A recent opinion of the New Jersey Superior Court, Appellate Division, in the matter of Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co. (Docket No. A-1687-02T5) (approved for publication August 16, 2006), 185 N.J.L.J. 777, August 28, 2006 at pg. 41, illustrates how the plaintiff must make sure that there is going to be insurance coverage before taking on a construction litigation case. In Firemen’s Insurance Co., suit was filed by the Society Hill Condominium Association, Inc. against various defendants for defects in construction of the condominium. The damage centered around the cost of replacing substandard fire walls. There was apparently no proof that the damage to the fire walls was causing damage to any other building components such as sheathing, framing, etc. The plaintiff spent the time and money to litigate the case all the way through trial and recovered a substantial judgment against several defendants in that construction defect litigation case. The insurance companies for the defendants prevailed in a subsequent declaratory judgment action which was intended to determine whether there was coverage under the defendants’ insurance policies.
In evaluating these types of insurance claims, the Appellate Division noted that courts typically focus on the “property damage” and the “occurrence” definitions in the applicable defense insurance policies. An “occurrence” was defined in the policy as Aan accident . . . which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. “Property damage” is “physical injury to or destruction of tangible property . . . including the loss of use thereof resulting therefrom, or loss of use of tangible property which has not been physically injured or destroyed if such loss of use is caused by an occurrence during the policy period.” The policies also contained exclusions for property damage to the insureds’ products arising out of such products and property damage to work performed by or on behalf of the named insured arising out of the work, or out of materials, parts or equipment furnished in connection therewith.
The Appellate Division held that there was no coverage under the defense insurance policies because the plaintiff could not establish either an “occurrence” or “property damage” within the meaning of the policies. The court reasoned that property damage does not include inferior materials or poor workmanship. Thus, in order for the plaintiff to prevail on its claims against the defense insurance policies, the plaintiff would have to prove that there was damage to other property beyond the damaged fire walls. Since the plaintiff was unable to prove that there had been damage to “other property” beyond the damaged fire walls, the court determined that there was no “occurrence” and no “property damage” for purposes of the insurance policies and, therefore, the insurance companies were not required to indemnify the defendants. Thus, even though the plaintiff prevailed at trial and obtained a substantial judgment against the defendants, there is no coverage under the defendants’ insurance policies.
Before bringing suit in a construction litigation context, it is imperative that the plaintiff undertake a careful analysis of insurance coverage. Otherwise, the plaintiff can find itself in the unenviable position of spending hundreds of thousands of dollars in attorneys’ fees and expert fees over the course of three or four years of litigation, prevail after weeks or months of trial, only to find that there is no insurance coverage with which to pay the judgment that the plaintiff ultimately gets. If the defendants are judgment-proof, either because they are out of business, bankrupt or simply have inadequate assets with which to satisfy the judgment, the plaintiff could be left at the end of the day without a remedy.