United States Court of Appeals For the First Circuit
No. 22-1462
ADMIRAL INSURANCE COMPANY, STARR INDEMNITY & LIABILITY COMPANY, GREAT AMERICAN ASSURANCE COMPANY,
Plaintiffs, Appellees,
v.
TOCCI BUILDING CORPORATION, TOCCI RESIDENTIAL LLC, JOHN L. TOCCI, SR.,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Barron, Chief Judge, Howard and Montecalvo, Circuit Judges.
Jeffrey J. Vita, with whom Kerianne Kane Luckett and Saxe Doernberger & Vita, P.C. were on brief, for appellant.
Eric B. Hermanson, with whom Austin D. Moody and White and Williams LLP were on brief, for appellee.
Joel Lewin, Eric F. Eisenberg, Alexandra A. Gordon, Hinckley Allen & Snyder, LLP on brief for Associated General Contractors of America, Inc. and Associated General Contractors of Massachusetts, Inc., amici curiae. November 8, 2024 HOWARD, Circuit Judge. This appeal results from a
dispute between a general contractor and its insurers over coverage
under a commercial general liability ("CGL") insurance policy.
The principal question is whether a general contractor's CGL
insurance policy covers damage to a non-defective part of the
contractor's project resulting from a subcontractor's defective
work on a different part of that project. The answer to that
question dictates whether Admiral Insurance Company ("Admiral")1
is obligated to defend Tocci Building Corporation, Tocci
Residential LLC, and John L. Tocci, Sr., (together, "Tocci") in an
underlying lawsuit alleging a range of issues with Tocci's work on
a residential construction project. Applying Massachusetts law,
the district court concluded that Admiral had no duty to defend
Tocci because the lawsuit did not allege "property damage" caused
by an "occurrence," as required for coverage under the Admiral
insurance policy. We are uncertain whether the Massachusetts
courts would ultimately agree with the district court's
interpretation of those terms, but we affirm the district court's
1 Two other insurers are also affected by our ruling. Starr Indemnity & Liability Company and Great American Assurance Company intervened in the suit brought by Admiral seeking a declaratory judgment as to its duty to defend. They provide excess policies that follow form to Admiral's policy. The parties agree that if Admiral has no duty to defend, then Starr and Great American can have no obligation to provide indemnity coverage either. (Neither excess policy includes a duty to defend.) On appeal, Starr and Great American adopted Admiral's briefing by reference, so we focus on Admiral's arguments throughout.
- 3 - ultimate holding that Admiral has no duty to defend Tocci, albeit
for different reasons.
I.
From 2013 to 2016, Tocci was the construction manager
for an apartment project owned by Toll JM EB Residential Urban
Renewal LLC ("Toll"). There were several work quality issues and
delays on the project, and Toll eventually terminated Tocci in
March 2016 for alleged mismanagement of the project. Toll then
filed a lawsuit against Tocci in New Jersey state court in July
2016, and Tocci removed it to federal court.
The amended complaint contained five counts: (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. The complaint did not
allege negligence or explicitly seek damages based on Tocci
damaging property. It did, however, include allegations regarding
instances of defective work leading to property damage. During
the course of preliminary discovery, it became clear that the
allegations included defective work by Tocci's subcontractors
resulting in various instances of property damage to non-defective
work on the project, including (1) damage to sheetrock resulting
from faulty roof work; (2) mold formation resulting from inadequate
sheathing and water getting into the building; and (3) damage to
- 4 - a concrete slab, wood framing, and underground pipes resulting
from soil settlement due to improper backfill and soil compaction.
In January 2020, Tocci sought defense and indemnity
coverage under the Admiral insurance policies. The most relevant
portions of coverage are:
• Admiral will cover "sums that the insured becomes
legally obligated to pay as damages because
of . . . 'property damage,'" provided that the "property
damage" is caused by an "occurrence."
