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A unanimous New Jersey Supreme Court opinion has affirmed the rights of an aggrieved plaintiff to recover counsel fees incurred in prosecuting relief through a declaratory judgment; enforcing a duty to defend owed by a general liability carrier to a contractor defendant in a construction defect action.

In Occihifinto v. Olivo Constructionn, Inc., et als, the plaintiff hired a masonry contractor to perform work on an addition to plaintiff’s warehouse. Plaintiff sued the mason and the mason’s general liability carrier (Mercer) refused to defend or indemnify, instead filing a declaratory judgment action. Plaintiff aggressively prosecuted relief against the carrier in the declaratory judgment action, acting as a surrogate for the insured masonry contractor.

Although the trail court and Appellate Division ruled otherwise, the Supreme Court unanimously affirmed the aggrieved plaintiff’s entitlement to recover his counsel fees under R.4:42-9 (a) (6), which provides for an award of counsel fees in “an action upon a liability or indemnity policy of insurance in favor of a successful claimant.”

The Supreme Court determined the plaintiff was a successful claimant by vindicating his position in the declaratory judgment action; establishing the carrier’s duty to defend the mason. The award of counsel fees was allowed to stand, even though the plaintiff was unsuccessful in establishing liability in the underlying litigation.

This is not only the correct outcome, but should embolden and inspire aggrieved plaintiffs to take aggressive action in declaratory judgment actions spawned by underlying defect claim litigation. Insured defendant contractors are often disinclined to aggressively defend their position or lack the incentive and resolve of the underlying plaintiff; whose ability to recover is contingent upon gaining access to available insurance proceeds, often as the singular means to obtain relief.

This ruling is soundly based upon the express language of the rule, which provides for this remedy, consistent with the practical realities presented by these types of actions. Where the obligation to carry the burden of prosecuting what would otherwise be the insured’s rightful position to otherwise vindicate is foisted upon the underlying plaintiff, logic dictates that the court avail the plaintiff of the basic relief otherwise available to the insured.

This should give insurance carriers otherwise inclined to shirk their rightful responsibility to provide a defense or indemnity under a general liability policy in the construction defect context, to think twice before arbitrarily seeking to avoid responsibility. Given the additional consequence of exposure to counsel fees, one can only hope that insurance carriers will be more circumspect in determining when and whether to reserve their rights, or seek to deny coverage. At a minimum, this ruling should serve to level the playing field in this arena, balancing the scales decidedly in favor of an aggrieved plaintiff.

In a recent decision in Kane Builders, Inc. v. Continental Casualty Company, the United States District Court in New Jersey remanded back to state court the determination of whether Continental owed the builder defense and indemnity in connection with an underlying construction defect case which had been playing out in state court.

As is typical in these matters, the insurance carrier filed a declaratory judgment action in federal court notwithstanding the pendency of a then existing state court construction defect action instituted against Kane Builders, its insured. The underlying plaintiff asserted claims for damages for alleged defective building construction and other claims. The insured instituted claims in the state court action, also, putting in play whether Continental, its insurance carrier providing covered coverage under a general liability policy, was obligated to provide the builder with a defense and indemnity in the pending state court action.

The District Court ruled that logic dictated having the state court judge, who was overseeing the construction action, also address the coverage issues between the builder defendant and its carrier. Judicial economy was thus served by avoiding duplicative, piecemeal litigation. The District Court was unimpressed and held that the federal forum held “no special call,” under the circumstances.

We have seen it is typical in these circumstances for insurance carriers to want to litigate coverage issues in federal court, presumably because carriers see it as a more hospitable forum. As was the case here, logic dictates that coverage issues be adjudicated alongside construction defect and other underlying claims typically filed, as in this case, in the state court. This case demonstrates that federal judges are willing to remand matters back to state court under these circumstances.

It is not uncommon in construction defect “transition” litigation to have declaratory judgment actions filed by one or more defendants during the pendency of the litigation, as insurance coverage issues are of significance in these matters and carriers don’t always readily acknowledge their obligations to provide defense and indemnity, depending upon the language of the policy or policies at issue.

Defendants in these cases should not be bashful about putting coverage issues in play and we have seen that many courts are willing to also acknowledge the rights of the underlying plaintiff in these matters (often a Condominium Association) to advance coverage claims when, for example, the insured defendant builder or subcontractor is either no longer in business or lacking sufficient motivation to pursue its own carrier more aggressively.

We have argued successfully that while a judgment against a carrier during the pendency of an underlying construction defect claim can be premature, a determination as to whether coverage is afforded can and sometimes should be made while the underlying case is ongoing, assuming sufficient facts are available, or the court is in a position to make a coverage determination. The rules do not prevent this, procedurally, although insurance carriers often oppose claims by the underlying plaintiff directly against the carrier based upon case law which we have seen is sometimes not directly supportive of the positions advanced. This is an interesting issue, which tends to rear its head reasonably often in these cases.

