at 6 (citations omitted).
The interpretation of an insurance policy is normally a question of law for the court. Ruggiero Ambulance Service, Inc. v. Nat'l Grange Ins. Co., 430 Mass. 794, 797 (2000). When the relevant facts upon which coverage of a claim is premised are not in dispute, the application of the insurance policy to those facts is also a question of law that can be resolved on summary judgment. Liberty Mutual Ins. Co. v. Metropolitan Life Ins. Co., 260 F.3d 54, 61 (1st Cir. 2001).
III. CHOICE OF LAW
As a preliminary issue, I must determine whether there is a conflict between the substantive law of the interested jurisdictions. Millipore Corp. v. Travelers Indemnity Co., 115 F.3d 21, 29 (1st Cir. 1997). Tudor contends that there exists a conflict between Rhode Island and Massachusetts law with respect to the point in the chain of events at which causing property damage triggers coverage under the policy. Tudor argues that Rhode Island law should be controlling. Amtrol maintains that the conflict is irrelevant on the facts of the case, but that if a choice must be made, Massachusetts law should govern.
There does appear to be a conflict between Rhode Island and Massachusetts law over which trigger of coverage theory is applicable on the facts. The Rhode Island Supreme court, in answer to a certified question posed by the First Circuit concerning a particular policy, adopted the manifestation theory of trigger. CPC Int'l, Inc. v. Northbrook Excess Surplus Ins. Co., 668 A.2d 647, 649 (R.I. 1995). "In other words, there can be no occurrence under the policy without property damage that becomes apparent during the policy period, and property loss and compensable damages cannot be assessed unless the property damage is discovered or manifests itself." Id. Massachusetts, by contrast, has rejected the manifestation theory in the context of an environmental contamination case, concluding "that coverage may be triggered before discovery or manifestation of the damage." Trustees of Tufts Univ. v. Comm. Union Ins. Co., 415 Mass. 844, 853-54 (1993). But the SJC has refrained from electing a single trigger of coverage theory, noting that "different triggers may be applied to different types of injuries and property damage." Id. at 855.
Amtrol argues that the Rhode Island "manifestation" cases do not necessarily establish a universal rule because of language in the policies defining occurrence as an event "which results, during the policy period, in personal injury [or] property damage." Employers Mut. Cas. Co. v. PIC Contractors, Inc., 24 F. Supp. d 212, 216 (D.R.I. 1998) (quoting CPC Int'l, 668 A.2d at 649). While the policies at issue here do not so define "occurrence," they do contain the same temporal limitation elsewhere in the scope of coverage. See Tudor Policy, I.A.1.b. (Stips. Ex. 1A) ("[t]his insurance applies to "bodily injury" and "property damage' only if . . . the 'bodily injury' or 'property damage' occurs during the policy period."). The court in Employers Mut. recognized that, although the parties did not make the argument, the manifestation rule may still apply to when the injury occurred, even if the occurrence is defined differently. Based on the language in the Tudor and Wausau policies, I find that Rhode Island law would look to when the property damage "manifests itself or is discovered or in the exercise of reasonable diligence is discoverable." CPC Int'l, 668 A.2d at 650).
For purposes of summary judgment, I find that the theoretical conflict between Rhode Island and Massachusetts law is inconsequential. Whether the relevant date on which the property damage occurred for purposes of policy coverage is measured by the manifestation theory or one of the three other major trigger theories identified by the SJC, there is likely little difference between the trigger date here under any of the potential theories. Unlike environmental contamination which can take years before the property damage is discovered, the leaks in question were easily discoverable, causing whatever property damage to occur within short order.
The SJC identified "the three most common 'trigger theories,'" apart from the manifestation trigger, as: "the exposure trigger (policies in effect during years claimant's property tortiously exposed to hazardous material triggered), the continuous (or multiple) trigger (property damage occurs during each year from the time of first hazardous exposure through manifestation), and the injury-in-fact (or actual injury) trigger (requires inquiry into when property damage actually occurred)." Trustees of Tufts Univ., 415 Mass. at 855 n. 9.
