11-2596-cv Ment Bros. Iron Works Co. v. Interstate Fire & Casualty Co. **UNITED STATES COURT OF APPEALS** 1 2 **FOR THE SECOND CIRCUIT** 3 4 August Term, 2012 5 6 7 (Argued: September 5, 2012 Decided: December 11, 2012) 8 9 Docket No. 11-2596 10 11 - - - - - - - - - - - - - - - - - - - -x 12 13 MENT BROS. IRON WORKS CO., INC., 14 15 Plaintiff-Appellant , 16 17 - v.- 18 19 INTERSTATE FIRE & CASUALTY CO., 20 21 Defendant-Appellee

. 22 23 - - - - - - - - - - - - - - - - - - - -x 24 25 Before: JACOBS, Chief Judge , CALABRESI and 26 CARNEY, Circuit Judges

. 27 28 Ment Bros. Iron Works Co., Inc. appeals from a judgment 29 of the United States District Court for the Southern 30 District of New York (Hellerstein, J. ) granting summary 31 judgment in favor of Interstate Fire & Casualty Co. in an 32 insurance dispute. Reversed. 33 NEAL M. EISMAN, Goetz 34 Fitzpatrick LLP, New York, NY, 35 for AppellantMent Bros. Iron 36 Works Co., Inc. 37 38STUART M. BODOFF, Rivkin Radler 1 LLP, Uniondale, NY (Evan H. 2 Krinick, Gary D. Centola, Jay 3 Kenigsberg, Erik Lindemann, on 4 the brief ), for Appellee 5 Interstate Fire & Casualty Co. 6 7 RICHARD VOLACK, Peckar & 8 Abramson, P.C., New York, NY 9 (Cesar F.F. Pereira, on the 10 brief ), for Amicus CuriaeAllied 11 Building Metal Industries, Inc., 12 in support of Appellant

. 13 14 DENNIS JACOBS, Chief Judge : 15 16 This declaratory judgment action disputes liability 17 insurance coverage for property damage alleged to have been 18 caused by the policyholder, a welding subcontractor, during 19 construction of a residential building at 40 Mercer Street 20 in New York City. Forty Mercer was planned and marketed by 21 the developer as a residential condominium, though no units 22 had been sold at the time the damage occurred. The general 23 commercial liability coverage (with an aggregate limit of $2 24 million) excludes property damage “arising out of the 25 construction of ‘residential properties,’ except 26 ‘apartments.’” “Residential properties” is defined to 27 include condominiums. An apartment is defined as “a unit of 28 residential real property in a multi-unit residential 29 30

2building or project where all units are owned by and titled 1 to a single person or entity.” 2 The policyholder,Ment Bros. Iron Works Co., Inc. 3 (“Ment”) filed suit against Interstate Fire & Casualty Co. 4 (“Interstate”) seeking a declaration that its insurer is 5 obligated to defend and indemnify. Ment appeals from the 6 judgment of the United States District Court for the 7 Southern District of New York (Hellerstein, J. ) granting 8 summary judgment in favor of Interstate. The district court 9 ruled that 40 Mercer was a “residential property” 10 construction but not an “apartment” at the time the damage 11 occurred--meaning that Ment had no coverage. Because we 12 conclude that 40 Mercer was an apartment building as defined 13 in the insurance policy when the damage occurred, Ment was 14 covered by the policy. We therefore reverse. 15 16

**I** 17 WXIV/Broadway Grand Realty, LLC (“WXIV/Broadway”), a 18 building owner and developer, began construction at 40 19 Mercer Street in 2005, using Pavarini McGovern, LLC 20 (“Pavarini”) as general contractor. Pavarini subcontracted 21 the welding to Ment. Ment completed its work between April 22

3and July 2006. At the time, WXIV/Broadway was the sole fee 1 owner of the building and project at 40 Mercer. 2 Thereafter, Pavarini discovered damage to the penthouse 3 windows, allegedly caused by welding sparks. Pavarini sued 4 Ment in New York state court. SeePavarini McGovern, LLC v. 5 Ment Bros. Ironworks , Index No. 107637/09 (N.Y. Sup. Ct. 6 2011) (York, J. ). Ment called on Interstate to defend the 7 suit and indemnify it. Interstate assigned counsel to 8 defend, but soon reserved its rights on the ground that the 9 damage had occurred during the construction of a 10 condominium, citing the residential construction exclusion. 11 Interstate agreed to furnish a defense until Ment’s counsel 12 could file a motion for summary judgment. When Ment’s 13 counsel advised Interstate that such a motion was not yet 14 feasible, Interstate gave thirty days’ notice that it would 15 relinquish the defense, so that Ment could make its own 16 arrangements. 17 Ment filed a two-count complaint in the Southern 18 District of New York seeking a declaration that Interstate 19 had duties of defense and indemnity on the underlying 20 Pavarini claim. SeeMent Bros. Iron Works Co. v. Interstate 21 Fire & Cas. Co. , No. 10 Civ. 3043 (Dkt. No. 1) (S.D.N.Y. 22

