In Admiral Insurance Co. v. Tocci Building Corp., 120 F.4th 933 (1st Cir. 2024), the federal Court of Appeals ruled that, under current Massachusetts law, a general contractor’s Commercial General Liability (CGL) policy does not cover damage to non-defective work resulting from defective work by subcontractors.

The defendant contractor was retained as a construction manager for an entire residential construction project. After several work quality issues and delays on the project, the contractor was terminated before the project’s completion. The owner of the project filed suit against the contractor for breach of contract and related claims but did not allege negligence by the contractor. The complaint included allegations of defective work by the contractor’s subcontractors leading to various instances of damage to non-defective work on the project including: (1) damage to sheetrock resulting from faulty roof work; (2) mold formation resulting from inadequate sheathing and water getting into the building; and (3) damage to a concrete slab, wood framing, and underground pipes resulting from soil settlement due to improper backfill and soil compaction. The contractor’s request for defense and indemnification coverage under its CGL policy was denied by its insurer. The insurer filed suit seeking a declaratory judgment confirming it had no obligation to defend or indemnify the contractor. The district court granted summary judgment in favor of the insurer and the contractor appealed.

The Court examined the “Damage to Property” exclusion outlined in subsection (I)(2)(j) of the CGL policy, which provides that there is no coverage for “property damage” to “(6) [t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” The CGL policy defines “your work,” in relevant part, as “work or operations performed by you or on your behalf.” Since the complaint alleged damage resulting from the contractor’s “incorrectly performed” work on the entire project, the Court interpreted the (j)(6) exclusion as applying to the entirety of the project where the contractor was the construction manager charged with supervising and managing the whole project, the Court enforced the exclusion against coverage for the contractor.

The Court also examined the exception to the exclusion in (j)(6), which provides that the exclusion does not apply to “‘property damage’ included in the ‘products-completed operations hazard.’” The “products-completed operations hazard,” in turn, “includes all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ except … (2) work that has not yet been completed or abandoned.” Since the contractor was terminated and did not complete or abandon the project prior to damage, the court of appeals concluded that the coverage exclusion in (j)(6) still applied.

In closing, the court of appeals left the door open for potential coverage for damage to non-defective, work arising from a subcontractor’s defective work even with the (j)(6) exclusion. Since the Massachusetts Supreme Judicial Court has yet to rule on the issue, it could interpret “property damage” caused by an “occurrence” to encompass this type of damage, which could allow a general contractor to potentially receive coverage if the work is completed or abandoned, as the exception to the exclusion would then apply.