Exclusions (k) and (m) in comprehensive general liability policies were the focus of a recent decision from the First Circuit. See Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750, 2009 U.S. App. LEXIS 7896 (1st Cir. April 16, 2009) [here].
Boston Financial Data Services (BFDS) hired Suffolk Construction Corporation as general contractor for a tenant improvement project. Suffolk subcontracted with BloomSouth to install carpet throughout the building. The subcontract required BloomSouth to perform minor preparation work on the concrete floor before laying the carpet.
After BloomSouth installed the carpet, BFDS employees moved back into the building. The employees, however, noticed an odor. BloomSouth scraped up the original carpet adhesive and re-carpeted the floor. The odor, however, spread to other parts of the building. BFDS presented a claim to Suffolk and demanded that the carpet be removed and the smell be eliminated. Suffolk, in turn, demanded that BloomSouth respond to BFDS's claim. When BloomSouth refused, Suffolk paid BFDS $1.4 million for remediation efforts.
BloomSouth had commercial general liability policies with Essex. Suffolk was an additional insured on the policies. Suffolk notified Essex of BFDS's claim and demanded that Essex defend and indemnify. Essex denied coverage.
Suffolk sued BloomSouth, alleging BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor. Essex then sued Suffolk and BloomSouth for a declaratory judgment on its coverage obligations.
The district court granted Essex's motion for summary judgment. The court agreed Suffolk's underlying complaint alleged property damage. But Exclusion (m) barred coverage for property damage to "impaired property," defined as property that had not been physically injured. This exclusion barred coverage because Suffolk's allegation that an unwanted odor permeated the building was an allegation of "impaired property." Exclusion (k) excluded coverage for property damage to the insured's own product. This exclusion applied to Suffolk's allegation that the concrete floor had to bead-blasted prior to the installation of the replacement carpet.
The First Circuit reversed, finding neither exclusion barred coverage. First, Exclusion (m) was not applicable because Suffolk's complaint alleged that odor "permeated the building," which could reasonably be interpreted to mean the odor physically injured the property. Further, property could only be "impaired property" if it could not be restored to use by "the repair, replacement, adjustment or removal of [the insured's] product or work." A fair reading of Suffolk's complaint suggested the property could not be restored to use simply by repairing, replacing, adjusting, or removing BloomSouth's product or work.
Second, Exclusion (k) eliminated coverage for "property damage to 'your product' arising out of it or any part of it." "Your Product" meant "[a]ny good or products, other than real property, manufactured, sold, handled or distributed or disposed of by . . . You . . . ." Here, Suffolk's complaint alleged damage to "real property," BFDS's concrete floor. Further, there was no indication that BloomSouth "manufactured, sold, handled, or distributed or disposed of" the concrete floor.
Finally, BloomSouth was entitled to attorney's fees. In Massachusetts, an insured could recover attorney fees incurred in establishing that the insurer breached its duty to defend. Therefore, Massachusetts law on the insured's recovery of fees after successfully establishing coverage is similar to Hawai`i statute on fees. See Haw. Rev. Stat. 431:10-242.
