Falls Lake National Insurance Company v. Best Interior Solutions Inc.

Background

Falls Lake issued an insurance policy to Best Interior Solutions Inc. covering August 24, 2021, through August 24, 2022. Professional Interior Contracting, Inc. (PIC) hired Best to paint, hang wallpaper, and refinish floors in Unit 20 at Beckford House. While preparing to paint a bathroom, Best placed Masonite over a sink and other surfaces. The Masonite fell, struck a faucet, and caused water to run onto the floor, damaging Unit 20, other units, and common areas.

Falls Lake disclaimed coverage and filed this declaratory-judgment action. It sought a ruling that the policy did not cover the property damage. Best and PIC filed a cross-motion for summary judgment, which asks the court to rule that no genuine dispute of important fact requires a trial and that a party is entitled to judgment under the law. They sought declarations that Falls Lake breached its duty to defend, owed indemnification, and should pay attorneys’ fees.

Falls Lake’s Motion

The policy contained a New Residential Construction Limitation excluding property damage connected with new residential construction, including condominiums. The court held that the limitation applied because Beckford House was still under construction when the damage occurred and Best’s work was connected to that construction. The court rejected the exception for projects containing no more than 20 condominium units because Beckford House contained 32 units.

The court nevertheless held that the exception for remodeling, repair, or maintenance work on an individual condominium previously occupied or put to its intended use applied. The court found that Best’s work was remodeling, not new construction, and interpreted Unit 20 as having been put to its intended use when it was purchased from the sponsor, even though no one had yet lived there. The court therefore held that the limitation did not allow Falls Lake to deny coverage for Best’s claim.

The court also held that PIC was an additional insured under the policy. Although the subcontractor agreement between Best and PIC was unsigned, the court found that the policy provision applicable to PIC required a written agreement but did not require a signature. The agreement stated that PIC was to be added as an additional insured, and the parties did not dispute that a contract existed.

The court declined to grant Falls Lake summary judgment concerning other exclusions that might apply to PIC. Although the evidence showed that PIC had supervisory authority over Best, genuine factual disputes remained about whether PIC negligently supervised Best’s work and whether the claimed damage arose from supervisory activities. The court also found factual disputes about whether Best or PIC violated the policy’s provision requiring Falls Lake’s consent before an insured made a payment or assumed an obligation.

The Defendants’ Motion

The court held that Falls Lake breached its duty to defend Best and PIC. Under New York law, that duty applies when the allegations in an underlying lawsuit create a reasonable possibility of coverage. Because the court found that the remodeling exception applied, PIC was an additional insured, and factual disputes remained concerning other coverage issues, Falls Lake had not shown that there was no possible basis for indemnification. Those circumstances created a duty to defend.

The court also held that Best and PIC were entitled to attorneys’ fees for defending this action. Under the applicable New York rule, an insured may recover fees when an insurer places the insured in a defensive position by seeking a declaration that it has no duty to defend and the insured prevails on the merits.

The court did not decide whether Falls Lake must indemnify the defendants for liability in the underlying lawsuits. Indemnification generally depends on a determination of liability, and no party provided information showing that the third parties in those lawsuits were likely to prevail. The court therefore held that the indemnification issue was not ripe and denied the defendants’ request for that declaration without prejudice to raising it again when it becomes ripe.

Disposition

Judge Valerie Caproni ordered that Falls Lake’s motion for summary judgment was denied in part and granted in part. Falls Lake received a declaration that it owed no duty to defend 301 East 81st PH 20 Inc. and Shweta Rawat, but it did not receive summary judgment concerning its duty to defend Best and PIC.

The defendants’ motion for summary judgment was granted in part and denied in part. Best and PIC received declarations that Falls Lake owed them a duty to defend and that they were entitled to attorneys’ fees connected with defending this action. The defendants’ request for a declaration that Falls Lake owed a duty to indemnify was denied without prejudice. The parties were ordered to meet and confer about the amount of attorneys’ fees, with a possible later hearing before a magistrate judge if they could not agree.