New Jersey Opinion Focuses on the “Nature and Scope” of Damage to Determine Trigger for Coverage

Recently, a New Jersey appeals court ruled that insurance coverage for construction defect liability claims extends until the nature and the scope of the property damage becomes apparent. Thus, a new grey area has been created for insurers to assess time on risk. The result of the opinion leads one to believe that insurer will more likely than not lose on summary judgment as to “trigger” because the court seemingly requires a rigorous and fact-intensive analysis of when the “last pull” of the trigger occurs.

The underlying matter involved a condominium building that was built between November 2005 and April 2008. As early as February 2008, homeowners noticed water damage in their windows, ceilings and other portions of the units. In May 2010 the unit owners hired an expert to perform a moisture survey of the development and he identified 111 spots of moisture damaged areas that need to be removed and replaced. The unit owners alleged the HVAC contractor was to blame for the moisture intrusion at the project.

Selective issued an “occurrence based” general liability policy that covered bodily injury and property damage taking place during the policy period of June 2009 through June 2012 for the HVAC contractor. Selective disclaimed coverage on the grounds the alleged property damage had occurred prior to the inception of its policy because the homeowners were aware of the problems in 2008. The trial court agreed with Selective and found that the continuous trigger applied to the claims against the HVAC contractor, but still held that Selective had no coverage obligations because the damage had in fact manifested before June 2009.

The HVAC contractor appealed and argued, “the end date for the continuous trigger doesn’t occur until an expert report or some other proof definitively establishes that the policyholder’s faulty work caused the alleged damage.” The court disagreed and stated that “an attribution analysis could be highly fact-dependent, and difficult to resolve when an insured makes a request for defense and indemnification after being named in a complaint.” In sum, HVAC contractor argued that the trigger began when the expert analysis was performed in 2010. Conversely, Selective argued that , based on the hearsay statements of the homeowners, the triggering event occurred in 2008. The appellate court found that information about the building defects was or reasonably could have been revealed at any time between the time of the unit owners’ complaints until the start of Selective’ s policy in June 2009 and the case should be reopened to allow for discovery to explore the critical factual issues outlined in the opinion regarding the discovery of the damage.

The ruling muddies the water as to triggering events and the parties have been ordered to complete more discovery to determine when the essential manifestation occurred in this instance. For insurers in this jurisdiction, this means they will need to pursue discovery as to the nature and scope of the damage to attempt demonstrate when the last trigger pull occurred if they are seeking to avoid providing coverage. Conversely, insureds will likely attempt to undercut this evidence as inadmissible or too vague to warrant a “trigger pull.” Those who represent insureds in this jurisdiction may find this case inconsistent with spirit of the New Jersey Supreme Court’s landmark 1994 ruling in Owens-Illinois Inc. v. United Insurance Co., which applied the continuous trigger in a dispute over coverage for asbestos-related bodily injury claims to maximize coverage.

This case is Air Master & Cooling Inc. v. Selective Insurance Co., case number A-5415-15T3, in the Superior Court of the State of New Jersey, Appellate Division. Our office intends to follow this case and will update with a blog post regarding significant decisions.

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Court Denies Coverage where Architect’s Notice of Potential Claim not Detailed Enough

The U.S. District Court for the Southern District of New York recently denied the University of Pittsburgh’s effort to obtain coverage on behalf of the architect who designed a troubled $40 million university campus construction project.  The Court held that the insured architect failed to properly notify Lexington Insurance of a potential claim because the notice sent by the architect lacked a proper description of the alleged damage and claim.

The Ballinger Company designed an 80,000-square-foot addition to the art deco Salk Hall on the University of Pittsburgh’s campus.  Under the terms of the Lexington policy, Ballinger was required to notify the insurer of any potential claim prior to the policy period ending and was required to set forth in its notice a description of the alleged breach of professional duty, when it occurred, what damage occurred and the circumstances of the alleged breach.  The day before the policy expired, Ballinger submitted an industry standard Acord General Liability Notice of Occurrence/Claim to Lexington.

The notice listed the location of the occurrence and set forth the following description: “senior management has been advised by the University of Pittsburgh that this project is experiencing problems and delays in its early stages.”  Lexington followed up with Ballinger requesting additional information, but Ballinger failed to provide any additional information.

