Opinion
Civil Action No. 00-12310-DPW
September 25, 2002
MEMORANDUM AND ORDER
This action presents the question whether a Commercial General Liability insurance policy issued by an insurer covers alleged property damage caused to a third party by the demolition of an insured's property. Finding genuine issues of material fact as to certain aspects of the dispute, I decline to grant plaintiffs' motion for summary judgment.
I. BACKGROUND
Defendant Hermitage Insurance Co. issued a policy of commercial general liability insurance to Washington Pilgrim Realty Trust (the "Trust") and Fitzgerald Investment Trust that was in effect from May 30, 1994 to May 30, 1995. Hermitage renewed the 1994-1995 policy, and issued successor policies which were in effect respectively from May 30, 1995 to May 30, 1996 and from May 30, 1996 to May 30, 1997. These policies covered multiple properties including 646-658 Washington Street and 660-672 Washington Street (known collectively as the "abutting premises").
Plaintiff Fitz-Inn Auto Parks Inc. was insured under the Hermitage policy owned by Fitzgerald Investment Trust and Washington-Pilgrim Realty Trust.
In the 1995-1996 applications dated April 21, 1995, the abutting premises were respectively classified by the insured as containing a vacant building and a building or premises and a vacant building. The 1995-1996 applications recited no "demolition exposure contemplated" for the six subject properties — including the abutting premises — covered by the application. In the 1996-1997 application dated May 2, 1996, the abutting premises were both described as "Vacant Land." The 1996-1997 application contained an affirmative response to the inquiry "Any Demolition Exposure Contemplated?" with respect to the subject properties.
In April 1997, The Hartford Insurance Company filed a lawsuit ("the underlying action") against Lee Kennedy Company, Inc. as well as Fitz-Inn and the Trust. The suit alleged several claims including negligence and strict liability for property damage sustained by Hartford's insured, Shoppers Garage, as the result of demolition work performed by Lee Kennedy and the plaintiffs on the abutting premises. The Hartford has indemnified Shoppers Garage for its losses and sought to recover damages from the defendants in the underlying action.
According to the plaintiffs in the action before me, the demolition of the abutting premises began in April 1996 and was temporarily halted on April 24, 1996 when it was discovered that the east wall of the abutting premises and the west wall of Shoppers Garage interlocked in some places. The removal of some of that brick created holes in the Garage wall. The remainder of the wall was removed between June 25 and June 29, 1996, creating additional voids in the Garage wall. Hermitage maintains that the damage occurred on or after July 20, 1996 based on the allegations contained in The Hartford's complaint in the underlying action.
On May 6, 1997, Fitz-Inn and the Trust notified Hermitage of the Shoppers Garage claim in writing. On May 13, 1997, Hermitage acknowledged receipt of the loss claim but refused to defend and indemnify Fitz-Inn and the Trust on the ground that the insurance policies did not cover the claim. Federal Insurance Company ("Federal") defended Fitz-Inn and the Trust in the underlying action, thereby incurring attorneys' fees and expenses. Federal has also paid $25,000 to Hartford to settle the claims against Fitz-Inn and the Trust. Federal now seeks to recover its cost of defense in the underlying action and its cost of pursuing this coverage action.
II. Interpretation of the Commercial General Liability Policy
Plaintiffs contend that Hermitage has both a duty to defend and a duty to indemnify. The duty to defend is broader than the duty to indemnify. An insurer has a duty to defend when the allegations in a complaint "are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms." Ruggerio Ambulance Service, Inc. v. National Grange Mutual Insurance Co., 430 Mass. 794, 796 (2000) (quoting Liberty Mut. Ins. Co. v. SCA Servs., Inc., 412 Mass. 330, 332 (1992)). "The duty to defend is based on the facts alleged in the complaint and those facts which are known by the insurer." Id. (quoting Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7, 10-11 (1989)).
Whether defendant has a duty to defend depends on the construction of the policy's provisions that are disputed by the party. Accordingly, I turn to the policy to consider whether defendant has a duty to defend and/or a duty to indemnify.
