American Home Assurance Co. v. AGM Marine Contractors, Inc. , 467 F.3d 810 ( 2006 )

United States Court of Appeals
For the First Circuit
No. 05-2310
AMERICAN HOME ASSURANCE COMPANY,
Plaintiff, Appellee,
v.
AGM MARINE CONTRACTORS, INC.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, Senior U.S. District Judge]
Before
Boudin, Chief Judge,
Torruella and Dyk,* Circuit Judges.
Eric F. Eisenberg with whom Jeremy Blackowicz and Hinckley,
Allen & Snyder, LLP were on brief for appellant.
Robert J. Murphy with whom Holbrook & Murphy was on brief for
appellee.
November 8, 2006
*
Of the Federal Circuit, sitting by designation.
BOUDIN, Chief Judge. This insurance coverage case arises
out of the following events. In fall 2000, the Town of
Provincetown, Massachusetts ("Provincetown"), contracted with AGM
Marine Contractors ("AGM") to reconstruct MacMillan Pier on the
Provincetown waterfront and to procure and install a concrete
floating dock system. Under AGM's superintendence, Southeast
Floating Docks ("Southeast") agreed to provide floating docks for
MacMillan Pier. Installation of the new dock system was completed
in June 2003.
There were two main floating docks (A and B) extending
outward from MacMillan Pier. These main docks floated on the
surface of the water but stayed in position next to MacMillan Pier
because piles, planted in the ground below the water's surface, ran
though u-brackets on the sides of the floating docks. A number of
smaller "finger" floating docks extended from the main floating
docks and were held in place by connections to the main docks.
A strong winter storm occurred during December 5-7, 2003.
Some of the floating docks broke loose; some sank; and most were
irreparably damaged. Immediately after the storm, Provincetown
directed AGM to retrieve the docks, which it did. AGM was later
required by the town to provide replacement docks. AGM incurred
significant costs which it sought to recover from both insurance
and from Southeast (which it accused of having failed to follow
specifications in building the docks).
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In March 2004, AGM notified American Home Assurance
Company ("American Home") of a claim under the commercial marine
liability policy that American Home had issued to AGM, providing
coverage from January 1, 2003 to January 1, 2004 ("the policy").
The policy is based on the standard Commercial General Liability
Coverage ("CGL") form written by the Insurance Services Office
("ISO"), an organization of insurance companies that prepares
standard form contracts, among other things.
American Home denied AGM's claim for coverage and on June
17, 2004, filed a petition for declaratory judgment in the federal
district court in Massachusetts to establish that it had no
liability under the policy. AGM counterclaimed and sought
recovery for the cost of recovering the docks, loss of use of the
docks and for repairing damage to the docks or replacing them.
Both sides moved for summary judgment.
On July 25, 2005, the district court granted summary
judgment in favor of American Home, concluding that the policy did
not cover the losses for which AGM sought recovery. American Home
Assurance Co. v. AGM Marine Contractors, Inc., 379 F. Supp. 2d 134,
135 (D. Mass. 2005). Less than six months later, an arbitrator
granted AGM recovery against Southeast for $389,703, concluding
that Southeast had failed to follow specifications in designing the
docks. Southeast is currently contesting the arbitration award.
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AGM now appeals from the district court's decision
denying insurance coverage. Review on summary judgment is de novo,
drawing inferences in favor of the non-moving party. Nicolo v.
Phillip Morris, Inc., 201 F.3d 29, 33 (1st Cir. 2000). Where, as
is the case here, cross-motions are involved, the court applies
this standard to each motion separately. Reich v. John Alden Life
Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997).
Although the case is within the admiralty jurisdiction of
the federal courts because the contract was "maritime in nature,"
Acadia Ins. Co. v. McNeil, 116 F.3d 599, 601, 603 (1st Cir. 1997),
we look to state law (in this case Massachusetts), given the
absence of a federal statute or a federal judicially created rule
governing such contracts. Littlefield v. Acadia Ins. Co., 392 F.3d
1, 6-7 (1st Cir. 2004). Absent Massachusetts precedent, decisions
elsewhere construing standard CGL language may be useful.
Generally, the policy provides that American Home "will
pay those sums that [AGM] becomes legally obligated to pay as
damages because of 'bodily injury' or 'property damage' to which
this insurance applies." Such damages must be caused by an
"occurrence," defined as "an accident, including continuous or
repeated exposure to substantially the same general harmful
conditions." There are also numerous exclusions to coverage.
American Home's position is that there was neither an
"occurrence" nor "property damage," and that even if there were,
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two different exclusions apply: the "damage to Assured's work"
exclusion and the "damage to Assured's product" exclusion. AGM
takes the opposite position on each issue and, in addition, argues
that there is coverage for damage to the docks under the "product-
completed operations hazard" and that public policy requires
coverage for the costs of recovering the docks after they broke
loose.
