Essex Insurance v. Bloomsouth Flooring Corp.

United States Court of Appeals
For the First Circuit

No. 06-2750

ESSEX INSURANCE COMPANY,

Plaintiff, Appellee,

v.

BLOOMSOUTH FLOORING CORPORATION,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Leo T. Sorokin, U.S. Magistrate Judge]

Before

Lipez, Selya and Howard,
Circuit Judges.

Steven L. Schreckinger, with whom Harvey Nosowitz, and Lynch,
Brewer, Hoffman & Fink, LLP, were on brief for appellant.
Robert L. Ciociola, with whom Litchfield Cavo, LLP was on
brief, for appellee.

April 16, 2009
 HOWARD, Circuit Judge. This appeal involves a coverage

dispute between Essex Insurance Company and its insured, BloomSouth

Flooring Corporation. Essex brought a declaratory judgment action

claiming that, pursuant to "business risk exclusions" in its

policies, it had neither a duty to defend nor a duty to indemnify

BloomSouth in connection with an underlying state court action

against BloomSouth. The magistrate judge, presiding by mutual

consent, see 28 U.S.C. § 636(c), granted Essex's motion for summary

judgment, finding that the pertinent exclusions relieved Essex of

both its duties to defend and to indemnify. On appeal, BloomSouth

targets only the duty to defend.

Because the exclusions, as applied to the underlying

complaint, do not relieve Essex of its duty to defend, we reverse

the district court's summary judgment ruling in pertinent part.

I. Background

We recite the facts in the light most favorable to

BloomSouth, the party against whom summary judgment was granted.

See Millipore Corp. v. Travelers Indem. Co., 115 F.3d 21, 25 (1st

Cir. 2006).

In 2000, Boston Financial Data Services ("BFDS") retained

Suffolk Construction Corporation as general contractor for a tenant

improvement project at its offices in Massachusetts. In

undertaking the project, Suffolk subcontracted with BloomSouth for

the installation of carpet tile and related materials throughout

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the building. The subcontract required BloomSouth to perform minor

preparation work before laying the carpet. This work included

testing and cleaning the concrete floor. BloomSouth itself

subcontracted out the installation to two other companies. One was

charged with supplying the carpet and the other with installing it.

During all material times BloomSouth had commercial

general liability policies with Essex. The general contractor

Suffolk was an additional insured on the Essex policies that were

issued to BloomSouth. BloomSouth's subcontract also required it to

defend and indemnify Suffolk for claims against Suffolk arising out

of BloomSouth's work. Coverage under a first policy began on July

15, 2000 and extended through July 15, 2001; coverage under a

second policy began on July 15, 2001 and extended through July 15,

2002.

Both policies specifically covered, among other types of

damage, liability for "property damage" that occurred in the

coverage territory and during the policy period. The policies

define property damage as both "[p]hysical injury to tangible

property, including all resulting loss of use of that property,"

and "[l]oss of use of tangible property that is not physically

injured." Both policies also contain a number of what are commonly

referred to as "business risk exclusions" that serve to deny

coverage for certain types of claims that relate directly to the

insured's faulty workmanship, as opposed to damage caused to a

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third party. In turn, many of these exclusions contain exceptions

that, if operable, will restore coverage to the insured.

In late April or early May 2001, the carpet was

installed. Although it is unclear exactly when BFDS employees

moved into the building, after moving in they noticed an odor. The

employees 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.

BFDS notified Suffolk of the offensive odor. In an

effort to eliminate the odor, one of BloomSouth's subcontractors

scraped up the original carpet adhesive and re-carpeted the floor.

That effort failed to correct the problem and the odor spread to

other areas of the building. As a result, the subcontractor and

Suffolk conducted tests of the carpet, the floor, and the air in

the building. Test results were inconclusive. The subcontractor

blamed the smell on a chemical reaction between the carpet and the

concrete floor, and Suffolk claimed that the subcontractor had

installed defective carpet, causing the odor. BFDS presented a

claim of property damage to Suffolk and demanded that Suffolk

remove the carpet and eliminate the smell. Suffolk subsequently

requested that BloomSouth respond to BFDS's claim. BloomSouth

refused, and as a result, Suffolk paid BFDS $1,417,500.00 for

remediation efforts. During the remediation process, Suffolk,

pursuant to its status as an additional insured under BloomSouth's

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policy with Essex, notified Essex of BFDS's claim and demanded that

Essex defend and indemnify Suffolk. In April 2002, Essex

disclaimed coverage to Suffolk for BFDS's claim.