Interpretation of an insurance policy is a matter of law for the court. Jet Line Services, Inc. v. American Employers Insurance Co., 404 Mass. 706, 710 n. 5 (1989). The rules of construction governing the interpretation of an insurance policy are familiar. "We begin with the actual language of the policies and consider 'what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.'" GRE Ins. Group v. Metropolitan Boston Housing Partnership, Inc., 61 F.3d 79, 81 (1995) (quoting Trustees of Tufts Univ. v. Commercial Unions Ins. Co., 415 Mass. 844, 849 (1993)). Insurance policies are to be construed as a whole. Falmouth National Bank v. Ticor Title Insurance Co., 920 F.2d 1058, 1061 (1st Cir. 1990). The words of the policy are to be read in their usual and ordinary sense. Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 280 (1997). "Where . . . there is more than one rational interpretation of policy language, 'the insured is entitled to the benefit of the one that is more favorable to it.'" Id. at 281 (quoting Trustees of Tufts Univ. v. Commercial Union Ins., 415 Mass. 844, 849 (1993)). Accordingly, exclusionary provisions are to be read narrowly and construed against the insurer. Id. at 282.
A. General Coverage
Plaintiffs contend that the liability in question — property damage to an adjoining property caused by the demolition on the insured's property — is covered by the commercial general liability policy and that no exclusions apply. The policy states:
"This insurance applies to 'bodily injury' and 'property damage' only if: (1) The 'bodily injury' or 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and (2) The 'bodily injury' or 'property damage' occurs during the policy period."
See Commercial General Liability ("CGL"), § 1(A)(1)(b).
An "occurrence" is defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." See CGL, § 5(12).
"Property damage" means "physical injury to tangible property, including all resulting loss of use of that property." See CGL, § 5(15)(a).
"Coverage territory" refers here to the United States, Puerto Rico and Canada. See CGL, § 5(4).
The alleged loss suffered by Shoppers Garage and indemnified by Hartford clearly falls within the primary coverage of the insurance policy. The damage alleged in the underlying action constitutes "property damage" under the policy. The negligent demolition of the plaintiffs' buildings which caused the property damage qualifies as an "occurrence" because it was an accident as normally defined. See Webster's Third International Dictionary, 11 (1996) (defining "accident" as "an unforeseen unplanned event or condition"). Moreover, the damage was the result of demolition that occurred on property listed in the policy application under premises information. Finally, since the policy was in effect from 1994 through 1997, the property damage occurred during policy periods for which Hermitage was responsible. I will consider more closely the issue of when the damage occurred as it affects defendant's arguments for exclusion.
The underlying action alleges the following property damage: damage to Shoppers Garage's party wall, terra cotta wall, rear garage wall, and stairwells as well as damage caused by spalling of concrete on its premises and interference with the use of Shoppers Garage and the resulting loss of business revenue.
The damage to the abutting premises was an "unforeseen event" because the plaintiff and his contractors did not know that the walls were interlocking. If, however, the term accident were to be construed more narrowly so as to exclude volitional or negligent acts, then the damage to abutting premises might not qualify as an occurrence. See Patrick J. O'Connor Jr., Commercial General Liability Coverage, 19-APR Construction Law, 5.
B. Faulty Workmanship Exclusion — 2(j)(6)
Hermitage argues that the policy's inclusion of a standard "faulty workmanship exclusion" precludes coverage of the damage at issue. This exclusion is contained at Section I, Coverage A, 2(j)(6): "This insurance does not apply to: . . . (j) 'property damage' to: . . . (6) that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." See CGL, § I(A)(2)(j)(6). "Your work" includes work done by or on behalf of the insured. See CGL, § 5(19).
Massachusetts and other state courts have construed this standard faulty workmanship exclusion on several different occasions. The most common application of the faulty workmanship exclusion is where a general contractor seeks reimbursement from a subcontractor for the cost of repairing or replacing the subcontractor's faulty work product. The exclusion precludes recovery against the subcontractor's insurance policy for the cost of this repair. See Donovan v. Commercial Union Ins. Co., 44 Mass. App. Ct. 596, 600 (1998) (exclusion covers the dismantling and replacement of defective wall).
The exclusion also pertains to the general contractor's cost of repairing damage to other aspects of the overall project directly caused by the subcontractor's faulty work. Lusalon v. The Hartford, 400 Mass. 767, 770 (1987). In Lusalon, the plaintiff, a masonry subcontractor, caused damage to the adjacent door and window frames while it was installing concrete masonry block. The Supreme Judicial Court rejected plaintiff's argument that the exclusion was limited to the repair of plaintiff's precise work product, which was masonry, and did not cover the damage to the door and window frames. Id. The Court held that the exclusion applies to damage directly caused by the insured's faulty work-product. Id.
