This is an action on a "builders' risk" commercial insurance policy. The parties have stipulated to try the issue of liability on the papers noted.

Factual Background

Plaintiff Rhino Excavating Corp., ("Rhino") is in the residential construction business. In or about 2001, Exeter Holding, Ltd., ("Exeter") a mortgagee, acquired title to an unfinished residential property after there had been a default on the construction loan by the original builder. The property is located at 1A Bittersweet Court in Centerport. On April 15, 2002, Exeter hired Rhino to complete the house which had been started on the property. According to Rhino, a large part of its business is this type of construction activity.

Pursuant to its contract with Exeter, Rhino was to be paid $25,000 plus one half of the profit upon sale of the property. Profit was to be calculated by deducting a "base value" of $550,000, and the cost of completion, from the amount realized upon the sale of the property.^[FN1] Rhino was required to "properly secure and insure the house until ownership is transferred to buyer." In accordance with its contract, Rhino obtained a "Builder's Risk" [*2]policy from defendant Assurance Company of America. Although the policy stated that it was a "new policy" which became effective July 1, 2004, it is clear that coverage had been in effect for at least a year prior to that date.^[FN2] The policy provided that the insurer would pay for "direct physical loss to covered property."^[FN3] "Covered property" was defined as meaning property which "has been installed or is to be installed in any commercial structure and/or any one to twelve family dwelling... at the location which you have reported to us. This includes (1) your property; (2) property of others for which you are legally responsible...."^[FN4] However, the policy provided that "covered property" did not include "existing building or structure to which an addition, alteration, improvement or repair is being made, unless specifically endorsed."^[FN5] The declarations page provided that the policy limits were $1.5 million on any one structure and $5 million on all covered property at all locations.

The policy was issued on a "continuous reporting" basis. Each month the insured was required to report to the insurer the "total estimated completed values of all covered property for each location started during the previous month."^[FN6] The report was to be made on a form provided by the insurer. Premiums were to be paid based on the "total estimated completed value of the property using the rate we furnish."^[FN7]

Plaintiff's report for June 2003 lists three projects, including the subject Bittersweet Court property. The report contains columns for entering data pertaining to each project. The legend explaining the code for entering the data is obscured by the copy of plaintiff's monthly premium check which is superimposed over the report. However, the report appears to indicate that all three of the projects were listed as "new starts."^[FN8]

The June 2003 report indicates that Rhino was charged a "protected" rate of .041 and [*3]an "unprotected" rate of .083 per $100 of value.^[FN9] Defendant's redacted underwriting file indicates that to receive the protected rate, the premises must be within a certain proximity to a fire station and meet other requirements to control the risk of fire.^[FN10] The report indicates that the protected rate of .041 was assigned to each project. On the report, plaintiff entered $500,000 as the total estimated completed value for the Bittersweet Court project.

The builder's risk policy contained an "other insurance clause" providing that if the insured had other insurance covering the loss, the insurer would pay only "the excess" over what the insured should have received from the other insurance.^[FN11] The policy also contained a "mortgageholder's clause," providing that the insurer would pay for covered losses to each mortgageholder shown on a certificate of insurance issued by the "current agent of record."^[FN12] Although defendant initially claimed that Exeter was an insured on the builder's risk policy, it now denies that a certificate of insurance was issued in favor of Exeter.^[FN13] Thus, the Court need not consider whether coverage available to Rhino under the builder's risk policy was "excess" to other insurance available to Exeter.

While Exeter was not an insured under the builder's risk policy, it did have a homeowner's policy covering the Bittersweet property. The policy was issued by Lloyd's, London, and the limit for property damage to the dwelling was $562,432. The policy had an endorsement providing that the insurance did not apply to personal injury, bodily injury, or property damage "arising out of the operations performed for the named insured by independent contractors or acts or omissions of the named insured in connection with his general supervision of such operations."^[FN14] KNH Associates was the insurance broker which placed both Rhino's builder's risk policy and the homeowner's policy held by Exeter.

On April 11, 2005, Exeter's subsidiary, Bittersweet Partners, Inc., entered into a contract to sell the property to Brett Reece for $869,000. The contract provided that Bittersweet was to "erect and complete" a two-story colonial style single family home on the premises. The closing was to occur within 15 days of the issuance of a certificate of occupancy, but no earlier than June 15, 2005.

On May 31, 2005, a fire occurred at the premises. Plaintiff asserts that the home was [*4]"virtually complete" as of the date of the loss, although a certificate of occupancy had not yet been issued. Plaintiff's expert, Casella Construction Corp., estimates that the cost of repairing the fire damage is $391,850. Exeter submitted a claim on the homeowner's policy which was denied by Lloyd's. Rhino submitted a claim on the builder's risk policy which was denied by Assurance.

