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Outside the Coverage Period but Still Covered: New Jersey's Warning to Insurers in Construction Defect Matters

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By:      Jacqueline A. Muttick, Esq. & Marc Shortino, Esq.
            Associate, New Jersey                Partner, New Jersey

Date:   October 19, 2017


            On October 10, 2017, the New Jersey Appellate Division addressed the “continuous-trigger” theory of insurance coverage in Air Master & Cooling, Inc. v. Selective Insurance Company of America, __ N.J. Super. __, Docket No. A-5415-15T3 (App. Div. Oct. 10, 2017). The Court found that the continuous trigger theory of insurance coverage applies “to third-party liability claims involving progressive damage to property caused by an insured’s allegedly defective construction work” and that the “last pull” of the trigger for ascertaining the end of a covered occurrence “happens when the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it.” Id. (slip op. at 3).

            The insured, Air Master & Cooling, Inc. (“Air Master”), was hired as a subcontractor to perform heating, ventilation, and air conditioning (“HVAC”) work at a condominium building project. Between November 2005 and April 2008, Air Master installed condenser units on the roof and HVAC devices within each unit. Air Master also had a number of Commercial General Liability (“CGL”) insurance policies during and after this work, including a policy through Penn National Insurance Company in effect from about June 22, 2014 through June 22, 2009, a policy through Selective Insurance Company of America (“Selective”) effective June 22, 2009 through June 22, 2012, and a policy from Harleysville Insurance Company (“Harleysville”) covering June 22, 2012 through June 22, 2015.

            In the beginning of 2008, unit owners began to notice water infiltration in their individual units. Specifically, by February 2008, as reported in a news article, at least one unit owner noticed leaks in the walls and windows of his unit. A May 3, 2010 expert consultant report found roof damage caused by moisture from water infiltration, and recommended removal and replacement of those damaged areas of the roof. That expert was unable to determine when the moisture infiltration occurred. Individual unit owners and the condominium association filed suit against the project’s developer and other defendants for property damage, and those defendants brought third-party complaints against subcontractors, including Air Master.

            Air Master sought defense and indemnity from its insurers under its CGL policies, and filed a declaratory judgment action against both Selective and Harleysville when those insurers disclaimed coverage. Selective’s CGL policy stated, in part, that the policy provided coverage for property damage occurring “during the policy period.” The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policy also defined “property damage” as “physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it.” “Property damage” included the “loss of use of tangible property that is not physically injured” and that loss “shall be deemed to occur at the time of the ‘occurrence’ that caused it.” Id. (slip op. at 7).

            Selective moved for summary judgment, arguing its policy did not cover water damage that materialized or manifested before the policy coverage began in June 2009. Air Master opposed that motion, arguing that the continuous-trigger theory of coverage applied and that coverage continued until the “last pull” of the trigger of injury occurs. Air Master also argued that manifestation occurs when it is known, or reasonably knowable, that damage is attributable to the work of the insured, which occurred in May 2010 with the issuing of the expert report. The trial judge granted summary judgment, ultimately finding that while the continuous-trigger theory of coverage applied, the damage manifested prior to the start of Selective’s policy period. Air Master appealed that determination.[1]

            On appeal, the Appellate Division also found that the continuous-trigger doctrine applies to claims for third-party, progressive property damage in construction defect litigation. “[T]he continuous-trigger theory recognizes that, because certain harms … will progressively develop over time, ‘the date of the occurrence should be the continuous period from exposure to manifestation.’” Id. (slip op. at 12) (quoting Owens-Illinois, Inc. v. United Insurance Co., 138 N.J. 437, 454-56 (1994)) (applying the continuous-trigger theory in the context of property damage claims arising from the installation of asbestos-related products). “Under such a continuous-trigger approach, ‘all the insurers over that period [are] liable for the continuous development’” of the damage. Id. (quoting Owens-Illinois, Inc., 138 N.J. at 450-51). “[T]he continuous-trigger approach requires multiple successive insurers up to the point of manifestation to cover a loss,” which the Court noted provides more coverage for claims and encourages insurers to monitor developing risks. Id. (slip op. at 13) (citing Owens-Illinois, Inc., 138 N.J. at 458-59). The Appellate Division stated that the doctrine was not unfair to insurers, but instead required them to bear a portion of the coverage burden that accumulated while the property harm had not yet manifested, as occurs in construction defect litigation where defects are not immediately obvious. Id. (slip op. at 17) (citing The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, LLC, __ N.J. __, Docket No. A-101/102/103/104-15 (2017) (slip op. at 34)).

            The Appellate Division also held that the “last pull” or “end” point of coverage under the continuous-trigger theory occurs when there is an “essential” manifestation of the injury, which is the “revelation of the inherent nature and scope of that injury.” Id. (slip op. at 25). That manifestation does not require that the damage be shown to be attributable to the conduct of a specific insured, as such an analysis would be highly fact-dependent and require lengthy discovery to determine. Id. (slip op. at 19). Instead, the “last pull” should be “a date of initial manifestation that is common to all parties – regardless of which contractor or subcontractor may be ‘at fault’ for the occurrence.” Id. (slip op. at 21).

            Using the above analysis, the Court determined that while the continuous-trigger doctrine applied to the third-party, progressive property damage claims asserted in the construction defect litigation, the “last pull” or “essential” manifestation could not be determined by the record presented on appeal. Specifically, it was unclear what defects were or reasonably could have been revealed between the time of the first unit owner’s complaint in February 2008 and the start of Selective’s CGL policy in June 2009.

            The application of the continuous-trigger doctrine to third-party, progressive property damage claims in New Jersey construction defect litigation impacts insurers who may be held liable for occurrences that would otherwise be outside the insured’s policy period. It also, as noted by the Appellate Division, distributes risk to several insurers which may have the impact of resolving claims earlier in litigation through settlement. Insurers will need to be aware that occurrences outside of the policy period may still result in risk on the policy under this ruling.




