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Court: Insurer Must Defend Policyholder In Construction Lawsuit
Alexander J. Anglim
Construction defect claims continue to be a fertile source of insurance coverage disputes. Too often, disputes arise because insurers try to stretch exclusions beyond their intended scope. A recent decision from a federal District Court in Massachusetts (applying Massachusetts law) provides an example.
In Capitol Specialty Insurance Company v. Dells Russo Enterprises, Civ. Action No. 21-10939-FDS (D. Mass. Jan. 24, 2023), the policyholder (Dello Russo) was hired to remodel and renovate an existing house. The contract work included limited demolition activities as a prerequisite to installing various new elements. During the project, cracks appeared, and the building partially collapsed. As a result of the partial collapse, the entire building had to be destroyed. The building owners sued Dello Russo. In the complaint, the owners alleged that Dello Russo’s negligence led to the collapse and destruction of the building. Dello Russo tendered the owners’ lawsuit to its insurer. Its insurer filed a declaratory judgment action, seeking a ruling that no coverage existed for the owners’ lawsuit against Dello Russo.
Dello Russo’s insurer argued, among under things, that the case involved only faulty workmanship, rather than property damage caused by an occurrence, and accordingly the claim was not covered under Massachusetts law. The court rejected the insurer’s argument. Although the court recognized that “[u]nder Massachusetts law, ‘faulty workmanship fails to constitute an accidental occurrence in a commercial general liability policy’”, the court reasoned that “coverage may lie when ‘faulty workmanship . . . causes an accident.’” (Citations omitted.). The court continued:
Here, the home-improvement contract makes clear—and Capitol does not dispute—that the [owners] did not hire Dello Russo to demolish the entire building. Nor does the Underlying Complaint allege that Dello Russo or any of its subcontractors in fact demolished the entire building. In other words, the Underlying Complaint does not allege that an improperly performed demolition was the accident. Rather, the Underlying Complaint alleges that as a result of Dello Russo’s faulty workmanship during renovations, the building partially collapsed, requiring the demolition of the remaining structure. In other words, the Underlying Complaint alleges that Dello Russo’s negligence caused an accident. Accordingly, the claims against Dello Russo allege “property damage” caused by an “occurrence.”” (Internal citations omitted.)
The insurer also argued that coverage was barred by the policy’s exclusion for “property damage to…[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The insurer argued that the phrase “that particular part” in this case refers to the entire building, because Dello Russo was hired to renovate the entire building. The court rejected the insurer’s argument. The court explained: “Massachusetts courts continue to construe exclusions that are limited to ‘that particular part of the property’ as being limited to ‘coverage for the work product of the insured but not for damage to larger units of which the insured’s work product is but a component.” Accordingly, the court held that the insurer had a duty to defend Dello Russo.
This case highlights (again) why policyholders should not simply assume that a coverage denial letter from an insurer is correct. Insurers sometimes misconstrue policy language, ignore case law that contradicts their position, or both. As a result, if your business is denied coverage then it should get advice from an experienced policyholder attorney before deciding how to proceed.
-Alexander J. Anglim, Outside General Counsel