American Home Assur. v. Agm Marine Contractors

• Decision Date: 08 November 2006
• Docket Number: No. 05-2310.,05-2310.
• Citation: 467 F.3d 810
• Parties: AMERICAN HOME ASSURANCE COMPANY, Plaintiff, Appellee, v. AGM MARINE CONTRACTORS, INC., Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

467 F.3d 810

AMERICAN HOME ASSURANCE COMPANY, Plaintiff, Appellee, v. AGM MARINE CONTRACTORS, INC., Defendant, Appellant.

No. 05-2310.

United States Court of Appeals, First Circuit.

Heard July 31, 2006.

Decided November 8, 2006.

Eric F. Eisenberg with whom Jeremy Blackowicz and Hinckley, Allen & Snyder, LLP, were on brief, for appellant.

Robert J. Murphy with whom Holbrook & Murphy, was on brief, for appellee.

Before BOUDIN, Chief Judge, TORRUELLA and DYK,^* Circuit Judges.

BOUDIN, Chief Judge.

This insurance coverage case arises out of the following events. In fall 2000, the Town of Provincetown, Massachusetts ("Provincetown"), contracted with AGM Marine Contractors ("AGM") to reconstruct MacMillan Pier on the Provincetown waterfront and to procure and install a concrete floating dock system. Under AGM's superintendence, Southeast Floating Docks ("Southeast") agreed to provide floating docks for MacMillan Pier. Installation of the new dock system was completed in June 2003.

There were two main floating docks (A and B) extending outward from MacMillan Pier. These main docks floated on the surface of the water but stayed in position next to MacMillan Pier because piles, planted in the ground below the water's surface, ran though u-brackets on the sides of the floating docks. A number of smaller "finger" floating docks extended from the main floating docks and were held in place by connections to the main docks.

A strong winter storm occurred during December 5-7, 2003. Some of the floating docks broke loose; some sank; and most were irreparably damaged. Immediately after the storm, Provincetown directed AGM to retrieve the docks, which it did. AGM was later required by the town to provide replacement docks. AGM incurred significant costs which it sought to recover from both insurance and from Southeast (which it accused of having failed to follow specifications in building the docks).

In March 2004, AGM notified American Home Assurance Company ("American Home") of a claim under the commercial marine liability policy that American Home had issued to AGM, providing coverage from January 1, 2003 to January 1, 2004 ("the policy"). The policy is based on the standard Commercial General Liability Coverage ("CGL") form written by the Insurance Services Office ("ISO"), an organization of insurance companies that prepares standard form contracts, among other things.

American Home denied AGM's claim for coverage and on June 17, 2004, filed a petition for declaratory judgment in the federal district court in Massachusetts to establish that it had no liability under the policy. AGM counterclaimed and sought recovery for the cost of recovering the docks, loss of use of the docks and for repairing damage to the docks or replacing them. Both sides moved for summary judgment.

On July 25, 2005, the district court granted summary judgment in favor of American Home, concluding that the policy did not cover the losses for which AGM sought recovery. American Home Assurance Co. v. AGM Marine Contractors, Inc., 379 F.Supp.2d 134, 135 (D.Mass. 2005). Less than six months later, an arbitrator granted AGM recovery against Southeast for $389,703, concluding that Southeast had failed to follow specifications in designing the docks. Southeast is currently contesting the arbitration award.

AGM now appeals from the district court's decision denying insurance coverage. Review on summary judgment is de novo, drawing inferences in favor of the non-moving party. Nicolo v. Philip Morris, Inc., 201 F.3d 29, 33 (1st Cir.2000). Where, as is the case here, cross-motions are involved, the court applies this standard to each motion separately. Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir.1997).

Although the case is within the admiralty jurisdiction of the federal courts because the contract was "maritime in nature," Acadia Ins. Co. v. McNeil, 116 F.3d 599, 601, 603 (1st Cir.1997), we look to state law (in this case Massachusetts), given the absence of a federal statute or a federal judicially created rule governing such contracts. Littlefield v. Acadia Ins. Co., 392 F.3d 1, 6-7 (1st Cir.2004). Absent Massachusetts precedent, decisions elsewhere construing standard CGL language may be useful.

