Innovative Mold Solutions, Inc. v. All America Insurance Company, Inc. et al
Filing
76
District Judge Timothy S Hillman: AMENDED ORDER entered. MEMORANDUM AND ORDER denying 32 Motion for Judgment on the Pleadings and granting 36 Motion for Judgment on the Pleadings. (Castles, Martin)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
_______________________________________
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INNOVATIVE MOLD SOLUTIONS, INC., )
)
CIVIL ACTION
)
Plaintiff,
)
NO. 4:15-CV-40010-TSH
)
v.
)
)
ALL AMERICA INSURANCE
)
COMPANY, INC., CENTRAL MUTUAL
)
INSURANCE COMPANY, INC., and
)
CENTRAL INSURANCE COMPANIES,
)
)
Defendants.
______________________________________ )
AMENDED MEMORANDUM AND ORDER ON DEFENDANTS’ MOTION FOR
JUDGMENT ON THE PLEADINGS (Docket No. 32) AND PLAINTIFF’S CROSSMOTION FOR JUDGMENT ON THE PLEADINGS (Docket No. 36)
July 12, 2016
HILLMAN, D.J.
This is a dispute over an insurer’s duty to defend in litigation brought against the insured
by a third party. As explained below, I find that the insured has met its burden of showing that the
underlying complaint alleged potentially covered property damage caused by an occurrence, as
those terms are defined in the parties’ commercial general liability policy and under applicable
law. I further find that the insurer has not met its burden of showing that three of the policy’s
exclusionary provisions would apply to bar coverage. Accordingly, the insurer had a duty to
defend the insured, and the insured is entitled to judgment on the pleadings on Count I of the
complaint. Defendant’s motion for judgment on the pleadings (Docket No. 32) is denied, and
Plaintiff’s cross-motion for judgment on the pleadings (Docket No. 36) is granted.
1
Background
The following facts are taken from the parties’ pleadings and assumed true for the purposes
of these motions. Innovative Mold Solutions, Inc. (IMS or Plaintiff) is an engineering and
manufacturing company. All America Insurance Company, Inc. and Central Mutual Insurance
Company, Inc. (collectively, All America or Defendants) are property and casualty insurance
companies.1 All America issued consecutive commercial general liability (CGL) policies to IMS,
effective January 1, 2007 through December 31, 2010 (the Policies). The Policies provided
coverage for “property damage” caused by an “occurrence,” as those terms were defined in the
Policies and under Massachusetts law, subject to certain exclusions. The Policies further provided
that All America would defend IMS in any suit in which a third party sought to recover damages
for covered property damage or bodily injury.
On February 15, 2012, IMS was served with a complaint, filed in the United States District
Court in Connecticut. The action was a qui tam False Claims Act (FCA) suit, brought against IMS
and others by a relator, Michael Ladas, on behalf of the United States (the Ladas action). The
complaint alleged that IMS and other defendants had violated the FCA by manufacturing
contractually noncompliant and defective components of night-vision goggles, which were
provided to the United States for use by the military and law enforcement. IMS notified All
America of the claim and requested that All America provide and pay for IMS’s defense, but All
America denied having a duty to defend or indemnify under the facts as alleged in the Ladas
complaint.2
1
Plaintiff also seeks relief from “Central Insurance Companies.” To the extent that “Central
Insurance Companies” is a legal entity, this Court’s order applies to it as well.
2
IMS also presented All America with a written demand letter, pursuant to Mss. Gen. Laws ch.
93A and 176D, in October of 2014.
2
The facts pled in the Ladas complaint are as follows. In 2005, the United States Army
awarded ITT Corporation a $1.39 billion contract for night vision devices. ITT Corporation was
to supply, among other things, monocular night-vision goggles. From 2007 to at least 2011, ITT
Corporation manufactured and supplied to the United States government more than 500,000 nightvision goggles at a cost of approximately $3,000 per item. Before the contract was awarded, the
proposed product went through a rigorous qualification process.
The night vision goggles consist of a single tube assembly that can be mounted on a
soldier’s helmet or firearm. The night vision tube assembly converts low-level light entering the
front end of the tube into small images that the soldier can see through the back end of the tube.
