On March 31, 2019, Judge Indira Talwani of the United States District Court for Massachusetts issued an insurance coverage decision in the case of Mills Construction Corporation et al. v. Nautilus Insurance Company. In this case, the judge denied a contractor’s declaratory judgment seeking defense for a homeowner’s suit against it for property damage. The court found the homeowner’s lawsuit did not allege an “occurrence” under the contractor’ commercial general liability (“CGL”) policy. The court also found the CGL’s standard “business risk” exclusion applied excluding damage to the “particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”
Agency Checklists has written prior law alerts relating to the exclusions under the commercial general liability policy (“CGL”) regarding the definitions of “your work” and the exclusion that prohibits coverage for a claim or occurrence where the damage is to the contractor’s work. For two recent articles, see Agency Checklists’ articles of April 19, 2019, “Appeals Court Reverses All America Insurance’s No Coverage Win on “Your Work” Exclusion in CGL” and February 19, 2019, ”
No Liability under Arch Insurance’s Wrap-Up Policy for Contractor’s Repair of Sub’s Work.”
A significant home fire with botched repairs lead to a lawsuit
November 5, 2013, Ms. Sychantha’s home in Marlborough had a large fire loss. Her homeowner insurer ultimately estimated the damage to the property at $374,000.
After interviewing various contractors to reconstruct her home, she contracted with Mills. In August 2014, Mills undertook demolition of the damaged premises. Ms. Sychantha alleged that “During demolition, Mills damaged the foundation.” She further stated that several engineers had evaluated the foundation and had given their professional opinions that “but for the damage caused by Mills, the foundation could have been re-used.”
The damage to the foundation and its repair caused a dispute between Ms. Sychantha and her insurance company that delayed the construction by more than a year. When construction restarted in December 2015, the unresolved foundation issues made it necessary to move the location of the house.
Once construction started, it was scheduled to take 180 works days. However, Ms. Sychantha alleged that Mills substantially delayed the work, and, after having been paid more than $440,000 for the job October 2016, Mills Construction stopped coming to the premises. At as a result of these delays and Mills not, Ms. Sychantha was unable to return to her home until June 2017.
Ms. Sychantha claimed that because of Mill’s substandard work, it would cost her over $300,000 to correct the problems with the reconstruction of her home after Mills left the job.
Coverage claim for Ms. Sychantha’s lawsuit denied by Nautilus
In October 2017, Ms. Sychantha filed a six-count complaint against Mills and its president, in Middlesex Superior Court. In her suit, she claimed Mills, in rebuilding her home, had breached its construction contract, had caused damages to her by its negligence, its negligent misrepresentations and negligent supervision of the construction. She also claimed Mills had breached a warranty of habitability for her home and sought triple damages under Massachusetts’ unfair and deceptive business practices act, G.L. c. 93A, against Mills.
The suit alleged that Mills had during the course of its construction contract had demolished part of the fire-damaged home and had, during that demolition, damaged the foundation. This foundation damage, according to the complaint, caused delays and ultimately required relocating the house. Besides the foundation damage allegations, the complaint alleged defects in Mills’ construction including:
- Various vents were not installed properly.
- The premises suffered water infiltration at the chimney
- Vents were installed where none were needed.
- Gutters were not installed.
- Finished trim work was not performed in a workmanlike manner.
- Exterior trim was installed with interior finish nails that will rust.
- The contractors failed to install stairs to the rear door of the house.
- The exterior doors leak.
- Contractors failed to follow specifications for the work.
- Certain flashing is missing.
- The exterior deck is not properly supported by beams or sonotubes, and,
- The foundation lacks rebar
Mills immediately reported the filing of Ms. Sychantha’s lawsuit to its CGL carrier, Nautilus, claiming Nautilus’ policy should provide defense and indemnity. Mills asserted coverage existed because the foundation damage alleged was not within the scope of their work, and they were not working in the area when the damage occurred.
Nautilus respond to Mills denying coverage because the suit’s allegations of Mills failing to perform construction work in a good and workmanlike manner did not state any claim arising from “accidental” conduct on the part of Mills.
Nautilus further advised Mills that the policy, as written, did not provide coverage for breach of contract and also excluded coverage for “damages to that part of real property on which you were performing operations” and “to that part of property that must be restored, repaired, or replaced because your work was incorrectly performed on it.”
Nautilus did request that Mills “provide for our consideration any additional information of facts you currently have in your possession or may develop in the future that may change our decision regarding coverage of this loss thereby providing us an opportunity to reconsider our position.”
During the course of discovery in Ms. Sychantha’s lawsuit, Mills sent Nautilus additional information and arguments attempting to show the suit involved an accident and did not involve Mills “work.”
- Mills asserted to Nautilus that the foundation damage alleged in Ms. Sychantha’s complaint was accidental because she had not alleged intentional or willful conduct.
- Mills asserted that factually no exclusion applied because Mills had not performed work on the foundation before any damage occurred.
- Mills alleged the foundation work was not its work under the construction agreement.
- Mills furnished Nautilus their original contract for “Reconstruction of a single-family house,” an estimate for repairs from the insurance company for Ms. Sychantha and various documents regarding other contractors on the site and the exchange of information and accusations between Mills and Ms. Sychantha.
- Mills advised Nautilus Ms. Sychantha had admitted in discovery responses that Mills and Crothers had not performed any work on the foundation at the time the foundation was damaged.
- In a state court pleading, Ms. Sychantha had claimed that “the alleged damage to the foundation was accidental.”
Nautilus continued its denial, and on March 1, 2018, Mills filed a declaratory judgment against Nautilus over its coverage denial. Mills also sought in its lawsuit multiple damages and attorney fees for Nautilus’ alleged unfair claim practices in denying Mills’ claim.
