NY: Engineer/Controlled Inspector Denied Coverage Under General Liability Policy

In Maxum Indemnity Co. v. A One Testing Laboratories, Inc., 14-cv-4023 (S.D.N.Y. Dec. 15, 2015) the U.S. District Court for the Southern District of New York granted Maxum Indemnity Company’s (“Maxum”) motion for summary judgment that Maxum owed no duty to defend or indemnify its engineering insured in a lawsuit by the Sponsor against the engineer and other defendants arising from construction of a new condominium building.

The engineer maintained a commercial general liability insurance policy which obligated Maxum to “pay those sums that [engineer] becomes legally obligated to pay as ‘damages’ because of ‘bodily injury’ or ‘property damage’ caused by an occurrence during the policy period. Id. The policy defined “occurrence” as “an accident including continuous or repeated exposure to substantially the same general harmful conditions.” The policy defined “property damage” as (a) “physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it;” or (b) “[l]oss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.”

The policy also provided that Maxum owed no duty to defend or indemnify the engineer for “any claim or ‘suit’ for breach of contract.”

Sponsor alleged that the engineer contracted with Sponsor to provide controlled inspection services for, among other things, fire-stops at the condominium, but failed to detect or correct the fire-stopping contractor’s defective work. Sponsor’s claims against the engineer were for breach of contract and negligence which the court noted mirrored each other. The Sponsor alleged that the engineer breached its duties and obligations under its contract “by failing to perform its controlled inspection services with reasonable care and in accordance with accepted industry standards and practices.” Sponsor’s claimed damages were for economic loss to recover for the defective work.

The Court held that the Sponsor’s complaint against the engineer did not allege “an occurrence” resulting in “property damage” sufficient to trigger coverage under the terms of the general liability policy. Rather, Sponsor’s claims turned upon the engineer’s purported failure to satisfy its contractual obligations, notwithstanding Sponsor’s negligence claim. The Court explained that “[a] contract default under a construction contract is not transformed into an accident, including continuous or repeated exposure to substantially the same general harmful conditions’ by the simple expedient of alleging negligent performance or negligent construction.” Indeed, the policy’s requirement that the covered damage arise from an “occurrence” establishes that Maxum, through the policy, “never intended to provide contractual indemnification for economic loss to [the] contracting party because the work product contracted for is defectively produced.” The Court further noted that if Maxum were required to defend under such circumstances, it would effectively be “transform[ed] into a surety for the performance of the [insured’s] work.” As such, the Court held that Maxum owed no duty to defend or indemnify A-1 under the “‘no occurrence, no coverage’ rule for commercial general liability policies under New York law.1”

1The Court did not address the availability of Professional Liability coverage.