The federal district court found that under New York law, the insurer had a duty to defend construction defect claims where damage to property other than the insured's work product was possible. Am.Home Assur. Co. v. Allan Window Techs., 2016 U.S. Dist. LEXIS 101118 (S.D. N. Y. Aug 2, 2016).
Kent Avenue Property ("Kent") sued Allan Window Technologies, Ltd. ("Allan"), alleging that Allan entered a written contract for the design, manufacture, assembly and installation of the window wall systems for a residential condominium building. Pursuant to the contract, Allan agreed to correct all work rejected as defective and to bear all costs for correcting the work. According to the complaint, the window wall systems and vent windows installed by Allan were not water-tight or air-tight, and therefore did not meet the air and water penetration requirements of the contract.The contract had an indemnification provision under which Allan agreed to indemnify, defend and hold harmless Kent from all losses, claims, lawsuits, etc. arising out of damage or injury to property at the project site. Kent sued for: (1) breach of contract; (2) breach of warranty, and (3) contractual indemnity.
American Home agreed to defend Allan under a full reservation of rights. American Home then sued for a declaratory judgment to establish it had no duty to defend or indemnify.
The parties agreed that American Home provided coverage for liability assumed in an "insured contract." There was no doubt that under the contract's indemnity provision, Allan assumed the tort liability of Kent. However, liability assumed in an "insured contract" was only covered if damages to which the policy applied were alleged. The damages therefore had to stem from "property damage" caused by an occurrence.
New York courts held that a CGL policy did not insure against faulty workmanship in the work product itself but rather faulty workmanship in the work product which creates a legal liability by causing property damage to something other than the work product. American Home claimed that the relief sought in the underlying complaint was only for costs associated with the repair or replacement of the window wall systems and vent windows constructed by Allan.
In the underlying complaint, however, Kent alleged it had received claims from condominium unit owners and the condominium association arising out of defects in the windows designed, manufactured and installed by Allan. The substance of the claims was not further described. Kent further asserted that under the indemnity provision, Allan was liable for any lawsuit arising out of the condominium unit owners'and association's claims.
From the allegations, it was unclear whether the claims for which Allan was liable were related to damages to the window wall systems themselves, or to other property owned by the condominium unit owners/condominium association. It was possible that some or all of the claims alleged in the underlying complaint were for tort damage caused to third-party property, distinct from Allan's work product. Because American Home could not reasonably claim that the underlying allegations allowed for no interpretation that the unit owners' claims related to third-party property damage, and thus fell within the policy's coverage, the court could not conclude that American Home did not have a duty to defend Allan.
Therefore, American Home's motion for summary judgment was denied. Not only did it have a duty to defend, it was too early to determine whether American Home had a duty to indemnify.