Subcontractors often obtain insurance in case of damage to the owner’s property during construction. These insurance contracts contain specific language about commercial liability coverage, including which types of projects are excluded from being insured. For a subcontractor to be indemnified against damage he causes, the insurance policy must actually cover the damage and the project must fit the type covered under the policy’s definitions.

In a recent case from New York City, a subcontractor and insurance company disputed whether the “residential property” on which the subcontractor was working qualified as an “apartment” in order to be covered under the insurance policy. The subcontractor was a welder hired by a general contractor. The general contractor was converting a single-owner apartment building to a condominium building with several owners. When the general contractor found damage caused by welding sparks, he sued the subcontractor. The subcontractor, believing he was insured for this damage, demanded that the insurance company indemnify him and defend the lawsuit.

The insurance company refused to do either. Under the insurance contract for commercial liability coverage, no damage to residential properties would be covered, “except apartments.” The insurance company argued that the property qualified as “condominiums,” not apartments; therefore, the project was excluded from insurance coverage under the policy terms.

Although the federal trial court ruled in favor of the insurance company, determining that the project was a condominium project and therefore excluded from insurance coverage, the subcontractor appealed. The Second Circuit found that the intent of the insurance policy terms was to avoid coverage for residential units that are held by multiple owners, but, at the time of the welding sparks damage, the property had a single owner. The apartment exception applied. Therefore, the insurance policy covered the subcontractor’s damage.

It may be obvious that commercial construction insurance contracts are limited in what damage, if any, is covered for residential properties. This case provides an example of the intricacies inherent in insurance policies. A clear understanding of how terms are defined within a policy is absolutely critical to preventing future litigation expenses and delay in receiving the contracted-for relief of indemnification.

Ment Bros Iron Works Co. v. Interstate Fire Cas. Co., 702 F.3d 118 (2d Cir. 2012).