[1] Harleysville also obtained summary judgment and Air Master did not appeal that determination.  
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SLIPPERY STAIRS AND THE LABOR LAW: NEW GUIDANCE, 

By Arthur P. Xanthos

Defense counsel and carriers should be aware of the recent Court of Appeals pronouncement on Labor Law 240(1) cases, particularly because this latest pronouncement provides a roadmap for defeating plaintiffs’ common stratagem – the summary judgment motion.

The decision is O'Brien v Port Auth. of N.Y. & N.J., 2017 N.Y. LEXIS 725, 2017 NY Slip Op 02466 (N.Y. Mar. 30, 2017) The facts have been seen many times:  Plaintiff working on construction site, while descending an exterior temporary scaffold staircase which was wet and slippery due to rain, slips and falls thereby injuring himself.  Plaintiff sues all relevant parties and the focus of the complaint is Labor Law 240(1).

Plaintiff made the traditional summary judgment motion, supported by an expert affidavit from a professional engineer who opined that the stairs were "not in compliance with good and accepted standards of construction site safety and practice", that slippery conditions on stairways should be eliminated before use, and that the stairs in question were smaller, narrower, more worn, and steeper than typical stairs.  The expert concluded that these conditions coupled with the fact that the stairs were wet due to rain created a dangerous condition that was not in compliance with good and accepted standards of construction site safety and created a significant risk of slipping on the stairs and of thus falling down the stairs.
In opposition, defendants submitted affidavits from a construction safety expert, who disagreed with plaintiff’s expert, and opined that the staircase was designed for both indoor and outdoor use and provided traction acceptable within industry standards and practice in times of inclement weather. He further disagreed that the steps were too narrow, or that the step treads had been worn down.  He noted that the staircase provided both perforated holes to allow rain to pass through and raised metal nubs for traction.  He concluded that these anti-slip measures were sufficient. The defendants’ expert also opined that the use of both handrails could have helped prevent plaintiff's fall.
Not surprisingly, the lower court and the appellate division ruled in favor of the plaintiff on the motion.  The Court of Appeals, however, reversed plaintiff’s summary judgment award.  The Court’s primary rationale was the following:  the mere fact a plaintiff falls from a height on a construction site does not give rise to automatic Labor Law 240(1) liability, and where the defendants raise questions of fact as to whether a safety device (in the O’Briencase, the staircase) provided adequate protection to the plaintiff, summary judgment is not warranted.

While this decision and rationale is not a technical rewrite of Labor Law 240(1), it does mark a sea change in what presumptions the lower courts should make in analyzing these motions.  Heretofore, the process with some exceptions has been maddeningly difficult for the defense, because once a court heard that a plaintiff had fallen from a height and was injured, the court presumed – regardless of contradicting expert affidavits -- that inadequate safety devices were in place.  In other words, courts have been utilizing the fact of the fall to impose automatic liability. 

O’Brien counsels the courts against making that presumption.

                                                     -APX 5/26/17



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Pre-Loss Risk Management Meetings with Insureds, by Arthur Xanthos

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Liability insurance carriers have several methods of managing the risk posed by their insureds' operations. One little used but very effective technique is the pre-loss risk management meeting between the insured and the carrier, or between the insured and an attorney hired by the carrier.

 In the case of a general contractor ("GC")insured, the procedure runs generally as follows: a GC that intends to develop land purchases a general liability insurance policy from an insurance carrier. As part of the insurance binder, the GC is obligated to meet with an attorney to review the subcontract agreements used by the GC, and to review the safety of its operations. (The carrier if it wishes can charge the GC a sum in addition to the premium to cover the cost of the meeting.) The meeting is then held between the attorney and the GC, during which subcontracts and insurance certificates are reviewed, and safety measures on the construction site are looked at (particularly those that might trigger New York State Labor Law liability). The attorney then makes suggestions to improve the GC's paperwork and its safety measures.

Rather than rewriting the insured's subcontracts entirely (an expensive, and likely vain pursuit), the attorney will want to leverage the time spent by focusing on three areas during the meeting with the insured: (1) the quality of the indemnity language in the insured's subcontracts; (2) the accuracy and proper wording of any insurance certificates from the subcontractors; and (3) the responsibility for safety on the construction site. It is these three areas that will pay the most dividends in the event of a loss.

In our experience conducting risk management meetings, not more than half of the contractor insureds we meet have both a valid indemnification provision in their favor, and a properly drafted insurance certificate from their subcontractors. Following a well run risk management meeting, however, the insured's subcontracts will have a valid and unambiguous indemnification clause running in favor of the insured, the insured's subcontractors will have made the insured an additional insured on the subcontractor's liability insurance policy, the insured will have received a tutorial on the strict safety rules applicable to owners and contractors on a construction site, and the carrier's adjustment of a future claim will be a matter of passing the defense and indemnity of the insured to the subcontractor and its insurance carrier.

So a proper risk management meeting will benefit both carrier and insured. For these reasons, all general liability insurance carriers should consider utilizing risk management meetings. Four points, however, should be kept in mind: (1) the insured is not always receptive to such meetings, even if the insurance binder requires it. Consequently, you will find that the meeting often takes place long after the insured starts work on the site; (2) you are counting on the insured taking the advice of the attorney. There is little recourse, however, if the insured does not do so (other than perhaps a non-renewal of the policy); (3) it is not a requirement that an attorney conduct these meetings -- an experienced adjuster can be just as effective; and (4) the average time to prepare for and conduct the meeting is six hours. The amount charged to the insured, if any, should reflect that anticipated cost.

                                                                                                          -APX 2/14/14
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