Appeals Court Rules Construction Defects Have No CGL Coverage
Case Involves Dispute Over Construction of a Single-Family Home in Marblehead
In 2007, Lawrence H. Lessard and Jennifer A. Meshna (Homeowners) signed a contract with R.C. Havens & Sons, Inc. (Haven & Sons) to construct a single-family home in Marblehead. The contract, valued at $630,500, required the contractor to build the house according to the Homeowners’ architectural plans. After discovering substantial construction defects, the Homeowners started legal proceedings against Havens & Sons and Timothy D. Havens (collectively, the Havens Defendants).
The ensuing jury trial resulted in a verdict favoring the Homeowners, with damages awarded against the Havens Defendants for negligence, breach of contract, and misrepresentation. The court’s judgment, including interest, amounted to almost $400,000, with an additional $98,000 in attorney’s fees under Chapter 93A and $5,000 in costs.
During the litigation, Main Street America Assurance Company (MSA), the Havens Defendants’ insurer, was allowed to intervene as a party in interest in the homeowners’ lawsuit against Havens & Sons.
Following the judgment, the Homeowners sought to reach and apply the MSA policy to satisfy their judgment. On cross-motions for summary judgment regarding insurance coverage, the Superior Court ruled in favor of MSA. The Homeowners appealed the adverse summary judgment to the Massachusetts Appeals Court.
The appeal of the case, Lessard v. R.C. Havens, Inc. and Main Street America Assurance Company, presented the Appeals Court with a question of first impression in Massachusetts insurance law: “Whether costs to repair or remove construction defects are… covered as “damages because of . . . `property damage”’ under commercial general liability (CGL) policies?”
Based on the CGL’s definition of “occurrence” and “property damage,” the Appeals Court ruled that, consistent with appellate decisions in other jurisdictions, the repair and removal of construction defects did not fit within the CGL’s definition of property damage.
The Plaintiff Homeowners have applied for further appellate review, asking for the Supreme Judicial Court to review the Appeals Court’s decision. That application is pending as of the date of this article.
Background
The case, ultimately decided by the Appeals Court, originated from a home construction project in Marblehead, Massachusetts. In the summer of 2007, Lawrence H. Lessard and Jennifer A. Meshna contracted R.C. Havens & Sons, Inc. to construct a new single-family home for $630,500. The agreement required Havens Inc. to build the house according to plans from a third-party architect. Timothy D. Havens, president of R.C. Havens & Sons, Inc., served as the licensed construction supervisor for the project.
As construction progressed and, in the years, following, the Homeowners discovered many significant defects in their new home. These defects, which were the basis of the claims in a subsequent jury trial, amounted to a catalog of construction failures, including:
1. Structural Deficiencies:
– A critical structural post, designed to run from the roof to the basement, was partially missing. – Partition walls, sill plates, and support beams were installed incorrectly, leading to improper weight distribution. – Some partition walls inadvertently bore weight they were not designed to support. – A structural engineer found and ultimately testified that fixing these issues would require extensive work, including installing the missing post, reinforcing floor joists, and adjusting floor levels.
2. Exterior Roof Deck Issues:
– The deck posts lacked proper counterflashing, letting water penetrate the rubber membrane installed beneath the deck. – An incorrect slip sheet between the rubber membrane and the deck contributed to water infiltration. – Multiple repair attempts by Havens & Sons and third-party contractors did not resolve the leaking issues.
3. Exterior Siding Defects:
– The red cedar siding exhibited buckling and pitting. – Improper fastening methods were used: staples shot through a pneumatic gun only attached the siding to the plywood, not the framing. – The fasteners used were electroplate galvanized steel instead of stainless steel, leading to corrosion in the coastal environment. – The back of the siding was not sealed as required. – Where nails were used, no pilot holes were drilled, causing the siding to split. – The siding was installed directly against window frames without the industry-standard 1/8-inch gap, causing compression of the frames.
4. Metal Roof Installation Problems:
– Neither a “cold roof” nor a high-temperature shield was installed, contrary to manufacturer recommendations. – Seams were misaligned, and side panel clips were improperly spaced. – No sealant was applied in necessary areas.
5. Foundation Insulation Inadequacies:
– Only half of the required insulation was installed on the foundation walls. – The plans specified two inches of rigid insulation (R-value 10), but only one inch (R-value 5-6) was installed.
6. Mold Development:
– Inadequate insulation and water infiltration led to mold growth in the basement. – Porous surfaces in the basement, including insulation, drywall, and plywood, became wet and moldy.
These defects resulted in various issues for the Homeowners, including structural instability, water damage, energy inefficiency, and potential health hazards. The extent and severity of these problems led the Homeowners to cease payments to Havens Inc. in September or October 2009, at which point the Havens Defendants stopped working on the project.
The Damage Suit Against The Havens Defendants And Related Defendants
After discovering more construction issues, the Homeowners filed a lawsuit against the Havens Defendants on April 26, 2012.
The complaint alleged, among other causes of action, breach of contract, negligence, misrepresentation, and violations of M.G.L. c. 93A, unfair and deceptive business practices. The complaint named the Havens Defendants, the architect, and various subcontractors.
The case went to trial in May 2016. The jury found both Havens Defendants negligent and determined that Havens & Sons. had breached the construction contract and made misrepresentations to the Homeowners. The jury awarded $272,035.79 in damages, augmented by $161,035.79 for statutory interest. The final judgment of $433,568.39 was reduced to $332,06.39 by payments of $101,500 made by settling codefendants that had worked with the Havens Defendants on the project.