In due course, Suffolk sued BloomSouth in state court.

Suffolk asserted claims for negligence, contractual indemnity,

breach of the implied warranty of merchantability, breach of

express warranty, breach of contract, and contribution under M.G.L.

ch. 231B. Suffolk's complaint alleged that: (1) BloomSouth was

responsible for negligently and defectively providing and

installing carpet "resulting in damage to and loss of use of the

building, including an alleged unwanted odor which permeated the

building," and (2) BloomSouth's negligent and defective work caused

Suffolk to spend money in an attempt to eliminate the alleged odor.

Money was spent on, among other things, "the installation of carbon

air filters to the ventilation system in the building," and

"removal of the existing carpet tile and adhesives, bead-blasting

of the concrete floor and replacement of the carpet tile and

related materials."

Shortly after Suffolk filed its action against BloomSouth

in state court, Essex filed a diversity action in the District of

Massachusetts, seeking a declaratory judgment against BloomSouth

and Suffolk. Essex sought a declaration that, under the insurance

policies issued to BloomSouth, it was not required to defend or

indemnify either Suffolk or BloomSouth for the claims being

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asserted in Suffolk's state court action or for the claims asserted

by BFDS against Suffolk. Essex specifically claimed that various

business risk exclusions relieved it of any duty to provide defense

or indemnity. BloomSouth and Suffolk filed counterclaims seeking

a declaration that Essex was required to defend and indemnify them.

After consenting to the jurisdiction of a magistrate

judge, the parties agreed to conduct discovery jointly with the

discovery in Suffolk's underlying state court action against

BloomSouth. After the completion of discovery, all parties moved

for summary judgment in the federal court action.

The court granted Essex's motion for summary judgment.

Although the court appeared to assume that Suffolk alleged property

damage sufficient to give rise to coverage, it concluded that

business risk exclusions labeled (m) and (k) relieved Essex of its

policy obligations. Exclusion (m) barred coverage for property

damage to "impaired property," defined as property that has not

been physically injured. The court held that this exclusion barred

coverage for Suffolk's allegation that an unwanted odor permeated

the building because it was an allegation of damage to "impaired

property." Exclusion (k) excluded coverage for property damage to

the insured's own product, and the court determined that this

exclusion applied to Suffolk's allegation that the concrete floor

had to be bead-blasted prior to the installation of replacement

carpet. The court arrived at this conclusion by reasoning that

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during the original installation process the concrete floor had

essentially become BloomSouth's product. Finding that these

exclusions effectively encompassed "all of the contingencies

presented in [Suffolk's] complaint" the court concluded that Essex

had no duty to defend or indemnify BloomSouth or Suffolk.

BloomSouth appeals from the final judgment of the court.

II. Discussion

We review de novo a court's grant of summary judgment.

Bogan v. City of Boston, 489 F.3d 417, 424 (1st Cir. 2007).

Because this is a diversity case, Massachusetts substantive law

controls. B & T Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co.,

382 F.3d 36, 38 (1st Cir. 2004). Under Massachusetts law, the

interpretation of an insurance policy is normally a question of law

for the court. Ruggerio Ambulance Serv. v. National Grange Ins.

Co., 724 N.E.2d 295, 298 (Mass. 2000). Summary judgment for an

insurance company is proper "when the allegations in the underlying

complaint lie expressly outside the policy coverage and its

purpose." Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 788

N.E.2d 522, 531 (Mass. 2003) (quotation omitted). The critical

issue is whether the summary judgment record alleges a liability

arising on the face of the complaint and the policy. Id. at 530

(quotation omitted).

The law regarding an insurer's duty to defend is well-

settled in Massachusetts. HDH Corp. v. Atl. Charter Ins. Co., 681

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N.E.2d 847, 850 (Mass. 1997). The duty to defend is broader than

the duty to indemnify. Herbert A. Sullivan, Inc., 788 N.E.2d at

531. In order to determine whether an insurer has a duty to

defend, a comparison must be made of the facts alleged in the

underlying complaint with the insurance policy provisions. Id.