The tube assembly requires electrical power to convert low-level light into visible images. The
electrical power is supplied through a power supply case of mechanically rigid plastic. The case
has a plated metal surface that serves as the contact area for inputting power into the tube assembly.
The power supply contains a gold tab that serves as the positive contact area (the B+ tab), and the
remaining plated surface serves as the negative contact area. Inside the night-vision goggle
assembly, springs contact with the power supply case and transfer power to the night vision tube
through the power supply case, utilizing the plated metal surface as the main electrical path.
The metal plating on the power supply case is comprised of three layers. The base layer is
silver epoxy; the middle layer is electroplated copper; and the top layer is electroplated tin. The
epoxy in the silver epoxy layer creates an adhesive bond between the surface of the plastic case
and the electroplated copper, and the silver material creates a metal surface on the plastic case
where the electroplated copper can attach. The function of the outer tin layer is to seal off the
outer surface of the copper layer and prevent oxidization.
3
The low chemical reactivity of the plastic case makes adhesion of metal plating to the
surface very difficult. While attempting to qualify the design before the contract was awarded,
ITT Corporation performed extensive research in order to select particularly formulated silver
epoxy paint, and a spray application method, to ensure proper coverage and adhesion to the plastic
case. The thickness of the silver epoxy layer is critical to achieving reliable plating. If the layer
contains voids, or if the bond to the copper layer is weak, the plating peels and the copper layer
becomes exposed to the environment and will oxidize. Over time, the oxidation increases as the
product is exposed to various temperatures, moisture, and electrical power. Oxidation, peeling, or
degradation on the power supply case plating and B+ tab limits the flow of electrical current and
causes the night vision tube assembly to function incorrectly or not at all, limiting or totally
eliminating the user’s ability to see in the dark.
ITT Power Solutions, a subsidiary of ITT Corporation, designed and manufactured the
power supply component of the night vision goggles. ITT Power Solutions subcontracted with
IMS to manufacture the molded components of the power supply assembly. Prior to 2007, the
power supplies sold under the contract were plated using the processes and materials that had been
qualified by ITT, as required under the contract. During November of 2007, however, IMS
changed the way that it manufactured the power supply case in two important ways. First, IMS
changed the process for applying the silver epoxy material onto the power supply case from a spray
method to a print-pad method. Second, IMS changed the composition of the silver epoxy material.
This new process was not approved by the qualification procedures.
At some point, ITT Power Solutions employees began to notice that defective power supply
cases were being shipped from IMS. The defects included bubbling, flaking, and “burn” marks on
the plating of the cases. The separation of the copper layer from the epoxy layer would sometimes
4
cause the B+ tab to lift. The plating problems impaired the transfer of electrical power from the
power supply case to the tube assembly, increasing the likelihood of power failure. IMS initially
withheld the unauthorized process change from ITT Power Solutions, but at some point ITT
personnel became aware of the change and did not take action to correct it.
Eventually, ITT Power Solutions admitted to having knowledge of the manufacturing
process changes. Thereafter, a struggle ensued between the quality control personnel at ITT Power
Solutions, who wanted to disclose the manufacturing change and subject it to testing and
qualification, and other high-level ITT personnel who did not wish to disclose the full nature of
the problem. In March of 2010, ITT Power Solutions terminated its Director of Quality, Michael
Ladas, who filed the Ladas action that underlies the instant insurance dispute.
Meanwhile, the government continued to order the goggles, and ITT’s quality assurance
personnel continued to observe that the power supply cases were peeling and had other
irregularities, including voids, scratches, and bubbling of the surface and solder joints on the B+
tab. “[F]ailures were occurring at every stage of the manufacturing process. There was failure at
Central Metal Finishing (where the metallic and copper tin layers were added), failure at [IMS],
failure at ITT Power Solutions, and failure after products were shipped to ITT Night Vision in
Roanoke, Virginia.” (Ladas Compl. at ¶ 86.)
In total, approximately 500,000 night vision goggles were sold to the United States
government from November of 2007 to the spring of 2011 with power supplies produced under
the changed process and materials. Ladas alleged that, through the date of the complaint in late
2013, ITT Corporation and ITT Power Solutions continued to conceal the nature of the process
changes.
5
The Ladas complaint contained three counts: violation of the FCA, 31 U.S.C.
