Interstate Fire & Casualty Co. Owes Defense Under Apartment Exception to Residential Construction Endorsement

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Ment Bros. Iron Works Co. v. Interstate Fire & Casualty Co.
(2012 U.S. App. LEXIS 25310 (2d Cir. N.Y. Dec. 11, 2012)

In this declaratory judgment action, The Second Circuit Court of Appeals found that Interstate Fire & Casualty Co. owed its insured, Ment Bros. Iron Works Co., a defense in a New York state court action stemming from property damage allegedly caused by Ment during the construction of a building located at 40 Mercer St., in New York City.

The developer, WXIV/Broadway Grand Realty LLC., owned the premises and marketed 40 Mercer as a residential condominium.  Pavarini McGovern LLC was hired as the general contractor, and Ment was subcontracted to perform welding work at the project.  Shortly after Ment completed its work, Pavarini found damage to the building’s penthouse windows allegedly caused by welding sparks.  Pavarini sued Ment in New York state court.  Interstate reserved rights and ultimately relinquished its defense of Ment, based upon a residential construction endorsement that excluded coverage for property damage arising out of the construction of residential properties, except apartments.

While Ment and Interstate agreed that 40 Mercer was a new construction of a residential property, the parties disputed whether the exception to the exclusion was applicable.

The residential construction endorsement stated “This insurance does not apply to ‘bodily injury’, ‘property damage’ or ‘personal and advertising injury’ arising out of the construction of ‘residential properties’, except ‘apartments.’  The policy defined a condominium as a unit in a residential building “where each unit is separately owned and titled” The policy defined an apartment as a unit in a residential building “where all units are owned by and titled to a single person or entity.”

The Second Circuit noted that although the developer marketed 40 Mercer as a residential condominium, the developer was still the sole owner of 40 Mercer, and no units had been sold at the time the alleged damages occurred.  Thus the Second Circuit found that the apartment exception to the Residential Construction Endorsement applied because 40 Mercer met the policy’s definition of ‘apartment’.

The Second Circuit was not persuaded by Interstate’s arguments that 40 Mercer was intended from the outset to be sold as condominiums.  The court noted that (1) the deed was sold only to WXIV/Broadway; (2) Mortgage documents show that WXIV/Broadway was the owner of the entire property; and (3) There was no evidence that any unit had been transferred when Ment finished its work at the project.