"If the allegations of the complaint are 'reasonably susceptible'

of an interpretation that they state or adumbrate1 a claim covered

by the policy terms, the insurer has a duty to defend." Mt. Airy

Ins. Co. v. Greenbaum, 127 F.3d 15, 19 (1st Cir. 1997) (noting duty

to defend may be triggered even if the allegations of the

underlying complaint are baseless); see also Cont'l Casualty Co. v.

Gilbane Bldg. Co., 461 N.E.2d 209, 212 (Mass. 1984). In sum, "The

obligation of an insurer to defend is not, and cannot be,

determined by reference to the facts proven at trial. Rather, the

duty to defend is based on the facts alleged in the complaint and

those facts which are known by the insurer." Boston Symphony

Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156,

1158-59 (Mass. 1989)(citing Desrosiers v. Royal Ins. Co., 468

N.E.2d 625, 627-28 (Mass. 1984)). "[I]nformation derived from

outside the complaint may not serve to negate the duty to defend."

1
We have defined "adumbrate" in the liability insurance context
to mean "to give a sketchy representation of; outline broadly,
omitting details . . . or to suggest, indicate or disclose
partially and with a purposeful avoidance of precision." Global
Naps v. Fed. Ins. Co., 336 F.3d 59, 61 n.2 (1st Cir. 2003)(internal
quotation omitted).

-8-
Metallized Prods. Inc. v. Travelers Ins. Co., 2003 WL 22481398 at

*3 (Mass. Super. Ct. Sept. 17, 2003)(citing Millipore, 115 F.3d at

35-36).

Determining the existence vel non of the duty to defend

requires a court to consider "what kind of losses may be proved as

lying within the range of the allegations of the complaint, and

then see whether any such loss fits the expectation of protective

insurance reasonably generated by the terms of the policy." Open

Software Found., Inc. v. U.S. Fid. & Guar. Co., 307 F.3d 11, 16

(1st Cir. 2002); see also Sterilite Corp. v. Cont'l Casualty Co.,

458 N.E.2d 338, 341 (Mass. App. Ct. 1983). Put differently, we ask

"what an objectively reasonable insured, reading the relevant

policy language, would expect to be covered." Hazen Paper Co. v.

United States Fid. & Guar. Co., 555 N.E.2d 576, 583 (Mass. 1990).

The insured initially bears the burden of showing that

the allegations in the underlying complaint fit within the covered

risks in the policy. Highlands Ins. Co. v. Aerovox Inc., 676

N.E.2d 801, 804 (Mass. 1997). Once the insured has satisfied this

burden, it falls to the insurer "to prove the applicability of one

or more separate and distinct exclusionary provisions." B & T

Masonry Constr. Co., 382 F.3d at 39 (citing Highlands Ins. Co., 676

N.E.2d at 804). Both determinations -- whether an allegation

creates the possibility of a covered claim, and whether an

exclusion applies to relieve an insurer of its duty to defend --

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depend on whether the insured would have reasonably understood the

exclusion to bar coverage. See Atlantic Mut. Ins. Co. v. McFadden,

595 N.E.2d 762, 764 (Mass. 1992).

As previously noted, the district court implicitly

assumed that BloomSouth had met its initial burden of showing that

the underlying complaint alleged "physical injury to tangible

property" within the meaning of the policy. On appeal, the parties

do not address directly the issue of whether there was physical

injury to tangible property. Rather, they address the issue only

in the context of the "impaired property" exclusion (m). As this

is a threshold issue, we confront it at the outset, after which we

analyze whether Essex can show that exclusions nonetheless serve to

relieve it of the duty to defend.

BloomSouth argues that two of the underlying allegations

are reasonably susceptible to the interpretation that they assert

claims of "physical injury." These allegations are: (1) that an

unwanted odor permeated the building, and (2) that the concrete

floor in the building required "bead-blasting." We agree.

A. Allegation of a permeating odor

The Massachusetts Supreme Judicial Court has not

determined whether the presence of a permeating odor may constitute

"physical injury." Accordingly, we make "an informed prophecy of

what the court would do" if confronted with the question. Trans-

Spec Truck Serv. v. Caterpillar Inc., 524 F.3d 315, 323 (1st Cir.),

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cert. denied, 129 S. Ct. 500 (2008). "In making such a prophecy,

we look to analogous cases decided by other courts in the forum

state, persuasive reasoning in cases from other states, and learned

treatises." Id.; see also Andrew Robinson Int'l, Inc. v. Hartford

Fire Ins. Co., 547 F.3d 48, 51-52 (1st Cir. 2008).

