NY District Court Holds Trade Contractor’s Insurer Obligated to Indemnify CM Even Though Trade Contractor Found Not Negligent

Turner Constr. Co. v. Am. Mfrs. Mut. Ins. Co.
2007 U.S. Dist. LEXIS 32640 (S.D.N.Y. Apr. 30, 2007)

Plaintiff Turner Construction Company entered into a construction management agreement with Central Synagogue in Manhattan for renovation work which included the installation of central air conditioning. The HVAC contractor on the project was Trident Mechanical Systems, Inc. During the project, a fire broke out, started by an employee of the roofing contractor who had been using a propane torch. The fire, which ordinarily would have caused minimal damage, was accelerated by exhaust fans that had been installed in the roof, and caused several millions of dollars damage to the landmark Synagogue. The Synagogue’s insurer, Wausau, sued Turner and some of the project’s contractors, to recover amounts it paid the Synagogue. The trial was bifurcated, trying liability first, then damages. Liability was determined as: Turner 50%, the roofing contractor 30%, the general contractor 15%, and Trident 0%. A settlement was reached before the damages portion of the trial began.

Turner brought an action against Trident’s insurer, American Manufacturers Mutual Insurance Company (AMMIC) and its excess insurer, Lumberman’s Mutual Casualty Company (LMCC), seeking a determination that they were required to defend and indemnify Turner in the Wausau and related actions. Pursuant to contract requirements, Trident’s policies named Turner as an additional insured. The AMMIC policy defined “an insured” as any entity to whom Trident was required by contract to provide insurance as afforded by the policy, “but only with respect to liability arising out of ‘your work’ for that insured by you…”. Similarly, the LMCC policy defined “an insured” as any entity to whom Trident was required by contract to provide insurance as afforded by the policy, “but only with respect to liability arising out of ‘your work,’ ‘your product’ and to property owned or used by you.” AMMIC and LMCC moved for summary judgment to dismiss the action. The court granted the motion holding that Trident, the named insured, had been found not liable for the Synagogue fire and that this finding was res judicata.

The Court of Appeals for the Second Circuit vacated and remanded the case, holding that Turner was covered under the policies if Turner’s liability arose out of Trident’s work, that res judicata did not bar Turner’s indemnity claim, and that AMMIC and LMCC were not entitled to summary judgment on Turner’s defense fees. In its remand, the Court of Appeals stated: “the only contract question at issue in Turner’s suit is whether its liability ‘arose out of’ Trident’s work … we conclude that the jury verdict favorable to Trident on the issue of negligence cannot, by itself, absolve the insurers of indemnification obligations to Turner.”

On remand, the sole issue before the Court was whether Turner’s liability “arose out of” Trident’s work. Turner moved for summary judgment on its allegation that AMMIC and LMCC had failed and/or refused to defend and indemnify Turner and that Turner was damaged as a result. In turn, AMMIC and LMCC moved for summary judgment, seeking dismissal. The Court rejected AMMIC and LMCC’s argument that there can be no duty to indemnify an additional insured if the named insured has been found not to be liable, holding Trident’s liability immaterial for purposes of considering the motions. In reviewing New York law on the construction of the phrase “arising out of,” the Court noted that proximate causation tests had been rejected. Rather, the phrase had been interpreted to mean “originating from, incident to, or having connection with.” The Court reasoned that “arising out of” does not focus on causation, but instead upon “the general nature of the operation in the course of which the injury was sustained.” Citing to other New York cases finding coverage of an additional insured to be appropriate even where the harm was found to have been attributable only to the negligence of the additional insured, the Court held that liability of a general contractor can arise out of the non-negligent work of a subcontractor where the subcontractor’s work is involved in the injury and that Turner’s liability arose out of Trident’s work. Accordingly, the damages for which Turner was held liable, which had a connection to Trident’s work, were insured by the policies and AMMIC and LMCC had a duty to defend Turner and were required to reimburse the reasonable attorneys’ fees and costs incurred by Turner in defending the underlying actions. Additionally, finding that the duty to indemnify is based on whether the loss is covered by the policy, the Court held AMMIC and LMCC had an obligation to reimburse the settlement amount paid by Turner.

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