That there should be doubts about the presence of an
"occurrence" or "property damage" might initially puzzle an
observer because the storm was obviously an "occurrence" in the
common use of the term, and the breaking loose of the dock and its
subsequent damage is easily described as an "accident" that led to
"property damage." The doubts that some courts have expressed
arise because CGL coverage is primarily directed to liabilities
other than defects in one's own work. As the Massachusetts Supreme
Judicial Court said, quoting an article on insurance:
The risk intended to be insured is the
possibility that the goods, products or work
of the insured, once relinquished or
completed, will cause bodily injury or damage
to property other than to the product or
completed work itself . . . . 1
1
Commerce Ins. Co. v. Betty Caplette Builders, Inc., 647
N.E.2d 1211, 1213 (Mass. 1995) (emphasis supplied) (quoting Roger
C. Henderson, Insurance Protection for Products Liability and
Completed Operations: What Every Lawyer Should Know, 50 Neb. L.
Rev. 415, 441 (1971)); see also Farmington Cas. Co. v. Duggan, 417
F.3d 1141, 1142 (10th Cir. 2005); Modern Equip. Co. v. Continental
Western Ins. Co., 355 F.3d 1125, 1129 (8th Cir. 2004); Russ, 9A
Couch on Insurance § 129:1 (3d ed. 1995).
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A curious split in authority has resulted. Some courts
have held that faulty workmanship by the insured, so far as damage
is only to its product, does not constitute an "occurrence" under
CGL policies, e.g., Auto-Owners Ins. v. Home Pride Cos., 684 N.W.2d
571, 577 (Neb. 2004); see also Russ, 9A Couch on Insurance § 129:4
(3d ed. 1995); and others have held that faulty workmanship does
not constitute "property damage," e.g., Amtrol, Inc. v. Tudor Ins.
Co., 2002 WL 31194863, at *6 (D. Mass. 2002). By contrast, other
courts have focused solely upon the exclusions of the CGL policy.
E.g., Caplette, 647 N.E.2d at 1213.
The cases that have refused coverage at the occurrence or
property damage threshold often involve the discovery of a latent
defect or of an emerging negative condition (like construction
defects, leaking water heaters, peeling paint, or cracking
floors).2 In such cases a court might well question whether there
is literally an "occurrence" or "property damage" due to an
"occurrence." But in this case what happened to the docks was far
from a mere latent condition or slow deterioration, so many of the
cases refusing coverage are distinguishable.
Whether Massachusetts would follow the "occurrence" cases
is not certain. In Caplette the Supreme Judicial Court bypassed
the issue in a case involving damage to the insured's product,
2
Home Pride Cos., 684 N.W.2d at 574; Amtrol, 2002 WL 31194863,
at *2; Indiana Ins. Co. v. Hydra Corp., 615 N.E.2d 70, 73 (Ill.
App. Ct. 1993).
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going instead directly to the exclusions. This might suggest that
the SJC thought that the occurrence and property damage
requirements were satisfied, but the parties did not dispute the
issue. In all events, one of the exclusions in this case bars
coverage even if we assume arguendo that there was an occurrence
and property damage within the meaning of the policy.
We deal first with the "Assured's work" exclusion. The
"Assured's work" exclusion excludes coverage under the policy for
the following:
"Property damage" to "the Assured's work" arising out of
it or any part of it and included in the "products-
completed operations hazard." This exclusion does not
apply if the damaged work or the work out of which the
damage arises was performed on the Assured's behalf by a
subcontractor.
Under the definitions section of the policy, "Assured's
work" includes "work or operations performed by the Assured or on
[its] behalf." So at first blush, the "Assured's work" appears to
include work done by Southeast, assuming that Southeast were a
subcontractor. But if Southeast were a subcontractor, the
exclusion would not apply by virtue of its second sentence. And if
instead Southeast were merely a vendor who supplied a product and
not a subcontractor, the docks would not be the "Assured's work" or
work done on "its behalf," so again the exclusion would not apply.
Of course, the exclusion would apply if the harm arose
out of AGM's own work rather than that of Southeast. However, the
arbitrator found that the original cause of the breaking away of
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the docks was faulty work by Southeast including failure to follow
specifications. Conceivably American Home could contest this
finding and blame AGM (the insurer was not a party to the
arbitration). We need not pursue this possibility because the
"Assured's product" exclusion does appear to bar coverage, even if
the "Assured's work" exclusion does not.