Moreover, Amtrol contends that all of the claims amount to a single occurrence, and therefore that the defendants are jointly and severally liable for the entire costs. Under plaintiff's theory, it only matters that some property damage occurred during each policy, thus triggering coverage of the entire claim by each defendant. Defendants do not dispute this theory.
Therefore, I find that there was a single occurrence based on the fact that all of the claims share a single common cause, i.e. faulty design and construction in the HWM leading to leaks from the coil assembly. See Colonial Gas Co. v. Aetna Cas Sur. Co., 823 F. Supp. 975, 983 (D.Mass. 1993). Because under each of the trigger theories, property damage in the form of water leakage occurred during each of the policy periods, coverage under each of the policies is potentially available. Therefore, the difference in trigger theories are irrelevant, and no conflict of law is presented. Accordingly, I will apply Massachusetts substantive law as the law of the forum.
IV. CONSTRUCTION OF POLICY
The heart of this dispute is over the meaning of "property damage" and the application of various exclusions to the costs incurred as a result of leaking HWMs. At issue is whether the policies provide coverage of the following costs: costs of settlement of underlying action, costs of repair and replacement of defective HWMs, costs of water damage to owners of property where HWMs were installed. I take up each of these issues within the respective sections on policy coverage below.
The initial burden lies with the insured to prove that the underlying facts state a claim for which the insurance policy provides coverage. Highlands Ins. Co. v. Aerovox Inc., 424 Mass. 226, 230 (1997). Once the insured has met this burden, the burden shifts to the insurer to establish that an exclusion of coverage applies. Id. In Massachusetts, exclusion provisions are strictly construed, with any ambiguity taken against the insurer. Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 282 (1997).
In construing an insurance contract, I utilize the normal rules of contract interpretation. Brasas Sporting Arms, Inc. v. American Enterprise Surplus Lines Ins. Co., 220 F.3d 1, 4 (1st Cir. 2000). I look first to the language of the policy, affording each term its ordinary and usual meaning. Hakim, 424 Mass. at 280. In so doing, I consider "what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.'" Id. at 282 (quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849 (1993)).
A. Direct Property Damage
Amtrol contends that the leakage of water from the HMWs itself constitutes property damage and therefore the cost of the repair and/or replacement of the leaking HMWs is covered as "those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." Policies, § 1.A.1.a. The insurers argue that the mere presence of water leaking from the HMWs, without more, cannot constitute property damage. All parties agree that water damage to third party property constitutes property damage and is covered under the policies.
The standard form policy defines property damage as "physical injury to tangible property." Policies, § V.15(a). The ordinary meaning of physical injury is a "harmful change in appearance, shape, composition, or some other physical dimension." Eljer Manuf. Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805, 808-09 (7th Cir. 1992) (J. Posner) (rejecting ordinary usage in favor of special contractual definition used "between sophisticated business entities"); Traveler's Ins. Co. v. Eljer Manuf., Inc., 197 Ill.2d 278, 304 (2001) (rejecting Judge Posner's interpretation in favor of ordinary meaning).
Amtrol argues that the unwanted presence of water within the home or building in which the HMW was installed is per se physically injurious. While Amtrol cites cases in which water damage in the form of rot or other damage to the home, its fixtures, and personal property is said to constitute property damage, see Eljer Manuf., 972 F.2d at 809; Traveler's Ins., 197 Ill.2d at 314, no case holds that the simple presence of water, absent other manifestation of injury, amounts to physical damage.
In fact, in Traveler's Ins. the Illinois Supreme Court specifically acknowledged the possibility that one could have a water leak without corresponding physical damage when it overruled Marathon Plastics, Inc. v. Int'l Ins. Co., 161 Ill. App.3d 452 (1987), 197 Ill.2d at 307-08.
The physical injury requirement in standard CGL policies exists to prevent recovery of mere economic loss. Id. at 312-14.
In other words, CGL policies
are intended to protect the insured from liability for injury or damage to the persons or property of others; they are not intended to pay the costs associated with repairing or replacing the insured's defective work and products, which are purely economic losses. Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond.