The parties have identified two cases, albeit

unpublished, from Massachusetts lower courts that support a finding

that the presence of odor in a building can constitute "physical

injury" to the building. In Matzner v. Seaco Ins. Co., 1998 WL

566658 (Mass. Super. Ct. Aug. 12, 1998), the insureds claimed that

carbon-monoxide contaminated their apartment building, entitling

them to coverage under an insurance policy that protected against

direct physical loss or damage to property. The court first noted

that the phrase "direct physical loss" was ambiguous2 and that it

should therefore be "interpreted in the manner most favorable to

the insured." Id. at *11. Accordingly, the court ruled that

"carbon monoxide contamination constitutes a 'direct physical loss

of or damage to' property." Id. at * 13. It is important to note

that Matzner was a first-party claim, and thus the duty to defend

was not at issue. Given that the salient question before us

involves the lesser burden of determining whether the underlying

2
"The phrase 'direct physical loss or damage' . . . is
susceptible of at least two different interpretations. One
includes only tangible damage to the structure of insured property.
The second includes a wider array of losses." Matzner, 1998 WL
566658, at *3.

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complaint is "reasonably susceptible" of stating a covered claim,

Mt. Airy Ins. Co., 127 F.3d at 19, we need not resolve the

ambiguity issue to conclude that the complaint can be so read.

In Arbeiter v. Cambridge Mut. Fire Ins. Co., 1996 WL

1250616 (Mass. Super. Ct. March 15, 1996), the insureds claimed

that the presence of oil fumes in their home constituted a

"physical loss" to the building triggering insurance coverage. The

court, in partially denying summary judgment for the insurer, was

persuaded by the plaintiffs' argument "that fumes are a physical

loss which attach to the property." Id. at * 3.

The two Massachusetts cases, Arbeiter and Matzner, relied

on cases from other jurisdictions to support their conclusions. In

Farmers Ins. Co. of Or. v. Trutanich, 858 P.2d 1332 (Or. Ct. App.

1993), upon which Arbeiter relied without further discussion, the

Oregon Court of Appeals held for an insured who claimed that

methamphetamine odors had physically injured his home. The court

found that the "pervasive" odors were "physical" because they

"infiltrated" the house and that such damage qualified as a

physical loss under the terms of his insurance policy. Id. at

1335-36. Similarly, in W. Fire Ins. Co. v. First Presbyterian

Church, 437 P.2d 52 (Colo. 1968), the Supreme Court of Colorado

upheld coverage where an insured argued that gasoline vapors

physically damaged the property because they contaminated the

foundation, halls, and rooms of a building. The court dismissed

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the concept that physical damage could only occur if "some tangible

injury to the physical structure itself could be detected," noting,

"[c]ommon sense requires that a policy should not be so interpreted

in the absence of a provision specifically limiting coverage in

this manner." Id. at 56 (citation omitted).

Essex makes three arguments in response. First, it

argues that the underlying claim does not reference injury to

"tangible" property, but instead alleges that the odors injured the

"air." Second, Essex asserts that an odor cannot constitute

"physical injury" to property. Finally, Essex says that, even if

there is an allegation of injury to tangible property, and even if

odors can constitute physical injury to property, the complaint

still would not trigger the duty to defend because the cases

suggest that the odor must have "persisted in and permeated the

structural components of the properties after their original source

was removed" to be considered physical injury to property. Essex

claims that the odor here does not qualify because once the carpet

was removed "there was no persistent odor remaining."

We reject each argument. First, Essex reads too much

into Suffolk's complaint when it states that Suffolk alleged -- and

BFDS claimed -- that odors only permeated the building's "air."

Suffolk in fact alleged that an unwanted odor "permeated the

building" (emphasis added). Such an allegation may be reasonably

construed as claiming damage to property.

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 Second, Essex does not provide any authority in support

of its contention that odor cannot constitute physical injury to

property. Given Arbeiter, Matzner, and the cases upon which they

rely, the appellant has met its initial burden on this issue.

