We have told you on numerous occasions that business owners need the help of an experienced, insurance professional to make sure that their business is adequately insured. This is a lesson that was learned too late by the defendants in the case, Lawrence H. Lessard and another v. R.C. Havens & Sons, Inc. and others, decided by the Massachusetts Appeals Court on August 14, 2024.
The Facts
The plaintiffs in the case were building a home in Marblehead, Massachusetts. They entered into a contract with the defendant, R.C. Havens & Sons, Inc. (Havens), to act as general contractor for the construction of their home. As the home neared completion, the plaintiffs noticed several construction defects that affected the structural integrity of the house. These included a missing structural post, improper installation of partition walls and support beams, and the faulty installation of a metal roof.
The plaintiffs were forced to retain other contractors to correct the defects and sued Havens and others, including the president of Havens, for the costs incurred in the work. After a jury trial, the jury awarded the plaintiffs a total of $272,533.
The reason that this is an insurance case is that Havens had procured a Commercial General Liability (CGL) insurance policy from Main Street America Insurance Company (MSA) to protect its business. After the lawsuit had been filed, but before trial, MSA had intervened in the case seeking a declaration that it owed no duty to indemnify Havens from the plaintiffs’ claims. After the entry of the jury verdict, both the plaintiffs and MSA filed motions for summary judgment on the issue of whether MSA was liable for the judgment of $272,533 entered against Havens, its insured.
The trial court granted MSA’s motion for summary judgment and denied the plaintiffs’ motion for summary judgment. In other words, the trial court held that MSA had no obligation to defend or indemnify Havens against the plaintiffs’ claims and that the plaintiffs could not recover their judgment against Havens under the MSA CGL insurance policy. Their only recourse was against Havens, whose pockets were not as deep as MSA’s.
The plaintiffs appealed, and the Massachusetts Appeals Court affirmed the decision of the trial court.
Why Was There No Coverage Under Havens's Commercial General Liability Policy?
In simple terms, a CGL insurance policy is designed to protect a business against losses for property damage or bodily injury arising from its business operations. Some CGL insurance policies limit coverage to incidents that occur on the premises of the business, while others offer broader coverage. Havens’s intent in procuring the MSA CGL insurance policy was to protect itself from claims that it caused property damage or bodily injury during its normal business operations. Since its “normal business operations” involved acting as general contractor for the construction of buildings, Havens and the plaintiffs thought that claims arising from defects in the construction of the plaintiffs’ home would be covered. However, they were wrong.
The insurance clause in the MSA CGL insurance policy provided that MSA would:
pay those sums that the insured becomes legally obligated to pay as damages because of . . . 'property damage' . . . to which this insurance applies.
The policy defined property damage as:
physical injury to tangible property, including all resulting loss of use of that property or loss of use of tangible property that is not physically injured.
Finally, the Court found that:
the policy applied to property damage if, among other criteria, the property damage was "caused by an 'occurrence.'" The policy defined "occurrence" to mean "an accident, including continuous or repeated exposure to substantially the same general harmful conditions.
In deciding this case, the Court first said that this was a case of first impression in Massachusetts. That means that no Massachusetts appellate court had previously decided this issue, which it framed as whether construction defects can constitute an occurrence under a CGL insurance policy. However, the Court then said that it could decide this issue on narrower grounds.
The Court found that construction defects do not constitute “physical injury to tangible property”. It held that the term “property damage” means that the property was at one time undamaged and was subsequently damaged by an independent occurrence. Where construction defects are alleged, the property was never undamaged and, therefore, could not have been subsequently damaged by an occurrence.
Because faulty construction is defective at the outset, other jurisdictions have distinguished between claims for the costs of repairing or removing construction defects, which are not claims for property damage, and claims for the costs of repairing damage caused by construction defects, which are claims for property damage.
To illustrate, the Court provided the example of a window that is improperly installed and leaks. The leak causes water damage to the surrounding wall. While the CGL policy would not cover the improper window installation, it would cover the repairs to the damaged wall caused by the leak. The water leaking through the window was an independent occurrence that damaged the surrounding wall that, prior to the leak, had been in an undamaged condition.
To further explain its decision, the Court engaged in reasoning that only a lawyer can appreciate. It said that a CGL policy is designed to protect a business against tort claims for physical damage to others and not against claims for economic loss resulting from a breach of contract. In this case, the Court found that Havens had breached the construction contract with the plaintiffs by failing to deliver the house without construction defects. It further found that damages for breach of contract are not covered by a CGL insurance policy.
What Could Havens Have Done to Protect Itself?
While every business needs a CGL insurance policy, Havens needed something more. Perhaps a builder’s risk policy or a specially-designed policy that covered its specific type of business.
Had Havens first consulted RMC Group, we could have assured that its business operations would be covered and that any judgment entered against would be paid by its insurance company and not out of its own assets.
Do not make the same mistake as Havens. Call RMC Group today at 239-298-8210 or email us at rmc@rmcgp.com.
