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Pervasive Odor in Structure Suffering Sick Building Syndrome is Physical Injury under Commercial General Liability Insurance Policy so that Insurer’s Duty to Defend is Triggered

Three weeks ago, the United States Court of Appeals for the First Circuit ruled in favor of an insured in a commercial general liability (CGL) insurer’s declaratory judgment action that had sought a declaration that the insurer did not have a duty to defend, nor a duty to indemnify, the insured because a claim against the insured for a installation of carpet that caused a sour chemical smell did not constitute a physical injury under the policy. Although the First Circuit was called upon to interpret Massachusetts state law, the ruling in favor of the insured should be of concern to insurers in other states because there is little if any other precedent on the issue.
In 2000, a financial services company hired a general contractor for a tenant improvement project at its offices in Massachusetts. The general contractor, in turn, retained the insured as the subcontractor for the installation of carpet throughout the offices. The insured was required to test and clean the concrete floor before the new carpet was installed. The insured then subcontracted the supplying of the carpet to one firm and the installation of the carpet to another firm.
During this time period, the insured was covered by two consecutive commercial general liability policies that were issued by the insurer, with the general contractor named as an additional insured. In addition, the contract with the general contractor required the insured to defend and indemnify the general contractor for any claims that were brought as a result of the installation of the carpet. The CGL policies provided coverage for property damage, which was defined as “physical injury to tangible property, including all resulting loss of use of that property…. and loss of use of tangible property that is not physically injured.”
After the carpet was installed, employees of the financial services company complained of an odor from the carpet, which “described the odor as a ‘locker room’ smell, a ‘playdough’ smell, or a ‘sour chemical’ smell. Some further complained that the odor caused headaches or other ill effects.” The carpet and adhesive that were used were removed and new carpet was installed, but the odor remained. The financial services company made a claim against the general contractor for remediation of the problem, which included bead-blasting of the concrete floor, and the general contractor presented the claim to the insured. The insured refused to pay the remediation claim, and the general contractor brought a state court action against the insured for $ 1,417,500.00, the amount that the general contractor paid on the remediation claim. The insurer then brought its declaratory judgment action in the United States District Court for the District of Massachusetts. The district court granted summary judgment to the insurer.
The First Circuit reversed that grant of summary judgment in Essex Ins. Co. v. BloomSouth Flooring Corp., 2009 U.S. App. LEXIS 7896 (1st Cir. Mass. Apr. 16, 2009). The First Circuit first noted that the Massachusetts Supreme Judicial Court had not ruled as to whether a permeating odor could constitute a physical injury under a CGL policy, and thus the court was required to make an “informed prophecy” as to how the Massachusetts’ courts would rule if they were confronted with that issue. The First Circuit stated that the parties had only found two state court decisions that related to this issue, and both decisions, while unpublished, supported a finding “that the presence of odor in a building can constitute ‘physical injury’ to the building.” One of those decisions, a first-party insurance claim from 1998, involved carbon monoxide contamination, and the other case from 1996 involved the presence of oil fumes in a home. The Massachusetts state court decisions relied upon decisions from Oregon in 1993 and Colorado in 1968.
The First Circuit initially rejected the insurer’s argument that the odor had only injured the air in the building and not the building itself, finding that an odor that permeated the air in the building was a physical injury to the building. Next, the First Circuit found that the insurer had failed to cite any legal authority to support its contention that an odor could not constitute physical injury to property. Thus, the insured had met its initial burden to defeat summary judgment. In addition, the claim by the financial services company that the concrete floor required bead-blasting could be reasonably interpreted as alleging that physical injury had occurred to the building.
Relying upon state court decisions that were more than a decade old, and which relied upon decisions that were as much as 40 years old, the First Circuit issued this sweeping ruling. “Against this legal and factual backdrop, we are persuaded both that odor can constitute physical injury to property under Massachusetts law, and also that allegations that an unwanted 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. Further, since nothing in Essex's policies suggests that odor cannot constitute physical injury to property, Suffolk's claim is colorable under the policies.”
Of course, this ruling is specifically applicable only to CGL policies in Massachusetts, and more generally applicable to other states in the First Circuit where similar CGL policies and similar state court rulings might, or might not exist. The potential far-reaching consequence of the decision, though, is its indication of the lack of precedent on the interpretation of what is common CGL policy language that defines physical injury to property. Although the First Circuit never refers to Sick Building Syndrome (SBS) in its decision, some legal commentators have already begun to use that term in analyzing this decision.
Legal counsel for insurers should consider how Essex Insurance might be interpreted in jurisdictions in which their clients issue CGL policies, especially if there is little or no state law jurisprudence on whether an odor can constitute physical injury. Sick Building Syndrome is a concept that is ripe for continued expansion by aggressive plaintiffs’ lawyers, and thus is an important issue for attorneys who represent insureds and insurers that face SBS claims. With so little precedent available on this issue, the Essex Insurance decision may be a crack in the wall of defense of insurers that may widen in the future.
[Editor's Note: Readers with a subscription to lexis.com and the Matthew Bender Insurance Laws Library can quickly and accurately research the law relating to what constitutes physical injury in CGL policies in Appleman on Insurance § 129.2, “CGL Coverage A: Bodily Injury and Property Damage Liability Coverage”, at 20-129 Appleman on Insurance § 129.2.]