Id. at 314 (quoting Qualls v. Country Mut. Ins. Co., 123 Ill. App.3d 831, 833-34 (1984)).
Therefore, in order to meet the physical damage requirement, one must show that the water has somehow exacted a physical harm upon tangible property that required remediation or otherwise diminished the value of the property itself. Id. at 314. A leak that results in no damage beyond the mere presence of water that can be removed or evaporates without harm does not constitute property damage. Thus, in order to seek coverage of costs based on direct property damage, Amtrol must show evidence of water damage caused by water leaked from each HWM it replaced or repaired for which it seeks recovery. Amtrol has not produced such evidence for the vast majority of the HWMs for which it claims coverage and therefore is not entitled to summary judgment on its theory of direct property damage.
B. Mitigation Costs
Amtrol argues that even if no property damage had yet occurred at the time of repair, it repaired and/or replaced the leaking HWMs in order to mitigate existing water damage and to prevent more extensive future damage. Citing a host of environmental cases, Amtrol contends that efforts to mitigate further property damage are covered by the policy as obligations incurred "because of . . . 'property damage.'" Policies, § I.A.1.a.
Amtrol's argument is one of analogy. In the environmental cases, the question is when the costs of cleanup or other efforts to mitigate the impact of pollution on the property of the insured are covered by CGL policies and not excluded by the owned property exclusion. The answer provided by most courts, including those in Massachusetts, is that cleanup costs designed to remediate damage to third parties are fully covered even if the efforts occur exclusively on the insured's land. See, e.g., Chemical Leaman Tank Lines, Inc. v. Aetna Cas. Surety Co., 788 F. Supp. 846, 853 (D.N.J. 1992) ("the owned property exclusion does not apply to remedial measures . . . that are designed to correct injury or to prevent further injury to" third party property); Allstate Ins. Co. v. Quinn Construction Co., 713 F. Supp. 35, 40-1 (D.Mass. 1989), vacated as a result of settlement, 784 F. Supp. 927 (D.Mass. 1990) ("owned property" exclusion does not bar recovery of environmental cleanup costs when contamination poses a "demonstrated danger to the property of another"); Hakim, 424 Mass. at 279-80 ("owned property exclusion not relieve the insurer of all liability for response costs incurred by the cleanup of the policyholder's own property . . . if the cleanup is designed to remediate, to prevent or to abate further migration of contaminants to the off-site property."); Rubenstein v. Royal Ins. Co. of Amer., 44 Mass. App. Ct. 842, 854 (1998) (all cleanup costs designed to remediate contamination of third party property covered even if the contaminating substances are solely on the insured's land).
The adage "an ounce of prevention is worth a pound of cure" underlies the reasoning in these cases. See, e.g., Quinn, 713 F. Supp at 41. Because of the nature of groundwater contamination, it is generally only a matter of time before contaminants buried on the insured's property spread to surrounding properties. Therefore, coverage of environmental cleanup costs necessary to prevent or mitigate harm to third parties is consistent with the underlying purpose of CGL insurance to cover damage to other people's property. Id. Cleanup efforts directed solely at remediating harm to the insured's property are not, however, covered. Hakim, 424 Mass. at 282.
The environmental cases are merely analogous because the parties are generally agreed that the contamination constitutes property damage, but disagree over whether it amounts to "'property damage to property owned by the insured,'" which is excluded. See id. at 279 n. 6 (quoting policy). The Massachusetts Appeals Court has held that efforts to prevent property damage on others' property is recoverable even if no such damage has yet occurred. Rubenstein, 44 Mass. App. Ct. at 854. Thus, by analogy, Amtrol's repair or replacement of its leaking HWMs is covered because it was designed to prevent water (property) damage even though the damage had not yet occurred.
The SJC did not have to address this issue in Hakim because it was undisputed that the contamination had spread to waterways adjacent to the insured's property. 424 Mass. at 280 n. 8.