Third and finally, although Essex may be correct that

odor can only constitute physical injury to property if it is

permeating or pervasive, nothing in the complaint (the controlling

document in the duty to defend inquiry) indicates that the odor was

not pervasive or permeating. On the contrary, the underlying

complaint explicitly asserts that the odor "permeated the building"

and that Suffolk expended funds "to remediate the alleged odor."

Essex claims that the odor was not pervasive or

permeating because, when the carpet was removed, "the smell went

out with the [carpet]." That claim, however, impermissibly relies

on extrinsic evidence, which Massachusetts law proscribes.3 See

Sterilite Corp., 458 N.E.2d at 344 ("What is not permitted is that

an insurer shall escape its duty to defend the insured against a

liability arising on the face of the complaint and policy, by dint

of its own assertion that there is no coverage in fact . . . .");

Nashua Corp. v. Liberty Mut. Ins. Co., 1997 WL 89163, at *3 (Mass.

Super. Ct. Feb. 18, 1997) ("[W]here a complaint is susceptible on

its face of a reading that brings the claim within the policy, the

3
The factual bases for much of Essex's argument comes from
discovery conducted in both this case and the underlying case.

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insurer cannot rely on facts outside the complaint to justify a

unilateral refusal to defend").

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. See W. Fire Ins. Co., 437 P.2d at 56.

B. Bead-blasting of the concrete floor

Suffolk's allegation that the concrete floor required

bead-blasting because of BloomSouth's negligent and defective work

and materials may also be reasonably interpreted as alleging

physical injury to property, viz., the concrete substrate.

Suffolk's complaint alleged that third-party property

(BFDS's concrete floor) had to be bead-blasted because of

BloomSouth's faulty work (the defective carpet which was placed

upon the concrete floor). The import of this allegation is that

BloomSouth's carpet, or its installation, caused physical injury to

BFDS's concrete floor. That is essentially the view of Suffolk's

allegation that the magistrate judge adopted. The court, in

paraphrasing Suffolk's complaint, stated, "Suffolk seeks

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remuneration for . . . bead-blasting the concrete []floor to

eradicate VOC contamination caused by the [carpet] or its

installation."4

Essex argues that Suffolk's bead-blasting allegation

cannot be reasonably construed as indicating physical injury to

property. It asserts that "The allegation itself conclusively

establishes that the 'bead-blasting' was part of the replacement

process for the defective carpet."

We reject Essex's argument. The claim that Suffolk's

allegation conclusively establishes that bead-blasting was part of

a replacement process -- as opposed to a remedial measure -- is

overstated. As we have noted, the allegation is reasonably

susceptible to a different interpretation: the one adopted by the

magistrate judge. Moreover, were we to read the complaint as Essex

suggests, we would be endorsing a more exacting pleading standard

than currently exists for establishing the duty to defend. See Lee

v. Aetna Cas. & Sure. Co., 178 F.2d 750, 753 (2d Cir. 1949) (L.

4
A Massachusetts appellate court has used similar logic in
determining that a complaint alleged physical injury to property.
In Sterilite, the underlying third-party complaint alleged, in
relevant part, that the third-party "incurred losses and suffered
damages including . . . increased costs of obtaining replacement
trays . . . ." 458 N.E.2d at 341. Although the allegation did not
mention any physical injury to the trays, the court noted, "The
reference in the complaint to the costs of replacing trays ought to
be enough to allow proof of physical damage of the trays." Id. at
342. Here, similarly, Suffolk never explicitly alleged that the
carpet "physically injured the floor." But, the allegation that
the floor required bead-blasting may be reasonably construed as
indicating the carpet caused such injury.

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Hand, J.) ("When . . . the complaint comprehends an injury which

may be within the policy, we hold that the promise to defend

includes it") (cited with approval in Sterilite); see also

Sterilite Corp., 458 N.E.2d at 341 ("There is no requirement that

the facts alleged in the complaint specifically and unequivocally

make out a claim within the coverage.") (citation omitted).