§ 3729(a)(1)(A) (count I); violation of the FCA, 31 U.S.C. § 3729(a)(1)(B) (count II); and
conspiracy to violate the FCA, 31 U.S.C. § 3729(a)(1)(C) (count III). Ladas sought the following
relief: enjoin the defendants from continuing to violate the FCA; order a recommended inspection
of all night vision goggles manufactured from September of 2007 through April of 2011, to be
“inspected for plating peeling, discoloration, and B+ solder joint cracking and bubbling”; order a
recommended recurring inspection of the night vision tubes; enter judgment against the defendants
in the amount of three times the actual damages sustained by the United States because of the
defendants’ actions, plus a civil penalty for each violation; and award the relator a share of the
damages, plus costs.
In September of 2014, after IMS had spent more than $400,000 on legal fees in defense of
these allegations, the Connecticut District Court dismissed the Ladas action on the grounds that
(1) Ladas did not have standing to bring an FCA claim because of a release that he had executed,
and (2) the complaint was not pled with sufficient particularly per Federal Rule of Civil
Procedure 9(b). Ladas appealed this decision to the Second Circuit, which held oral arguments in
May of 2015. At some point in 2015, IMS paid Ladas $25,000 to settle the suit, and Ladas
withdrew his appeal as to IMS.3
IMS brought this suit against All America on January 9, 2015, seeking a declaratory
judgment that All America had a duty to defend IMS in the Ladas action (count I). IMS also
alleges breach of contract (count II); breach of implied covenant of good faith and fair dealing
(count III); and violation of Chapter 93A (count IV). IMS seeks to recover the fees it paid for its
3
It is not clear if Ladas also settled separately with the other defendants, or if the appeal remains
pending.
6
defense in the Ladas action, as well as its fees for bringing the instant action, with treble damages
and interest. All America moved for judgment on the pleadings (Docket No. 32), and IMS filed a
“cross-motion for judgment on the pleadings or for summary judgment.” (Docket No. 36.) In their
filings, the parties address only the declaratory judgment count regarding the duty to defend. In
November of 2015, this Court granted the parties’ joint request to file their motions under seal,
with redacted copies added to the public docket.
Standard of Review
Pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, a party may move for
judgment on the pleadings “[a]fter the pleadings are closed—but early enough not to delay trial.”
This Court reviews motions for judgment on the pleadings under a standard that is essentially the
same as that for a motion to dismiss under Fed. R. Civ. P. 12(b)(6), except that “[a] Rule 12(c)
motion, unlike a Rule 12(b)(6) motion, implicates the pleadings as a whole.” Aponte–Torres v.
Univ. of P.R., 445 F.3d 50, 54–55 (1st Cir. 2006). Facts contained in the pleadings are viewed in
the light most favorable to the nonmovant, and all reasonable inferences are drawn in his or her
favor. Zipperer v. Raytheon Co., 493 F.3d 50, 53 (1st Cir. 2007). Judgment on the pleadings is
appropriate “only if the uncontested and properly considered facts conclusively establish the
movant’s entitlement to a favorable judgment.” Id. (quoting Aponte–Torres, 445 F.3d at 54).
When reviewing a motion under Rule 12(c), the court “may consider ‘documents the
authenticity of which are not disputed by the parties; . . . documents central to plaintiffs’ claim;
[and] documents sufficiently referred to in the complaint.’” Curran v. Cousins, 509 F.3d 36, 44
(1st Cir. 2007) (quoting Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993)). When the court is
confronted with cross-motions for judgment on the pleadings, the pertinent inquiry is “whether
7
either of the parties deserves judgment as a matter of law on facts that are not disputed.” Id.
(quoting Barnes v. Fleet Nat'l Bank, N.A., 370 F.3d 164, 170 (1st Cir. 2004)).
Discussion
A. The Duty to Defend
In Massachusetts, the law regarding an insurer’s duty to defend is well settled. Essex Ins.
Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 403 (1st Cir. 2009); HDH Corp. v. Atl. Charter
Ins. Co., 681 N.E.2d 847, 850 (Mass. 1997). The duty to defend is broader than the duty to
indemnify and is based on an assessment of the insurance policy, the facts alleged in the underlying
complaint against the insured, and facts known or readily knowable by the insurer. See BloomSouth
Flooring Corp., 562 F.3d at 403. “An insurer has a duty to defend an insured when the allegations
in a complaint are reasonably susceptible of an interpretation that states or roughly sketches a claim
covered by the policy terms.” Billings v. Commerce Ins. Co., 936 N.E.2d 408, 414 (Mass. 2010).
