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40 Mercer is the Exception to the Exclusion

By Robyn Hagan Cain on December 11, 2012 3:02 PM

Luxury buildings are never just apartments. They’re homes, or condominiums, or exclusive living opportunities.

But, depending on how courts interpret an insurance contract, a chichi residential building like 40 Mercer can be an “apartment.”

WXIV/Broadway Grand Realty, LLC, a building owner and developer, began construction at 40 Mercer Street in 2005, using Pavarini McGovern, LLC as general contractor. Pavarini subcontracted the welding to Ment.

Pavarini later discovered damage to the penthouse windows, allegedly caused by welding sparks, and sued Ment in state court.

Ment called on Interstate Fire & Casualty to defend the suit and indemnify it. Interstate, however, claimed that it didn't have to cover the defense and/or damage because the welding snafu occurred during the construction of a condominium, and fell under the residential construction exclusion.

Ment followed up with a two-count complaint in the Southern seeking a declaration that Interstate had duties of defense and indemnity on the underlying Pavarini claim.

The district court ruled that 40 Mercer was a "residential property" construction but not an "apartment" at the time the damage occurred -- meaning that Ment had no coverage.

The Second Circuit Court of Appeals reversed that decision, concluding that 40 Mercer was an apartment building as defined in the insurance policy when the damage occurred, and Ment was covered by the policy.

In New York law, an insurer bears the burden of proving that an exclusion applies. Once the insurer establishes that an exclusion applies, the burden of proof shift to the insured to establish the applicability of an exception to the exclusion.

Here, Interstate proved that the residential construction exclusion applied to Ment's work on 40 Mercer, but Ment showed that the apartment exception to the exclusion preserved Ment's coverage.

The case ultimately turned ownership. The record showed that WXIV/Broadway was the sole fee owner of the building and project at the relevant time, and the Second Circuit noted that no claim or evidence that any unit of the planned condominium had been transferred when Ment finished performing its welding subcontract. Thus, the appellate court concluded that 40 Mercer met the policy's definition of "apartment" when Ment completed the welding.

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