Massachusetts CGL Coverage Split: First Circuit’s New Ruling Changes Risk Landscape

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The First Circuit Court of Appeals has addressed, but not definitively settled, a fundamental question about commercial general liability (CGL) coverage in construction defect cases under Massachusetts law. The November 8, 2024, decision in Admiral Insurance Co. v. Tocci Building Corp. examined whether a CGL policy must defend claims against a general contractor for property damage resulting from defective subcontractor work.

While acknowledging uncertainty about how the Massachusetts Supreme Judicial Court might ultimately interpret such coverage, the First Circuit affirmed the District Court’s decision in favor of Admiral Insurance Co. (“Admiral”), although on different grounds. Rather than predict how Massachusetts’ highest court would view coverage for resulting damage from subcontractor work, the First Circuit relied on the policy’s business risk exclusions to find no duty to defend.

This coverage dispute emerged from the troubled construction of The Golden Triangle, a luxury apartment complex in East Brunswick, New Jersey. Tocci Building Corporation (“Tocci”) served as construction manager from 2013 until March 2016, when the project owner, Toll JM EB Residential Urban Renewal LLC, terminated Tocci, citing widespread construction defects. Key claims involved classic resulting damage scenarios: water damage to sheetrock from faulty roof work, mold formation from inadequate sheathing, and damage to underground pipes and concrete slabs from improper soil compaction – all performed by Tocci’s subcontractors but allegedly damaging work outside the scope of their specific contracts.

The District Court, applying Massachusetts law, found no coverage based on its interpretation that the damage did not constitute “property damage” or an “occurrence” under Tocci’s CGL policy. On appeal, the First Circuit took a different path. While acknowledging uncertainty about how Massachusetts courts would interpret CGL coverage for resulting damage from subcontractor work, the appeals court found it unnecessary to address this open question. Instead, the First Circuit focused on the policy’s definition of “Your Work,” encompassing the entire project for which Tocci contracted to manage as a general contractor. Under this reading, the CGL’s business risk exclusion barred coverage for all resulting property damage caused by Tocci’s subcontractors.

Factual Background and Procedural History: A Complex Construction Management Dispute

In December 2013, Toll JM EB Residential Urban Renewal LLC engaged Tocci Building Corporation as construction manager for The Golden Triangle apartment complex in East Brunswick, New Jersey. The construction management agreement placed Tocci in charge of all aspects of project construction, including hiring and supervising the various subcontractors who performed work on the development.

Problems emerged throughout the construction process. According to Toll’s claims, significant workmanship issues plagued the project, particularly concerning the building envelope. Specific defects included deficient installation of the primary weather resistive barrier (identified as the “Zip System”) and improper window installation and sealing across all five buildings under construction at the time.

The issues extended beyond the building envelope. Toll alleged Tocci missed critical permitting deadlines and failed to install required perimeter drains in basement areas. Perhaps most significantly, Tocci allegedly failed to properly backfill basement walls with appropriate structural bracing, leading to soil settlement that damaged underground utilities. The severity of these settlement issues prompted Toll to issue Stop Work Orders for portions of two buildings.

On March 2, 2016, Toll terminated Tocci, citing “countless delays to the Project schedule” that Tocci either caused or exacerbated through improper project management. Toll filed suit in New Jersey Superior Court in July 2016. The complaint alleged breach of contract and breach of the implied covenant of good faith and fair dealing claims rather than negligence theories, though it detailed numerous instances of defective work leading to property damage.

Despite Toll having filed suit in 2016, Tocci did not seek coverage from Admiral until January 2020. Admiral had issued successive CGL policies to Tocci from 2012 through 2020, each providing $1 million per occurrence and $2 million aggregate limits. In March 2020, Admiral denied coverage, asserting that Toll’s action contained no allegations of property damage caused by an occurrence as defined in the policies.