“The duty to defend is determined based on the facts alleged in the complaint, and on facts known
or readily knowable by the insurer that may aid in its interpretation of the allegations in the
complaint.” Ferreira v. Chrysler Grp. LLC, 13 N.E.3d 561, 566 (Mass. 2014) (quoting
Metropolitan Property & Cas. Ins. Co. v. Morrison, 951 N.E.2d 662, 667 (Mass. 2011)). “In order
for the duty of defense to arise, the underlying complaint need only show, through general
allegations, a possibility that the liability claim falls within the insurance coverage. There is no
requirement that the facts alleged in the complaint specifically and unequivocally make out a claim
within the coverage.” Billings, 936 N.E.2d at 414 (quoting Sterilite Corp. v. Cont'l Cas. Co., 458
N.E.2d 338, 341 (Mass. App. Ct. 1983)). “However, ‘when the allegations in the underlying
complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the
duty to investigate or defend the complaint.’” Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788
8
N.E.2d 522, 531 (Mass. 2003) (quoting Timpson v. Transamerica Ins. Co., 669 N.E.2d 1092, 1095
(Mass. App. Ct. 1996)) (quotation marks and citation omitted).
In determining whether the insurer has a duty to defend, the process is not limited to
“looking at the legal theory enunciated by the pleader.” Billings, 936 N.E.2d at 415 (citation
omitted). Rather, the court must consider “what kind of losses may be proved as lying within the
range of the allegations of the complaint,” and then determine “whether any such loss fits the
expectation of protective insurance reasonably generated by the terms of the policy.” Essex Ins.
Co., 562 F.3d at 403-04 (quoting Open Software Found., Inc. v. U.S. Fid. & Guar. Co., 307 F.3d
11, 16 (1st Cir. 2002)). The pertinent inquiry is “what an objectively reasonable insured, reading
the relevant policy language, would expect to be covered.” Id. at 404 (quoting Hazen Paper Co. v.
United States Fid. & Guar. Co., 555 N.E.2d 576, 583 (Mass. 1990)). The insured bears the burden
of proving coverage under a CGL policy. Id. If the insured satisfies his burden, then the insurer
must prove that an exclusion applies in order to avoid coverage. Id.
B. Property Damage
The policies at issue in this case provided coverage for “sums that the insured becomes
legally obligated to pay as damages because of . . . ‘property damage’ to which this insurance
applies.” (CGL Policy at 115.) All America argues that it had no duty to defend IMS because the
Ladas complaint did not allege “property damage” within the meaning of the Policies. The Policies
define “property damage” as “Physical injury to tangible property, including all resulting loss of
use of that property,” or “Loss of use of tangible property that is not physically injured.” (CGL
Policy at 128.) All America argues that, as “property damage” is construed in CGL policies under
Massachusetts law, it requires physical damage to property other than that of the insured. Mere
repair or replacement of the insured’s property does not trigger coverage.
9
All America’s argument is based on the precept that “CGL coverage is primarily directed
to liabilities other than defects in one's own work.” Am. Home Assur. Co. v. AGM Marine
Contractors, Inc., 467 F.3d 810, 812 (1st Cir. 2006). Although this concept is well-established in
insurance law, its analytical placement in CGL coverage analyses has not been consistent. As the
First Circuit has noted, “[s]ome 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, . . . and
others have held that faulty workmanship does not constitute ‘property damage,’ . . . [while] other
courts have focused solely upon the exclusions of the CGL policy.” Id. (citations omitted).
Although Massachusetts courts have not developed a consistent mode of analysis in this regard, in
several decisions involving damage to the insured’s product the courts have declined to address
the issue within the realm of defining “property damage” and have instead focused on the relevant
exclusions. See Commerce Ins. Co. v. Betty Caplette Builders, Inc., 647 N.E.2d 1211, 1213 (Mass.
1995); Lusalon, Inc. v. Hartford Acc. & Indem. Co., 511 N.E.2d 595, 597 (Mass. 1987); Pac.
