     11-2596-cv
     Ment Bros. Iron Works Co. v. Interstate Fire & Casualty Co.

 1                       UNITED STATES COURT OF APPEALS
 2
 3                           FOR THE SECOND CIRCUIT
 4
 5                              August Term, 2012
 6
 7
 8   (Argued: September 5, 2012                Decided: December 11, 2012)
 9
10                              Docket No. 11-2596
11
12   - - - - - - - - - - - - - - - - - - - -x
13
14   MENT BROS. IRON WORKS CO., INC.,
15
16                     Plaintiff-Appellant,
17
18               - v.-
19
20   INTERSTATE FIRE & CASUALTY CO.,
21
22                     Defendant-Appellee.
23
24   - - - - - - - - - - - - - - - - - - - -x
25

26         Before:           JACOBS, Chief Judge, CALABRESI and
27                           CARNEY, Circuit Judges.
28
29         Ment Bros. Iron Works Co., Inc. appeals from a judgment

30   of the United States District Court for the Southern

31   District of New York (Hellerstein, J.) granting summary

32   judgment in favor of Interstate Fire & Casualty Co. in an

33   insurance dispute.        Reversed.

34                                       NEAL M. EISMAN, Goetz
35                                       Fitzpatrick LLP, New York, NY,
36                                       for Appellant Ment Bros. Iron
37                                       Works Co., Inc.
38
 1                                 STUART M. BODOFF, Rivkin Radler
 2                                 LLP, Uniondale, NY (Evan H.
 3                                 Krinick, Gary D. Centola, Jay
 4                                 Kenigsberg, Erik Lindemann, on
 5                                 the brief), for Appellee
 6                                 Interstate Fire & Casualty Co.
 7
 8                                 RICHARD VOLACK, Peckar &
 9                                 Abramson, P.C., New York, NY
10                                 (Cesar F.F. Pereira, on the
11                                 brief), for Amicus Curiae Allied
12                                 Building Metal Industries, Inc.,
13                                 in support of Appellant.
14
15   DENNIS JACOBS, Chief Judge:
16
17       This declaratory judgment action disputes liability

18   insurance coverage for property damage alleged to have been

19   caused by the policyholder, a welding subcontractor, during

20   construction of a residential building at 40 Mercer Street

21   in New York City.   Forty Mercer was planned and marketed by

22   the developer as a residential condominium, though no units

23   had been sold at the time the damage occurred.    The general

24   commercial liability coverage (with an aggregate limit of $2

25   million) excludes property damage “arising out of the

26   construction of ‘residential properties,’ except

27   ‘apartments.’”   “Residential properties” is defined to

28   include condominiums.   An apartment is defined as “a unit of

29   residential real property in a multi-unit residential

30



                                    2
1    building or project where all units are owned by and titled

2    to a single person or entity.”

3        The policyholder, Ment Bros. Iron Works Co., Inc.

4    (“Ment”) filed suit against Interstate Fire & Casualty Co.

5    (“Interstate”) seeking a declaration that its insurer is

6    obligated to defend and indemnify.    Ment appeals from the

7    judgment of the United States District Court for the

8    Southern District of New York (Hellerstein, J.) granting

9    summary judgment in favor of Interstate.   The district court

10   ruled that 40 Mercer was a “residential property”

11   construction but not an “apartment” at the time the damage

12   occurred--meaning that Ment had no coverage.     Because we

13   conclude that 40 Mercer was an apartment building as defined

14   in the insurance policy when the damage occurred, Ment was

15   covered by the policy.   We therefore reverse.

16

17                                 I

18       WXIV/Broadway Grand Realty, LLC (“WXIV/Broadway”), a

19   building owner and developer, began construction at 40

20   Mercer Street in 2005, using Pavarini McGovern, LLC

21   (“Pavarini”) as general contractor.   Pavarini subcontracted

22   the welding to Ment.   Ment completed its work between April


                                   3
1    and July 2006.    At the time, WXIV/Broadway was the sole fee

2    owner of the building and project at 40 Mercer.

3        Thereafter, Pavarini discovered damage to the penthouse

4    windows, allegedly caused by welding sparks.      Pavarini sued

5    Ment in New York state court.       See Pavarini McGovern, LLC v.

6    Ment Bros. Ironworks, Index No. 107637/09 (N.Y. Sup. Ct.

7    2011) (York, J.).    Ment called on Interstate to defend the

8    suit and indemnify it.    Interstate assigned counsel to

9    defend, but soon reserved its rights on the ground that the

10   damage had occurred during the construction of a

11   condominium, citing the residential construction exclusion.