Defendants attack the analogy on several fronts. First, they argue that contexts unique to environmental damage reflect the strong public policy favoring prevention of environmental contamination and consequently are inapplicable in the instant setting. See Quinn Construction, 713 F. Supp. at 41 ("In the unique context of environmental contamination, where prevention can be far more economical than post-incident cure . . ."). The potential impact on surrounding property and the public at large justifies policies strongly promoting prompt remediation of environmental contamination, including strict liability rules under CERCLA and a narrow interpretation of the owned property exclusion in standard CGL policies. No such important policy concerns are at issue with respect to leaking boilers.
Amtrol contends that the policy construction does not depend on the source or type of property damage. It notes that the Maryland Court of Special Appeals, while acknowledging "the special context of environmental pollution cases," found the environmental cases applicable to a case involving water damage to third party property emanating from the insured's condominium. Aetna Ins. Co. v. Aaron, 112 Md. App. 472, 500 (1996).
In Aetna, however, the court did not hold that prevention efforts are covered regardless of whether damage had already affected the third party. Rather, noting W.M. Schlosser Co. v. Ins. Co. of N. Amer., a Maryland Court of Appeals decision holding that a CGL policy did not cover the costs expended purely to prevent imminent property damage where none had yet occurred, the Aetna court held that "as a predicate to coverage under a liability policy for remediation expenses incurred in connection with the insured's own property, . . . the insured's property must first have caused damage to property owned or controlled by a third party." 112 Md. App. at 490.
However, Aetna dealt with the owned property exclusion, rather than the definition of property damage itself. Absent the strong policy considerations found in environmental contamination cases, I am reluctant to expand the definition of property damage to include costs incurred solely for the prevention of property damage where none had yet occurred. See Aetna, 112 Md. App. at 40 (property damage is a prerequisite to coverage of remediation costs).
Furthermore, defendants argue that many of the environmental cases are distinguishable because the insurer was immediately notified of the claim and therefore was able to participate in the development of remediation efforts. See McNeilab, Inc. v. N. River Ins. Co., 645 F. Supp. 525, 554, n. 31 (distinguishing Leebov v. United States Fidelity Guar. Co., 401 Pa. 477 (1960)); Banker's Trust Co. v. Hartford Accident Indem. Co., 518 F. Supp. 371, 373 (S.D.N.Y. 1981), vacated on other grounds, 621 F. Supp. 685 (S.D.N.Y. 1981). Here, the defendants weren't notified of Amtrol's claim until February 1999, even though Amtrol began repairing and replacing leaking units in April 1996. This lack of notice highlights another distinction made by the defendants — that the costs of repair and replacement of faulty HWMs were incurred because of the plaintiff's warranty program and not directly because of an interest in mitigating property damage or reducing their liability. See McNeilab, 645 F. Supp. at 536. Although interpreting slightly different language, the McNeilab court found that the insured's intent behind a remedial action "is crucial" for determining coverage. Id. It is hard on these facts to say that Amtrol undertook the repair and/or replacement of leaking units because of its liability for property damage. Rather, Amtrol was under an independent duty under the warranty to repair or replace the unit if it leaked, regardless of whether the leak caused property damage.
The Policies provide that the insured "must see to it that [the insurer is] notified as soon as practicable of an 'occurrence' or an offense which may result in a 'claim.'" Policies, § IV.1. In order for an insurance company to avoid liability on the ground that the insured delayed in giving notice of a claim, the insurer must show that it was prejudiced by the delay. See Johnson Controls, Inc. v. Bowes, 381 Mass. 278, 282 (1980); Mass. Gen. Laws ch. 175, § 112.
The CGL policy at issue in McNeilab provided that the insurer "agrees . . . to indemnify the insured for all Sums which the shall be obligated by reason of the liability (a) imposed upon the insured by law, or (b) assumed under contract or agreement . . . for damages on account of — (i) Personal Injuries (ii) Property Damage (iii) Advertising Liability . . ." 645 F. Supp. at 528.
McNeilab involved coverage of recall expenses following the Tylenol deaths in Chicago in the early 1980s. The court found that the insured's motivation for recall was not mitigation of existing liability but rather prevention of future deaths and reassurance of the public. 645 F. Supp. at 536.
