Business Risk Exclusion Dooms Coverage for Construction Defect Claim

    The First Circuit, following Massachusetts law, found that coverage for allegations against the insured contractor for faulty workmanship were barred by the policy's (j) (6) Exclusion. Admiral Ins. Co. v. Tocci Bldg. Corp., 2024 U.S. App. LEXIS 28439 (1st Cir. Nov. 8, 2024). 

    Tocci Building Corporation 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 for alleged mismanagement of the project. Toll then filed a lawsuit against Tocci. 

    The claims against Tocci included (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 a concrete slab, wood framing, and underground pipes resulting from soil and settlement due to improperly backfill and soil compaction. 

    Tocci tendered the suit to Admiral. Coverage was denied based on Admiral's conclusion that there were no allegations that Tocci was liable for property damage caused by an occurrence. Admiral commenced this coverage action seeking a declaratory judgment that it had no obligation to defend or indemnify Tocci.

    Admiral and Tocci filed cross-motions for partial summary judgment on whether Admiral had a duty to defend. The district court granted Admiral's motion and denied Tocci's motion, concluding that Admiral had no duty to defend. The court ruled that the damage alleged in Toll's complaint did not qualify as "property damage" as defined in the policy because the allegations consisted  entirely of damage at Tocci's own project.

    On appeal, the key issue was whether, under Massachusetts law, a general contractor's CGL policy covered damages to non-defective work resulting from defective work by subcontractors. The First Circuit found that Massachusetts' law was unsettled on whether damage to non-defective work resulting from a subcontractor's defective work constituted "property damage" or was caused by an "occurrence."  Instead, the First Circuit turned to the policy's exclusions.

    Exclusion (j) (6) stated there was no coverage for "property damage" to "(6) That particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it." "Your work" was defined as "[w]ork or operations performed by you or on your behalf[.]" An exception to Exclusion (j) (6) provided that it did not apply to "'property damage' included in the 'products-completed operations hazard.'" The "products-completed operations hazard", however, did not apply if the work had been completed or abandoned. 

    The question presented was whether the allegations qualified 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." Here, Tocci was retained as a general contractor for the entire Toll project, not just a portion of it. Thus, "[t]hat particular part of any property that must be restored, repaired or replaced because '[Tocci's] work' was incorrectly performed on it" referred to the entirety of the project where Tocci was the general contractor charged with supervising and managing the project as a whole.

    Another question was whether the project was "completed or abandoned" prior to the damage so that it would fall under the "products-completed operations hazard" and be covered. Here, Tocci was terminated from the project and did not complete the work. It made no argument that its termination from the project should qualify as "abandonment" under the policy. Therefore, Tocci failed to meet its burden of showing that any exception to the exclusion applied.

    The ruling for the district court was affirmed.