Indem. Co. v. Lampro, 12 N.E.3d 1037, 1043 (Mass. App. Ct. 2014); see also Oxford Aviation,
Inc. v. Glob. Aerospace, Inc., 680 F.3d 85, 88-92 (1st Cir. 2012).
Here, the parties’ disagreement centers on whether the Ladas complaint alleged damage to
property that belonged to someone other than IMS. I find that the complaint did make these
allegations. According to the complaint, the crux of the problem with the goggles was the faulty
silver epoxy on the power supply case, which caused the copper and tin layers to crack, bubble,
and peel, and the B+ tab to lift, which in turn resulted in limited power conductivity and prevented
the goggles from functioning properly. The Ladas complaint stated that IMS applied the silver
epoxy, but that an entity called “Central Metal Finishing” applied the copper and tin layers. The
complaint further alleged that the B+ tab was added to the product by ITT Power Solutions.
10
All America argues that the copper and tin layers, although added by a different company,
nevertheless became part of IMS’s product, because IMS was responsible for manufacturing the
molded components of the power supply assembly. However, the Ladas complaint does not
specify the relationship between Central Metal Finishing and IMS, nor does it define precisely
which portions of the power supply assembly IMS was tasked with creating. At the duty-to-defend
stage, these questions need not be answered. It is sufficient that, pursuant to the Ladas complaint,
IMS’s allegedly faulty epoxy potentially caused damage to components that were supplied by other
entities. Thus, I find that the Ladas Complaint alleged a possibility of covered property damage,
and All America’s duty to defend will not be denied on this basis.
C. Occurrence
Next, All America argues that even if the Ladas complaint alleged property damage, this
damage was not caused by an “occurrence” as that term is defined under the Policies and applicable
law. The Policies apply only to property damage that is caused by an “occurrence.” (CGL Policy
at 115.) “Occurrence” is defined as “an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” (CGL Policy at 127.) Under Massachusetts
law, an “accident” is commonly defined as “an unexpected happening without intention or design.”
Lampro, 12 N.E.3d at 1042 (citing Liberty Mut. Ins. Co. v. Tabor, 553 N.E.2d 909, 912 (Mass.
1990)). In the context of insurance coverage, the word has been broadly construed. Quincy Mut.
Fire Ins. Co. v. Abernathy, 469 N.E.2d 797, 799 (Mass. 1984). “Accident” encompasses injuries
that are caused “recklessly.” Id. And, even “the resulting injury which ensues from the volitional
act of an insured is still an ‘accident’ within the meaning of an insurance policy if the insured does
not specifically intend to cause the resulting harm or is not substantially certain that such harm
will occur.” Id. “If, however, an insured knows with substantial certainty that harm will follow
11
from his conduct, like setting a fire, it is not necessary that he gauge the degree of harm with
precision.” Smartfoods, Inc. v. Northbrook Prop. & Cas. Co., 618 N.E.2d 1365, 1367 (Mass. App.
Ct. 1993).
All America argues that IMS’s actions of changing the composition and application of the
epoxy were intentional acts of misconduct, and thus the resulting damages were not accidental. In
response, IMS asserts that its conduct, as pled in the Ladas complaint, falls under the broad
construction of accident because there are no allegations that IMS specifically intended the injury
that resulted from its changed manufacturing process. Although the Ladas complaint shows that
IMS intentionally changed the epoxy process, the facts do not show that IMS knew with substantial
certainty that switching from a spray method to a print-pad method would cause the copper and
tin layers to lose their adhesion.
Given the liberal interpretation of “accident,” and the broad
construction of the duty to defend, I find that the Ladas complaint does not conclusively establish
that the results of changing the epoxy process were not accidental. Therefore, the damages were
potentially caused by an “occurrence.”
D. Damages
All America briefly argues that it did not have a duty to defend IMS because Ladas did not
seek damages, as his complaint contained only FCA claims. Under Massachusetts law, “damages”
is defined as “the word which expresses in dollars and cents the injury sustained by the plaintiff.”
116 Commonwealth Condo. Trust v. Aetna Cas. & Sur. Co., 742 N.E.2d 76, 79 (Mass. 2001)
(quoting Turcotte v. DeWitt, 131 N.E.2d 195, 197 (Mass. 1955)). This includes “injunctive relief
that requires the insured to incur costs to remedy covered losses.” Omega Flex, Inc. v. Pac.