Court rules allegations of the complaint and not extrinsic evidence determine the duty to defend
In its suit, Mills sought a declaratory judgment that Nautilus had to provide it with a legal defense against Ms. Sychantha’s underlying action. Nautilus, for its part, sought a declaratory judgment that under the terms of its policy with Mills, Ms. Sychantha’s suit did not allege an occurrence and, that if the court found otherwise, the business risks exclusions of the policy barred coverage.
After some discovery, Mills, and Nautilus each moved for summary judgment.
In a ruling of the motions for summary judgment on Nautilus’ duty to defend Mills, the court first restated Massachusetts law on the subject.
Massachusetts law provides a liability insurer’s duty to defend under an insurance policy arises:
- when “the allegations in a complaint are reasonably susceptible of an interpretation that states or roughly sketches a claim covered by the policy terms;”
- “If the allegations in the third-party complaint are reasonably susceptible of an interpretation that they state or adumbrate a claim covered by the policy terms;”
- The “initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions [. . . ].”)
In determining a summary judgment motion on an insurer’s duty to defend, the court stated, “The critical issue is whether the summary judgment record alleges ‘a liability arising on the face of the complaint and policy.’”
Using these principles, the court first addressed Mills arguments and proofs that Ms. Sychantha complaint alleged accidental damage to the foundation constituting an occurrence under Nautilus’ policy.
The court noted that neither Mills nor Nautilus disputed that the claim of a damaged foundation amounted to“property damage” under the insurance contract. They did disagree, however, on whether Ms. Sychantha’s complaint stated or adumbrated a claim for damage to the foundation caused by an occurrence.
The court found that her state court complaint described no accidents leading to the foundation damage. Instead, it merely stated that “in or about August 2014, Mills undertook demolition of the damaged premises. During demolition, Mills damaged the foundation.”
The complaint, according to the court, further asserted that Mills breached its contract by:
- “[F]ailing to demolish . . . the premises in conformity with building plans and specification,”
- That Mills “breached the duty of care by failing to act as a reasonable construction supervisor,” and
- That Mills failed to supervise its subcontractors working at the premises properly.
Based on these allegations, the court found Ms. Sychantha’s complaint described no accidents related to the foundation, and thus, no policy defined “occurrences.”
The court concluded, “the complaint – when considered alone – does not support an interpretation that Sychantha’s claims regarding the foundation damage trigger Nautilus’s duty under the Policies to defend Mills and [its president].”
On the additional facts and submissions that Mills submitted to Nautilus after Nautilus’ initial denial of coverage, that court stated, “Massachusetts courts generally use extrinsic facts (such as those set forth in demand letters to the insurer) to aid interpretation of the complaint and not as independent factual predicates for a duty to defend.” Thus, the court ruled that extrinsic facts cannot create a duty to defend in the absence of complaint alleging possible covered claims. In support of this ruling, the court cited a Massachusetts Supreme Judicial Court denying that “an insured can in the absence of a complaint that requires coverage, force its insurer to defend the insured by simply telling the insurer facts which would create coverage.”
Balance of alleged covered claims barred by business risk exclusion of Nautilus’ policy
In its motion for summary judgment, Mills also asserted that, along with the foundation claim, three other covered claims contained in Ms. Sychantha’s complaint alleged covered claims: damage to the home’s paint job, damage to hardwood floors, and damage to a hearth.
In addressing all these coverage claims, the judge started with the premise that “General liability coverage is not intended as a guarantee of the insured’s work, and for that reason, general liability policies contain ‘business risk’ exclusions.” These “business risks” the judge noted are those:
Which management can and 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.
In Nautilus’ policy, the business risk exclusions, Exclusions 2(J)(5) and 2(J)(6), precluded coverage for damage to “[t]hat 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” and damage “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it,” respectively. In the policy, the term “your work,” as used in Exclusion 2(J)(6) means “(1) Work or operations performed by you or on your behalf; and (2) Materials, parts or equipment furnished in connection with such work or operations.”
The court noted that even if one could read Ms. Sychantha’s complaint as alleging policy-defined “occurrences,” any such claims would still invoke the policy’s business risk exclusions.
The court restated that in her complaint Ms. Sychantha alleged that she hired Mills to “perform construction work to rebuild the premises,” that Mills undertook to demolish the damaged premises, and that, in doing so, damaged the foundation. She alleged further that there were “many problems with the construction of the home,” naming various discrete issues. The examples she provided, included that the rebuilt “foundation lacks rebar.”
To the court, these statements were consistent with Ms. Sychantha claim that she contracted with Mills for an overall project, from home demolition to reconstruction. The contract Mills submitted to the court was for “reconstruction of a single-family home,” with the “Contract Documents” describing the work of the contract including not only the insurance claim repairs but also “Plans and specifications,” and “Owner provided plans.”
On further review of Ms. Sychantha’s complaint, the court agreed with Nautilus that because Ms. Sychantha claimed that she had contracted with Mills to reconstruct her home, all the claims involved “particular part[s] of real property.” As a result, whether accidents or not, all the claims fell within the policy’s business risk exclusions “as they stem from Plaintiffs’ work on the entire property, and amount to a claim for poor workmanship.”
Final judgment for Nautilus with no appeal filed by Mills
The court finished the ruling stating: “For the reasons discussed above, [Nautilus’ Motion for Summary Judgment is hereby GRANTED and [Mills’] Motion for Summary Judgment is DENIED.” (Emphasis in original).
Mills had thirty days to appeal Judge Talwani’s decision to the First Circuit Court of Appeals. Since no appeal was filed by May first, the court’s decision is final.