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Bad Smell Can Constitute Property Damage under CGL Policy; Claim Triggered Insurer’s Duty to Defend
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February 8, 2010
By Stephen D. Palley
Does a bad smell constitute property damage for purposes of a standard commercial general liability insurance policy? According to the U.S. Court of Appeals for the 1st Circuit, the answer is “yes,” particularly if the smell is “pervasive” or “permeating.”
The case arose from installation of new carpet during construction of tenant improvements in an existing office building in Massachusetts. The general contractor subcontracted with BloomSouth “for the installation of carpet tile and related materials throughout the building.” The scope of work included minor preparation work before laying the carpet, including testing and cleaning the concrete floor on which the carpet was to be installed. BloomSouth subcontracted supply of the carpet to one company and installation to another.
After the carpet was installed, employees of the tenant complained of an odor that they characterized, variously, as a “locker room smell,” a “playdough smell” and a “sour chemical smell.” Some employees complained that “the odor caused headaches or other ill effects.” The tenant notified the general contractor, which notified BloomSouth. One of BloomSouth’s subcontractors scraped up the original carpet adhesive and re-carpeted the floor. That did not correct the problem, and the odor spread.
Testing was conducted but was inconclusive. The general contractor claimed that BloomSouth was responsible because it had installed defective carpeting, and BloomSouth’s subcontractor claimed the bad smell resulted from a chemical reaction between the floor and the carpet for which it was not responsible. Ultimately, the general contractor paid $1.4 million for remediation efforts. These allegedly included installing air filters, removing carpet and adhesive, bead-blasting the concrete floor, and replacing the carpet and related materials.
While undertaking remediation, the general contractor placed BloomSouth’s insurer, Essex, on notice of the claim, seeking defense and indemnity as an additional insured. After the general contractor sued BloomSouth in state court, Essex filed a declaratory judgment action in federal court, naming both the general contractor and BloomSouth. Essex sought a determination that the CGL policy did not obligate Essex to defend or indemnify either BloomSouth or the general contractor.
The U.S. District Court hearing the declaratory relief action granted summary judgment to Essex, holding that it had neither a duty to defend nor a duty to indemnify. BloomSouth appealed the ruling as to Essex’ duty to defend. The appeals court reversed. Essex Insurance Co. v. BloomSouth Flooring Co., 562 F.3d 399 (1st Cir. 2009).
The appeals began its analysis by noting that under Massachusetts law, an insurer’s duty to defend is determined by facts alleged in the complaint and facts known to the insurer and consideration of the losses flowing from those allegations and is not determine by what facts ultimately are proven at trial.
The appeals court then explored whether under Massachusetts law the odor constituted property damage. The Essex policy’s definition of property damage included “physical injury to tangible property, including all resulting loss of use of that property,” and “[l]oss of use of tangible property that is not physically injured.”
Because Massachusetts’ highest court had not decided the issue, the appeals court looked to two unpublished Massachusetts Superior Court decisions (one involving carbon monoxide and the other oil fumes). Finding them not quite on point, the appeals court looked to Oregon and Colorado cases cited in the Massachusetts cases. The Oregon and Colorado cases (involving methamphetamine odors and gasoline vapors) held that smell constitutes physical injury to property when it is “pervasive” and “infiltrates” a space. In its decision, the Colorado Supreme Court observed that it was contrary to common sense to require “tangible injury to the physical structure itself” in order find coverage for smells.
Relying on these cases and the plain language of the Essex policy, the appeals court held that an odor can constitute physical injury to property under Massachusetts law. Even if the odor must be permeating or pervasive to trigger coverage, the appeals court held found such damages had been alleged in the underlying liability case. The appeals court held: “[A]llegations that an unwarranted odor permeated the building and resulted in a loss of use of the building are reasonably susceptible to an interpretation that physical injury to property has been claimed.”
Essex also asserted that two policy exclusions, “impaired property” and “your work,” excused it from defending the general contractor. The appeals court found the exclusions to be inapplicable.
It noted that while the “impaired property” business risk exclusion precludes coverage of the insured’s own faulty workmanship, it does not apply to a claim for physical injury to the property of a third party – in contrast to damage to the insured’s own work product. The appeals noted that it had found that odors could constitute physical injury to property – in this case the office space owned by third parties that was re-carpeted.
In addition, the appeals court found that the odors, even if not a physical injury, had caused a loss of use of the property, which would trigger coverage. The appeals court then examined whether use of the property could be restored if the work product alone was repaired or replaced – which would bar coverage. The appeals court concluded that the complaint sufficiently alleged repairs over and beyond the insured’s work product to qualify for coverage of its defense. The appeals court expressly noted that it was not deciding whether the insured was entitled to indemnity for the damages actually suffered.
The appeals court found the “your work” exclusion inapplicable because damage to more than the insured’s work product was alleged.
The appeals court held that under Massachusetts law, BloomSouth was entitled to attorney fees it spent in establishing that the insurer had breached its duty to defend.
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