12   Interstate agreed to furnish a defense until Ment’s counsel

13   could file a motion for summary judgment.      When Ment’s

14   counsel advised Interstate that such a motion was not yet

15   feasible, Interstate gave thirty days’ notice that it would

16   relinquish the defense, so that Ment could make its own

17   arrangements.

18       Ment filed a two-count complaint in the Southern

19   District of New York seeking a declaration that Interstate

20   had duties of defense and indemnity on the underlying

21   Pavarini claim.    See Ment Bros. Iron Works Co. v. Interstate

22   Fire & Cas. Co., No. 10 Civ. 3043 (Dkt. No. 1) (S.D.N.Y.


                                     4
1    Apr. 9, 2010) (Hellerstein, J.).   Cross-motions for summary

2    judgment were filed on January 18, 2011.   At oral argument

3    on June 13, 2011, the district court ruled from the bench.

4    A summary order explained that the residential construction

5    exclusion applied “[f]or the reasons provided on the

6    record,” and therefore “grant[ed] summary judgment to

7    Interstate dismissing the Complaint.”   Summ. Order, at 1

8    (Dkt. No. 46) (S.D.N.Y. June 13, 2011).    Ment timely filed a

9    notice of appeal.

10

11                                 II

12       We review an order granting summary judgment de novo,

13   drawing all factual inferences in favor of the non-moving

14   party.   Costello v. City of Burlington, 632 F.3d 41, 45 (2d

15   Cir. 2011).   Likewise, we review de novo the interpretation

16   of contracts, including insurance agreements.   Fireman’s

17   Fund Ins. Co. v. TD Banknorth Ins. Agency Inc., 644 F.3d

18   166, 169 (2d Cir. 2011).

19

20                                III

21       The provisions at issue are contained in Endorsement

22   ICB-6002 (12/04), entitled “RESIDENTIAL CONSTRUCTION


                                   5
1   EXCLUSION WITH APARTMENT EXCEPTION.”   The fuller text is in

2   the margin.1   The critical wording of the exclusion and the

3   exception (so labeled) is set out as follows, decisive terms

4   emphasized:

5              This insurance does not apply to . . . “property

         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 multi-
        family 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 multi-
        unit residential building or project where each unit is
        separately owned and titled.

    J.A. 87.
                                   6
1               damage” . . . arising out of the construction of
2               “residential properties” [the exclusion], except
3               “apartments” [the exception].
4
5    J.A. 87 (emphasis added).   The exclusion and exception are

6    followed by qualifying language, which applies to

 7   “apartments” that are converted to “condominiums”:
 8
 9              In the event any “apartment” to which coverage
10              under this policy applies is converted to a
11              “condominium, . . . ”, then coverage under this
12              policy is excluded for any claims for . . .
13              “property damage” arising out of, related to,
14              caused by, or associated with, in whole or part,
15              the construction of said “apartments” which occur
16              after the conversion of the “apartment” into a
17              “condominium, townhome or multi-family dwelling”
18              [qualifying language].
19
20   Id. (emphases added).

21

22                                 IV

23       Under New York law, which governs this dispute, an

24   insurer bears the burden of proving that an exclusion

25   applies.   See, e.g., Consol. Edison Co. of N.Y. v. Allstate

26   Ins. Co., 98 N.Y.2d 208, 218 (2002) (“Generally, it is for

27   the insured to establish coverage and for the insurer to

28   prove that an exclusion in the policy applies to defeat

29   coverage.”); 2 Allan D. Windt, Ins. Claims & Disputes § 9:1

30   (5th ed. 2010).   Once the insurer establishes that an

31   exclusion applies, however, New York law has evolved to

                                    7
1    place the burden of proof on the insured to establish the

2    applicability of an exception to the exclusion.

3        This Court has previously interpreted New York law to

4    be that the insurer retains the burden of also showing that

5    an exception to the exclusion is inapplicable.    See New York

6    v. Blank, 27 F.3d 783, 789 (2d Cir. 1994) (citing Colonial

7    Tanning Corp. v. Home Indem. Co., 780 F. Supp. 906, 919

8    (N.D.N.Y. 1991)); see also Town of Union v. Travelers Indem.

