A federal district court in California has ruled that a “contracting” exclusion in an umbrella insurance policy precluded coverage for claims that a subcontractor renovating a condominium owner's unit had damaged a neighboring property.
The Case
Thomas Coyne owned a condominium in a building located at 2560 California Street in San Francisco, California. He alleged that he was having work done on his condominium when a subcontractor started a fire in his unit resulting in substantial damages to the building next door, owned by Armenta Properties I, LLC, and insured by Travelers Insurance Company.
A lawsuit against Mr. Coyne alleged that he, in his individual capacity and as the president, majority shareholder, board member, or controlling member of Perine Place Owners Association, the condominium's homeowners' association, was liable for the fire that caused damage to the building owned by Armenta.
Travelers submitted a demand to Farmers Insurance Exchange, as the primary insurer for Mr. Coyne and Perine Place, as well as to American Alternative Insurance Corporation (“AAIC”), which had issued a personal umbrella insurance policy to Mr. Coyne, seeking reimbursement of the $1,382,656.25 it had paid on behalf of Armenta.
AAIC issued a reservation of rights letter to Mr. Coyne and reserved its right to decline coverage for the Armenta claim based on Exclusion q, which excluded coverage for damages arising out of contracting operations.
AAIC then filed a declaratory action seeking a determination of its legal obligations, and moved for summary judgment. AAIC contended that the exclusion applied to the contracting operations performed by Mr. Coyne's subcontractors when engaged in the remodel of his unit.
For his part, Mr. Coyne contended that the term “contracting” referred to the business of a general contractor or, at the very least, to his business activities. Therefore, he contended, the remodel of his personal residence did not qualify as an excluded business activity and should not fall within the exclusion of coverage.
The AAIC Policy
Exclusion q in the AAIC policy precluded coverage for losses:
arising out of any contracting or property development operations by or on behalf of a covered personThe Court's Decision
The court granted AAIC's motion, rejecting Mr. Coyne's interpretation of the exclusion as “untenable.”
In its decision, the court stated that, as drafted, Exclusion q was “not a model of clarity” but then ruled that the “reasonable interpretation of the clause” precluded coverage for contracting operations on Mr. Coyne's behalf, including the welding that allegedly caused harm to the neighboring property.
It concluded that AAIC's legal interpretation of the exclusion to preclude coverage “was reasonable.”
Steven A. Meyerowitz
Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. He may be contacted at [email protected].