As per Massachusetts law, the judge decided the 93A claim of the Homeowners’ complaint. She found that Havens & Sons’ actions had violated G.L. c. 93A.violation. She did not find that the Havens Defendants had acted willfully or knowingly limiting the Homeowners’ recovery under c. 93A to attorney fees and costs of $98,000.00 and $5,564.00, respectively.
In April 2018, Havens & Sons filed for bankruptcy without having paid any money on the homeowner’s judgment.
The CGL Policy Litigation
After the Havens & Sons bankruptcy, the Homeowners focused their legal efforts on seeking to reach and apply R.C. Havens’ CGL policy for the payment of their remaining $332,000 judgment.
Since MSA had become an intervenor in the Homeowners’ suit against Havens & Sons, the insurer, the Homeowners, and MSA filed cross-motions for summary judgment, each asserting they had the right to judgment based on the unambiguous policy terms in the policy’s insuring agreement, the definition of “property damage” and the definition of “occurrence.”
The CGL Policy Terms Relied On By MSA And The Homeowners
The CGL policy issued by (MSA) to Havens & Sons provided in its insuring agreement that MSA would:
“[P]ay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.”
The policy further specified that the insurance afforded applied to “bodily injury” and “property damage” only if:
a. “The ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory’”;
b. “The ‘bodily injury’ or ‘property damage’ occurs during the policy period”;
The policy defined “property damage” as:
a. “Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it,” or
b. “Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.”
Finally, the policy provided the standard definition of “Occurrence:”
“[A]n accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The Superior Court denied the Homeowners’ motion for summary judgment and granted MSA’s motion, finding no coverage for the judgment the Homeowners had obtained against MSA’s insured, Havens & Sons.
The Homeowners appealed the Superior Court’s decision to the Massachusetts Appeals Court, claiming legal error.
The Appeals Court’s Analysis Of A CGL’s Coverage For Defective Work
The Homeowners’ appeal presented The Appeals Court with a question of first impression in Massachusetts insurance law: “Whether costs to repair or remove construction defects are covered as ‘damages because of . . . property damage’ under commercial general liability (CGL) policies?”
The Court Focuses On The Meaning Of “Property Damage” And “Occurrence” In A CGL
The court’s analysis centered on the CGL policy’s definition of “property damage.” The court examined whether the costs associated with repairing or removing construction defects fit within this definition.
The court interpreted “property damage” as requiring physical injury to tangible property or loss of use of tangible property and considered whether faulty workmanship by itself could constitute physical injury to property within the meaning of the policy.
The Appeals Court concluded that costs to repair or remove construction defects are not “property damage” as defined in the CGL policy. The court reasoned that faulty workmanship alone is not physical injury to property but rather a failure to meet an agreed-upon quality standard.
Likewise, it found that faulty repairs did not, under any accepted meaning of the word “accident,” satisfy the policy’s definition of an “occurrence.”
Comparison With Other Jurisdictions
The court noted that its decision aligned with appellate decisions from other states. For example, the Supreme Court of South Carolina had previously stated, “faulty workmanship is not an accident but a business risk to be borne by the contractor.” Similarly, the Supreme Court of Connecticut had ruled that “defective work, standing alone, does not constitute an occurrence.”
The Court’s Rationale For Its Ruling
The Appeals Court emphasized that CGL policies are designed to cover unforeseen accidents resulting in injury or damage, not the cost of correcting defective work. The court reasoned that interpreting the policy to cover faulty workmanship would effectively transform a CGL policy into a performance bond or warranty.
The Appeals Court’s Decision Aligns With The Insurance Industry’s Long-Standing Position
The Appeals Court’s decision reinforces the insurance industry’s long-standing position that CGL policies are not intended to serve as warranties for the quality of a contractor’s work.
This ruling supports the industry’s view that the purpose of CGL insurance is to protect against unforeseen third-party injuries or property damage, not to guarantee the quality of the insured’s work.
Insurance professionals have consistently communicated to clients that a CGL policy is a liability policy, not a “repair policy.” The court’s decision provides legal backing to this interpretation, clarifying the CGL policy’s limitations for both insurers and policyholders in Massachusetts.
The Court’s Final Order
The Appeals Court affirmed the Superior Court decision that the CGL policy issued by MSA did not provide coverage for the damages alleged by the Homeowners resulting from construction defects. By this decision, Massachusetts joins in the prevailing view of other jurisdictions regarding the scope of CGL coverage in construction defect cases.
The Homeowner’s Application For Further Appellate Review By The Supreme Judicial Court
The Massachusetts Appeals Court is an intermediate appellate court, while the Supreme Judicial Court has the ultimate judicial authority in Massachusetts. Parties dissatisfied with an Appeal Court’s decision may apply to the Supreme Judicial Court for further appellate review. However, the Supreme Judicial Court has the discretion to allow any further appeal, and it is most often not granted.
On September 4, 2024, the Homeowners, Lawrence Lessard and Jennifer Meshna, applied to the Supreme Judicial Court for further appellate review.
Main Street America has until September 24, 2024, to file its opposition to the Supreme Judicial Court accepting the homeowner’s appeal for further review.
Agency Checklists will track the Homeowners’ application for further appellate review and supplement this article.
Owen Gallagher
Insurance Coverage Legal Expert/Co-Founder & Publisher of Agency Checklists
Over the course of my legal career, I have argued a number of cases in the Massachusetts Supreme Judicial Court as well as helped agents, insurance companies, and lawmakers alike with the complexities and idiosyncrasies of insurance law in the Commonwealth.
Connect with me directly, by calling me at 617-598-3801.
