A determined suit by a high-end builder, 689 Charles Street, LLC, to have its insurer, American Zurich Insurance Company, provide coverage under a builders’ risk policy for a third-party lawsuit claiming defective construction by a home purchaser who paid $1,880,000 to the builder, ended in a decision for the insurer in federal court on September 4, 2018,
In the decision, 689 Charles River, LLC v. American Zurich Insurance Company (“Charles River” and “Zurich”), a federal district judge ruled in favor of Zurich on a motion for summary judgment. In its coverage suit, Charles River contended that Zurich’s builders’ risk policy was a third-party policy that ought to protect it from liability for damage suffered by the homeowner.
Sale of a home in Needham for $1,880,000 with claimed substandard construction
Charles River bought a parcel of land from the Archdiocese of Boston for $600,000 on Charles River Street in Needham in 2012. Thereafter, it built a single-family home on the property located at 689 Charles River Street, Needham. In July 2014, Charles River sold the new-completed home to a limited liability company (“LLC”). This LLC purchased the property on behalf of Steven J. Sands (“Sands”) for $1,880,000.
In the winter of 2015, the house suffered extensive ice dams that exposed multiple construction defects. Sands insurance company, Privilege Underwriters Reciprocal Exchange (“PURE”) paid Sands $82,313.38 for ice dam damage.
After the ice dams brought to light the alleged construction defects, Sands and his LLC filed a lawsuit against Charles River in Norfolk Superior Court alleging breach of the implied warranty of habitability, fraud and deceit, fraudulent misrepresentation, negligence, and unfair and deceptive business practices in violation of Mass. Gen. Laws. ch. 93A.
Charles River, for its part, submitted the suits to Zurich which denied coverage. Charles River sued Zurich for coverage in state court, and Zurich removed the suit to the United States District Court for Massachusetts.
Charles River’s construction project and Zurich’s builders’ risk policy
Zurich had issued a builders’ risk policy to “689 Charles River Street LLC,” with a policy period that ran from July 3, 2013, to July 3, 2014.
The policy provided coverage for damage to new construction occurring at 689 Charles River Street, Needham, Massachusetts (“the Covered Property”), up to $850,000, and included coverage of certain consequential losses, such as debris removal, pollutant clean-up, fire department service charges, and storage of property at a temporary location.
The policy’s insuring agreement stated: “[Zurich] will pay for direct physical loss or damage to Covered Property from any Covered Cause of Loss described in this Coverage Form.”
The policy defined “Covered Property,” in part, as “[p]roperty which has been installed, or is to be installed in any ‘commercial structure’ or in any one to four-family dwelling. .. includ[ing]: (a) Your property; (b) Property of others for which you are legally responsible; [and] (c) Paving, curbing, fences and outdoor fixtures.”
The policy further provides that Zurich “may adjust losses with the owners of lost or damaged property if other than you. If we pay the owners, such payments will satisfy your claim against us for the owners’ property. We will not pay the owners more than their financial interest in the Covered Property.”
In the next paragraph, it states that Zurich “may elect to defend you against suits arising from claims of owners of the property. We will do this at our expense.”.
The policy covered “risk of direct physical loss or damage to Covered Property,” but excluded “loss or damage caused by or resulting from…[f]aulty, inadequate or defective:
- Planning, zoning, development, surveying, siting;
- Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
- Materials used in the repair, construction, renovation or remodeling; or
- Maintenance of all or part of any Covered Property wherever located.”
The Sands lawsuit and the PURE subrogation suit
On October 9, 2015, Sands filed a lawsuit against Charles River seeking damages from Charles River and five individuals for the “spectacularly shoddy and stunningly substandard design and construction” of the house.
The lawsuit alleged the house Sands bought contained “serious latent defects” caused by “improper design, material, and/or workmanship,” which combined to make the house “unfit for human habitation.” However, the lawsuit claimed the defects did not manifest themselves until February 2015.
The alleged defects included inadequate or wholly missing insulation, improper air filtration, missing joists and structural beams, improper toilet installation, and sealing so poor as to cause “catastrophic water damage to the interior of the Home from typical regional weather such as snow, rain and ice” and “disastrous growth of mold.” The lawsuit alleged five counts for relief:
- Breach of the Implied Warranty of Habitability.
- Fraud and Deceit.
- Fraudulent Misrepresentation.
- Negligence
- Violation of Mass. Gen. Laws ch. 93A. ( Ex. 1 ¶¶ 42-79).
