SOUTHERN DISTRICT OF TEXAS DISTRICT COURT HOLDS “CONSTRUCTION OF RESIDENTIAL PROPERTY EXCLUSION WITH EXCEPTION FOR APARTMENTS” POLICY PROVISION RELIEVED INSURER FROM DUTY TO DEFEND
On March 21, 2013, Judge Keith Ellison of the Southern District of Texas, Houston Division, determined that the “Construction of Residential Property Exclusion with Exception for Apartments” provisioncontained in a commercial general liability policy relinquished the insurer’s duty to defend its insured in a construction defect lawsuit. American Empire Surplus Lines Ins. Co. v. Nat. Fire Ins. Co. of Hartford, 2013 WL 1194866, Civil Action No. H–12–2313 (S.D. Tex. – Houston, Mar. 21, 2013).
The salient facts are as follows: Plaintiff American Empire Surplus Lines Insurance Corporation and First Specialty Insurance Corporation issued insurance policies to ARCI, Ltd. for different policy periods. First Specialty issued a General Liability Policy to ARCI with a policy period from 2003 to 2004, during which time ARCI performed roofing, sheet metal, and chimney flashing work in the construction of an apartment complex in Florida. In 2006, the apartments were converted to condominiums. ARCI was later sued in a Florida state court for its work in the apartment complex construction. First Specialty argued that its obligation to defend ARCI in the Florida state action was precluded by the relevant policy endorsement entitled “Construction of Residential Property Exclusion with Exception for Apartments.”
The pertinent language of First Specialty’s endorsement provided that no duty to defend was provided for any claim, including but not limited to, claims for “bodily injury,” “property damage,” “personal and advertising injury” arising out of the construction of residential properties, except apartments, but including and not limited to condominiums. The provision went to state that if any apartment was converted to a condominium, then coverage under the policy would be excluded for any claims for “bodily injury,” “property damage,” “personal and advertising injury,” arising out of the construction of the apartments which occurred after the conversion of the apartment into a condominium.
Plaintiff American Empire filed suit in the Southern District of Texas seeking a declaration that First Specialty was also obligated to defend ARCI in the construction defect lawsuit in Florida. American Empire argued that First Specialty’s policy excluded only injuries and damages that occurred after the conversion of the apartments into condominiums and, because the alleged construction defects (property damage) occurred before conversion, First Specialty’s policy did not exclude coverage for the alleged apartment complex defects. In response, First Specialty argued that the provision excluded coverage for all claims made after the conversion of the apartments to condominiums and, since the claims for construction defects were made after the conversion to condominiums, the claims asserted against ARCI in the Florida suit were outside First Specialty's coverage.
As a matter of first impression (the parties agreed that the particular language at issue had never before been construed by a court in Texas or any other jurisdiction), Judge Ellison found that although “the draftsmanship was less than perfect” the logical interpretation of the policy language was that all claims made after the conversion of the apartments to condominiums were excluded from coverage. Therefore, the Court held First Specialty did not have a duty to defend ARCI in the Florida state action and dismissed the case with prejudice.