4Apr. 9, 2010) (Hellerstein, J. ). Cross-motions for summary 1 judgment were filed on January 18, 2011. At oral argument 2 on June 13, 2011, the district court ruled from the bench. 3 A summary order explained that the residential construction 4 exclusion applied “[f]or the reasons provided on the 5 record,” and therefore “grant[ed] summary judgment to 6 Interstate dismissing the Complaint.” Summ. Order, at 1 7 (Dkt. No. 46) (S.D.N.Y. June 13, 2011). Ment timely filed a 8 notice of appeal. 9 10

**II** 11 We review an order granting summary judgment de novo , 12 drawing all factual inferences in favor of the non-moving 13 party. Costello v. City of Burlington , 632 F.3d 41, 45 (2d 14 Cir. 2011). Likewise, we review de novothe interpretation 15 of contracts, including insurance agreements. Fireman’s 16 Fund Ins. Co. v. TD Banknorth Ins. Agency Inc. , 644 F.3d 17 166, 169 (2d Cir. 2011). 18 19

**III** 20 The provisions at issue are contained in Endorsement 21 ICB-6002 (12/04), entitled “RESIDENTIAL CONSTRUCTION 22

5EXCLUSION WITH APARTMENT EXCEPTION.” The fuller text is in 1 the margin. 1The critical wording of the exclusion and the 2 exception (so labeled) is set out as follows, decisive terms 3 emphasized: 4 This insurance does not apply to . . . “property 5

1 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”. In the event any “apartment” to which coverage under this policy applies is converted to a “condominium, townhome or multi-family dwelling”, then coverage under this policy is excluded for any claims for “bodily injury”, “property damage”, “personal and advertising injury”, arising out of, related to, caused by, or associated with, in whole or part, the construction of said “apartments” which occur after the conversion of the“apartment” into a “condominium, townhome or multifamily dwelling”. As used in this endorsement, the following terms have the following meanings: 1. “Residential properties” include but are not limited to single-family dwellings, “townhomes, condominiums or multifamily dwellings”. 2. “Apartment” means a unit of residential real property in a multi-unit residential building or project where all units are owned by and titled to a single person or entity. 3. “Condominium, townhome or multi-family dwelling”means a unit of residential real property in a multiunit residential building or project where each unit is separately owned and titled. J.A. 87. 6damage” . . . arising out of the construction of 1 “residential properties” [ **the exclusion**], except 2 “apartments” [ **the exception**]. 3 4 J.A. 87 (emphasis added). The exclusion and exception are 5 followed by qualifying language, which applies to 6 “apartments” that are converted to “condominiums”: 7 8 In the event any “apartment” to which coverage 9 under this policy applies is convertedto a 10 “condominium, . . . ”, thencoverage under this 11 policy is excluded for any claims for . . . 12 “property damage” arising out of, related to, 13 caused by, or associated with, in whole or part, 14 the construction of said “apartments” which occur 15 after the conversionof the “apartment” into a 16 “condominium, townhome or multi-family dwelling” 17 [**qualifying language** ]. 18 19 Id. (emphases added). 20 21

**IV** 22 Under New York law, which governs this dispute, an 23 insurer bears the burden of proving that an exclusion 24 applies. See, e.g. , Consol. Edison Co. of N.Y. v. Allstate 25
Ins. Co. , 98 N.Y.2d 208, 218 (2002) (“Generally, it is for 26 the insured to establish coverage and for the insurer to 27 prove that an exclusion in the policy applies to defeat 28 coverage.”); 2 Allan D. Windt, Ins. Claims & Disputes§ 9:1 29 (5th ed. 2010). Once the insurer establishes that an 30 exclusion applies, however, New York law has evolved to 31

7place the burden of proof on the insured to establish the 1 applicability of an exception to the exclusion