C. Exclusions

Having determined that Suffolk's and BFDS's allegations

can be reasonably interpreted as giving rise to a duty to defend,

we next consider whether the business risk exclusions nonetheless

relieve Essex of its duty to defend. The appellant argues that

exclusion (m) is not applicable, because Suffolk's allegation did

not involve "impaired property" as that term is defined in the

policies. It contends that exclusion (k) does not apply either,

because Suffolk's allegation that the concrete floor had to be

bead-blasted showed there was damage to a third party's real

property -- BFDS's concrete floor -- rather than damage to

BloomSouth's own product. Thus, the argument goes, the court's

determination that exclusion (k) applied was erroneous because this

exclusion operates to deny coverage only for damage to the

insured's own product.

1. Exclusion (m)

We begin our analysis with the broad observation that

exclusion (m) is one of several "business risk exclusions" in a

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Commercial General Liability policy. These "business risks" are

those:

which management can and should control or
reduce to manageable proportions; risk which
management cannot effectively avoid because of
the nature of the business operations; and
risks which relate to the repair or
replacement of faulty work or products. These
risks are a normal, foreseeable and expected
incident of doing business and should be
reflected in the price of the product or
service rather than as a cost of insurance to
be shared by others.

Sterilite Corp., 458 N.E.2d at 323 n.13 (citation and internal

quotation marks omitted). 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. Frankel v. J. Watson, Inc., 484 N.E.2d 104, 106 (Mass.

App. Ct. 1985).

Exclusion (m) bars coverage for property damage to

"impaired property," which the exclusion internally defines as

"property that has not been physically injured." (emphasis added).5

Further, for the exclusion to apply the alleged damage must arise

5
Under the policies' definition, "property damage" may be
manifested by either (i) physical injury to tangible property,
including all resulting loss of use of that property, or (ii) the
loss of use of tangible property that is not physically injured.
Thus, exclusion (m) serves to exclude coverage for non-physical
injury to tangible property that arises from (or in other words is
caused by) the insured's defective product or work.

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out of "a defect, deficiency, inadequacy, or dangerous condition in

the insured's product or work."

The first reason why the exclusion does not apply is

plain. Suffolk's complaint alleged that odor "permeated the

building." As we have concluded, this allegation is reasonably

susceptible to an interpretation that the odor physically injured

the property.

The policies' more detailed definition of "impaired

property" provides the second reason for concluding that the

exclusion is inapplicable. The policies define "impaired property"

as tangible property, other than the insured's product or work,

that cannot be used or is less useful because it incorporates part

of the insured's product or work that is "known or thought to be

defective, deficient, inadequate, or dangerous." This definition

is, however, somewhat narrowed by a condition that property is

"impaired property" only if such property can be restored to use by

(i) the repair, replacement, adjustment, or removal of the

insured's product or work, or (ii) the insured's fulfilling the

terms of its contract or agreement.

Although the complaint alleges property damage (odor) to

tangible property (the building) that cannot be used or is less

useful because it incorporates the insured's defective, deficient,

inadequate, or dangerous product (the carpet), we also must

consider the definition's internal limiting condition. Property

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can only be "impaired property" if it can be restored to use by

"the repair, replacement, adjustment or removal of [the insured's]

product or [] work." If it cannot be so restored, then it is not

"impaired property." Dorchester Mut. Fire Ins. Co. v. First Kostas

Corp., Inc, 731 N.E.2d 569, 572 (Mass. App. Ct. 2000) ("Other cases

implicating this exclusion have turned on the fact that the

exclusion applies only if the damaged property can be restored to

use by the 'repair, replacement, adjustment or removal' of the

insured's work.") (citation omitted).

A fair reading of Suffolk's complaint suggests the

property could not be restored to use simply by repairing,

replacing, adjusting, or removing BloomSouth's product or work.

The allegations thus fall outside the definition of impaired

property. Suffolk's complaint states in relevant part, "as a

result of the defendant's negligent and defective work and

materials, and in order to eliminate the alleged odor . . . Suffolk

expended monies in attempting to remediate the alleged odor . . .

including . . . the installation of carbon air filters to the

ventilation system in the building." (emphasis added).6

6
Suffolk's initial complaint contained a specific allegation
concerning the installation of carbon filters. The amended
complaints do not contain this allegation but rather general
allegations that Suffolk spent money in an attempt to remediate the
alleged odor. These may be read in conjunction with the earlier
allegations. Boston Symphony Orchestra, Inc., 545 N.E.2d at 1158
(prior allegations known to insurer must be considered by insurer
in determining whether to defend).