Subsequently, PURE filed its own suit in Suffolk Superior Court subrogating against Charles River for the $82,313.38 ice dam claim it paid on the Sands property.
Zurich denies Charles River’s claim as not being within the insuring agreement
In December 2015, Charles River submitted a claim to Zurich for defense costs and indemnity for the Sands suit claiming coverage under Zurich’s builders’ risk policy. Charles River reported the date of loss as February 15, 2015, the date of the Sands’ ice dam claim. Subsequently, Charles River submitted the PURE subrogation suit for claim payments PURE paid Sands. Zurich denied coverage for both claims.
After Zurich’s denials, Charles River sued Zurich in the Massachusetts Superior Court alleging its builders’ risk policy provided coverage for the Sands lawsuit and the PURE lawsuit.
Zurich removed Charles Rivers’ suit to federal court, and after some discovery, Zurich filed for summary judgment stating that there were no material facts in dispute requiring a jury trial, and based on these undisputed facts, Zurich was entitled to judgment in its favor as a matter of law.
The federal judge hearing the case agreed.
Court’s decision on builders’ risk policy’s coverage
In his decision, the judge noted the distinction in insurance law between “first-party policies” and “third-party policies.” With first-party policies covering physical loss or damage to the insured’s property caused by actions or effects outside of the policyholder’s control including the negligent conduct of others. However, third-party policies are intended to protect the insured by defending and indemnify insureds from liability for damage suffered by third parties arising out of actual or alleged actions of the insured.
In this case, the judge noted, the builders’ risk policy contained no obligation to defend. The word “defend” did appear in the policy but only once—in the section titled “Loss Payment,” where it stated: “We may elect to defend you against suits arising from claims of owners of the property. We will do this at our own expense.”
The judge found the words “may elect to defend” did not create an obligation to defend, because the option to defend only applied to Zurich—not Charles River.
Since the policy explicitly stated that it covered “direct physical loss or damage,” the court was not inclined to read the single sentence allowing Zurich to “elect to defend” Charles River against suit from “claims of owners of property” as a general promise to defend Charles River against legal claims from the Sands and PURE lawsuits.
Instead, the judge read the builders’ risk policy in question as expressly excluding “loss or damage caused by or resulting from. .. [f]aulty, inadequate or defective:
- Planning, zoning, development, surveying, siting;
- Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction;
- Materials used in the repair, construction, renovation or remodeling; or
- Maintenance of all or part of any Covered Property wherever located.”
The Sands suit alleged that “serious latent defects”—including inadequate or wholly missing insulation, improper air filtration, missing joists, and structural beams, improper toilet installation, and poor sealing—were caused by “improper design, material, and/or workmanship.”
The federal judge found those allegations—of defective workmanship and dishonest acts—are exactly what the policy said it would not cover. To the judge, the policy was not reasonably susceptible to an interpretation that it covered the allegations of the third-party complaints by Sands or PURE.
The Court concluded: “Therefore, even if the builders’ risk policy could be considered a third-party liability policy—which the Court seriously doubts—Zurich has no obligation to defend or indemnify Charles River from the Sands and PURE lawsuits.”
Claim under second policy voided for failing to pay the policy’s premium
Charles River also claimed under another commercial policy that Zurich had issued to “689 Charles River Street LLC.” This policy was to have a policy period extending from July 3, 2014, to July 3, 2015. However, the Court found that Charles River never paid the premium for that second policy. The judge presumed that Charles River never paid the premium because it sold the house to Sands on July 5, 2014, two days after the policy was to have taken effect.
Based on the evidence of nonpayment and a flat cancellation issued by Zurich’s agent, the Court found this policy never took effect, and its terms were immaterial.
Notwithstanding the cancellation, this policy would have provided no coverage to Charles River after the property was sold. The policy had a “Commercial Marine Miscellaneous Declarations Unsold Dwelling” form which provided:
This policy insures vacant, unoccupied dwellings–the property of the first named insured–until such time as the property has been sold…In no event shall this policy cover completed dwellings which have been occupied in whole or in part for a period in excess of 30 days.”(Emphasis added).
Since the Sands lawsuit alleged that the property in question was conveyed on July 5, 2014, and the loss occurred on February 15, 2015, more than thirty days after the property became occupied, any insurance coverage ceased before the alleged date of loss.
Thirty days to appeal
Charles River has thirty days to appeal to the First Circuit Court of Appeals. Agency Checklists will monitor any appeal if an appeal is filed. However, based on the purpose and terms of a builders’ risk policy, an appeal seems unlikely.