. 2 This Court has previously interpreted New York law to 3 be that the insurer retains the burden of also showing that 4 an exception to the exclusion is inapplicable. SeeNew York 5 v. Blank , 27 F.3d 783, 789 (2d Cir. 1994) (citing Colonial 6 Tanning Corp. v. Home Indem. Co. , 780 F. Supp. 906, 919 7 (N.D.N.Y. 1991)); see alsoTown of Union v. Travelers Indem. 8
Co. , 906 F. Supp. 782, 787 (N.D.N.Y. 1995) (applying Blank ). 9 But New York law on this point has changed since 1994. 10 In Northville Industries Corp. v. National Union Fire 11 Insurance Co. of Pittsburgh , 89 N.Y.2d 621 (1997), the New 12 York Court of Appeals held that once an insurer establishes 13 that an exclusion applies, “the burden shifts to the insured 14 to demonstrate” that an exception to the exclusion applies. 15 Id.at 634; see alsoHritz v. Saco , 795 N.Y.S.2d 236, 237 16 (1st Dep’t 2005); Barry R. Ostrager & Thomas R. Newman, 17 Handbook on Insurance Coverage Disputes§ 10.02[a][1] (14th 18 ed. 2008) (collecting cases applying burden-shifting rule). 19 Several district courts in this Circuit have recognized the 20 shift in New York law. See, e.g. , RSUI Indem. Co. v. RCG 21 Grp. (USA) , --- F. Supp. 2d ---, 2012 WL 3100636, at *9 & 22

8n.8 (S.D.N.Y. July 31, 2012); Mahl Bros. Oil Co. v. St. Paul 1 Fire & Marine Ins. Co. , 307 F. Supp. 2d 474, 494 (W.D.N.Y. 2 2004). Because this Court has not had occasion to consider 3 this issue of New York law since Blank , we now acknowledge 4 that after an insurer establishes that a policy exclusion 5 applies, the burden shifts to the policyholder to prove that 6 an exception to that exclusion applies. 7 Thus if Interstate can show that the residential 8 construction exclusion applied to Ment’s work on 40 Mercer, 9 then Ment must show that the apartment exception to the 10 exclusion preserved Ment’s coverage. 11
12

**V** 13 The exclusion forecloses coverage for “‘property 14 damage’ . . . arising out of the construction of 15 ‘residential properties.’” J.A. 87. “Residential 16 properties” are defined to “include but are not limited to 17 single-family dwellings, ‘townhomes, condominiums or 18 multifamily dwellings.’” Id. (emphasis added). 19 “The New York approach to the interpretation of 20 contracts of insurance is to give effect to the intent of 21 the parties as expressed in the clear language of the 22

9contract.” Mount Vernon Fire Ins. Co. v. Belize NY, Inc. , 1 277 F.3d 232, 236 (2d Cir. 2002) (internal quotation marks 2 omitted). Terms in an insurance contract must be given 3 “‘their plain and ordinary meaning.’” 10 Ellicott Square 4 Court Corp. v. Mountain Valley Indem. Co. , 634 F.3d 112, 119 5 (2d Cir. 2010) (quoting Essex Ins. Co. v. Laruccia Constr., 6
Inc. , 898 N.Y.S.2d 558, 559 (2d Dep’t 2010)). 7 Forty Mercer qualifies as a “residential property” 8 under the ordinary meaning of the term. Moreover, the term 9 is defined in the contract to include properties such as 10 single-family homes, townhomes, condominiums, or similar 11 properties. In any event, the parties do not dispute that 12 the 40 Mercer building was a new construction of a 13 “residential property” at the time the damage occurred. 14 The harder question is whether Ment’s coverage is 15 preserved nevertheless by the exception to the exclusion. 16 Although coverage is excluded for “‘property 17 damage’ . . . arising out of the construction of 18 ‘residential properties,’” there is the exception for 19 “apartments,” which are defined as “a unit of residential 20 real property in a multi-unit residential building or 21 project where all units are owned by and titled to a single 22

10person or entity.” J.A. 87 (emphasis added) **.**An 1 “apartment” is in that respect the opposite of a 2 “condominium,” which is defined as **“**a unit of residential 3 real property in a multi-unit residential building or 4 project where each unit is separately owned and titled .” 5 Id.(emphasis added). 6 The record is clear that, in 2006, 40 Mercer was an 7 apartment building rather than a condominium. The sale deed 8 in the record shows that in 2001, the property was sold by 9 multiple owners to WXIV/Broadway alone. The documentation 10 of the mortgage obtained by WXIV/Broadway in October 2005 11 clearly shows that WXIV/Broadway was the owner of the entire 12 40 Mercer property. There is no claim or evidence that any 13 unit of the planned condominium had been transferred when 14 Ment finished performing its welding subcontract in the 15 summer of 2006. 16 Since 40 Mercer met the policy’s definition of 17 “apartment” at the relevant time, we therefore hold that 18 Ment has sustained its burden to show that the apartment 19 exception to the residential construction exclusion applies 20 and that it is entitled to coverage on this loss. 21 22