Lexington denied coverage.  Subsequently, the University of Pittsburgh filed suit against Lexington and moved for a determination by the Court that Ballinger’s notice was sufficient to trigger coverage under the Lexington policy.

The Court denied the University of Pittsburgh’s motion for summary judgment seeking a determination that the notice was sufficient.  The Court held that the language used by Ballinger was “entirely nonspecific” and “could mean just about anything” and that the Lexington policy language required Ballinger to “provide more than a simple statement conveying that there is ‘trouble brewing at Pittsburgh.”

The court concluded that Ballinger’s notice was “plainly deficient on its face.”

This case demonstrates a court’s willingness to enforce the insured’s obligations under specific policy language, even when failure to meet those obligations has grave consequences to the insured.

The case is University of Pittsburgh v. Lexington Insurance Co., et al., case number 1:13-cv-00335, in the U.S. District Court for the Southern District of New York.  Please contact us if you would like a copy of the case or have any questions.

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IOWA SUPREME COURT HOLDS SUBCONTRACTOR’S SLOPPY WORK COVERED DESPITE PRECEDENT

The Iowa Supreme Court recently held that property damage caused by defective work performed by an insured’s subcontractor may constitute an accident, and therefore an occurrence for which coverage exists under the commercial general liability policy.  The ruling affirmed the Iowa Court of Appeals decision demanding the insurer National Surety Corporation (“NSC”) pay $12,439,500, plus statutory interest, for the underlying settlement of construction defect claims.

In 2002, developers and a general contractor began construction on a multi-unit apartment complex in West Des Moines, Iowa; during construction, the project was sold to Westlake Investments, LLC (“Westlake”).  The developers and general contractor had purchased a primary commercial general liability policy with a $1,000,000 policy limit from Arch Insurance Group (“Arch”) and an excess CGL policy with a $20,000,000 policy limit from NSC.  The terms of the Arch policy defined the scope of coverage under the NSC policy; the NSC policy incorporated by reference the terms, conditions, and exclusions of the Arch policy.

During original construction, water intrusion issues surfaced in several of the buildings.  Westlake proceeded with the purchase because the parties believed the defects to be only aesthetic in nature; however, the defects remained, resulting in extensive water intrusion damages.  In February 2008, Westlake sued the developers and the general contractor seeking to recover lost profits, repair costs and other damages under tort and contract theories.  The developers and general contractor then sued numerous subcontractors and the architect as third-party defendants.

In early 2012, Westlake settled with the developers, general contractor and all but one of the subcontractors for $15,600,000.  Arch tendered its policy limits towards the settlement.  Pursuant to the terms of the settlement agreement, the developers and general contractor assigned their claims on the NSC excess policy to Westlake.

Subsequently, NSC sought a ruling in Iowa state court that the subcontractors’ defective workmanship could not constitute an accidental occurrence under the CGL policy.  The court disagreed, holding that defective work by a subcontractor can be an occurrence as defined by the policy. The case proceeded to trial and the jury found the NSC was liable for the unpaid portion of the settlement.

NSC appealed the decision to the Iowa Supreme Court seeking a determination that a subcontractor’s shoddy workmanship can never be an occurrence under a CGL policy by virtue of the state high court’s precedential 1999 decision in the case of Pursell Construction v. Hawkeye-Security Insurance.  The court distinguished Pursell, finding that case only dealt with costs of repairing the policyholder’s own defective work.  The court found the policy anticipates coverage for some property damage caused by defective workmanship on the part of the insured’s subcontractor.

This case was the first time the Iowa Supreme Court directly addressed this issue; lengthy dissents pronounced the ruling as counter to precedent established in analyzing CGL policies.  The dissent stated that an accident is an “undesigned, sudden and unexpected event,” and there is “nothing sudden about the gradual infiltration of rainwater through leaky window frames over seasons.”  Further, the dissent opined “the majority in effect converts the liability insurance policy into a home warranty.”

This case stands for the seemingly unpredictable nature of judicial interpretation of insurance policies, and the willingness of courts to depart from precedent in certain circumstances.  This case will have a great effect on insurance coverage matters in Iowa and beyond.

The case is National Surety Corp. v. Westlake Investments LLC, case number 14-1274, in the Supreme Court of the State of Iowa. If you would like a copy of the opinion or have any questions, please feel free to contact us.