9    Co., 906 F. Supp. 782, 787 (N.D.N.Y. 1995) (applying Blank).

10   But New York law on this point has changed since 1994.

11       In Northville Industries Corp. v. National Union Fire

12   Insurance Co. of Pittsburgh, 89 N.Y.2d 621 (1997), the New

13   York Court of Appeals held that once an insurer establishes

14   that an exclusion applies, “the burden shifts to the insured

15   to demonstrate” that an exception to the exclusion applies.

16   Id. at 634; see also Hritz v. Saco, 795 N.Y.S.2d 236, 237

17   (1st Dep’t 2005); Barry R. Ostrager & Thomas R. Newman,

18   Handbook on Insurance Coverage Disputes § 10.02[a][1] (14th

19   ed. 2008) (collecting cases applying burden-shifting rule).

20   Several district courts in this Circuit have recognized the

21   shift in New York law.   See, e.g., RSUI Indem. Co. v. RCG

22   Grp. (USA), --- F. Supp. 2d ---, 2012 WL 3100636, at *9 &


                                   8
1    n.8 (S.D.N.Y. July 31, 2012); Mahl Bros. Oil Co. v. St. Paul

2    Fire & Marine Ins. Co., 307 F. Supp. 2d 474, 494 (W.D.N.Y.

3    2004).   Because this Court has not had occasion to consider

4    this issue of New York law since Blank, we now acknowledge

5    that after an insurer establishes that a policy exclusion

6    applies, the burden shifts to the policyholder to prove that

7    an exception to that exclusion applies.

8        Thus if Interstate can show that the residential

9    construction exclusion applied to Ment’s work on 40 Mercer,

10   then Ment must show that the apartment exception to the

11   exclusion preserved Ment’s coverage.

12

13                                 V

14       The exclusion forecloses coverage for “‘property

15   damage’ . . . arising out of the construction of

16   ‘residential properties.’”   J.A. 87.   “Residential

17   properties” are defined to “include but are not limited to

18   single-family dwellings, ‘townhomes, condominiums or

19   multifamily dwellings.’”   Id. (emphasis added).

20       “The New York approach to the interpretation of

21   contracts of insurance is to give effect to the intent of

22   the parties as expressed in the clear language of the


                                   9
1    contract.”    Mount Vernon Fire Ins. Co. v. Belize NY, Inc.,

2    277 F.3d 232, 236 (2d Cir. 2002) (internal quotation marks

3    omitted).    Terms in an insurance contract must be given

4    “‘their plain and ordinary meaning.’”   10 Ellicott Square

5    Court Corp. v. Mountain Valley Indem. Co., 634 F.3d 112, 119

6    (2d Cir. 2010) (quoting Essex Ins. Co. v. Laruccia Constr.,

7    Inc., 898 N.Y.S.2d 558, 559 (2d Dep’t 2010)).

8        Forty Mercer qualifies as a “residential property”

9    under the ordinary meaning of the term.   Moreover, the term

10   is defined in the contract to include properties such as

11   single-family homes, townhomes, condominiums, or similar

12   properties.   In any event, the parties do not dispute that

13   the 40 Mercer building was a new construction of a

14   “residential property” at the time the damage occurred.

15       The harder question is whether Ment’s coverage is

16   preserved nevertheless by the exception to the exclusion.

17   Although coverage is excluded for “‘property

18   damage’ . . . arising out of the construction of

19   ‘residential properties,’” there is the exception for

20   “apartments,” which are defined as “a unit of residential

21   real property in a multi-unit residential building or

22   project where all units are owned by and titled to a single


                                    10
1    person or entity.”    J.A. 87 (emphasis added).   An

2    “apartment” is in that respect the opposite of a

3    “condominium,” which is defined as “a unit of residential

4    real property in a multi-unit residential building or

5    project where each unit is separately owned and titled.”

6    Id. (emphasis added).

7        The record is clear that, in 2006, 40 Mercer was an

8    apartment building rather than a condominium.     The sale deed

9    in the record shows that in 2001, the property was sold by

10   multiple owners to WXIV/Broadway alone.   The documentation

11   of the mortgage obtained by WXIV/Broadway in October 2005

12   clearly shows that WXIV/Broadway was the owner of the entire

13   40 Mercer property.   There is no claim or evidence that any

14   unit of the planned condominium had been transferred when

15   Ment finished performing its welding subcontract in the

16   summer of 2006.