• Admiral has the "right and duty to defend the insured
against any 'suit' seeking those damages."
• An "occurrence" is defined as "an accident, including
continuous or repeated exposure to substantially the
same general harmful conditions."
• "Property damage" is defined as "[a] Physical injury to
tangible property, including all resulting loss of use
of that property. All such loss of use shall be deemed
to occur at the time of the physical injury that caused
it; or [b] Loss of use of tangible property that is not
physically injured. All such loss of use shall be deemed
to occur at the time of the 'occurrence' that caused
it."
There are also various exclusions to this coverage,
discussed in more depth below.
- 5 - Admiral denied coverage in March 2020, stating that the
action "does not include any allegations that Tocci is liable for
property damage caused by an occurrence, as those terms are defined
in the policy" and that, even if it did, an exclusion to coverage
would apply. After some back-and-forth letters, Admiral commenced
this action, seeking a declaratory judgment that it has no
obligation to defend or indemnify Tocci in the Toll action under
Massachusetts law.
Admiral and Tocci filed cross-motions for partial
summary judgment on Count I of Admiral's complaint to determine
whether Admiral has a duty to defend Tocci. In March 2022, the
district court granted Admiral's motion and denied Tocci's motion,
concluding that Admiral has no duty to defend Tocci against the
Toll action. The court concluded that the damage alleged in Toll's
complaint does not qualify as "property damage" as defined in the
policy because the allegations consisted entirely of damage at
Tocci's own project. It also concluded that, even if the alleged
damage qualified as "property damage," it was not caused by an
"occurrence" (as required for coverage under the policy) because
faulty workmanship does not constitute an "accident," as required
by the definition of "occurrence."
Following the grant of summary judgment for Admiral on
Count I, the parties stipulated to a final order on Admiral's other
- 6 - claims because they would be resolved based on the same legal
reasoning.
II.
We review an order granting summary judgment de novo.
See Quinn v. City of Boston, 325 F.3d 18, 29 (1st Cir. 2003).
The key issue here is whether, under Massachusetts law,2
a general contractor's CGL policy covers damages to non-defective
work resulting from defective work by subcontractors. Tocci does
not argue that it should not cover replacement costs for the
defective work itself.
There are three steps to this analysis: (1) Do the
damages alleged in the action fall within the scope of coverage?;
(2) if so, do the exclusions to coverage apply?; and (3) if so, do
any exceptions to the exclusions apply? The burden alternates
between the insured and insurer at each of these steps: the insured
has the burden of establishing the first, the insurer must
demonstrate the second, and the insured must establish the third.
See John Beaudette, Inc. v. Sentry Ins. A Mut. Co., 94 F. Supp. 2d
77, 134-35 (D. Mass. 1999); Highlands Ins. Co. v. Aerovox Inc.,
424 Mass. 226, 231 (1997).
2In district court, Tocci argued that New Jersey law should apply instead of Massachusetts law. The district court determined that Massachusetts law should apply, and Tocci does not challenge that decision on appeal, so we apply Massachusetts law.
- 7 - The district court focused only on the first step,
concluding that allegations regarding a subcontractor's faulty
work causing damage elsewhere on the project is not "property
damage" caused by an "occurrence," as defined in the policies. In
determining that the alleged damage did not constitute "property
damage," the district court focused largely on the background
purpose of CGL policies: to provide coverage for tort liability,
not contractual liability. See López & Medina Corp. v. Marsh USA,
Inc., 667 F.3d 58, 67-69 (1st Cir. 2012); Com. Ins. Co. v. Betty
Caplette Builders, Inc., 420 Mass. 87, 90 (1995). Because the
alleged damage was all within the contractually covered scope of
the project, the district court reasoned, it could not constitute
"property damage." See, e.g., Friel Luxury Home Constr., Inc. v.