Of course, the fact that Amtrol had an independent warranty duty to repair the leaking HWMs does not mean that it did not also take these steps in the interest of reducing liability for water damage. Certainly, the prompt repair or replacement of the faulty HWMs limited Amtrol's exposure for water damage loss. However, the fact that Amtrol did not make a claim to its insurers for three years during which it was replacing faulty units under its warranty suggests that concern about liability for property damage was not Amtrol's principal motivation for action. See McNeilab, 645 F. Supp. at 536.
Finally, there is a competing interest in limiting the coverage under the CGL policy to its tort liability and not covering all of Amtrol's business risks. As discussed in part A, CGL policies are not designed to cover the costs of repair and replacement of poorly made products. Rather, CGL policies cover the potential liability of harm to property or person caused by a faulty product. See Traveler's Ins., 197 Ill.2d at 314. The vast majority of the damages incurred by Amtrol were for repair and replacement costs, a form of first party liability that CGL policies are not designed to cover. See id. While reimbursement for such first party liability may be acceptable when the product causes actual third party damage, it stretches the analogy too far to allow coverage based on the prevention of potential property damage caused by a leaking HWM. See McNeilab, 645 F. Supp. at 538 (quoting Alcorn Bank Trust Co. v. United States Fid. Guar. Co., 705 F.2d 128, 130, ("This distinction between first party losses and third party damage claims is generally recognized").
For these reasons, I find that the policy covers only the costs associated with HWMs for which actual water damage can be shown. Therefore, the costs of repairing HWMs for the purpose of preventing future water damage are not covered.
C. Exclusions
Defendants claim that the repair and replacement costs to the HWMs are excluded under several policy exclusions, including (k) product damage exclusion, (m) impaired property exclusion, and (n) sistership exclusion.
Exclusions such as k and m are known as "business risk" exclusions.
These exclusions are all premised on the theory that liability policies are not intended to provide protection against the insured's own faulty workmanship or product, which are normal risks associated with the conduct of the insured's business. Rather the policies are meant to afford coverage to other property caused by the insured's work or product.
United States Fidelity Guar. Co. v. Wilkin Insulation Co., 144 Ill.2d 64, 81-82 (1991).
Such "business risks" have been described as those "which management can should control or reduce to manageable proportions; risks which management cannot effectively avoid because of the nature of the business operations; and risks which relate to the repair or replacement of faulty work or products. These risks 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."
Dorchester Mut. Fire Ins. Co. v. First Kostas Corp., Inc., 49 Mass. App. Ct. 651, 654-55 (2000) (quoting Sterilite Corp. v. Continental Cas. Co., 17 Mass. App. Ct. 316, 321-33 (1983)). See Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 239-40 (1979) (discussing distinction between business risks and liability risks, noting the former are not covered by CGL policies).
I find that exclusion k applies to the costs of repair or replacement of the HWMs. Amtrol asserts that the leak in the HWM is not damage to the HWM because it can continue to perform its essential function of heating the water. However, I view this characterization as perverse. The leak stems from a failure of the HWM's coil system. This failure, which is the subject of a specific warranty, constitutes damage to the HWM, at least insofar as the HWM has lost value due to the leak, but more so because its leakage constitutes a failure to function properly. "Repairing or replacing faulty products is a business expense, ordinarily to be borne by the insured . . . ." Commerce Ins. Co. v. Betty Caplete Builders, Inc., 420 Mass. 87, 92 (1997). "The purpose of the [products] exclusion is to prevent the insured from using its product liability coverage as a form of property insurance to cover the cost of repairing or replacing its own defective products or work." Id.
