The US Court of Appeals for the First Circuit recently ruled that an offensive odor can constitute physical injury to property in a commercial general liability policy under Massachusetts law. The insured installed an offensive-smelling carpet which required installation of air filters and beadblasting of the building’s pre-existing concrete floor to eradicate. The First Circuit held that the policy’s “impaired property” exclusion did not relieve the insurer of its duty to defend because the complaint, reasonably interpreted, alleged physical injury, and because the property could not be restored to use by repairing, replacing or removing Bloomsouth’s product or work. The court further ruled that the “your product” exclusion also did not relieve the insurer of its duty to defend because the exclusion does not encompass damages to real property, and the complaint, reasonably read, alleged damage to real property, i.e., the building’s pre-existing concrete floor.  

Background  

Bloomsouth Flooring Corp. installed a carpet in a building that later emitted an offensive odor. To eliminate the odor, the general contractor of the construction project installed air filters in the building’s ventilation system and bead-blasted the concrete floor beneath the carpet. Essex Insurance Co. declined to defend on the basis of business risk exclusions contained in its commercial general liability policy.  

The First Circuit’s Ruling  

  • The First Circuit ruled that an offensive odor can constitute physical injury to property in a commercial general liability policy under Massachusetts law. The Court relied on two unpublished Massachusetts Superior Court cases, and cases outside of Massachusetts, so holding. The Court further ruled that allegations of the complaint could reasonably be interpreted as alleging physical injury to property by asserting that the odor “permeated the building” and that the insureds expended funds “to remediate the . . . odor.”  
  • The Court also ruled that the policy’s business risk exclusions (for “impaired property” and “your product”) did not relieve Essex of its duty to defend. The “impaired property” exclusion barred coverage for damage to property that has not been physically injured. The Court ruled that the exclusion did not apply because the complaint reasonably alleged that the odor physically injured the property.  
  • The Court also noted that property can only be “impaired property” if it can be restored to use by repair, replacement or removal of the insured’s product or work. Here, the Court held that the property could not be restored to use by repairing, replacing or removing Bloomsouth’s product or work because the remediation work included installing air filters and bead-blasting the pre-existing concrete floors in the structure.  
  • Finally, the Court concluded that the “your product” exclusion did not relieve Essex of its duty to defend. The Court concluded that the exclusion for damages to “your product” does not encompass damages to real property, and the complaint, reasonably read, alleged damage to real property, i.e., the building’s pre-existing concrete floor.  
  • The Court concluded that Essex erroneously denied a defense to its insured.

Conclusion

The Court held that an offensive odor can constitute physical injury to property in a commercial liability policy under Massachusetts law. The Court further concluded that the business risk exclusions for “impaired property” and “your property” did not relieve the insurer of its duty to defend.