The "Assured's product" exclusion precludes recovery for
"'property damage' to 'the Assured's product' arising out of it or
any part of it." The policy defines "Assured's product" to include
"any goods or products, other than real property, manufactured,
sold, handled, or distributed by . . . [t]he Assured." The
"Assured's product" exclusion, like the "Assured's work" exclusion,
is broadly consistent with the limited office of CGL coverage to
protect against liability for harm "other than to the product or
completed work itself." Caplette, 647 N.E.2d at 1213.
AGM disputes that the docks were its product, saying that
they were made by Southeast. But if AGM acquired the docks from
Southeast as a vendor and resold them to Provincetown, "sold"
applies; if they were made by Southeast as a subcontractor and
installed by AGM (and transferred to Provincetown as part of the
overall project), they were at least "handled" by AGM.3 So AGM's
3
AGM's argument that case law supports its claim that it did
not "handle" the docks is unavailing. Gulf Miss. Marine Corp. v.
George Engine Co., 697 F.2d 668 (5th Cir. 1983), is
distinguishable. In Gulf the insured party was a subcontractor who
merely touched the components while assembling them; here AGM was
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response does not avoid the embracing language of the definition
that triggers the exclusion.
Whether the docks come within the real property exception
found in the definition of "Assured's product" is a closer
question. The exception for real property eliminates from the
exclusion a building constructed on the land and, arguably, a pier
built upon and planted in submerged land (MacMillan Pier itself
likely fits this description). But the main floating docks were
tethered by the u-brackets and pilings rather than affixed to the
submerged land below and the finger docks were connected to the
main docks even more loosely.
The technical definition of real property, in the
dictionary and some of the case law, covers those things "attached
to, or erected on [the land], excluding anything that may be
severed without injury to the land."4 Similarly, Massachusetts
case law defines real property as property "so annexed that it
cannot be removed without material injury to the real estate or to
itself." Medford Trust Co. v. Priggen Steel Garage Co., 174 N.E.2d
responsible for procuring the docks and providing them in their
final form to Provincetown.
4
Black's Law Dictionary (8th ed. 2004) (emphasis supplied);
see also Wanzek Constr. v. Employers Ins., 679 N.W.2d 322, 327
(Minn. 2004) (citing Black's Law Dictionary in a CGL case);
American Equity Ins. Co. v. Van Ginhoven, 788 So. 2d 388 (Dist. Ct.
App. Fla. 2001) (citing Black's Law Dictionary and stating that
"[t]he term 'real property' is a clearly understandable and defined
legal term").
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126, 128 (Mass. 1930). There is also good deal of related law
seeking to determine whether an item is a "fixture"–-personal
property that becomes part of the real property, Bernheim, 2
Tiffany Real Property § 606 (3d ed. 1939 & Supp. 2006).
Case law as to whether floating docks are "real property"
is not uniform-–which is unsurprising because the issue arises
under various statutes and in different contexts (sales, taxes,
condemnation). A leading federal tax decision says that floating
docks are not real property, Morgan v. Comm'r of Internal Revenue,
52 T.C. 478, 483 (Tax Ct. 1969); see also Rev. Rul. 75-178, 1975-1
C.B. 9, 1975 WL 34655. No Massachusetts case involving a floating
dock has been cited to us, and case law in other jurisdictions is
divided.5
Putting the divided cases to one side, the docks in this
case were shipped to Provincetown and--instead of being
incorporated physically into the land or ocean bottom--were used as
floating concrete platforms, much like a tied-up barge. Under the
classic definition of real property, the floating docks do not
qualify as real property. They could easily be, and were in fact,
severed from MacMillan Pier: the marine surveyor's report shows
5
Compare Newport Island Yacht Club v. Inver Grove Heights
Marina, Inc., 1995 WL 70215, at *2 (Minn. App. Ct. Feb. 21, 1995)
(floating docks are personal property) with Taylor v. Township of
Lower, 13 N.J. Tax 371, 387 (N.J. Tax Ct. 1993) (floating docks are
real property). Pointlessly, American Home cites cases in its
favor interpreting policies that happen to lack the real property
exception.
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that, without injury to MacMillan Pier, the docks sank or broke
free and others were hoisted onto the pier after the storm.
One might argue that the docks and piles taken together
comprise AGM's "product" and therefore "real property" for purposes
of the "Assured's product" exclusion--given that the piles are
embedded in the ocean floor. But the "severability" aspect
implicit in Black's definition of real property contemplates that
some items which are conceptually or even physically "connected" to
real property may be so readily removable that they never lose
their nature as personal property.
For example, courts have held that mobile homes, even
where anchored to the ground and attached to utility lines, remain
personal property. E.g., United States v. Shelby County, Tenn.,
385 F. Supp. 1187, 1189 (W.D. Tenn. 1974). Similarly, a
Massachusetts court noted that machines may remain chattels where
the attachment to the land "merely stead[ies]" property for "more
convenient use." Carpenter v. Walker, 5 N.E. 160, 162 (Mass.
