QBE Insurance v. Adjo Contracting Corp.
997 N.Y.S.2d 425, 121 A.D.3d 1064 (2014)
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Rule of Law:
Under New York's choice-of-law rules for a liability insurance policy covering risks in multiple states, the law of the insured's domicile governs. If that state's law, such as Pennsylvania's, requires an "occurrence" to be a fortuitous event, then reasonably foreseeable consequential damages from faulty workmanship do not constitute an "occurrence" and are not covered.
Facts:
- In 2003, Archstone-Smith Operating Trust (ASOT) contracted with Tocci Building Corporation of New Jersey, Inc. (Tocci) to serve as the general contractor for a rental apartment complex project in Westbury, New York.
- Tocci entered into trade agreements with numerous subcontractors to perform work on the project.
- The construction took place in stages, ending in 2007, with tenants beginning to occupy the complex before its full completion.
- The finished complex suffered from extensive water intrusion, which led to significant mold growth throughout the buildings.
- As a result of the water damage and mold, Archstone terminated all tenant leases effective March 31, 2008.
Procedural Posture:
- Tenants filed several class-action lawsuits against the property owner, Archstone, which were consolidated into a single action.
- Archstone commenced an action against the general contractor, Tocci, seeking common-law indemnification.
- Archstone and Tocci's insurer, Travelers, sought defense and indemnification from the numerous insurers of the project's subcontractors.
- QBE Insurance Corporation, one of the subcontractors' insurers, filed a declaratory judgment action to determine its coverage obligations.
- Travelers and Archstone then filed third-party and second third-party actions against the other subcontractors' insurers.
- In the Supreme Court, Nassau County (trial court), Archstone and Travelers moved for summary judgment to declare that the insurers had a duty to defend them.
- Multiple insurers filed cross-motions for summary judgment, seeking a declaration that they had no duty to defend.
- The trial court granted summary judgment in favor of Archstone and Travelers against most of the insurers, finding a duty to defend.
- The affected insurers appealed the trial court's order to the Appellate Division of the Supreme Court, Second Judicial Department.
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Issue:
Does a subcontractor's commercial general liability policy cover claims for bodily injury and property damage resulting from the subcontractor's faulty workmanship when the policy, governed by Pennsylvania law, defines an 'occurrence' as an 'accident'?
Opinions:
Majority - Skelos, J.E.
No. A subcontractor's commercial general liability policy governed by Pennsylvania law does not cover claims for bodily injury and property damage that are a reasonably foreseeable consequence of faulty workmanship, because such events are not considered a fortuitous 'accident' and thus not an 'occurrence' under the policy. The court first identified a conflict between New York law, which generally considers consequential property damage from faulty work to be a covered 'occurrence,' and Pennsylvania law, which does not. Pennsylvania law emphasizes fortuity and excludes coverage for damages that are a 'reasonably foreseeable result of the faulty workmanship,' such as mold from water infiltration. Applying New York's choice-of-law rules for multi-state insurance risks, the court determined that the law of the insured’s domicile serves as a proxy for the principal location of the risk. Because the named insured for insurers Erie and Penn National was domiciled in Pennsylvania, Pennsylvania law governed their policies. Under that state's stricter definition, the tenants' claims were not a covered 'occurrence,' relieving Erie and Penn National of their duty to defend.
Analysis:
This decision clarifies the application of choice-of-law rules in complex, multi-state construction insurance disputes, emphasizing the significance of the insured's domicile. It highlights a critical jurisdictional split on what constitutes a covered 'occurrence,' contrasting New York's broader view with Pennsylvania's stricter 'fortuity' requirement for faulty workmanship claims. The ruling serves as a precedent that the governing law, dictated by the insured subcontractor's home state, can be outcome-determinative, potentially negating coverage for construction defect claims even when the project and injury occurred elsewhere. This impacts how insurers and contractors must assess risk and coverage across state lines.
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