DPC New York, Inc. v. Scottsdale Insurance Company

Background

DPC New York, Inc., described as a New York-based general contractor, sued Scottsdale Insurance Company, described as an Ohio-based insurance company, in a diversity action. DPC sought a declaration that Scottsdale was required under a commercial general liability policy to defend and indemnify DPC in an underlying New York state-court lawsuit brought by the Sung Plaintiffs. DPC also sought payment of more than $30,000 in defense costs already incurred.

The underlying lawsuit concerned alleged construction-related damage to a building at 18 Murray Street in Manhattan. The Sung Plaintiffs alleged that construction at the neighboring 19 Park Place property caused various problems, including cracks, elevator malfunctions, falling façade materials, and other damage. They alleged that DPC became the general contractor after the original general contractor was terminated and that DPC continued work that damaged and threatened the integrity of the Sung Building. The underlying complaint asserted negligence and gross-negligence claims against DPC and other defendants.

The Scottsdale policy covered sums that DPC became legally obligated to pay because of covered property damage and stated that Scottsdale had a duty to defend suits seeking those damages. The policy period ran from February 15, 2014, to February 15, 2015. The policy included a “Continuing or Ongoing Damage” exclusion for property damage that first occurred, began to occur, or was alleged to have occurred before the policy began. It also included a “Residential Building Project” exclusion for damage connected with work on a residential project, subject to stated exceptions.

Parties’ Arguments

Scottsdale moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a claim. Scottsdale argued that both policy exclusions barred coverage and that it had no duty to defend or indemnify DPC.

DPC argued that the complaint adequately stated coverage claims, that Scottsdale had not shown that either exclusion applied, and that exceptions to the residential-project exclusion might apply. DPC also argued that Scottsdale had, at minimum, a duty to defend it in the underlying lawsuit.

Court’s Analysis

The court exercised its discretion to hear DPC’s request for a declaratory judgment because the parties had a real dispute about whether Scottsdale had duties to defend and indemnify DPC. The court applied New York substantive law because both parties relied on that law in their arguments.

Under New York law, an insurer’s duty to defend is broader than its duty to indemnify. An insurer generally must defend when the underlying complaint or facts known to the insurer suggest a reasonable possibility of coverage. To avoid that duty based on an exclusion, the insurer must show that the underlying allegations fall entirely within the exclusion, that the exclusion has no other reasonable interpretation, and that there is no possible factual or legal basis for eventual indemnification.

Regarding the continuing-damage exclusion, the court found that the underlying complaint provided little detail about DPC’s alleged negligence or the damage DPC allegedly caused. Although the underlying complaint described damage before DPC became the general contractor, the court could not determine whether that earlier damage was connected to the damage allegedly caused by DPC. Because the relationship between the two sets of damage was unclear, Scottsdale had not shown at this stage that the exclusion completely barred coverage.

Regarding the residential-project exclusion, the court accepted that the underlying complaint described 19 Park Place as a twenty-two-story residential condominium building. But the court found that the pleadings did not establish facts relevant to possible exceptions to the exclusion, including the number of planned units or whether the project had received a certificate of occupancy before DPC began its work. The court declined to resolve those issues as a matter of law before discovery.

Disposition

The court denied Scottsdale’s motion to dismiss. The order did not finally determine whether Scottsdale must defend or indemnify DPC; it determined only that DPC’s claims could proceed because Scottsdale had not shown on the pleadings that the policy exclusions eliminated any possible basis for coverage.