Amtrol argues that the product exclusion is not applicable where there is also damage to third party property. However, the case it cites, United States Fidelity Guar. Co. v. Wilkin Insulation Co., stands only for the proposition that the health risks attendant to the use of asbestos insulation are not excluded as property damage resulting from failure of the product to perform as warranted. Here, as in Wilkin, damage to third party property or persons are covered, but the damage to or cost of repairing/replacing the product itself is not. This is consistent with the general proposition that CGL policies do not cover damages for breach of contract warranties. See Weedo, 81 N.J. at 239-40. The repair of the HWMs is an economic loss and a business expense for Amtrol, one it incurred as the result of a contractual liability pursuant to its warranty obligations. See id.; American Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 27 (1st Cir. 1986) (dicta stating that product exclusion bars cost of repair of faulty windows notwithstanding coverage of consequential damages due to property damage); Lowville Producer's Dairy Cooperative, Inc. v. Am. Motorists Ins. Co., 604 N.Y.S.2d 421, 422 (1993) (covering damage to other property while excluding damage to product itself). Thus, for individual claims where Amtrol can prove property damage, the costs of repair and replacement of the HWMs are excluded from coverage.
I find the impaired property exclusion largely irrelevant. It excludes property damage including loss of use claims to impaired property defined as "tangible property other than 'your product' . . . that cannot be used or is less useful because: a) it incorporates your product . . . that is known or thought to be defective, deficient, inadequate or dangerous . . ." Policies, §§ I.A.2.m, V.7(a). Amtrol does not allege recovery of damages based on the loss of use of property due to the malfunctioning of the HWMs.
I find that the sistership exclusion (n), though perhaps applicable, duplicative in its exclusion of the repair/replacement costs of HWMs. The sistership exclusion only applies "'in cases where, because of the actual failure of the insured's product, similar products are withdrawn from use to prevent the failure of these other products, which have not yet failed but are suspected of containing the same defect.'" Wilkin Insulation, 144 Ill.2d at 81 (quoting Honeycomb Systems, Inc. v. Admiral Ins. Co., 567 F. Supp. 1400, 1406 (D.Me. 1983)). It does not apply when the product has already failed and caused property damage.
Amtrol asserts that it did not institute a general recall of the affected units and that only HWMs with leaks were repaired or replaced. However, defendants contend that eight non-leaking units were replaced along with eight leaking units at the Natick Housing Authority. Having determined that the costs of repair and replacement to faulty HWMs are not recoverable under exclusion k, I find that the cost of replacing any non-leaking HWMs due to the existence of other leaking HWMs to be excluded under the sistership exclusion.
Finally, defendants contend that coverage of costs prior to notification of the insurers is barred by the prohibition of voluntary payments provision. See Policies, § IV.2.d. In order for an insurer to deny coverage based on the voluntary payments provision, it must be able to establish that it was prejudiced. Sarnafil, Inc. v. Peerless Ins. Co., 418 Mass. 295, 305 (1994) (citing Augat, Inc. v. Liberty Mut. Ins. Co., 410 Mass. 117, 122-23 (1991)); Employers' Liab. Assurance Corp. v. Hoechst Celanese Corp., 43 Mass. App. Ct. 465, 481 (1997). In Augat, the SJC held that prejudice had been established on the facts of the case because the insured had entered into a settlement agreement without notifying the insurer, thus denying the insurer any ability to protect its interests. Id. (citing Augat, 410 Mass. at 122). The facts here are different; the insurers must establish that Amtrol's payments and repair/replacement costs prior to notification in 1999 actually caused them prejudice. Without more on this record, I find that the issue is a matter of disputed fact ripe for determination by a jury. Id.
The provision provides: "No insured will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.
D. Settlement Costs
Tudor contends that none of the settlement costs are covered because they were not incurred because of property damage. I agree. The claims alleged in the complaint were for breach of warranty, negligence, and unfair and deceptive trade practices. There were no specific allegations in the complaint of property damage sustained by the named plaintiffs. Moreover, the terms of the settlement agreement include payments to the named plaintiffs who are installers rather than owners of HWMs, payments to an association of contractors, reimbursement of legal fees, and the institution of an extended warranty program through June 8, 2002 for Affected Units. None of these terms directly address property damage since the only damage payments go to contractors who spent time repairing HWMs, but did not directly suffer property damage nor were they required to make their repairs as a result of property damage caused by the HWMs. Therefore, I grant summary judgment on Tudor's third counterclaim declaring that it had no duty to indemnify Amtrol for its settlement costs.
