New appellate perspectives on EIFS exclusions and mixed claims under insurance law
Insurance coverage attorneys often face challenges when seeking to enforce policy exclusions on their clients’ behalf. To that end, New York appellate courts have ruled on certain policy exclusions so often that their enforcement is akin to legal doctrine; yet, some exclusions remain virtually untouched by the higher courts, leaving the respective lawyers for policyholders and insurers alike to battle ardently over the meaning of what are otherwise clear, plain terms. But, even then, assuming the exclusion can be proven to apply, coverage lawyers also must ask and answer the often dreaded question in New York state — did the insurer timely raise the exclusion in compliance with the stringent disclaimer requirements of Insurance Law § 3420(d)(2)?
On March 24, 2022, the Appellate Division, First Department issued its Decision and Order in First Mercury Insurance Company v. Nova Restoration of NY, Inc., et al., and in doing so, made two significant findings that will benefit insurers and their counsel with respect to these matters. For one, it recognized the enforceability (and rejected arguments of alleged ambiguity) of an exclusion for insureds’ work on buildings that use an exterior insulation finish system (“EIFS”)—an exclusion that has been making its way through jurisdictions around the United States, but for which very little New York appellate case law exists. Cf. FSLM Assocs. LLC v. Arch Ins. Grp., 122 A.D.3d 493 (1st Dep’t 2014). And, for the first time, the First Department rejected the argument that a bodily injury component in a claim that predominately sounds in property damage necessarily triggers the timely disclaimer requirements of Insurance Law § 3420(d)(2).
Facts and legal backdrop of the case
In Nova, the Plaintiff Insurer, First Mercury Insurance Company (“First Mercury”) sought a declaration that it had no obligation to provide coverage with respect to an underlying action brought against its insured. The insured was a contractor that had performed some renovation work on, inter alia, the roof deck of a condominium building.
In the underlying action, the owners of a penthouse unit of the condominium brought suit against several parties (including the condominium board, management company, and the insured contractor), alleging that their negligence caused the unit owners to suffer both property damages and personal injuries. More specifically, it was claimed that shoddy construction work (including the work on the roof deck) led to water intrusions in the unit, resulting in damage to various aspects of the property, as well as the development of mold, which caused or exacerbated respiratory conditions in the owners and their family.
The insured contractor ultimately sought coverage for the underlying action from First Mercury; however, coverage was denied because (i) it was understood that portions of the condominium building contained EIFS; and (ii) the relevant policy excluded coverage for any work performed by an insured on a “structure” that contained EIFS (the “EIFS Exclusion”):
DESIGNATED WORK EXCLUSION – EXTERIOR INSULATION AND FINISH SYSTEMS
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART PRODUCT/COMPLETED OPERATIONS LIABILITY COVERAGE PART
This insurance does not apply to “bodily injury” or “property damage” included in the “products-completed operations hazard” and arising out of “your work” described as:
- The design, manufacture, construction, fabrication, preparation, installation, application, maintenance or repair, including remodeling, service, correction, or replacement, of an “exterior insulation and finish system” (commonly referred to as synthetic stucco) or any part thereof, including the application or use of conditioners, primers, accessories, flashings, coatings, caulkings or sealants in connection with such a system.
- Any work or operation with respect to any exterior component, fixture or feature of any structure if any “exterior insulation and finish system” is used on any part of that structure.
For the purpose of this endorsement, an “exterior insulation and finish system” means an exterior cladding or finish system used on any part of any structure, and consisting of:
- A rigid or semi-rigid insulation board made of expanded polystyrene or other materials, and
- The adhesive and/or mechanical fasteners used to attach the insulation board to the substrate; and
- A reinforced based coat; and
- A finish coat providing surface texture and color.
First Mercury asserted that the condominium building contained EIFS in a number of locations on the exterior of the building and, therefore, the EIFS Exclusion applied.
At the trial court level, before the Honorable Barry Ostrager, First Mercury raised this argument in a summary judgment motion, pointing to references to EIFS in, inter alia, the underlying complaint and expert reports annexed thereto. Judge Ostrager initially denied the motion (as well as the cross-motions filed by the other parties), indicating that it was not clear precisely where the EIFS was located. First Mercury was given permission (and the parties agreed) to inspect the property with an expert, who identified where the EIFS was located, and First Mercury renewed its motion for summary judgment with the newfound expert evidence in hand.
The parties opposing First Mercury’s position raised three arguments. First, that renewal was procedurally improper, because no new facts or evidence had been adduced by First Mercury. Second, it was argued that the term “structure,” as used in the exclusion, was ambiguous, such that the term could refer to any individual portion of the condominium, rather than the condominium as a whole. In other words, the opposing parties argued that coverage could not simply be excluded merely because the insured performed work on part of a building that, somewhere else, contained an EIFS. Of note, while courts outside of New York have rejected such a reading of the exclusion, see, e.g., Kaitlin Woods Condo. Ass'n, Inc. v. Kaitlin Woods, LLC, 2017 WI App 56 (Wisc. Ct. App. 2017), the limited case law pertaining to EIFS exclusions in New York had not directly addressed the issue.
Finally, it was argued that, because the underlying claim also contained allegations of respiratory ailments as a result of mold, First Mercury’s disclaimer was untimely under Insurance Law § 3420(d)(2). First Mercury argued in response that the claim was primarily for property damage, rather than bodily injury, making § 3420(d)(2) inapplicable. See, e.g., KeySpan Gas E. Corp. v. Munich Reinsurance Am., Inc., 23 N.Y.3d 583 (2014).
Ultimately, Justice Ostrager ruled in First Mercury’s favor on all issues. That decision was appealed, which resulted in the First Department’s Decision and Order discussed herein.
The appellate division’s decision and order
The First Department addressed each of the three principal arguments asserted by the parties. First, the Court held that renewal was proper pursuant to CPLR 2221. The Court recognized that new evidence (i.e., from the expert inspection) was being presented, and that there was a reasonable excuse for not providing it earlier. In particular, the Court referenced the fact that the parties that were contesting whether renewal was proper had “joined in the request to allow the expert discovery.”
Second, the Court rejected the opposing parties’ interpretation of the EIFS exclusion, and held that both “prongs” of the exclusion applied. The Court recognized that the insured did in fact work directly with the EIFS (the first prong of the exclusion), but also, that they “worked on an ‘exterior component, fixture or feature of any structure’ where EIFS ‘is used on any part of that structure” (the second prong of the exclusion). While the Court did not decide whether the term “structure” meant the entire building or the penthouse unit itself, it recognized that “work was performed on an exterior component of both, and EIFS was used on both structures.” And, the Court expressly rejected the “strained construction” of the exclusion urged by the insured—i.e., that the term “structure” could “refer to components such as the roof or roof deck, on which no EIFS was used.”
Finally, the Court rejected the argument that Insurance Law § 3420(d)(2) barred First Mercury from raising the EIFS exclusion. At oral argument, the Court had asked several questions about how “mixed” claims of property damage and bodily injury should be treated under the statute (i.e., whether the statute would apply in part, in full, or not at all to such claims). In the Decision and Order, the First Department ultimately held that the statute was wholly inapplicable under the circumstances, based on use of the term “accident” therein. Specifically, the Court held that “[c]ontrary to the . . . Condo defendants’ contention, the underlying claim, which asserts shoddy construction resulting in water damage and growth of mold does not arise out of an ‘accident’ as that term is used in section 3420(d)(2).” Consequently, § 3420(d)(2) was held not to apply, and First Mercury was not time-barred from raising the EIFS exclusion, which the Court held to be plainly applicable.