17       Since 40 Mercer met the policy’s definition of

18   “apartment” at the relevant time, we therefore hold that

19   Ment has sustained its burden to show that the apartment

20   exception to the residential construction exclusion applies

21   and that it is entitled to coverage on this loss.

22


                                    11
1                                  VI

2        Interstate seeks to elide the fact of unitary ownership

3    of the building.   Instead, Interstate points to condominium

4    offering literature filed with the New York Attorney

5    General, which shows that 40 Mercer was intended from the

6    outset to be sold as condominiums, and cites New York cases

7    suggesting that the ultimate intended use of a building is

8    determinative.   See, e.g., Admiral Ins. Co. v. Joy

9    Contractors, Inc., 917 N.Y.S.2d 168 (1st Dep’t 2011).2

10       We are unpersuaded.   The contract wording governs.

11   Whatever the developer’s design or marketing plan, the

12   wording of the exception to the exclusion, and the related

13   definitions, indicate that Ment was covered.   Moreover, the

14   qualifying language in the policy supports the view that an

15   apartment is not a condominium until after conversion:

16            In the event any “apartment” to which coverage
17            under this policy applies is converted to a
18            “condominium, . . . ”, then coverage under this
19            policy is excluded for any claims for . . .
20            “property damage” arising out of . . . the

          2
             After 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. See Admiral
     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.
                                   12
1             construction of said “apartments” which occur
2             after the conversion of the “apartment” into a
3             “condominium, townhome or multi-family dwelling.”

4    J.A. 87 (emphases added).   Interstate does not dispute that

5    at the time the damage occurred, the 40 Mercer project was

6    owned by and titled to a single owner.

7        Although the language of the policy governs and settles

8    the dispute, Interstate’s argument regarding ultimate intent

9    is additionally unpersuasive because under New York law, a

10   building does not become a condominium until a condominium

11   declaration is filed.   “A parcel of real property becomes a

12   condominium and thus is subject to the jurisdiction of the

13   Condominium Act by the filing of a declaration.”   Schoninger

14   v. Yardarm Beach Homeowners’ Ass’n, 523 N.Y.S.2d 523, 527

15   (2d Dep’t 1987) (internal citations omitted); see also id.

16   at 526-27 (“In New York the creation and administration of

17   condominiums is governed by the provisions of [the

18   Condominium Act].”); 19A N.Y. Jur. 2d Condos. § 80 (2012).

19   Without a “valid and existing condominium declaration,” a

20   condominium’s “existence is not recognized at law.”   Local

21   798 Realty Corp. v. 152 W. Condo., 830 N.Y.S.2d 79, 80 (1st

22   Dep’t 2007).

23


                                   13
1        WXIV/Broadway did not file a condominium declaration

2    until February 9, 2007, after Ment had completed its work on

3    40 Mercer.   WXIV/Broadway and everyone involved in the

4    project may have intended and anticipated that 40 Mercer

5    would become a condominium, but it was not a condominium

6    under New York law until the declaration was filed in

7    February 2007.

8        Even if the apartment exception to the residential

9    construction exclusion were ambiguous, any ambiguity must be

10   construed against Interstate as drafter of standard contract

11   wording.   See Belt Painting Corp. v. TIG Ins. Co., 100

12   N.Y.2d 377, 383 (2003) (“It follows that policy exclusions

13   are given a strict and narrow construction, with any

14   ambiguity resolved against the insurer.”).   The same

15   principle applies regardless of whether, as to a particular

16   clause, the burden of proof falls on the insurer or the

17   policyholder.    See Nick’s Brick Oven Pizza, Inc. v.

18   Excelsior Ins. Co., 877 N.Y.S.2d 359, 361-62 (2d Dep’t 2009)

19   (construing an ambiguous term in an exception to an

20   exclusionary clause against the insurer).

21       To the extent it matters, there would seem to be good

22   reason why an insurer would draft wording to avoid coverage



                                    14
1    for residential units that are held by multiple owners.

2    Although Interstate did not explain the purpose of the

3    apartment exception to the residential construction

4    exclusion, Ment suggested that its purpose is to provide

5    coverage for contractors facing liability from a single

6    building owner but not for contractors facing numerous

7    potential suits from various individual residential owners.3

8        Because we hold that the apartment exception applied to

9    Ment’s work on the 40 Mercer building, we need not consider

10   Ment’s remaining arguments on appeal regarding equitable and

11   promissory estoppel.

12       For the foregoing reasons, we reverse the judgment of

13   the district court.




          3
             That 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”).
                                  15