Procedural History

Plaintiff commenced this action on the builder's risk policy by filing the summons and complaint with the New York County Clerk's office on December 7, 2005. Venue was changed to Nassau County pursuant to a stipulation of the parties. By order dated January 7, 2008, Hon. Michele Woodard denied plaintiff's motion for summary judgment on the ground that plaintiff had not established prima facie that its loss was covered by the policy. Justice Woodard denied defendant's cross-motion for summary judgment on the ground that defendant had not established prima facie that the Bittersweet Court project was an "existing building" undergoing "addition, alteration, or improvement," and therefore not included within the definition of "covered property."

Following the decision by Justice Woodard, the parties stipulated to try the issue of liability before this Court. The trial record consists of "new" affidavits as well as the depositions and other documents which were submitted on the summary judgment motion.

Decision

Insurance contracts should be interpreted according to the reasonable expectations and purposes of the ordinary business person when making an ordinary business contract. GMAC v. Nationwide Ins. Co., 4 NY3d 451, 457 (2005). In resolving a dispute over insurance coverage, a court first looks to the language of the policy. The court must construe the policy in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect. Raymond Corp. v. National Union Fire Ins. Co., 5 NY3d 157, 162 (2005). Where there are separate lines of insurance, the court should apply a "functional analysis," interpreting each policy in light of the role it is to play in managing the overall risk. Jefferson Ins. Co. v. Travelers Indemnity Co., 92 NY2d 363, 372 (1998).

Builder's risk insurance is a unique form of property insurance that typically covers only projects under construction, renovation, or repair and insures against accidental losses, damages or destruction of property for which the insured has an insurable interest. Fireman's Fund v. Structural Systems Technology, Inc., 426 F. Supp.2d 1009, 1025 (D. Neb. 2006). An "insurable interest" includes "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction, or pecuniary damage." Insurance Law § 3401. A contractor obligated to repair or replace any damage to the building has an insurable interest in the project. Board of Fire Underwriters v. Trans Urban Construction Co., 60 NY2d 912 (1983). Similarly, a building contractor obligated to "secure and insure" the project has an insurable interest in the building during the course of construction. A builder' risk policy "should be read, if it can be, without twisting words and rendering plain [*5]meanings nugatory, so as to make the scheme of the policy reasonable and to protect the builder [against covered loss]". Ira S. Bushey & Sons v. American Ins. Co., 237 NY 24, 28 (1923).

Because of its obligation to secure and insure the house, Rhino had an insurable interest in the Bittersweet Court property while Rhino was completing construction. Exeter's homeowner's policy excluded coverage for property damage "arising out of" operations performed by independent contractors, and consequently damage arising out of Rhino's operations was not a risk covered by that policy. Applying a "functional analysis" to the two lines of insurance, the Court concludes that the purpose of builder's risk policy was to cover fire damage to projects listed on the monthly report, regardless of whether Rhino was responsible for the fire.

Generally, it is for the insured to establish "coverage" and for the insurer to prove that an "exclusion" in the policy applies to defeat coverage. Consolidated Edison Co. v. Allstate Ins. Co., 98 NY2d 208, 218 (2002). Whether a particular issue may be categorized as one of "coverage" or "exclusion" depends upon the language of the policy and the context in which the loss occurs. Id. at 218-220. In Consolidated Edison, a public utility sold its gas manufacturing facility to a private party who subsequently discovered environmental pollution on the site. When the utility submitted a claim to its liability insurer for environmental damage, the insurer denied the claim on the ground that the pollution was the result of an "intentional act." The insured commenced an action on the policy.

The trial court ruled that the issue of whether pollution arose from an "accident or occurrence" was a matter of coverage. Thus, the burden of proof was on the insured to establish that the pollution was not intentional. Id. at 217. In affirming a judgment for the insurer, the Court of Appeals held that the burden of proof was properly placed on the insured to establish coverage. The Court reasoned that it was appropriate to place the burden of proof on the party "having better and earlier access to the actual facts and circumstances surrounding the [loss]". Id. at 220.

The Court finds that at the time the insurance contract was made, a reasonable businessperson would expect that the subject property, an as-yet unfinished private residence, would be treated as new construction rather than an "existing building" undergoing alteration or improvement for the purpose of determining insurance coverage. The plaintiff thus has established, prima facie, coverage for its loss.

Accordingly, the burden of proof is on Assurance to establish that Rhino's loss was excluded under the policy. It relies on a contention that plaintiff was charged a lower rate applicable only to home improvement work, without existing structure coverage, as opposed to a higher rate applicable to new construction activity. See, Harris v. Allstate Ins. Co, 309 NY 72, 76 (1955) [lower premium paid by insured supports expectation that certain losses will be excluded.]

