Essex Ins. Co. v. Bloomsouth Flooring Corp., 06-2750.

• Citation: 562 F.3d 399
• Decision Date: 16 April 2009
• Docket Number: No. 06-2750.,06-2750.
• Parties: ESSEX INSURANCE COMPANY, Plaintiff, Appellee, v. BLOOMSOUTH FLOORING CORPORATION, Defendant, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

562 F.3d 399

ESSEX INSURANCE COMPANY, Plaintiff, Appellee, v. BLOOMSOUTH FLOORING CORPORATION, Defendant, Appellant.

No. 06-2750.

United States Court of Appeals, First Circuit.

Heard September 11, 2007.

Decided April 16, 2009.

Steven L. Schreckinger, with whom Harvey Nosowitz, and Lynch, Brewer, Hoffman & Fink, LLP, were on brief for appellant.

Robert L. Ciociola, with whom Litchfield Cavo, LLP was on brief, for appellee.

Before LIPEZ, SELYA and HOWARD, Circuit Judges.

HOWARD, Circuit Judge.

This appeal involves a coverage dispute between Essex Insurance Company and its insured, BloomSouth Flooring Corporation. Essex brought a declaratory judgment action claiming that, pursuant to "business risk exclusions" in its policies, it had neither a duty to defend nor a duty to indemnify BloomSouth in connection with an underlying state court action against BloomSouth. The magistrate judge, presiding by mutual consent, see 28 U.S.C. § 636(c), granted Essex's motion for summary judgment, finding that the pertinent exclusions relieved Essex of both its duties to defend and to indemnify. On appeal, BloomSouth targets only the duty to defend.

Because the exclusions, as applied to the underlying complaint, do not relieve Essex of its duty to defend, we reverse the district court's summary judgment ruling in pertinent part.

I. Background

We recite the facts in the light most favorable to BloomSouth, the party against whom summary judgment was granted. See Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 25 (1st Cir.1997).

In 2000, Boston Financial Data Services ("BFDS") retained Suffolk Construction Corporation as general contractor for a tenant improvement project at its offices in Massachusetts. In undertaking the project, Suffolk subcontracted with BloomSouth for the installation of carpet tile and related materials throughout the building. The subcontract required BloomSouth to perform minor preparation work before laying the carpet. This work included testing and cleaning the concrete floor. BloomSouth itself subcontracted out the installation to two other companies. One was charged with supplying the carpet and the other with installing it.

During all material times BloomSouth had commercial general liability policies with Essex. The general contractor Suffolk was an additional insured on the Essex policies that were issued to BloomSouth. BloomSouth's subcontract also required it to defend and indemnify Suffolk for claims against Suffolk arising out of BloomSouth's work. Coverage under a first policy began on July 15, 2000 and extended through July 15, 2001; coverage under a second policy began on July 15, 2001 and extended through July 15, 2002.

Both policies specifically covered, among other types of damage, liability for "property damage" that occurred in the coverage territory and during the policy period. The policies define property damage as both "[p]hysical injury to tangible property, including all resulting loss of use of that property," and "[l]oss of use of tangible property that is not physically injured." Both policies also contain a number of what are commonly referred to as "business risk exclusions" that serve to deny coverage for certain types of claims that relate directly to the insured's faulty workmanship, as opposed to damage caused to a third party. In turn, many of these exclusions contain exceptions that, if operable, will restore coverage to the insured.

In late April or early May 2001, the carpet was installed. Although it is unclear exactly when BFDS employees moved into the building, after moving in they noticed an odor. The employees described the odor as a "locker room" smell, a "playdough" smell, or a "sour chemical" smell. Some further complained that the odor caused headaches or other ill effects.

BFDS notified Suffolk of the offensive odor. In an effort to eliminate the odor, one of BloomSouth's subcontractors scraped up the original carpet adhesive and re-carpeted the floor. That effort failed to correct the problem and the odor spread to other areas of the building. As a result, the subcontractor and Suffolk conducted tests of the carpet, the floor, and the air in the building. Test results were inconclusive. The subcontractor blamed the smell on a chemical reaction between the carpet and the concrete floor, and Suffolk claimed that the subcontractor had installed defective carpet, causing the odor. BFDS presented a claim of property damage to Suffolk and demanded that Suffolk remove the carpet and eliminate the smell. Suffolk subsequently requested that BloomSouth respond to BFDS's claim. BloomSouth refused, and as a result, Suffolk paid BFDS $1,417,500.00 for remediation efforts. During the remediation process, Suffolk, pursuant to its status as an additional insured under BloomSouth's policy with Essex, notified Essex of BFDS's claim and demanded that Essex defend and indemnify Suffolk. In April 2002, Essex disclaimed coverage to Suffolk for BFDS's claim.