ProBuilders Specialty Ins. Co., No. 09-cv-11036-DPW, 2009 WL
5227893, at *3-4 (D. Mass. Dec. 22, 2009) (faulty roofing work
leading to replacement of gutter systems did not constitute
"property damage" because the policy was not intended to cover
damage to the insured's own work product). In the alternative,
the court held that the damage did not result from an "occurrence,"
basing its reasoning on cases suggesting that faulty workmanship
alone is not an accidental occurrence because it is "not an
insurable 'fortuitous event,' but a business risk to be borne by
the insured." Am. Home Assur. Co. v. AGM Marine Contractors, Inc.,
379 F. Supp. 2d 134, 136 (D. Mass. 2005) (quoting 9 Lee R. Russ &
- 8 - Thomas F. Segalla, Couch on Insurance § 129:11 (3d ed. 1996)),
aff'd on other grounds, 467 F.3d 810 (1st Cir. 2006). Because
Tocci was hired as a general contractor, the court reasoned, damage
to non-defective parts of the project resulting from a
subcontractor's faulty work on another part is still damage to
Tocci's work product, so it would not be an "occurrence."
Although the district court's reasoning is in line with
some prior district court cases, we are more hesitant to predict
which way the Massachusetts Supreme Judicial Court ("SJC") -- which
has yet to rule on this precise issue -- would come out. As we
have recognized before, there is a sharp split of authority on
whether damage to non-defective work resulting from a
subcontractor's defective work constitutes "property damage" or is
caused by an "occurrence." Am. Home Assur. Co., 467 F.3d at 813.
As the Tenth Circuit recognized in 2018, "[s]tate supreme courts
that have considered the issue since 2012 have reached near
unanimity that construction defects can constitute occurrences and
contractors have coverage under CGL policies at least for the
unexpected damage caused by defective workmanship done by
subcontractors." Black & Veatch Corp. v. Aspen Ins. Ltd., 882
F.3d 952, 966 (10th Cir. 2018) (internal quotations and emphasis
omitted) (applying New York law); see also Cypress Point Condo.
Ass'n, Inc. v. Adria Towers, LLC, 226 N.J. 403, 423 (2016) (noting
"a strong recent trend in the case law [of most federal circuit
- 9 - and state courts] interpret[ing] the term 'occurrence' to
encompass unanticipated damage to nondefective property resulting
from poor workmanship" (alterations in original) (quoting
Greystone Constr. v. Nat'l Fire & Marine Ins. Co., 661 F.3d 1272,
1282-83, 1286 (10th Cir. 2011))). It is certainly possible that
the SJC would follow these recent trends. See Caplette, 420 Mass.
at 88 (referring to damage to non-defective parts of a house
resulting from a subcontractor's defective work on the septic
system as "property damage" but determining that an exclusion to
coverage applied); Davenport v. U.S. Fid. & Guar. Co., 778 N.E.2d
1038 (Mass. App. Ct. 2002) (table) (noting that although "[f]aulty
workmanship, alone, is not an 'occurrence[,]'" coverage would
extend to "faulty workmanship which causes an accident" (quoting
Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 249 (1979))).
However, as we have done before, we decide to sidestep
this issue by focusing on the exclusions, as we view the resolution
under Massachusetts law to be more straightforward. See, e.g.,
Am. Home Assur. Co., 467 F.3d at 813.3
There are two "Damage to Property" exclusions outlined
in subsection (I)(2)(j) of the policy that Admiral argues apply
Contrary to Tocci's assertion that the exclusions are not 3
properly before us, we may affirm the district court on any ground supported by the record. See Stoll v. Principi, 449 F.3d 263, 265 (1st Cir. 2006).
- 10 - here. They provide that there is 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.
"Your work" is defined, in relevant part, as "[w]ork or operations
performed by you or on your behalf[.]"
There is also an exception to the exclusion in (j)(6)
providing that it does not apply to "'property damage' included in
the 'products-completed operations hazard.'" The "products-
completed operations hazard," in turn, "[i]ncludes 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." In other words, the coverage exclusion in (j)(6) does
not apply if the work has been completed or abandoned.