Employers Ins. Co., 937 N.E.2d 52, 57 (Mass. App. Ct. 2010) (citing Hazen Paper Co., 555 N.E.2d
at 582-83).
12
In his prayer for relief, Ladas sought an injunction to stop IMS from continuing to violate
the FCA; an injunction to order an inspection of goggles manufactured between 2007 and 2011;
and monetary damages on behalf of the United States government. In an FCA suit, like the Ladas
action, monetary damages would include the costs of reimbursing the government for the amount
that the defendants received on account of their fraudulent actions, plus statutory multipliers and
civil penalties. These costs could potentially encompass some insurable amounts with regard to
IMS, as could the requested injunctive relief. Accordingly, I find that IMS has satisfied its initial
burden of showing that the damages claimed in the Ladas action were potentially within the bounds
of the Policies’ primary coverage.
E. Business Risk Exclusions
As mentioned above, Massachusetts courts recognize the overarching rule that “CGL
coverage is primarily directed to liabilities other than defects in one’s own work.” AGM Marine,
467 F.3d at 812. In this vein, All America argues that several “business risk” exceptions apply to
this case. Because “[g]eneral liability coverage is not intended as a guarantee of the insured’s
work,” CGL policies such as the one at hand “contain ‘business risk’ exclusions.” Lampro, 12
N.E.3d at 1043 (quoting Dorchester Mut. Fire Ins. Co. v. First Kostas Corp., 731 N.E.2d 569, 572
(Mass. App. Ct. 2000)). These exclusions express the principle that “[t]he 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, and for which the insured may be found liable.” Betty Caplette Builders, Inc., 647
N.E.2d at 1213 (citation omitted).
The risks relating to repair or replacement of the insured’s faulty work or products are not
intended to be insured, because these “are a normal, foreseeable and expected incident of doing
13
business and should be reflected in the price of the product . . . .” BloomSouth Flooring Corp., 562
F.3d at 407 (quoting Sterilite Corp., 458 N.E.2d at 343 n.13). “Thus, a distinction is drawn
between ‘faulty workmanship’ claims involving only the insured’s own work product, for which
a defense need not be provided, and claims for damage to the property of a third party, for which
a defense is required.” Id. quoting Frankel v. J. Watson, Inc., 484 N.E.2d 104, 106 (Mass. App.
Ct. 1985)). Exclusions are strictly construed under Massachusetts law; All America will be
relieved of its duty to defend only if it has shown, based on the allegations in the Ladas complaint,
that the exclusions completely precluded coverage. See Abernathy, 469 N.E.2d at 799; Vappi &
Co. v. Aetna Cas. & Sur. Co., 204 N.E.2d 273, 276 (Mass. 1965).
All America identifies three exclusions at issue in this case: “J(6),” “M,” and “N.” The
J(6) exclusion is a standard faulty-workmanship exclusion, which Massachusetts courts have
construed to apply to the costs of repairing damage to other aspects of an overall project, if the
costs are directly caused by a subcontractor’s faulty work. See Lusalon, 511 N.E.2d at 597. This
exclusion precludes coverage for property damage to: “That particular part of any property that
must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” (CGL
Policy at 118.) “Your work” is defined as: “Work or operations performed by you or on your
behalf” and “Materials, parts or equipment furnished in connection with such work or operations.”
(CGL Policy at 129.) However, this exclusion “does not apply to ‘property damage’ included in
the ‘products-completed operations hazard.’” (CGL Policy at 118.)
The “products-completed
operations hazard,” in turn, includes “all . . . ‘property damage’ occurring away from premises you
own or rent and arising out of ‘your product’ or ‘your work.’”4 (CGL Policy at 128.)