I note that in Frankel v. J. Watson Co., Inc., 21 Mass. App. Ct. 43 (1986), the Appeals Court seems to have limited the application of the faulty workmanship exception to damage to the particular work product, thus allowing recovery for damage to the larger unit of which the work product was a component. Id. at 46 (citing New York state cases). The insured in Frankel was contracted to construct a new foundation and to move the house onto that foundation. The Frankel court held that the exclusion did not apply to damage to the superstructure of the house allegedly caused by the faulty construction of the foundation which began to sag. Id. There is, however, significant doubt as to whether Frankel is still good law in Massachusetts after Lusalon. See Donovan, 44 Mass. App. Ct. at 601-02.
In any event, at issue here is whether the faulty workmanship exclusion covers damage to third-party property that is not part of the overall project. Generally, faulty workmanship exclusions cover only damage to the work product itself, not damage to third party property. See General Mfg. Co. v. CNA Lloyd's of Texas, 806 S.W.2d 297, 300 (Tex.App. 1991).
This rule finds support in the language of the exclusion. The provision excludes damage to "that particular part of any property" on which "'your work' was incorrectly performed." Thus, the exclusion does not apply to damage to adjoining property on which one was not working, even though it was caused by the faulty workmanship on the principal property. The use of "particular," which means in its initial dictionary definition, albeit described as an archive usage, "a separate part of a whole", see Webster's Third Int'l Dictionary, at 1647 (1986), reinforces the distinction between the property that was being worked on and third party property.
This rule is not undermined by Lusalon's application of the exclusion to damage to other portions of the overall project of which the subcontractor's negligent work was a part. While Lusalon talks of excluding any "direct damage", 400 Mass. at 770, 771 n. 6, which could as a general proposition include the damage to the abutting premises, there is a clear distinction between the damage that faulty work directly causes to the rest of the structure to which the work is connected and damage to third party property that is completely separate from the overall project.
This distinction is further supported by the phrase "because 'your work' was incorrectly performed on it." A subcontractor can fairly be said to be working on both his precise work product and on the overall project, and therefore it is fair to exclude damage inflicted on other aspects of the project. To extend Lusalon to cover damage to third party property would render meaningless the phrase "on it" and open up the exclusion beyond the expectations of the parties.
C. Exclusion by Classification Limitation
Hermitage argues that the GCL policy does not cover damage related to the demolition of a building because of the Classification Limitation HIC 160 (3/90). The Classification Limitation, made a part of both policies, states: "Coverage under this policy applies only to those operations described in The Schedule of Insurance coverage parts and/or endorsements made a part of this policy." Hermitage contends (1) that the representation in the 1995-1996 application that no demolition was contemplated and (2) that the description of the property as vacant land in the 1996-1997 application precludes coverage for demolition under either or both policies.
The parties dispute which policy was in effect at the time of the damage claim. Plaintiffs filed a notice of claim on May 7, 1997 stating that the occurrence took place on May 30, 1996 and that the claim was filed under the 1996-1997 policy. The Hartford's underlying complaint alleges that the damage occurred on July 20, 1996. However, plaintiffs now maintain that the initial damage was done in April and May 1996, and that further damage was done in June 1996. They produce evidence in the form of an affidavit by Thomas Guerette, the foreman on the demolition project, stating that the initial damage occurred on April 24, 1996. They also cite a letter from Hermitage stating that it was aware that the loss occurred in May, June, and July 1996. See Corona letter, dated 5/16/97, at 2 (Pl. Motion, Ex. 5(B). In connection with their response to my procedural order of September 10, 2002, the plaintiffs contend that a photograph attached to the Guerette Affidavit shows that as of May 30, 1996 there was no longer a structure on the abutting premises. For its part, Hermitage offers no evidence other than the claim filed and the complaint in the underlying action in support of its position that the entire claim falls under the 1996-1997 policy. For purposes of summary judgment, however, that is enough to create a genuine issue regarding which policy was in effect when the damage occurred.