In due course, Suffolk sued BloomSouth in state court. Suffolk asserted claims for negligence, contractual indemnity, breach of the implied warranty of merchantability, breach of express warranty, breach of contract, and contribution under M.G.L. ch. 231B. Suffolk's complaint alleged that: (1) BloomSouth was responsible for negligently and defectively providing and installing carpet "resulting in damage to and loss of use of the building, including an alleged unwanted odor which permeated the building," and (2) BloomSouth's negligent and defective work caused Suffolk to spend money in an attempt to eliminate the alleged odor. Money was spent on, among other things, "the installation of carbon air filters to the ventilation system in the building," and "removal of the existing carpet tile and adhesives, bead-blasting of the concrete floor and replacement of the carpet tile and related materials."

Shortly after Suffolk filed its action against BloomSouth in state court, Essex filed a diversity action in the District of Massachusetts, seeking a declaratory judgment against BloomSouth and Suffolk. Essex sought a declaration that, under the insurance policies issued to BloomSouth, it was not required to defend or indemnify either Suffolk or BloomSouth for the claims being asserted in Suffolk's state court action or for the claims asserted by BFDS against Suffolk. Essex specifically claimed that various business risk exclusions relieved it of any duty to provide defense or indemnity. BloomSouth and Suffolk filed counterclaims seeking a declaration that Essex was required to defend and indemnify them.

After consenting to the jurisdiction of a magistrate judge, the parties agreed to conduct discovery jointly with the discovery in Suffolk's underlying state court action against BloomSouth. After the completion of discovery, all parties moved for summary judgment in the federal court action.

The court granted Essex's motion for summary judgment. Although the court appeared to assume that Suffolk alleged property damage sufficient to give rise to coverage, it concluded that business risk exclusions labeled (m) and (k) relieved Essex of its policy obligations. Exclusion (m) barred coverage for property damage to "impaired property," defined as property that has not been physically injured. The court held that this exclusion barred coverage for Suffolk's allegation that an unwanted odor permeated the building because it was an allegation of damage to "impaired property." Exclusion (k) excluded coverage for property damage to the insured's own product, and the court determined that this exclusion applied to Suffolk's allegation that the concrete floor had to be bead-blasted prior to the installation of replacement carpet. The court arrived at this conclusion by reasoning that during the original installation process the concrete floor had essentially become BloomSouth's product. Finding that these exclusions effectively encompassed "all of the contingencies presented in [Suffolk's] complaint" the court concluded that Essex had no duty to defend or indemnify BloomSouth or Suffolk. BloomSouth appeals from the final judgment of the court.

II. Discussion

We review de novo a court's grant of summary judgment. Bogan v. City of Boston, 489 F.3d 417, 424 (1st Cir.2007). Because this is a diversity case, Massachusetts substantive law controls. B & T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382 F.3d 36, 38 (1st Cir.2004). Under Massachusetts law, the interpretation of an insurance policy is normally a question of law for the court. Ruggerio Ambulance Serv. v. National Grange Mut. Ins. Co., 430 Mass. 794, 724 N.E.2d 295, 298 (2000). Summary judgment for an insurance company is proper "when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose." Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 788 N.E.2d 522, 531 (2003) (quotation omitted). The critical issue is whether the summary judgment record alleges a liability arising on the face of the complaint and the policy. Id. at 530 (quotation omitted).

The law regarding an insurer's duty to defend is well-settled in Massachusetts. HDH Corp. v. Atl. Charter Ins. Co., 425 Mass. 433, 681 N.E.2d 847, 850 (1997). The duty to defend is broader than the duty to indemnify. Herbert A. Sullivan, Inc., 788 N.E.2d at 531. In order to determine whether an insurer has a duty to defend, a comparison must be made of the facts alleged in the underlying complaint with the insurance policy provisions. Id. "If the allegations of the complaint are `reasonably susceptible' of an interpretation that they state or adumbrate¹ a claim covered by the policy terms, the insurer has a duty to defend." Mt. Airy Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (noting duty to defend may be triggered even if the allegations of the underlying complaint are baseless); see also Cont'l Casualty Co. v. Gilbane Bldg. Co., 391 Mass. 143...