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Insurance Companies Avoid Providing Coverage in Settlement of Defective Window Installation

In a recent decision coming from the Northern District of Illinois, a federal judge ruled that Allied Property & Casualty Co. (“Allied”) and Amco Insurance Co. (“Amco”) did not have to provide coverage for a window installer’s settlement of claims stemming from its poor workmanship which caused extensive water intrusion into the Metro North Condominium complex (“Metro North”). The judge found the policies did not cover damages included in the settlement agreement.

The judge granted Allied and Amco’s motion for summary judgment finding that most of the damages caused by water intrusion in Metro North were not recoverable under the policy.

CSC Construction, Inc. (CSC Construction) entered into a subcontract to provide window and glazing services for Metro North during original construction. Metro North is a condominium building located in Chicago, which is governed by Metro North Condominium Association. Allied and Amco provided commercial liability policies to CSC Construction from March 30, 2006 to March 30, 2007.

On October 2006, during original construction a rainstorm began to cause water intrusion issues. Metro North claimed the water intrusion caused damage to the building and to the unit owners’ personal property and brought claims against CSC Construction for breach of the implied warranty of habitability.

Allied and Amco provided CSC Construction with an independent defense in the underlying lawsuit under a reservation of rights. Ultimately, Metro North settled its claims with CSC Construction for $700,000 and accepted an assignment of the subcontractor’s rights against Allied and Amco.

Next, Allied and Amco sued Metro North requesting a ruling that their policies do not cover Metro North’s claims against CSC Construction because the damages sought are not recoverable based on a claim of breach of the implied warranty of habitability. The court looked at Illinois case law and determined in Illinois consequential damages tied to the breach of the implied warranty of habitability are not recoverable unless the property is rendered uninhabitable. The judge found Metro North was not rendered uninhabitable as a result of the water infiltration.

In concluding the opinion, the judge looked to make a determination regarding whether or not the defective work of CSC Construction was an accidental occurrence triggering coverage under the policies. He found, “when a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building.” thus “there is no accident, so there is no occurrence, so there is no coverage.”

This case is an example of how a court may be hesitant to find consequential damages from the breach of implied warranty of habitability when construction defects are serviceable and do not render a building truly uninhabitable. Further in this case, the court held a CGL policy is not meant to cover “an accident of faulty workmanship but rather faulty workmanship which causes an accident.” In conclusion, this opinion serves as an example of the way jurisdictions can differ on their interpretation of CGL policies and how the consequential damages from the implied warranty of habitability are understood.

This case is Allied Property & Casualty Insurance Co. et al. v. Metro North Condominium Association, case number 1:15-cv-03925, in the U.S. District Court for the Northern District of Illinois. Please contact us if you would like a copy of the case or have any questions.

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Fourth Circuit Denies Coverage when Developer Failed to Timely Notify Insurer

The Fourth Circuit recently ruled against the Insured in a construction defect action as to coverage when the Insured failed to timely notify its insurance companies of a potential claim. The court ruled the Insured was not covered under its two insurance policies (St. Paul Mercury Insurance Co. and National Surety Corp.) because it delayed giving notice to the insurance companies, depriving them of the opportunity to pursue claims against the subcontractors involved in the project.

THF Clarksburg Development Two LLC (“THF”) entered into two agreements in 2002 with Lowe’s Home Centers, Inc. (“Lowe’s”) for over $4,000,000 to develop a large track of land in Clarksburg, West Virginia, including the preparation of a building pad area where a Lowe’s store could be built. THF subcontracted with CTL Engineering (“CTL”) to build the pad and provide geotechnical engineering certification that would support the construction of the Lowe’s store. CLT delivered the certified building pad to THF on April 9, 2002 and THF delivered it to Lowe’s on April 15, 2002.
Lowe’s built the store, but during the one-year inspection Lowe’s discovered a settlement problem that would likely cause worsening foundation failure and continued wall movement. Lowe’s notified THF of the issue on April 20, 2003. THF then notified CLT of the problem and hired them again to determine the cause of the settlement. CLT investigated and determined the problem was unrelated to the construction of the building pad and was likely caused by an external force. THF sent the findings to Lowe’s on March 20, 2005.