Assurance also may offer evidence as to its underwriting practices for insuring similar risks. See Carpinone v. Mutual of Omaha Ins. Co., 265 AD2d 752, 754 (3d Dept 1999). More specifically, Assurance may show that it charged approximately the same rate for [*6]completion of unfinished projects and alteration or improvement of existing buildings because of the similar risks associated with the two types of construction activity. If Assurance makes such a showing, it will meet its initial burden of establishing that unfinished construction is not "new", but rather falls within the "existing building" category and is thus excluded under the policy.

Upon a review of the evidence presented, however, the Court concludes that defendant has not carried its burden that Rhino was charged a lower rate applicable to home improvement work without existing structure coverage, as opposed to a higher rate applicable to new construction activity. Nor has defendant established that the rates which it charged for completion of unfinished projects and alteration or improvement of existing buildings were approximately the same because of the similar risks associated with the two types of construction activity. Defendant's underwriting file reveals the data which defendant appears to have considered in fixing the rates for the projects covered by the policy. This data includes the "completed value" and "total project completed value" for individual projects.^[FN15] The file also contains data as to the percentage of the project which was complete and whether there was a sales contract on the property.^[FN16] There is also information as to whether the insured's profit on the job is included within the value of improvements made to the structure.^[FN17]

In addition, the underwriting file reveals that the insured had the option of requesting "existing structure coverage" for each project.^[FN18] There is data as to the date that the "existing structure" was purchased,^[FN19] whether "remodeling work" would begin within 60 days of the effective date of the policy,^[FN20] whether the existing structure would be occupied during construction,^[FN21] and whether it was presently insured for "permanent property coverage."^[FN22]

However, although the defendant has offered evidence as to the data which it considered in setting rates, it has not submitted evidence as to the specific rates applicable [*7]to different types of construction projects. The June 2003 report indicates that all three jobs were residential, as opposed to commercial, and all were charged the protected rate of .041.^[FN23] While Bittersweet Court was purportedly an unfinished project, there is no evidence as to the nature of the other two jobs listed on the June 2003 report, and thus no meaningful comparison can be made. Similarly, the underwriting file refers to a rate of .041 but does not identify the different types of construction projects to which this rate might apply. Thus, defendant has not established that plaintiff was charged a rate lower than what was applicable to new construction. Nor has defendant even established that it charged the same rate for the completion of an unfinished project as it did for the alteration or improvement of an existing structure.

Accordingly, given this failure of proof the Court finds that the subject projects which the insured was hired to complete was not excluded under the builder's risk policy. Nor can the Court find that Bittersweet Court was in fact wholly new construction, but that Rhino misrepresented it as an unfinished but exiting structure in order to receive a lower rate, a misrepresentation which would entitle the insurer to avoid the contract. Insurance Law §3105(b). As noted above, it was reasonable for Rhino to expect that such a structure would be treated as new construction for purposes of coverage, but no attempt to convince the defendant that the building was something other than what it actually was is apparent in the record. Indeed, the fact that Exeter had foreclosed on the initial construction loan made by Rhino's predecessor indicates that Rhino was not starting a completely new project.

Alternatively, Assurance argues that if there is coverage, its liability under the policy is limited to damage to the portion built after June 2003.Assurance argues that because Rhino's role was to complete a partially finished house, the policy was intended to insure only the value which Rhino added to the project. However, Assurance offers no policy language or underwriting evidence to support its interpretation of the policy. "The purpose of builder's risk insurance is to compensate for loss due to physical damage or destruction caused to the construction project itself." Fireman's Fund v. Structural Systems Technology, Inc., supra, 426 F. Supp.2d at 1025. Moreover, Rhino's premium was based on the total estimated completed value which the insured reported, and the premises were never occupied and a Certificate of Occupancy had never been issued. This supports the conclusion that Rhino's project should not be treated piecemeal, i.e., viewed as merely adding on to an existing structure. Thus, the Court concludes that the builder's risk policy was intended to cover the total value of the project at its stage of completion, not merely the value which had been added by the builder.

Accordingly, the Court finds in favor of the plaintiff on the issue of liability, and concludes that Assurance must pay for all damage to the property caused by the May 31, [*8]2005 fire. A trial on damages will be had in accord with the practices and procedures of the Supreme Court, Nassau County.

This shall constitute the Decision and Order of this Court.

E N T E R

DATED: June 11, 2008

_____________________________

HON. DANIEL PALMIERI

Acting Supreme Court Justice

TO: