Insured Finds Coverage For Sick Building Claims

September 4, 2009

The First Circuit recently ruled in favor of a policyholder in a case arising from the release of fumes from carpet tile and related materials throughout the insured’s building. This case has significant favorable implications for insureds seeking coverage for construction defect claims both in Massachusetts and elsewhere. The case is styled Essex Ins. Co. v. BloomSouth Flooring Corp., No. 06-2750, 2009 U.S. App. LEXIS 7896 (1st Cir. April 16, 2009).

In 2000 Boston Financial Data Services retained Suffolk Construction Corporation as general contractor for a project at its offices. Suffolk subcontracted with BloomSouth for the installation of carpet and related materials throughout the building. This work included testing and cleaning the concrete floor. BloomSouth itself subcontracted the installation to two other companies. One was charged with supplying the carpet and the other with installing it.

After the completion of the work, Boston Financial employees began to complain about odors in their offices and experienced headaches. In an effort to eliminate the source of the odors, one of BloomSouth’s subcontractors removed the adhesive under the carpet and installed new carpet tiles. The building continued to emit odors, however.

Boston Financial ultimately hired other contractors to repair the problem and sued Suffolk Construction and BloomSouth. The lawsuit alleged that BloomSouth was liable for installing the carpet in a defective manner, which caused “damage to and loss of use of the building.” In addition, the suit alleged that BloomSouth’s 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.”

The defendants both sought coverage under a CGL policy that Essex had issued to BloomSouth. Essex declined to defend BloomSouth, and the trial court found in favor of the insurer. BloomSouth appealed.

As a preliminary matter, the First Circuit declared that the suit against BloomSouth sought recovery for “property damage.” The First Circuit ruled that the odors in the building, which the insured described as a “locker room” smell, had resulted in physical injury to tangible property. Significantly, the court rejected the insurer’s contention, and the rule followed in many state courts, that “property damage” requires tangible injury to the physical structure itself.

With the foundation that the insured had experienced “property damage” the court of appeals went on to rule that the “business risk” exclusions were inapplicable. First, the court held that because there was physical injury to the building, the “impaired property” exclusion did not apply. Next, the court found that the “your product” exclusion did not apply because the building experienced damage over and above the damage to the carpet.

This case is particularly significant, because most state courts have refused to find that unhealthy air or “odors” in a building amounts to property damage. This First Circuit opinion outlines an effective game plan for policyholders seeking to obtain coverage for mold or “sick buildings.” Also, this case is significant because the court recognized the importance of the “reasonable expectations” of the policyholder.