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 Admittedly, there is no express indication in the

complaint that the installation of the air filters actually

restored the property to use. On the other hand, neither is there

any indication that repairing, replacing, adjusting, or removing

the defective product (the carpet) restored the property to use.

The closest the complaint comes to using such language is in the

allegation that reads, "Suffolk was ultimately required to pay BFDS

for removal of the existing carpet . . . and adhesives, bead-

blasting of the concrete floor and replacement of the carpet [] and

related materials." But even this language indicates that "bead-

blasting," a remedial effort that may be distinct from removal and

replacement of the carpet, was necessary to restore the property to

use. A legitimate reading of the complaint is that Suffolk

attempted to remediate the alleged injury (odor) by installing

carbon air filters and bead-blasting the concrete floor. Whether

it was these actions, the removal and replacement of the offending

carpet, or some combination that restored the building to use is

unclear. What is clear is that Essex had the burden of proving the

applicability of exclusion (m). See Highlands Ins. Co., 676 N.E.2d

at 804. Such a hurdle simply cannot be cleared given the wording

of Suffolk's complaint.7

7
BloomSouth argues that in the event exclusion (m) does bar
coverage an exception to the exclusion operates to restore
coverage. Because exclusion (m) is inapplicable we need not
address this argument.

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 We express no opinion on the issue of whether the alleged

odor damage here will ultimately require indemnification. A

Massachusetts court may conclude that odor in general, or this odor

in particular, does not constitute "physical injury" to the

property. Moreover, exclusion (m) may serve to deny

indemnification if, for example, a fact-finder determines that

removing or replacing the carpet alone would have sufficed to

restore the property to use.

2. Exclusion (k)8

The magistrate judge found that coverage for the claim

for damage to the concrete floor was barred by exclusion (k), which

proscribes coverage for "Property damage to 'your product' arising

out of it or any part of it." The definition section of the policy

provides:

'Your Product' means

a. Any goods or products, other than real
property, manufactured, sold, handled or
distributed or disposed of by:

(1) You;

(2) Others trading under your name; or

(3) A person or organization whose business or
assets you have acquired

8
Although the magistrate judge discussed other exclusions in
addition to exclusion (k), it noted that further factual
development may trigger exceptions in other exclusions causing them
to become inapplicable. As such, its finding that exclusion (k)
unequivocally served to exclude coverage for property damage to the
floor was the key to its analysis.

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 The language employed by the exclusion does not relieve

Essex of its duty to defend. Where, as here, the complaint alleges

damage to "real property" the exclusion cannot apply because it

excludes coverage only for damage to goods or products, "other than

real property." See CU Lloyd's of Texas v. Main St. Homes, Inc.,

79 S.W.3d 687, 697 (Tex. App. 2002) (agreeing with another court

that the definition of "'your product'" in a similar exclusion

"does not apply to a building and its components"). In this case,

Suffolk's complaint alleged damage to "real property,"

specifically, BFDS's concrete floor. In addition, the policy

further defines the insured's "product" as any good or product

"manufactured, sold, handled or distributed or disposed of by" the

insured or the insured's agents. There is no indication in this

case that BloomSouth or its subcontractors "manufactured, sold,

handled, or distributed or disposed of" the concrete floor.9

The district court elided the policy language by

reasoning that the concrete floor became BloomSouth's product, thus

bringing Suffolk's claim within the reach of exclusion (k). The

court stated, "BloomSouth's 'product' and 'work' includes the

Subcontract's requirements for the [concrete] subfloor even though

9
Although it might be argued that BloomSouth "handled" the floor
because it touched the floor when laying carpet, that description
of BloomSouth's work is too broad. See National Union Fire Ins.
Co. of Pittsburgh, Pa. v. Structural Sys. Tech., Inc., 756 F. Supp
1232, 1239 (E.D. Mo. 1991)(amended by 764 F.Supp. 145 (E.D. Mo.
1991), aff'd, 964 F.2d 759 (8th Cir. 1992)(defining handled as "to
deal or trade in" rather than to touch)).

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BloomSouth did not build the [concrete] subfloors," and

"BloomSouth's 'product' of labor and/or materials damaged the

surface of the subfloors, which were also within BloomSouth's

product." We reach a different conclusion.

