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November 13, 2014

New York Court Holds That Liability Policy Covering Multi-State Risks Should Be Interpreted Under Law Of State Where Insured Is Domiciled

Major construction projects can require the work of dozens, if not hundreds, of contractors and subcontractors, often each with its own general liability insurer. Frequently, when something goes wrong on the project, every contractor and subcontractor gets sued and every insurer scrambles to prove that one or more of the other insurers provide primary coverage. And, where the contractors and subcontractors are headquartered in different states, determining the coverage obligations of the various insurers may require a determination of which law applies.

Such is the case of QBE Insurance Corp. v. Adjo Contracting Corp., 2014 NY Slip Op 07342 (2d Dep't Oct. 29, 2014). Archstone was the builder of a rental apartment complex in Westbury, New York. Archstone hired Tocci to serve as general contractor, and Tocci hired numerous subcontractors to work on the project between 2003 and 2007. The buildings suffered from extensive water intrusion, however, and Archstone was forced to terminate all tenant leases effective March 31, 2008. The tenants sued Archstone and Tocci, and Archstone and Tocci's insurer Travelers sought coverage from the various liability insurers for the subcontractors.

Insurers Erie and Penn National, which insured a subcontractor headquartered in Pennsylvania, argued that the tenants' claims did not arise out of an "occurrence," as that term is defined under Pennsylvania law, and that their commercial general liability ("CGL") policies provided no coverage. The Appellate Division noted that, under New York law, while a CGL policy does not insure for damage to the work itself, there is coverage for bodily injury or damage to property other than the work itself which arises out of faulty workmanship. By contrast, Pennsylvania interprets standard CGL policies as excluding both damage to the product itself and consequential damages which are a reasonably foreseeable result of faulty workmanship.

With respect to liability insurance policies, New York generally applies the law of the jurisdiction which the parties understood to be the principal location of the risk. In this case, however, the subcontractor was doing work in multiple states, so the court applied the law of the subcontractor's domicile; i.e., Pennsylvania. Since the claims did not arise out of a covered "occurrence" under Pennsylvania law, the project owner and general contractor were not entitled to coverage under the Erie and Penn National policies.

Notably, insurers ACE and Zurich, also seeking to avoid coverage, argued for applying the law of Texas where their policies were issued. The Appellate Division conducted a second choice of law analysis, ultimately finding no conflict since both Texas and New York permit a court to look at evidence outside the complaint and the policy to determine an insurer's duty to defend. The discussion, though, is a reminder that courts may perform multiple choice-of-law analyses and apply the laws of different states to different issues within the same litigation (a practice sometimes called "depecage").

Should you have questions regarding the information presented in this alert, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or


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