4
The “products-completed operations hazard” also contains several exclusions, including
“products that are still in your physical possession” and “work that has not yet been completed or
14
All America argues that the J(6) exclusion applies because IMS’s “work” was the
improperly plated power supply case, and this was the only portion of the goggles that suffered
damage. All America relies on an instructive decision by the Supreme Judicial Court, Lusalon,
Inc. v. The Hartford Acc. & Indem. Co., 511 N.E.2d 595 (Mass. 1987). In Lusalon, the plaintiff
was a masonry subcontractor that caused damage to the adjacent door and window frames of a
building while it was installing concrete masonry block. Id. at 596. Specifically, the subcontractor
splattered mortar on the door and window frames and, in the course of removing the mortar,
applied—and failed to properly remove—a cleaning agent known as muriatic acid. Id. The door
and window frames were then painted, and the paint peeled as a result of the acid. Id. The Supreme
Judicial Court rejected the plaintiff’s argument that a faulty-workmanship exclusion in the policy5
was limited to the repair of the plaintiff’s precise work product, which was masonry, and did not
cover the damage to the door and window frames. Id. at 597. Rather, the Court held that the
exclusion applied to damage that was directly caused by the insured’s faulty work-product. Id.;
see Bond Bros. v. Robinson, 471 N.E.2d 1332, 1333-34 (Mass. 1984) (interpreting identical
exclusionary language to deny coverage where a subcontractor’s faulty installation of rebar caused
the failure of a concrete foundation poured by the general contractor).
Here, like in Lusalon, IMS’s work—regardless of what portion of the power supply
assembly—was itself a component part of a larger product. The epoxy coating was a component
of the power supply case, which was a component of the goggles as a whole. The Ladas complaint
abandoned”; however, these exclusions do not affect the analysis of whether the J(6) exclusion
applies to the case at hand.
5
The wording of the exclusion was nearly identical to the exclusion at issue here, eliminating
coverage for property damage to “that particular part of any property . . . the restoration, repair or
replacement of which has been made or is necessary by reason of faulty workmanship thereon by
or on behalf of the insured.” Lusalon, 511 N.E.2d at 597.
15
clearly alleged that IMS’s faulty workmanship on the silver epoxy application process was the
cause of the damage to the other parts of the power supply assembly and, in turn, to the goggles.
Crucially, however, the complaint did not allege that IMS’s faulty work caused damage to any
third-party property outside of the goggles themselves. This is distinguishable from a scenario in
which the insured’s negligent work on a project causes damage to third-party property that is not
part of the overall project, in which case the faulty-workmanship exclusion would not apply. See
Fed. Ins. Co. v. Hermitage Ins. Co., No. CIV.A.00-12310-DPW, 2002 WL 31194872, at *4 (D.
Mass. Sept. 25, 2002) (faulty workmanship exclusion did not apply where negligent demolition on
the insured’s property caused damage to adjoining building).
Thus, the J(6) exclusion would bar the potential for coverage in this case—but for the fact
that All America’s Lusalon analysis fails to address the entirety of J(6). As noted above, the J(6)
exclusion “does not apply to ‘property damage’ included in the ‘products-completed operations
hazard,’” which includes “all . . . ‘property damage’ occurring away from premises you own or
rent and arising out of ‘your product’ or ‘your work.’” (CGL Policy at 118, 128.)
The case of Oxford Aviation, Inc. v. Glob. Aerospace, Inc., 680 F.3d 85 (1st Cir. 2012), is
instructive here for its analogous facts.6 In Oxford Aviation, Oxford was a company that contracted
to repair an aircraft. Id. at 86. On the flight back to the owner’s location from Oxford’s premises
in Maine, one of the plane’s side windows cracked. Id. at 86. The owner later sued Oxford,
complaining about the window and a slew of other allegedly substandard work performed on the
plane. Id. at 86-87. In the ensuing litigation regarding Oxford’s insurer’s duty to defend, the First
Circuit construed an exclusion that was identical to the J(6) exclusion at issue in the case at hand,
6
Although the court in Oxford applied Maine law, the analysis with regard to the J(6) exclusion is
entirely consistent with Massachusetts law and does not rely on any Maine precedent.
16
including its language regarding the products-completed operations hazard. In rejecting the
exclusion’s applicability to the broken window, the court explained:
The . . . exclusion . . . fails to negate the duty to defend. Conceivably,
the cracked side window is a “particular part” of property “on”
which Oxford performed work. . . . But the your-work exclusion by
its terms does not apply to “property damage occurring away from
premises you own or rent and arising out of your product or your
work,” and [the plane’s owner] explicitly alleged that the crack
occurred in-flight.
Oxford, 680 F.3d at 90. Thus, the court held that the exclusion failed to negate the insurer’s duty
to defend.7 Id.
