Commerce Ins. Co. v. Betty Caplette Builders, Inc.

• Decision Date: 14 April 1995
• Citation: 420 Mass. 87,647 N.E.2d 1211
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: COMMERCE INSURANCE COMPANY v. BETTY CAPLETTE BUILDERS, INC., & another. 1

Page 1211

647 N.E.2d 1211

420 Mass. 87

COMMERCE INSURANCE COMPANY v. BETTY CAPLETTE BUILDERS, INC., & another. ¹

Supreme Judicial Court of Massachusetts Worcester.

Argued Nov. 7, 1994.

Decided April 14, 1995.

Charles B. Straus, III, Worcester, for defendants.

Philip J. MacCarthy, Worcester, for plaintiff.

Before LIACOS, C.J., and WILKINS, ABRAMS, NOLAN, LYNCH, O'CONNOR, and GREANEY, JJ.

O'CONNOR, Justice.

The question before us in this appeal is whether a house built and sold by a builder and developer of residential real estate is a "product" for purposes of a product exclusion in the developer's comprehensive general liability insurance policy. We answer that question, "Yes." Accordingly, we affirm the judgment of the Superior Court.

The following are the material undisputed facts. The plaintiff, Commerce Insurance Company (Commerce), issued to Doris E. Caplette and, by amendment, to Betty Caplette Builders, Inc. (referred to collectively as "Caplette" unless otherwise indicated), a comprehensive general liability insurance policy (CGL policy) which included a broad form comprehensive general liability endorsement. Section I of the CGL policy provides that:

"The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of

"A. bodily injury or

"B. property damage

"to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage...."

The policy contained exclusions to the recited coverage. Among the listed exclusions were those stating that coverage did not apply:

"(n) to property damage to the named insured's products arising out of such products or any part of such products;

"(o) to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof...."

The phrase "named insured's products" is defined by the policy to:

"mean[ ] goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name, including any container thereof (other than a vehicle), but "named insured's products" shall not include a vending machine or any property other than such container, rented to or located for use of others but not sold."

Section VI of the broad form comprehensive general liability endorsement provides that:

"The insurance for property damage liability applies, subject to the following provisions:

"(A) Exclusion[ ] ... (o) [is] replaced by the following:

"...

"(3) with respect to the completed operations hazard ... to property damage to work performed by the named insured arising out of such work or any portion thereof...."

Caplette is a real estate developer whose business involves purchasing house lots and building houses on them for sale to the general public. Between 1987 and 1989, four of the owners of houses built and sold by Caplette sued Caplette Builders, Inc., for property damage to their real estate resulting from defective septic systems. The deficiencies in the septic systems were recognized by the homeowners after they had purchased their homes from Caplette. All the septic systems were designed and installed by subcontractors on behalf of Caplette, not by Doris E. Caplette or Betty Caplette Builders, Inc.

Commerce declined to cover Caplette for the property damage to the septic systems of the four houses, and Commerce also declined to provide Caplette with a defense. In declining to provide either indemnification or a defense, Commerce relied on exclusions (n) and (o), the product exclusion and the work exclusion.

Commerce commenced the present action against Caplette in the Superior Court seeking a declaratory judgment that it was not obligated either to defend the homeowners' actions for property damage to their homes or to pay any judgments in those actions. Commerce relied on exclusion (n) and exclusion (o). Caplette answered the complaint and Doris E. Caplette asserted a counterclaim alleging unfair and deceptive settlement practices by Commerce. Thereafter, Caplette moved for summary judgment on Commerce's complaint, and a judge ordered partial summary judgment in favor of Caplette requiring Commerce to defend the four homeowner actions against Caplette.

Following a trial without jury, another judge declared "that the Commerce Insurance policy issued to Caplette does not cover property damage allegedly caused by Caplette's negligence and breach of various warranties in the construction of four houses." "In light of the foregoing," the judge dismissed the counterclaim and ordered the entry of judgment for Commerce as plaintiff. We transferred the defendant's appeal to this court on our own initiative.

Commerce's comprehensive general liability policy extended protection to Caplette against claims by others arising out of an "occurrence" for which Caplette was responsible. Commerce does not dispute that the claims would be within the insurance coverage were it not for exclusion (n), but contends that coverage of the claims is avoidable because of that exclusionary clause. Exclusion (n) excludes coverage for "property damage to the named insured's products arising out of such products." "[N]amed insured's products" is defined as "goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name, including any container thereof." It is Commerce's position that the houses built and sold by Caplette, the insured, are Caplette's "products" within the meaning of the product exclusion. We agree.

Whether a house is a product of the insured builder-vendor for insurance purposes is a question of first impression in this Commonwealth. The majority of jurisdictions which have examined this issue have held that the entire house is the product of the builder. See, e.g., Gary L. Shaw Builders, Inc. v. State Auto. Mut. Ins. Co., 182 Ga.App. 220, 223-224, 355 S.E.2d 130 (1987) (house was builder's product); Indiana Ins. Co. v. DeZutti, 408 N.E.2d 1275, 1280 (Ind.1980) (because insured was general contractor over construction of entire residence, his finished product was entire house); Owings v. Gifford, 237 Kan. 89, 93-94, 697 P.2d 865 (1985) (house built by insured builder is product of builder); Allen v. Lawton & Moore Builders, Inc., 535 So.2d 779, 781 (La.Ct.App.1988) (house and lot were contractor's products); Gene & Harvey Builders, Inc. v. Pennsylvania Mfr. Ass'n Ins. Co., 512 Pa. 420, 425, 517 A.2d 910 (1986) (house was product of the contractor). See also U.S. Fire Ins. Co. v. Colver, 600 P.2d 1 (Alaska 1979); Quality Homes, Inc. v. Bituminous Casualty Corp., 355 N.W.2d 746 (Minn.Ct.App.1984); T.E. Ibberson Co. v. American & Foreign Ins. Co., 346 N.W.2d 659 (Minn.Ct.App.1984). The reasoning in these decisions is persuasive, and although we know of one State court which has held the contrary, Mid-United Contractors, Inc. v. Providence Lloyds Ins. Co., 754 S.W.2d 824, 826 (Tex.Ct.App.1988), we follow what is clearly the majority view. As Professor Roger C. Henderson states in a frequently cited article:

"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, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because...