The coverage dispute intensified when Tocci’s counsel highlighted deposition testimony from Toll’s corporate designee detailing specific instances of resulting damage: sheetrock damage from roof leaks, mold formation from water infiltration, and concrete slab and framing damage from soil settlement. These examples formed the core of Tocci’s argument that subcontractor-caused damage to otherwise non-defective work should trigger CGL coverage.

Admiral responded by filing this declaratory judgment action in federal court, seeking confirmation it had no duty to defend or indemnify Tocci under Massachusetts law. The ensuing litigation would test the boundaries of CGL coverage for construction defect claims, particularly regarding the treatment of resulting damage caused by subcontractor work.

The First Circuit’s Analysis: Navigating Complex Coverage Territory

The First Circuit’s decision revealed the intricate interplay between general liability coverage and construction defect claims in Massachusetts. While the appeals court ultimately affirmed the District Court’s ruling denying coverage, it did so through markedly different reasoning that could affect future construction coverage disputes.

Choice of Law

Although Tocci had initially argued for the application of New Jersey law in the District Court proceedings, a move that would have potentially secured coverage under New Jersey’s more expansive interpretation of CGL policies, this issue became moot on appeal. The First Circuit applied Massachusetts law without controversy, as Tocci did not challenge the District Court’s choice of law determination.

The Core Coverage Question

The central issue before the court involved whether Admiral’s CGL policies covered resulting damage to non-defective portions of the project caused by defective subcontractor work. The District Court had concluded no coverage existed because the alleged damage did not qualify as “property damage” and was not caused by an “occurrence” under Massachusetts law.

The First Circuit, however, expressed uncertainty about whether Massachusetts courts would adopt this restrictive view. The court noted a “sharp split of authority” nationally on whether damage to non-defective work resulting from a subcontractor’s defective work constitutes “property damage” or is caused by an “occurrence.” Significantly, the court acknowledged that since 2012, state supreme courts considering this issue “have reached near unanimity,” recognizing coverage for unexpected damage caused by defective subcontractor workmanship.

The Business Risk Exclusion Path

Rather than predict how the Massachusetts Supreme Judicial Court might resolve this unsettled question, the First Circuit focused on the policy’s business risk exclusions. The court particularly examined exclusion (j)(6), which bars coverage for “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.”

Crucially, the court interpreted “your work” broadly based on Tocci’s role as a general contractor. Because Tocci was responsible for managing the entire project, the court reasoned that all property damage at the site – even damage to non-defective work caused by subcontractors – fell within this exclusion. The court cited the Massachusetts case Jet Line Services, Inc. v. American Employers Insurance Co. for the principle that when a commercial insured contracts to perform work on an entire unit of property, the insured cannot slice and dice the exclusions to apply to less than the whole unit.

The Decision Leaves A Key Coverage Questions Unresolved

While affirming no coverage exists for Tocci Building Corporation’s construction defect claims, the First Circuit Court of Appeals has acknowledged fundamental uncertainty in Massachusetts law regarding CGL coverage for damage caused by defective subcontractor work. The November 8, 2024 decision highlights a growing national split on this critical coverage issue.

In ruling for Admiral Insurance Company, the First Circuit sidestepped the central question that divides jurisdictions: whether standard CGL policies cover resulting damage to non-defective work when caused by defective subcontractor performance. The court noted that state supreme courts addressing this issue since 2012 have overwhelmingly recognized such coverage. New Jersey, where Tocci’s troubled Golden Triangle luxury apartment project was located, explicitly provides this protection.

Instead of predicting how Massachusetts would resolve this question, the First Circuit relied on the policy’s business risk exclusions. Because Tocci served as the general contractor responsible for the entire project, the court found all property damage fell within the “Your Work” exclusion – even damage to non-defective portions caused by subcontractors.

This approach resolved the immediate dispute, leaving the question of broader coverage for the Massachusetts Supreme Judicial Court. Until a Massachusetts appellate court rules, the application of CGL coverage for general contractors sued over any resulting damage caused by its subcontractors’ substandard work remains an open question of Massachusetts insurance coverage law.