Here, like in Oxford, the Ladas complaint alleged that some damage to the goggles may
have occurred after they left IMS’s premises. As alleged, the changed epoxy process caused lesseffective adhesion, meaning that the tin layer would begin to peel, bubble, and crack after a period
of time, exposing the copper layer, which would oxidize when exposed to the environment.
According to the Ladas complaint, the weak adhesion could appear satisfactory at first but then
7
The oddity of this conclusion was not lost on the court:
This is a curious case. Reading the complaint against the exclusions,
one must agree with the district judge that the underlying liability is
only to [the plane’s owner]; that the alleged property damage to [the
plane’s owner], if proved as charged, likely traces back to defective
work by Oxford; and that such damage to the insured's client
resulting from such a cause is what the business-risk exclusions
taken together hope to cabin, limit and usually preclude.
But for obvious reasons (e.g., to cover consequential damages
claimed by third parties), the CGL policy does not have an exclusion
broadly written to exclude all claims arising from faulty
workmanship. Rather, [the insurer] has crafted complex exclusions
occupying several pages of text; and they have created an
opportunity in some cases for a complaint to circumvent all of them.
Here, at least one scenario relating to the cracked window, occurring
in flight and away from Oxford's facilities, does fall within coverage
and could plausibly avoid all cited exclusions.
Oxford, 680 F.3d at 91-92.
17
would develop damage as the product was exposed to various temperatures, moisture, and
electrical power. Thus, the latent nature of the alleged damage suggests that much of it did not
occur until the products had left IMS’s facilities. The complaint alleged that there were product
failures at IMS, but also at Central Metal Finishing, at ITT Power Solutions, and at ITT Night
Vision. And, many of the goggles that were tested at ITT were nevertheless likely to fail later on:
“the testing [at ITT] was only designed to identify power supply cases with current peeling issues;
it did not screen out power supply cases with surfaces that would deteriorate over time and when
subjected to the rigors of use.” (Ladas compl. at ¶ 93.) Thus, I find that the Ladas complaint
alleged that property damage may have occurred away from IMS’s premises, arising out of IMS’s
product or work. This damage would be covered by the products-completed operations hazard,
which means that it would not be subject to the J(6) exclusion. Accordingly, All America will not
be released from its duty to defend on this basis.
All America also argues that the Policies’ “M”8 and “N”9 exclusions apply, but concedes
that these exclusions would not apply if there was damage to property owned by someone other
8
This exclusion precludes coverage for
“Property damage” to “impaired property” or property that has not
been physically injured, arising out of:
1) A defect, deficiency, inadequacy or dangerous condition in “your
product” or “your work”; or
2) A delay or failure by you or anyone acting on your behalf to
perform a contract or agreement in accordance with its terms.
(CGL Policy at 118.)
9
This exclusion precludes coverage for:
Damages claimed for any loss, cost or expense incurred by you or
others for the loss of use, withdrawal, recall, inspection, repair,
replacement, adjustment, removal or disposal of:
1) “Your product”;
2) “Your work”; or
3) “Impaired property”;
If such product, work, or property is withdrawn or recalled from the
market or from use by any person or organization because of a
18
than IMS. As explained supra, I find that the Ladas complaint alleged the possibility of thirdparty property damage, because the copper and tin layers, and the B+ tab, were not added to the
product by IMS.
Because IMS has met its burden of showing that the Ladas complaint alleged potentially
covered property damage, and because All America has not met its countervailing burden of
showing that one of the Policies’ exclusions bars coverage, I find that All America had a duty to
defend IMS in the Ladas action. Accordingly, IMS is entitled to judgment on Count I of the
complaint.
Conclusion
For the reasons set forth above, Defendant’s motion for judgment on the pleadings (Docket
No. 32) is denied, and Plaintiff’s cross-motion for judgment on the pleadings (Docket No. 36) is
granted. Judgment shall be entered in favor of Plaintiff on Count I. Pursuant to the Policies, All
America had a duty to defend IMS in the underlying Ladas action.
SO ORDERED.
/s/ Timothy S. Hillman
TIMOTHY S. HILLMAN
DISTRICT JUDGE
known or suspected defect, deficiency, inadequacy or dangerous
condition in it.
(CGL Policy at 119.)
19
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