It is no secret that insurance policies are famous for containing convoluted language. The average insured likely has no clue what is and is not covered. Little solace can be found in referring to the conspicuous “Definitions” section; ultimately no more than a trap to trick unsuspecting policyholders into believing that any ambiguities that arise will be easily rectified. Insurance is big business and carriers don’t want to have to pay claims. At the end of the day, coverage is all about semantics and carriers use the complicated wording of their policies to create plausible ways to deny claims otherwise assumed to be covered. Carriers bank on the fact that many insureds either don’t know the law (and will simply accept the carrier’s interpretations) or can’t afford to fight the carrier in court. Carriers save significant dollars each year because some insureds don’t pursue questionable coverage denials. Radical change is not likely on the horizon. Some good news, however, is that there is a body of policyholder-friendly case laws in New Jersey on the issue of ambiguity.

A recent unpublished decision out of the U.S. District Court for the District of New Jersey reaffirmed the long-standing principal that ambiguities in insurance policies must be construed in favor of the insured. In Gregory Packaging, Inc., v. Travelers Prop. Cas. Co. of Am., the Court found that a shutdown of the insured’s factory caused by the discharge of an unsafe amount of ammonia constituted a “direct physical loss or damage” to the property; a condition precedent to coverage. The carrier argued that a physical change of, or alteration to, the property, is necessary to trigger coverage. The Court disagreed and found that an accident that renders a building unfit for occupancy, and in need of remediation, amounts to a direct physical loss. Here, the release of ammonia physically transformed the air, rendering the facility dangerous. Accordingly, the Court determined that coverage cannot be denied on the basis that there was not a “direct physical loss.”

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An action for nuisance may be brought against a public entity unhampered by the TCA. Private nuisance is but one possible theory for recovery of damages caused by the invasion of one’s interest in the private use and enjoyment of land. That interest may be invaded by more than one type of conduct, i.e., the conduct may be intentional, it may be unintentional but caused by negligent or reckless conduct, or it may result from an abnormally dangerous activity for which there is strict liability. One is subject to liability for private nuisance if the invasion is either:
(a) intentional and unreasonable, or
(b) unintentional and otherwise actionable under the rules controlling liability for negligent or reckless conduct, or for abnormally dangerous conditions or activities.

[Restatement (Second) of Torts, § 822 (1979).]

The conduct necessary to make the actor liable for a private nuisance may consist of an act or a failure to act under circumstances in which the actor is under a duty to take positive action to prevent or abate an interference. Restatement (Second) of Torts, § 824 (1979). An invasion is intentional if the actor purposely causes it or knows that the invasion is substantially certain to result from his conduct. An intentional invasion of another’s use is unreasonable if:
(a) the gravity of the harm outweighs the utility of the actor’s conduct, or
(b) the harm caused by the conduct is serious and the financial burden of compensating for this and similar harm to others would not make the continuation of the conduct not feasible.

[Restatement (Second) of Torts, § 826.].

Water discharge from a broken storm drain pipe is most likely an actionable nuisance. See, e.g., City of Oxford v. Spears, 228 Miss. 433 (1956) (There is no question that an invasion of one’s interest in the use of downstream waters may constitute a nuisance); Sterling Iron and Zinc Co. v. Sparks Manufacturing Co., 55 N.J.Eq. 824 (E. & A. 1896) (New Jersey long ago recognized that the pollution of a watercourse may constitute an actionable nuisance); Bengivenga v. Plainfield, 128 N.J.L. 418 (E. & A. 1942) (municipalities were held liable for nuisance resulting in water pollution, although the legal analysis upon which liability was based, active wrongdoing, is now outdated); Borough of Westville v. Whitney Home Builders, 40 N.J. Super. 62, 68 (App. Div. 1956) (Our courts have held that the discharge of treated sewage effluent into a running stream is not necessarily an unreasonable riparian use in today’s civilization, but that it may be unreasonable if the harm from doing so outweighs the benefit).

Presented with the question of whether a public entity can be liable for a nuisance as recognized by the TCA, our Supreme Court concluded that it is for two reasons: First, sections of the Tort Claims Act may be interpreted as making public entities liable for nuisance under the standards provided by the Act, and second, in light of the history of municipal liability in this area, the Supreme Court perceived no intent to eliminate this liability.

With respect to the statutory recognition and continuation of the nuisance cause of action, the two sections of the act implicated are N.J.S.A. 59:4-2 and N.J.S.A. 59:2-2. The former creates liability for injury caused by the dangerous condition of a public entity’s property. Nothing in this section has been construed to impose liability upon a public entity for a dangerous condition of its public property if the action the entity took to protect against the condition or the failure to take such action was not palpably unreasonable. Thus, this section imposes liability upon a municipality in its status as property owner for nuisance where its actions can be found to be “palpably unreasonable.”

