A federal court in New York has ruled that an excess liability policy must respond to losses from a Manhattan apartment building fire, finding that applying a residential construction exclusion would result in illusory coverage driven by a mutual mistake, according to BestWire.
The case centers on Systems 2000 Plumbing Services, which faced multimillion-dollar exposure after a 2021 fire at an apartment building where it was replacing valves.
The decision came from the United States District Court for the Southern District of New York.
The primary liability policy was issued by The Travelers Indemnity Co. of Connecticut. That policy carried a $2mn limit and, on paper, included a residential construction exclusion. The problem started earlier.
The exclusion’s actual language never appeared in the policy proposal Systems 2000 signed. Instead, the proposal referenced an obscure “exc-hazard-connected designated exposure” exclusion, which the court found was meant to describe the residential-work exclusion.
The real wording only surfaced after the fire claim was submitted.
After the loss, Travelers reviewed Systems 2000’s operations and concluded the contractor’s work was entirely residential. Even so, Travelers chose not to rescind the policy.
It initially denied coverage based on the exclusion, then reversed course, removed the exclusion, and agreed to pay the full $2mn primary limit.
The excess layer, issued by GuideOne National Insurance Co., followed form to the Travelers policy and provided an additional $4mn in limits. GuideOne denied coverage, citing the same residential exclusion, and held that position even after Travelers abandoned it.
At trial, the court found that stance untenable. Evidence showed GuideOne knew Systems 2000’s business focused on apartment buildings and intended to cover that work when issuing the excess policy.
GuideOne’s head of excess and surplus casualty testified that the carrier meant to insure the plumbing services Systems 2000 performed in residential buildings.
The testimony also showed the insured paid a higher premium precisely because of the nature of that work.
GuideOne argued the contractor should have known the exclusion applied. The court wasn’t persuaded. Systems 2000 was explicit about the coverage it sought. There was no attempt to insure a different risk. Just bad alignment between intent and wording.
The court concluded there was no meeting of the minds when the excess policy was bound. Both parties, it said, “understood, intended and agreed” that the excess policy would cover residential apartment work.
Applying the exclusion would have wiped out coverage entirely, since all of Systems 2000’s operations were residential. That result, the court held, would render the policy meaningless.
The remedy was blunt. The residential-work exclusion was struck from the excess policy.
Because of that ruling, all remaining claims against Travelers were deemed moot and dismissed. Any cross-claims were dismissed without prejudice.
The parties were ordered to submit a proposed judgment and schedule by Jan. 16 to resolve any remaining issues.
According to Beinsure, the decision is a pointed reminder for excess carriers. Follow-form language doesn’t cure a broken foundation. If intent, underwriting, and premium all point one way, courts may not tolerate exclusions that erase coverage after the fact.
