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September 30, 2009

Appellate Division Construes Work-Product Exclusion

Homeowners sued Camelot Associates Corporation, a builder, for breach of the housing merchant warranty, alleging that their homes were built at an insufficient elevation in relation to the seasonal high groundwater, causing dampness in their basements. J. Lucarelli & Sons, Inc. v Mountain Valley Indemnity Company, 64 A.D.3d 856 (3d Dep't. 2009). J. Lucarelli & Sons ("Lucarelli") was brought in as a third party to the underlying action along with the engineer and another contractor. Camelot Associates sought contribution and indemnification on negligence, breach of contract and breach of warranty theories. The engineer then commenced a fourth party action against J. Lucarelli & Sons seeking indemnification and contribution for negligence.

Mountain Valley Indemnity Company, ("Mountain Valley"), which insured Lucarelli, disclaimed coverage on the third party claim, and did not defend on the fourth-party claim although they did not disclaim coverage.

Lucarelli then brought a declaratory judgment action against Mountain Valley. Both parties moved for summary judgment. Supreme Court granted Mountain Valley's cross-motion for summary judgment, holding that there was no coverage under the policy because the homeowners' claims were within the work-product exclusion, which excluded damage to "[t]hat particular part of real property on which you are performing operations, if the 'property damage' arises out of those operations; or"¦.[t]hat particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it."

"Your work" was defined as "[w]ork or operations performed by you or on your behalf," [including] "[w]arranties or representations made at any time with respect to the fitness, quality, durability, performance or use of 'your work.'"
The Third Department affirmed Supreme Court's order, holding that the causes of action against the contractor arose out of "excavation work allegedly performed by plaintiff in connection with the building of the homes, and seek[s] damages for faulty workmanship" and were within the work-product exclusion. The Court restated the principle that commercial general liability policies are to provide coverage for "tort liability for physical damage to others and not for"¦ economic loss because the product"¦ is not what the damaged [party] bargained for."

Lucarelli argued that Mountain Valley had a duty to defend because the underlying complaints included allegations of negligence and that the insurer must defend whenever the allegations suggest a reasonable possibility of coverage. The Court rejected this argument because the underlying facts alleged only a violation of the housing warranty. The Court found that the negligence claim was based on contract, not tort, and was "solely and entirely within the policy's exclusion."
Lucarelli also asserted estoppel with respect to the fourth-party claim as Mountain Valley did not disclaim coverage. The Court rejected this argument, noting that the plaintiff was relying on Insurance law §3420(d) which applies to "death and bodily injury" claims. The Court noted further that "requiring payment of a claim upon failure to timely disclaim would create coverage where it never existed."

This case stands for the proposition that there is no duty to defend and indemnify when the underlying cause of action arises from a work-product claim, even when the allegations sound in tort and the work-product exclusion will extend to third and fourth party claims seeking indemnification and contribution.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Practice Area.

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