After eight months without a response from Lowe’s, THF sent another letter saying it presumed Lowe’s lack of response meant Lowe’s was in agreement with the findings in the report. After almost two years had passed, Lowe’s sent a letter to THF stating the delay in response was due to its own engineers investigating the issues. Lowe’s engineers ultimately determined the soil failures were a latent defect to which THF’s extended warranty applied and subsequently put THF on notice of the claims. On April 26, 2012, over nine years since becoming aware of the issue, Lowe’s filed suit.
In June 2012, THF notified its insurers St. Paul Mercury Insurance Co. and National Surety Corp. about the lawsuit and two years later, in 2014, the Insurers moved for a declaratory judgment seeking a determination by the court regarding of the existence of coverage. The Northern District of West Virginia determined THF was not entitled to coverage due to its delay in notifying the insurers of the potential claims.

The court determined the delay in notice prejudiced the insurers as a matter of law because West Virginia’s 10-year statute of repose would bar the insurers from asserting claims against the subcontractors. The court upheld the district court’s ruling in favor of St. Paul Mercury Insurance Co. and National Surety Corp. and against THF.

This case is a hard lesson of which developers, builders, design professionals, and contractors should take note. Whenever there is the existence of even a potential claim, the insurance carrier must be notified as soon as possible to avoid prejudice to the carrier. Even if the claims appear to be unrelated to a construction entity’s scope of work, allowing the Insurer to have the relevant information to determine liability could have a huge impact on the Insured as in the instant case. Finally, this case reinforces the ever-present need by attorneys and insurance carriers to determine relevant dates during construction and delivery to avoid issues related to statute of limitation and statute of repose in construction defect cases.

This case is St. Paul Mercury Ins. Co. v. THF Clarksburg Dev. Two, LLC, No. 15-1453, 2016 WL 715007 (4th Cir. Feb. 23, 2016). Please contact us if you would like a copy of the case or have any questions.

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First Circuit, Souter Grant Coverage despite Exclusion

Former Associate Justice of the Supreme Court David Souter returned to his First Circuit roots and participated in an August 2015 ruling declining to uphold a policy exclusion where the injured person was employed by a contractor with no written contractual relationship to the insured. The court’s rationale was the term “contractor” is ambiguous and the ambiguity should be construed against the insurer.

In July 2009, homeowners hired general contractor Benchmark Construction Services, Inc. to renovate their home in Massachusetts. The homeowners hired architect Thomas Huth to design the renovation plans. Huth hired Sara Egan d/b/a Painted Design to do some decorative painting to one of the interior walls of the home. Egan sent her employee, Meghan Bailey, to the perform the painting work. Benchmark did not have a written contractual relationship with Huth (architect), Egan (painter), or Bailey (painter’s employee). On March 5, 2010, while Bailey was applying decorative paint, she fell from a ladder that was standing on top scaffolding allegedly erected by Benchmark.

Bailey sued Benchmark in the Massachusetts Superior Court, alleging she was injured in the fall, Benchmark owed her a duty of care, and Benchmark negligently erected and maintained the ladder and scaffolding. Benchmark sought defense from its insurer, United States Liability Insurance Company (“USLIC”) but USLIC determined Bailey’s claims were not covered under Benchmark’s insurance policy. According to USLIC, an endorsement to the policy specifically excluded Bailey’s injuries from coverage. Therefore, USLIC has no duty to defend or indemnify Benchmark against those claims.

USLIC won on summary judgment, with the district court finding the endorsement to be “unambiguous.” Bailey’s claims were not entitled to indemnity because of a policy endorsement excluding coverage for employees of contractors and subcontractors injured while performing services. The district court said the term “contractor,” which was undefined in the policy, meant “anyone with a contract” and coverage for Bailey’s claims was excluded as her employer had contracted to do painting work.

The panel, including Souter, disagreed with the district court. Finding that “reasonably intelligent people” could differ regarding the meaning. “Anyone with a contract is surely a reasonable definition of the word ‘contractor,’ as the district court found, but so is a more narrow definition focused on the contractual relationship of the injured party and the insured.”

The court determined when disputed terms are “susceptible to multiple reasonable definitions, then the court will apply a reasonable definition that confers coverage, if one exists.” Ultimately concluding USLIC had a duty to defend and indemnify Benchmark in the underlying negligence suit.

The holding could be problematic to insurers because the court granted coverage to an injured party employed by any contractor or subcontractor on the project despite no contractual privity with the insured.

The case is U.S. Liab. Ins. Co. v. Benchmark Const. Servs., Inc., 797 F.3d 116 (1st Cir. 2015). Please contact us if you would like a copy of the case or have any questions.

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