E. Defense Costs
Amtrol seeks summary judgment that defendants have breached their insurance contracts by failure to pay their share of plaintiff's defense costs. Defendants do not dispute that they had a duty to defend Amtrol in the underlying action and that they have not made payment of any reimbursement for legal fees. However, there remain factual disputes as to the appropriate way to calculate the amount of defense costs owed by each defendant. For example, there are factual disputes over the rate of hourly compensation, over whether Tudor is obligated to reimburse legal fees incurred prior to May 3, 1999, and over how to calculate the amount owed in light of Tudor's self-insured retention and Wausau's method of reimbursement. Therefore, summary judgment is not appropriate.
V. Mass. Gen. Laws ch. 93A (Count III and IV)
Amtrol seeks summary judgment on counts III and IV contending that defendants violated Mass. Gen. Laws ch. 93A, §§ 9 and 11 by, among other things, refusing to provide reasonable explanation of the legal basis for their denial of coverage, see Mass. Gen. Laws ch. 176D, § 3(9)(n), and by failing to pay or credit undisputed costs, see Mass. Gen. Laws ch. 176D, § 3(9)(f).
Tudor argues that Ch. 93A, § 11 is not available as a cause of action because the underlying practice or act did not occur "primarily and substantially within the Commonwealth." Mass. Gen. Laws ch. 93A, § 11. In Bushkin Assoc., the SJC determined that relief under ch. 93A was not available to the plaintiff, even though Massachusetts law applied to the dispute, because the alleged deceptive acts did not take place in Massachusetts. 393 Mass. at 638. In making this determination the court considered 1) where the deceptive statements were made, 2) where they were received, and 3) the site of the loss. Id. However, Massachusetts federal courts have since refined the Bushkin Assoc.'s "place of injury" test, and instead opted for either a "place of conduct" analysis or a "functional approach." Boston Hides Furs, Ltd. v. Sumitomo Bank, Ltd., 870 F. Supp. 1153, 1166. (Compare Goldstein Oil Co. v. C.K. Smith Co., 20 Mass. App. Ct. 243, 479 N.E.2d 728, 731 n. 7 (Mass.App.Ct.) ("place of conduct"), with Makino, U.S.A. v. Metlife Capital Credit Corp., 25 Mass. App. Ct. 302, 518 N.E.2d 519, 523 (Mass.App.Ct., 1988) ("functional approach.")) Judge Stearns has elaborated the following ten factors as bearing on the "primarily and substantially analysis" in a ch. 93A case involving a contract:
(1) the place of contracting; (2) the place of negotiation of the contract; (3) place of performance; (4) the location of the subject matter of the contract; (5) the domicile, residence, nationality, place of incorporation and place of business of the parties; (6) where the defendant committed the alleged deceptive or unfair acts or practices; (7) the location of the plaintiff when the plaintiff acted upon the alleged deceptive or unfair statements; and (8) the situs of the plaintiff's loss . . . and (9) whether the underlying contract is to be governed by and interpreted in accordance with Massachusetts law, and (10) whether the parties to the underlying contract agreed to submit all contract disputes to Massachusetts (state and federal) courts.
Citicorp North America v. Ogden Martin Sys., 8 F. Supp.2d 72, 81 (D.Mass. 1998).
In the instant case, the allegedly deceptive practices include failure to provide a reasonable explanation of defendants' refusal to cover the claim and failure to effectuate a prompt settlement of undisputed claims. Applying the ten factors listed above, I note that fewer than half of the factors support finding that the actions took place primarily and substantially in Massachusetts. The insurance contracts were neither negotiated, signed, nor performed in Massachusetts. None of the parties are incorporated or reside in Massachusetts. The alleged unfair statements were made outside of Massachusetts as the agents of both defendants who were responsible for handling the claims were not located in Massachusetts. Furthermore, any loss must have occurred in Rhode Island where Amtrol has its primary place of business. While the subject of the dispute is located primarily in Massachusetts, and Massachusetts law and courts are applicable in the dispute, these factors are insufficient to support a § 11 ch. 93A claim. I note that the plaintiff has made no compelling argument to support finding that the acts took place primarily in Massachusetts, and therefore deny summary judgment for plaintiff on its 93A claims.