Generally, the policy provides that American Home "will pay those sums that [AGM] becomes legally obligated to pay as damages because of `bodily injury' or 'property damage' to which this insurance applies." Such damages must be caused by an "occurrence," defined as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." There are also numerous exclusions to coverage.

American Home's position is that there was neither an "occurrence" nor "property damage," and that even if there were, two different exclusions apply: the "damage to Assured's work" exclusion and the "damage to Assured's product" exclusion. AGM takes the opposite position on each issue and, in addition, argues that there is coverage for damage to the docks under the "product-completed operations hazard" and that public policy requires coverage for the costs of recovering the docks after they broke loose.

That there should be doubts about the presence of an "occurrence" or "property damage" might initially puzzle an observer because the storm was obviously an "occurrence" in the common use of the term, and the breaking loose of the dock and its subsequent damage is easily described as an "accident" that led to "property damage." The doubts that some courts have expressed arise because CGL coverage is primarily directed to liabilities other than defects in one's own work. As the Massachusetts Supreme Judicial Court said, quoting an article on insurance:

The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself .... ¹

A curious split in authority has resulted. Some courts have held that faulty workmanship by the insured, so far as damage is only to its product, does not constitute an "occurrence" under CGL policies, e.g., Auto-Owners Ins. v. Home Pride Cos., 268 Neb. 528, 684 N.W.2d 571, 577 (2004); see also Russ, 9A Couch on Insurance § 129:4 (3d ed.1995); and others have held that faulty workmanship does not constitute "property damage," e.g., Amtrol, Inc. v. Tudor Ins. Co., 2002 WL 31194863, at *6 (D.Mass.2002). By contrast, other courts have focused solely upon the exclusions of the CGL policy. E.g., Caplette, 647 N.E.2d at 1213.

The cases that have refused coverage at the occurrence or property damage threshold often involve the discovery of a latent defect or of an emerging negative condition (like construction defects, leaking water heaters, peeling paint, or cracking floors).² In such cases a court might well question whether there is literally an "occurrence" or "property damage" due to an "occurrence." But in this case what happened to the docks was far from a mere latent condition or slow deterioration, so many of the cases refusing coverage are distinguishable.

Whether Massachusetts would follow the "occurrence" cases is not certain. In Caplette the Supreme Judicial Court bypassed the issue in a case involving damage to the insured's product, going instead directly to the exclusions. This might suggest that the SJC thought that the occurrence and property damage requirements were satisfied, but the parties did not dispute the issue. In all events, one of the exclusions in this case bars coverage even if we assume arguendo that there was an occurrence and property damage within the meaning of the policy.

We deal first with the "Assured's work" exclusion. The "Assured's work" exclusion excludes coverage under the policy for the following:

"Property damage" to "the Assured's work" arising out of it or any part of it and included in the "products-completed operations hazard." This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on the Assured's behalf by a subcontractor.

Under the definitions section of the policy, "Assured's work" includes "work or operations performed by the Assured or on [its] behalf." So at first blush, the "Assured's work" appears to include work done by Southeast, assuming that Southeast were a subcontractor. But if Southeast were a subcontractor, the exclusion would not apply by virtue of its second sentence. And if instead Southeast were merely a vendor who supplied a product and not a subcontractor, the docks would not be the "Assured's work" or work done on "its behalf," so again the exclusion would not apply.

Of course, the exclusion would apply if the harm arose out of AGM's own work rather than that of Southeast. However, the arbitrator found that the original cause of the breaking away of the docks was faulty work by Southeast including failure to follow specifications. Conceivably American Home could contest this finding and blame AGM (the insurer was not a party to the arbitration). We need not pursue this possibility because the "Assured's product" exclusion does appear to bar coverage, even if the "Assured's work" exclusion does not.

The "Assured's product" exclusion precludes recovery for "`property damage' to 'the Assured's product' arising out of it or any part of it." The policy defines "Assured's product" to include "any goods or products, other than real property, manufactured, sold, handled, or distributed by ... [t]he Assured." The "Assured's product" exclusion, like the "Assured's work" exclusion, is broadly consistent with the limited office of CGL coverage to protect against liability for harm "other than to the product or completed work itself." Caplette, 647 N.E.2d at 1213.

AGM disputes that the docks were its product, saying that they were made by Southeast. But if AGM acquired the docks from Southeast as a vendor and resold...