11**VI** 1 Interstate seeks to elide the fact of unitary ownership 2 of the building. Instead, Interstate points to condominium 3 offering literature filed with the New York Attorney 4 General, which shows that 40 Mercer was intended from the 5 outset to be sold as condominiums, and cites New York cases 6 suggesting that the ultimate intended use of a building is 7 determinative. See, e.g. , Admiral Ins. Co. v. Joy 8 Contractors, Inc. , 917 N.Y.S.2d 168 (1st Dep’t 2011). 2 9 We are unpersuaded. The contract wording governs. 10 Whatever the developer’s design or marketing plan, the 11 wording of the exception to the exclusion, and the related 12 definitions, indicate that Ment was covered. Moreover, the 13 qualifying language in the policy supports the view that an 14 apartment is not a condominium until after conversion: 15 In the event any “apartment” to which coverage 16 under this policy applies is convertedto a 17 “condominium, . . . ”, thencoverage under this 18 policy is excluded for any claims for . . . 19 “property damage” arising out of . . . the 20

2After briefing was completed in this appeal, the New York Court of Appeals affirmed but modified the opinion of the First Department in Admiral Insurance Co. SeeAdmiral Ins. Co. v. Joy Contractors, Inc. , 19 N.Y.3d 448 (2012). The Court of Appeals explicitly observed that a developer’s “intent does not control whether” a policy containing a residential construction exclusion affords coverage. Id. at 458.
12construction of said “apartments” which occur 1 after the conversionof the “apartment” into a 2 “condominium, townhome or multi-family dwelling.” 3 J.A. 87 (emphases added). Interstate does not dispute that 4 at the time the damage occurred, the 40 Mercer project was 5 owned by and titled to a single owner. 6 Although the language of the policy governs and settles 7 the dispute, Interstate’s argument regarding ultimate intent 8 is additionally unpersuasive because under New York law, a 9 building does not become a condominium until a condominium 10 declaration is filed. “A parcel of real property becomes a 11 condominium and thus is subject to the jurisdiction of the 12 Condominium Act by the filing of a declaration.” Schoninger 13 v. Yardarm Beach Homeowners’ Ass’n , 523 N.Y.S.2d 523, 527 14 (2d Dep’t 1987) (internal citations omitted); see alsoid. 15 at 526-27 (“In New York the creation and administration of 16 condominiums is governed by the provisions of [the 17 Condominium Act].”); 19A N.Y. Jur. 2d Condos. § 80 (2012). 18 Without a “valid and existing condominium declaration,” a 19 condominium’s “existence is not recognized at law.” Local 20 798 Realty Corp. v. 152 W. Condo. , 830 N.Y.S.2d 79, 80 (1st 21 Dep’t 2007). 22 23

13WXIV/Broadway did not file a condominium declaration 1 until February 9, 2007, after Ment had completed its work on 2 40 Mercer. WXIV/Broadway and everyone involved in the 3 project may have intended and anticipated that 40 Mercer 4 would become a condominium, but it was not a condominium 5 under New York law until the declaration was filed in 6 February 2007. 7 Even if the apartment exception to the residential 8 construction exclusion were ambiguous, any ambiguity must be 9 construed against Interstate as drafter of standard contract 10 wording. SeeBelt Painting Corp. v. TIG Ins. Co. , 100 11 N.Y.2d 377, 383 (2003) (“It follows that policy exclusions 12 are given a strict and narrow construction, with any 13 ambiguity resolved against the insurer.”). The same 14 principle applies regardless of whether, as to a particular 15 clause, the burden of proof falls on the insurer or the 16 policyholder. SeeNick’s Brick Oven Pizza, Inc. v. 17 Excelsior Ins. Co. , 877 N.Y.S.2d 359, 361-62 (2d Dep’t 2009) 18 (construing an ambiguous term in an exception to an 19 exclusionary clause against the insurer). 20 To the extent it matters, there would seem to be good 21 reason why an insurer would draft wording to avoid coverage 22

14for residential units that are held by multiple owners. 1 Although Interstate did not explain the purpose of the 2 apartment exception to the residential construction 3 exclusion, Ment suggested that its purpose is to provide 4 coverage for contractors facing liability from a single 5 building owner but not for contractors facing numerous 6 potential suits from various individual residential owners. 3 7 Because we hold that the apartment exception applied to 8 Ment’s work on the 40 Mercer building, we need not consider 9 Ment’s remaining arguments on appeal regarding equitable and 10 promissory estoppel. 11 For the foregoing reasons, we reverse the judgment of 12 the district court. 13

3That explanation is consistent with one industry publication, which attributes the rise of residential exclusions in commercial general liability policies to the fact that “construction defect litigation, spearheaded by the residential sector” has “increased dramatically over the last few years.” Patrick J. Wielinski & Marc A. Young, New Challenges to Insurance Coverage for Defective Construction , 56 Fed’n Def. & Corp. Couns. Q. 175, 178-81 (2006) (describing the “cost of defense of massive subdivision-wide and homeowners association condominium claims,” as well as difficulties associated with “insurance coverage litigation among multiple parties and their insurers”).
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