The Wausau agent is located in New York while the Tudor agent is located in New Jersey.
Plaintiff, however, alternatively asserts his claims pursuant to § 9 of Mass. Gen. Laws ch. 93A which does not contain the same location requirement. Defendant Wausau contends that this avenue is not available to a business entity because it is only "entitled to bring action under § 11 of this chapter." See Mass. Gen. Laws ch. 176D, § 9(1). The SJC has not yet determined whether a person entitled to bring an action pursuant to § 11 of ch. 93A can also bring an action pursuant to § 9 based on a violation of ch. 176D, § 3(9), i.e. unfair settlement practices. See Kiewit Constr. Co. v. Westchester Fire Ins. Co., 878 F. Supp. 298, 301 (D.Mass. 1995). However, based on the plain language of the statute, I believe it is clear that entities which may bring a § 11 action are not precluded from bringing a § 9 action for unfair settlement practices. The absence of the limiting phrase "other than a person entitled to bring action under section 11" following the second "any person" in § 9 makes clear that the people eligible to bring an unfair settlement practices claim under § 9 includes non-consumers.
The relevant language of § 9 provides:
Any person, other than a person entitled to bring action under § 11 of this chapter, who has been injured by another person's use or employment of any method, act or practice declared to be unlawful . . . or any person whose rights are affected by another person violating the provisions of ch. 176D, § 9(3) may bring an action. . . ."
Mass. Gen. Laws ch. 176D, § 9(1) (emphasis supplied).
Amtrol's claim that the defendants failed to provide a reasonable explanation of its legal basis for denying coverage is, however, unavailing. Amtrol makes issue of the fact that defendants did not cite case law in support of their positions despite plaintiff's abundant inclusion of case law in its correspondence. I note, however, that both defendants promptly and thoroughly explained their positions with respect to coverage of the disputed claims, reimbursement of attorneys fees, and other issues. On this record, I am satisfied that defendants were not unreasonable as a matter of law in the substance of their explanation of their legal and factual position with respect to coverage under their respective policies.
Amtrol's claim that the defendants failed to effectuate a prompt settlement of a claim when liability is undisputed also fails. Amtrol argues that with respect to the defendants' duty to defend the lawsuit at a blended rate of $130/hr. liability is clear yet defendants have failed to make payment on this sum. Amtrol's presentation overlooks defendants' arguably valid objections to immediate payment. Wausau's October 17, 2000 letter to Amtrol's counsel suggests that there is a dispute over the application of annual reimbursement limits under the policy as well as the method for payment of legal expenses. (Stips. Ex. 16) I cannot say as a matter of law that these objections are meritless. With respect to Tudor, it has made an offer to reimburse legal expenses under the agreed upon structure subject to its position that it is not liable for fees pre-May 3, 1999 and that the self-insured retention obligation of $100,000 applies to its share of the legal expenses. (Tudor 9/21/00 letter, Stips. Ex. 24). In addition, Tudor offers to reimburse plaintiff at Foley Hoag's higher rates and to credit pre-May 3 expenses. (Id.) These offers of compromise appear to be in good faith and are sufficient to create a material issue of fact under ch. 176D.
CONCLUSION
For the reasons set forth more fully above, I hereby DENY Plaintiff's motion for partial summary judgment. I GRANT Tudor's motion for summary judgment on its third and fifth counterclaims.
I DENY Tudor's and Wausau's motion for summary judgment with respect to Count I (breach of contract) based on the existence of a disputed fact as to the amount of third party property damage, if any, for which the defendants are liable.
. . .
m. 'Property damage' to 'impaired property' or property that has not been physically injured, arising out of: (1) A defect, deficiency, inadequacy or dangerous condition in 'your product' or 'your work';
. . .
This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to 'your product' or 'your work' after it has been put into its intended use.
Wausau Policy, § I.A.2.