1886). We conclude that the floating docks do not comprise real
property under Massachusetts law.
Ambiguities in the policy are construed against the
insurer, B & T Masonry Constr. Co. v. Pub. Serv. Mutual Ins. Co.,
382 F.3d 36, 39 (1st Cir. 2004), but the general definition of real
property excludes floating docks that can be removed without damage
and we are offered no coherent counter-definition to set against
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the classic definition, which has at least the advantage of
mechanical application. That the floating docks may be close to
the line--being big structures that ordinarily are not moved about-
-does not make the line itself uncertain.
It would be a different matter if there were some obvious
rationale for the real property exception in the policy that would
be frustrated by applying the classic definition. But, so far as
we can tell, the exception came about almost by happenstance;6 and,
so far as we understand the rationale for the "Assured's product"
exclusion itself, as described in Caplette, it appears to apply
with full force to the floating docks.
AGM has yet one more argument. It says that the
"products-completed operations hazard" ("PCOH") provides it with
coverage. PCOH is defined, with exceptions not here relevant, to
include "all . . . 'property damage' occurring away from premises
the Assured owns or rents" where work has been completed. Within
the policy, several of the exclusions are made inapplicable to
6
Earlier CGL policies did not have the real property
exception; and, in construing such policies, courts divided as to
whether the phrase "manufactured, sold, handled, or distributed"
implicitly excluded real property, compare, e.g., Mid-United
Contractors, Ins. v. Providence Lloyds Ins. Co., 754 S.W.2d 824,
826 (a building is not a product "because in ordinary language
buildings are constructed or erected, not manufactured"), with
Caplette, 647 N.E.2d at 1214 (a building is a product of its
builder). The ISO inserted the real property language to resolve
the matter. Cunningham & Fischer, Insurance Coverage in
Construction--The Unanswered Question, 33 Tort & Ins. L.J. 1063,
1095-1096 (1998).
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coverage found in PCOH. For example, the "damage to property"
exclusion has an exception for "'property damage' included in the
'products-completed operations hazard.'"
Seemingly, the damage to the docks would come within the
clause defining PCOH. But, contrary to AGM's premise, the policy
does not on its own provide coverage for damage within the PCOH
clause. The clause merely renders a given exclusion inapplicable
where that exclusion so provides. The "Assured's product"
exclusion contains no reference to the clause and therefore remains
applicable to PCOH damage.
Although we conclude that the "Assured's product"
exclusion does apply to the damage suffered by the docks
themselves, this does not quite end the story. It means that the
cost of replacing the floating docks (apparently about $230,000) is
not covered by the policy; but AGM's claims were not only for the
cost of replacing the docks but also for emergency work in
recovering the sunken or loose docks and for the cost of providing
temporary docks in the interim.
Non-coverage of the temporary docks and the emergency
work follows from non-coverage of the docks themselves. The basic
coverage under the CGL policy is for liability incurred "because
of" "property damage" ("bodily injury" is not present in this
case). Thus, the cost of temporary replacement for covered
property might well be recoverable. But it is hard to see how
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coverage would exist for temporary replacement of excluded
property. AGM points to no policy language or rationale for such
coverage.
Non-coverage is also clear as to the emergency work.
That work on its face is even harder to classify as liability for
property damage--save that courts have been willing in some
circumstances to include the cost of emergency efforts on the
premise that the insured is mitigating insured losses that would
otherwise be borne by the insurance company and that it serves
public policy to encourage such mitigation.7
This rationale fails if the property losses to the
relevant product are themselves not covered and the insured has no
obligation to replace the property. To be sure, public policy
might want to encourage mitigation, but not necessarily at the
insurer's expense, and anyway AGM had a substantial self-interest
in mitigating losses itself. It might be a different case if the
docks had actually threatened bodily injury or third-party property
damage for which American Home could be responsible.
The rationale for the patchwork coverage provided by the
CGL policy is obscure and especially hard to understand without
more information about other coverages available for product
7
Intel Corp. v. Hartford Accident & Indem. Co., 692 F. Supp.
1171, 1193 (N.D. Cal. 1988), aff'd in part, 952 F.2d 1551 (9th Cir.
1991); Bankers Trust Co. v. Hartford Accident & Indem. Co., 518 F.
Supp. 371, 373-74, vacated, 621 F. Supp. 685 (S.D.N.Y. 1981).
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defects. All we can do is take the relevant provisions one by one
and match them against the facts of this case. Having done so we
conclude that coverage was properly denied.
Affirmed.
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