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

            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.