As opposed to the carpet itself -- which BloomSouth

concedes is its "product" -- the pre-existing building structures,

including the concrete subfloor over which the carpet was to be

installed, are "real property," and are thus excluded from the

definition of "product." Two Massachusetts appellate decisions

inform this conclusion. In Frankel, the court found that damage

to the superstructure of a farmhouse caused by the insured's faulty

construction of a foundation -- onto which the farmhouse was to be

moved -- could be the basis of a covered claim because it

distinguished between "damage to the work product of the insured"

(the foundation) and "damage to larger units of which the insured's

work product is but a component." 484 N.E.2d at 105-06 (citations

omitted).

In addition, despite a finding that coverage did not

exist, Mello Construction, Inc. v. Acadia Ins. Co., 874 N.E.2d

1142, 2007 WL 2908267 (Mass. App. Ct. 2007)(unpublished), is also

instructive. In Mello, the insured general contractor sought

coverage for allegations that it or its subcontractor improperly

installed a concrete slab as part of a school construction project.

Id. at ***1. The insured had to fix the slab, as well as perform

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repairs to paint, mechanical systems, and floors, and sought

reimbursement from the carrier. Id. at ***2, ***4. The insured

relied on Frankel, but the court distinguished it because the

insured's "work product, as general contractor, encompassed the

entire elementary school." Concluding that the entire school was

"the insured's particular work," the court found no coverage. Id.

at ***5-6. The circumstances here are more akin to those in

Frankel than to those in Mello. Like the foundation in Frankel,

the carpet was "but a component," while the underlying complaint

alleged damage to "the larger unit."10

Additionally, we do not believe that an insured would

reasonably understand exclusion (k) to bar coverage for property

damage to third-party property such as the subfloor, that was, at

all times, part of the building in which it was working in just the

same way as the walls, ceilings and windows. The court's

conclusion that the subfloor "became" BloomSouth's product

stretches too far the contours of what an insured might reasonably

understand.

Essex, for its part, gives us no good reason to affirm

the court's decision regarding exclusion (k). Specifically, Essex

10
The district court found support in Commerce Ins. Co. v. Betty
Caplette Builders, Inc. 647 N.E.2d 1211 (Mass. 1995) for its
conclusion that the building was BloomSouth's product. We find the
reliance to be misplaced. In Caplette, as in Mello, the insured
was a developer. Thus, its "product" was the completed building.
Here, however, similar to the scenario in Frankel, the carpet is a
component of the larger building.

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fails to offer any reasoned argument in support of the court's

conclusion that the concrete floor became BloomSouth's product for

purposes of the exclusion. Instead, Essex states that "The

defective carpet is clearly BloomSouth's product. Just as clearly,

it does not constitute real property." While we may agree with

Essex on this point, BloomSouth's argument is that Suffolk's

complaint may be reasonably construed as alleging that the carpet

caused damage to a third party's real property -- BFDS's concrete

floor. Essex's statement is not responsive to this argument.

In sum, we conclude that exclusion (k) does not relieve

Essex of its duty to defend, and summary judgment for Essex on this

basis cannot be sustained. Again, as was the case with the

complaint of a permeating odor, we express no opinion on the

question of whether Essex will ultimately be required to indemnify

BloomSouth for the damage caused to the concrete floor.

D. Attorney's Fees

BloomSouth argues that it is entitled to recover

attorney's fees incurred in establishing that Essex breached its

duty to defend. In Massachusetts, an insured generally is entitled

to recover attorney fees incurred in successfully establishing that

its insurer breached its duty to defend. Preferred Mutual Ins. Co.

v. Gamache, 686 N.E.2d 989, 993 (Mass. 1997). BloomSouth is

directed to file its attorney's fees application in the district

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court, in accordance with Local Rule 39.1(b) of the First Circuit

Court of Appeals.

III. Conclusion

Because the allegations in Suffolk's complaint are

reasonably susceptible to an interpretation that they state covered

claims and because those allegations do not prove the applicability

of the business risk exclusions in the Essex policies, we hold that

Essex erroneously denied a defense to BloomSouth. Accordingly, the

court's grant of summary judgment to Essex is reversed, and we

remand for proceedings not inconsistent with this opinion.

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