Firm News: Jacqueline A. Muttick

               In Kernahan, the parties entered into a consumer agreement and, after plaintiff consumer filed litigation, defendants moved to dismiss the complaint and enforce arbitration pursuant to the agreement. The Court found that the contract failed to inform consumers, including the plaintiff, that they were waiving their right to trial. Specifically, the arbitration provision was found in a section of the agreement labeled “Mediation,” the font size was small making the provision difficult to read, and the provision itself contained contradictory terms including requiring the arbitration to proceed under the AAA’s Commercial Mediation Rules. (Mediation and arbitration are vastly different, with mediation still providing parties with the opportunity to litigate while arbitration is a process that results in a final disposition.) The Plain Language Act, N.J.S.A. 56:12-1 to -13, requires consumer contracts be written in such a manner as to be understandable by a lay person, and the case law regarding arbitration provisions applies this standard as well. Since the provision in the Kernahan agreement failed to meet these requirement, there was no mutual assent to arbitration and the provision was deemed unenforceable. The Court again reaffirmed the position that “an arbitration agreement is clearly enforceable when its terms affirmatively state, or unambiguously convey to a consumer in a way that he or she would understand, that there is a distinction between agreeing to resolve a dispute in arbitration and agreeing to resolve that dispute in a judicial forum.” Id. slip op. at 24 (citing Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 442-444 (2014)).

            The Kernahan decision is significant for its discussion of Kindred Nursing Centers Ltd. Partnership v. Clark, 137 S. Ct. 1421 (2017). In Kindred Nursing, the United States Supreme Court reviewed a Kentucky case requiring a power of attorney agreement to explicitly state that the agent (the attorney-in-fact) held the authority to waive the principal’s right to a jury trial. The Supreme Court held that such a requirement contravened the Federal Arbitration Act, 9 U.S.C. §§ 1 to 16, by holding arbitration agreements to a more exacting standard than other agreements, and by adding an additional barrier to the enforcement of arbitration agreements.  The Court in Kernahan was not asked to review whether Atalese and other New Jersey cases violated Kindred Nursing. Nevertheless the Court did note that such an analysis would not be required for Kernahan because the threshold issue of whether the arbitration provision was clear was easily answered, as the provision did not contain the clarity required for mutual assent. In his concurring opinion, Justice Albin directly addressed this issue and found that Atalese did not conflict with Kindred Nursing, as New Jersey's case law does not disfavor arbitration agreements, but instead only requires the same mutual assent for enforcement that is required of all contracts.

While the majority opinion avoided directly opining on whether Atalese and its progeny runs afoul of Kindred Nursing, it appears from Kernahan that the Court is poised to uphold current New Jersey case law. Given the Court’s ruling in Kernahan, it is anticipated that New Jersey courts will continue their reading of consumer arbitration provisions, which currently favors jury trial in the event there is any ambiguity regarding the mutual assent to arbitrate. At the moment, the Court requires an explicit waiver of jury trial (see, e.g, Atalese), selection of the specific arbitration forum, itemization of the rights replacing the right to proceed in court (see Flanzman), and observance of the Plain Language Act, including clarity in contract terms and headings.
                                                                              -JAM 6/18/19

“Any and all claims or controversies arising out of or relating to [plaintiff's] employment, the termination thereof, or otherwise arising between [plaintiff] and [defendant] shall, in lieu of a jury or other civil trial, be settled by final and binding arbitration. This agreement to arbitrate includes all claims whether arising in tort or contract and whether arising under statute or common law including, but not limited to, any claim of breach of contract, discrimination or harassment of any kind.”

            While the trial court compelled arbitration, the Appellate Division reversed and held that there is no “meeting of the minds” between the parties when the arbitration clause lacks an agreed upon forum or process for arbitration. Citing Atalese v. United States Legal Services Group, 219 N.J. 430 (2014), the Court explained that arbitration agreements, like any other contract, require mutual assent and a “meeting of the minds” before the agreement will be found enforceable. Parties to an arbitration agreement must “clearly and unambiguously” agree to waive their otherwise statutory right to a trial, and the parties must understand the ramifications of that waiver. “[T]o understand the ramifications of a waiver of a jury trial, the parties must generally address in some fashion what rights replace those that have been waived.”

            This fashioning includes setting forth the arbitrator(s) who will be used, or identifying an arbitral institution, like AAA or JAMS. Selection of an arbitral institution “informs the parties about the right that replace those that they waived in the arbitration agreement,” including the rules, procedures, and setting for the arbitration. The Court noted that if an arbitration agreement does not specify an arbitration forum it could nonetheless suffice by setting forth the process for selecting a forum.

            The Court distinguished this matter from one in which a court under the Federal Arbitration Act (9 U.S.C. §5) or the New Jersey Arbitration Act (N.J.S.A. 2A:23B-11(a)) could appoint an arbitrator. The Court noted that the case under review was not a matter in which the parties could not select an arbitrator; rather, in this matter the forum, not the arbitrator, was unspecified. In the absence of a forum or forum selection process, there was no “meeting of the minds” or agreement to arbitrate.

            The Court stressed in its ruling that there are no “talismanic words” required in an arbitration provision to make it enforceable, other than the requirement for a “clear mutual understating of the ramifications” of judicial waiver as set forth in Atalese. Since the arbitration provision in Flanzman did not set forth any arbitration forum or process for choosing an arbitration forum, or otherwise specify the rights replacing the right to proceed in court, the clause was unenforceable.

            While the Appellate Division emphasized that this ruling does not require specific language in an arbitration clause to make it enforceable, it does add a previously unarticulated condition for such clauses to be valid. The Court in Atalese mandated that arbitration provisions clearly and unambiguously state that parties waive the right to seek relief in court and instead elect arbitration. The Flanzman ruling now requires the arbitration forum, or the process of choosing a forum, be denoted in sufficient detail so the parties understand the replacement forum.

            While Flanzman dealt with an employment matter, it will likely have a far-reaching impact on arbitration clauses in other contracts, especially contracts between “sophisticated parties” and individuals. Now, parties seeking to enter into arbitration agreements need take heed not only to waive explicitly the right to bring an action in court (as required by Atalese), but also to specify the arbitration forum or forum-selection process in accordance with Flanzman.

            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.