We focus our analysis on the (j)(6) exclusion because we
conclude that it covers the allegations in the Toll complaint. We
do not address whether Admiral has met its burden of showing that
the (j)(5) exclusion applies.
The damage at issue here includes (1) damage to sheetrock
resulting from faulty roof work; (2) mold formation resulting from
- 11 - inadequate sheathing and water getting into the building; and (3)
damage to a concrete slab, wood framing, and underground pipes
resulting from soil settlement due to improper backfill and soil
compaction. The question for coverage is whether this qualifies
as property damage to "[t]hat particular part of any property that
must be restored, repaired or replaced because '[Tocci's] work'
was incorrectly performed on it."
Tocci argues that this exception does not apply because
it is not seeking coverage for the cost of repairing and replacing
the defective work itself (e.g., the faulty roof, inadequate
sheathing, or faulty soil fill). It is instead seeking coverage
for the resultant property damage caused by its subcontractor's
defective work, which it argues would not fall under this
exclusion. Applying Massachusetts law, however, we disagree.
In Jet Line Services, Inc. v. American Employers
Insurance Co., the SJC interpreted "[t]hat particular part of any
property . . . on which operations are being performed" from a
prior standard CGL policy to apply to the entire unit of property
on which the insured was retained to work. 404 Mass. 706, 711
(1989). There, Jet Line personnel were working on the bottom part
of a large underground tank when it exploded, causing damage to
the tank in the amount of $400,000. Id. at 706. The insurance
policy excluded coverage for damage "to that particular part of
any property . . . upon which operations are being performed" by
- 12 - the insured "at the time of the property damage arising out of
such operations." Id. at 711. Jet Line argued that this provision
should only exclude coverage for damage to the bottom of the tank,
because that was the only portion employees were actively working
on at the time of the explosion. Id. The SJC, however, concluded
that this provision applied to the entire tank because "Jet Line
was retained to clean the entire tank, and it was the entire tank
on which operations were being performed within the meaning of the
policy language." Id. The SJC noted a series of cases from other
courts applying the exclusion to the entire property "[e]ven in
cases in which damage occurred to property on only part of which
the insured was retained to work." Id. at 711-12. It reasoned:
"Where, as here, the insured was retained to perform work on an
entire unit of property, and not just a portion of it, the
applicability of the exclusion to damage to the entire unit is
even more apparent than in cases in which the insured was retained
to work on only a part of the unit." Id. at 712.
Although Jet Line interpreted a different exclusion more
akin to the (j)(5) exclusion, we find the SJC's broad
interpretation of "that particular part of any property . . . on
which operations are being performed" to be instructive in
analyzing the (j)(6) exclusion as well. Here, Tocci was retained
as a general contractor for the entire Toll project, not just a
portion of it. As a general contractor, Tocci did not directly
- 13 - perform construction -- it instead supervised and coordinated the
work performed by subcontractors. The complaint alleges damage
resulting from Tocci's "incorrectly performed" work on the entire
project. Thus, "[t]hat particular part of any property that must
be restored, repaired or replaced because '[Tocci's] work' was
incorrectly performed on it" refers to the entirety of the project
where Tocci was the general contractor charged with supervising
and managing the project as a whole.
This conclusion is bolstered by the SJC's overall
approach to the purpose and scope of CGL policies. For example,
in Caplette, the SJC explained that commercial general liability
coverage "is for tort liability for physical damages to others and
not for contractual liability of the insured for economic loss
because the product or completed work is not that for which the
damaged person bargained." 420 Mass. at 91 (quoting Roger C.
Henderson, Insurance Protection for Products Liability and
Completed Operations -- What Every Lawyer Should Know, 509 Neb. L.
