In Mello Constr. Co. v. Acadia Ins. Co., 874 N.E.2d 1142 (Mass. App. Ct. 2007), an unpublished decision, the court held that the commercial general liability (“CGL”) policy of a general contractor did not cover the defective work of a subcontractor who performed a portion of the work. In Mello, a subcontractor improperly constructed the concrete slab supporting the elementary school for which the insured was the general contractor. The insured then sought coverage under its policy. The CGL policy specifically excluded: damage to the property on which the contractor or any of its subcontractors are working, which arises from the work done on the property; repairs of the contractor’s improper work; damage to impaired property or property that has not been physically damaged, arising from the contractor’s defective work; and damages for loss of use of, or repair to, the contractor’s product, work or impaired property owing to an inadequacy in the contractor’s product or work.

Affirming the summary judgment in favor of the insurer, the appellate court underscored the distinction between “liability risks,” which were covered by the CGL policy, and “business risks,” which were not. Citing Professor Roger C. Henderson’s discussion of general liability insurance in Insurance Protection for Products Liability and Completed Operations-What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971)(“Henderson’s article’), the court stated:

“[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.... The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.”

On the other hand, a business risk, pertains to the insured's contractual responsibilities as a provider of goods or services.

Mello at 3, quoting Henderson’s article at 441.

The court elaborated, “The insured . . . may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages [of a general liability policy] in question are designed to protect against.” Mello at 3 (quoting Henderson’s article at 441 & citing Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 239-40 (1979)). Accordingly, the Mello court found that the policy excluded the subcontractor’s defective work “because the faulty workmanship damaged directly the very property which had to be replaced.” Mello at 4 (quoting Donovan v. Commercial Union Ins. Co., 44 Mass. App. Ct. 596, 600 (1998)).

The court also distinguished Frankel v. J. Watson Co., 21 Mass. App. Ct. 43, 46 (1985), which it deemed to be only “superficially” applicable. In Frankel, the insured contracted to move a farmhouse onto a new foundation that it constructed. The insured’s faulty construction of the foundation damaged the superstructure of the farmhouse. Finding that the policy covered the loss, the Frankel court differentiated between “damage to the work product of the insured and damage to larger units of which the insured's work product is but a component.” Id. at 46.

In contrast to Frankel, in Mello, the work of the insured general contractor encompassed the entire elementary school. Thus, the subcontractor’s negligent performance on a portion of the insured’s work was excluded from coverage.