The unsettled dispute over which of the policies was in effect at the time of the occurrence becomes potentially relevant because of differences in the classification of the properties between the 1995-1996 policy and the 1996-1997 policy. The IL 1201 1185 form ("1201 form") is an endorsement that lists the commercial property covered and its classification. The 1995-1996 1201 form lists the abutting properties as having both "Building Lessor's Risk" and "Vacant Building" coverage. The 1996-1997 1201 form lists the abutting premises as "vacant land" only. For each of the separate coverages, there is apparently a rate and premium associated. I will separately consider Hermitage's objections to coverage in the respective coverage years.
After reflecting on the record following the hearing in this matter, I solicited for the parties' additional submissions on the question of the practical effect of classification on risk assessment as reflected in premiums. Although the parties could not stipulate, I will accept for purposes of summary judgment that the premiums for vacant land based on the 1996/1997 applications were substantially lower than if they had been classified as commercial buildings.
1. 1995-1996 Denial of Demolition Exposure
I find without merit Hermitage's contention that the 1995-1996 policy does not cover damage caused by demolition because plaintiffs answered "no" to the question — "Any demolition exposure contemplated?" — in its application.
In order to show that plaintiffs' answer constituted a material misrepresentation sufficient to defeat the policy, Hermitage would have to show that it was made with intent to deceive. See Mass. Gen. Laws ch. 175, § 186. No such allegation is made. And any suggestion of material misrepresentation was denied by Hermitage at the hearing in this matter. That position seems appropriate. The question as drafted asks no more than the applicant's opinion at the time it is completing the application. That the application was completed in April 1995 and the demolition did not begin until one year later is insufficient to support a claim of deception; this merely supports the proposition that plaintiffs did not expect to demolish the building at the time the application was completed.
Absent a finding of material misrepresentation, there is no basis for construing the application to exempt liability for demolition. The section of the application in question does not contain any language advising the applicant that it must update its answers to the application questions. The rule favoring narrow readings of exclusions requires that I find that coverage is not affected by plaintiffs' answer to the 1995-1996 application regarding anticipated demolition exposure.
2. 1996-1997 Description of Abutting Properties as "Vacant Land"
Hermitage does not point to any written document nor cite any cases that directly support its argument that the 1201 form classification of the abutting premises as vacant land excludes damage caused by demolition on the property. Nevertheless, Hermitage appears correct that the operations on a piece of property described as "vacant land" logically do not include the demolition of a building. It also follows that the insurer would assign a lower premium to properties classified as vacant land than to vacant buildings or occupied buildings because of the reduced risks to vacant land. To allow for coverage of damage sustained as a result of demolition on land classified, upon the representation of the insured, as "vacant land" might undermine the insurer's ability to assess risk accurately and might unfairly reward an insured's misclassification of the land.
The two cases that defendant cites deal with policy differences. Harvey v. Mr. Lynn's Inc., 416 So.2d 960 (La.App. 2d Cir. 1982), holds that owners', landlords' and tenants' liability insurance doesn't cover negligent production of a fashion show in a site other than the insured building. Southeastern Fidelity Ins. Co. v. Sintros, 409 So.2d 521 (Fl.App. 5th Dist. 1982) holds that an insurance policy covering automobile service center hazards doesn't cover damage occurring as part of a separate car rental business on the same site.
Plaintiffs argue that any implicit exclusion of demolition coverage by listing the property as vacant is overcome by the answer "Yes" to the question regarding anticipated demolition in the 1996-1997 application. However, this checkmark appears in the context of the overall policy, which includes a property located at 1 Boston Street and described as a vacant building with land. If defendant's argument is correct, the contemplation of demolition exposure could be limited to this one property that did contain a building rather than the two at issue that are listed as vacant land.
The short of the matter is that I cannot resolve this case on summary judgment. There are genuine issues of material fact regarding when the damage occurred. If it was wholly in the 1995-1996 coverage period, then judgment for the plaintiffs would appear appropriate. If, by contrast, some portion of the damage occurred in the 1996-1997 coverage period, Hermitage may be able to establish that a misclassification of the abutting properties relieves it of some portion of its obligation to the insured.
III. CONCLUSION
For the reasons set forth more fully above, I hereby DENY plaintiffs' motion for summary judgment.