Rev. 415, 441 (1971)). Although the SJC has not addressed the
exact issue raised here, at least one lower Massachusetts court
has concluded -- in line with the purpose articulated in Caplette
-- that the "Damage to Property" exclusions apply to unintended
damage to the project resulting from faulty workmanship. See E.H.
Spencer & Co. v. Essex Ins. Co., 944 N.E.2d 1094 (Mass. App. Ct.
2011) (table) ((j)(5) and (j)(6) exclusions "serve to deny coverage
- 14 - when the insured builder or its subcontractor has caused any damage
to the home itself" where the builder is responsible for the entire
home); see also Frankel v. J. Watson Co., Inc., 484 N.E.2d 104,
105-06 (Mass. App. Ct. 1985) (applying exclusion to damage to the
work product of the insured); B & T Masonry Constr. Co. v. Pub.
Serv. Mut. Ins. Co., 382 F.3d 36, 41 (1st Cir. 2004) (finding that
the business risk exclusions "bar coverage as to any damages to
the project itself caused by [the subcontractor's] faulty
workmanship"). We concur with that approach here.
Having concluded that Admiral met its burden of
establishing that the Toll action only alleges damage falling
within the (j)(6) exclusion, we turn to whether Tocci has shown
that an exception to that exclusion applies. Highlands Ins. Co.,
424 Mass. at 231. Specifically, the question is whether the
project was "completed or abandoned" prior to the damage, such
that it would fall under the "products-completed operations
hazard" and thus be covered. In its reply brief, Tocci did not
even attempt to make this argument -- it provided only two
paragraphs of explanation on why the (j)(6) exclusion does not
apply without even mentioning any exceptions. Had Tocci made some
effort at argumentation, that argument likely would have been
futile. The "products-completed operations hazard" provides that:
"[Y]our work” will be deemed completed at the earliest of the following times:
- 15 - (a) When all of the work called for in your contract has been completed.
(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.
(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.
Tocci, however, was terminated from the project and did
not complete the work. And it makes no argument that its
termination from the project should qualify as "abandonment" under
the policy. Cf. Clarendon Am. Ins. Co. v. Gen. Sec. Indem. Co. of
Ariz., 124 Cal. Rptr. 3d 1, 9-10 (Cal. Ct. App. 2011) (contractor's
work not "abandoned" or "completed" where it was terminated from
the project before completing its work). Therefore, Tocci has not
met its burden of showing that any exception to the exclusion
applies.
We add a coda merely to note that this application of
the (j)(6) exclusion does not mean that a general contractor's CGL
policy could never cover damage to non-defective work arising from
a subcontractor's defective work. If the Massachusetts SJC were
to interpret "property damage" caused by an "occurrence" to
encompass this type of damage, a general contractor could still
- 16 - potentially receive coverage if the work is completed or abandoned,
as the exception to the exclusion would then apply.4
Affirmed.
4 We do not canvas all of the policy's exclusions or exceptions
to determine if any of them might apply in the alternative. However, we do briefly address one exclusion/exception raised by amici. The Admiral policy includes a coverage exclusion for damage to "your work" arising out of it or any part of it and included in the "products-completed operations hazard," but there is an exception "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." Amici argue that the district court's reading of "property damage" and "occurrence" to exclude coverage for the type of damage involved here would make this exclusion/exception pair meaningless surplusage. Admiral responds that this language was added as a backstop for use in jurisdictions that had found there was coverage for this type of claim -- in other words, it may be surplusage in jurisdictions that have concluded such damage is not "property damage" or does not arise from an "occurrence." See, e.g., Oxford Aviation, Inc. v. Glob. Aerospace, Inc., 680 F.3d 85, 88-89 (1st Cir. 2012) (discussing Maine approach). We take no view on the correct interpretive meaning of this exclusion/exception pair but merely note that our reading of the (j)(6) exclusion does not make that exclusion/exception pair a nullity because of the (j)(6) exclusion's exception for completed work.
- 17 -