In sum, an action in nuisance may be maintained against a municipality under and subject to the standards of the Tort Claims Act, so long as Plaintiff shows that the action taken or failure to act by the public entity was palpably unreasonable. See, e.g., Lyons v. Twp. of Wayne, 185 N.J. 426, 434 (2005) (“When analyzing a nuisance . . . wrongful conduct is not limited to the creation of the condition. Rather, a failure to physically remove or legally abate that condition, resulting in the physical invasion of another’s property, also constitutes wrongful conduct.”); Gould & Eberhardt, Inc. v. City of Newark, 6 N.J. 240, 243 (1951) (“[A] municipality does not have the right to collect surface water and discharge it upon private property in greater quantity and with greater force than would occur from natural flow, so as to cause substantial injury.”); Sheppard v. Twp. of Frankford, 261 N.J. Super. 5, 8 (App. Div. 1992) (noting that injunctive relief was appropriate because unreasonable discharge of storm waters by township onto plaintiffs’ property created continuing nuisance); Black v. Borough of Atlantic Highlands, 263 N.J. Super. 445, 453 (App. Div. 1993) (allowing nuisance cause of action for failing to prune crab apple trees creating dangerous condition on adjacent private property).

In Russo Farms v. Vineland Bd. of Educ., 144 N.J. 84 (N.J. 1996), the Plaintiffs brought a lawsuit against, inter alia, the Vineland Board of Education (the Board) and the City of Vineland (the City) for damages to their crops and farmland from flooding that resulted from the improper siting and construction of a public school located across the street from their property and by an inadequate drainage system on a bordering street. Plaintiffs claimed that the Board and City were liable under a nuisance theory because the Board and City’s use of their property invaded plaintiffs’ use and enjoyment of their land. The Court noted that invasion was a physical invasion, which ordinarily sounds in trespass, but “the flooding of the plaintiff’s land, which is a trespass, is also a nuisance if it is repeated or of long duration.” See also Hennessy v. Carmony, 50 N.J. Eq. 616, 618 (Ch. 1892) (throwing water on another’s property once constitutes a trespass, “to continue to do so constitutes a nuisance”).

When a court finds that a continuing nuisance has been committed, it implicitly holds that the defendant is committing a new tort, including a new breach of duty, each day, triggering a new statute of limitations. That new tort is an “alleged present failure” to remove the nuisance, and since this failure occurs each day that the defendant does not act, the defendant’s alleged tortious inaction constitutes a continuous nuisance for which a cause of action accrues anew each day. See also Sheppard v. Township of Frankford, 261 N.J. Super. 5, 8-9 (App. Div. 1992) (noting that disposal of water runoff onto plaintiff’s property created continuing nuisance).

It is pretty well settled that periodic flooding due to defective construction of a drainage system constitutes a continuing tort. The Russo Farms court held that a nuisance is continuing when it is the result of a condition that can be physically removed or legally abated. In such a case, it is realistic to impute a continuing duty to the defendant to remove the nuisance, and to conclude that each new injury includes all elements of a nuisance, including a new breach of duty. On the other hand, when the nuisance cannot physically be removed, it is unfair to impose a continuing, impossible to fulfill duty to remove the nuisance.

Accordingly, the continued flooding of a landowner’s property would be considered an actionable continuous nuisance. See Russo Farms, supra, 144 N.J. at, 97-105 (holding that TCA permits nuisance and negligence causes of action for damages caused on private property by dangerous condition on public entity’s property created by school drainage and municipal storm-water drainage system); Medford Lakes, supra, 90 N.J. at 591-96 (allowing action for nuisance for damage to lake caused by discharge from municipally owned and operated sewage treatment plant); Saldana v. DiMedio, 275 N.J. Super. 488, 499 (App. Div. 1994) (allowing cause of action against municipality for dangerous condition on its property for fire that spread from city-owned abandoned building to privately-owned property); Sheppard v. Township of Frankford, 261 N.J. Super. 5 (App. Div. 1992) (in a nuisance case that involved a public entity’s disposal of storm-water runoff onto private property the court found a continuous nuisance existed where the storm-water drainage system at issue “enhanced, concentrated, and sped up the flow of the storm water into the drainage ditch,” thereby causing flood damage on the plaintiff’s property).

The “business risk” doctrine has become a fixture of insurance coverage law, with profound implications for insured contractors and plaintiff property owners involved in construction-defect litigation. Concisely stated, the doctrine holds that “faulty workmanship standing alone, resulting in damage only to the work product itself. . .” falls outside the ambit of coverage provided by a CGL policy. Firemen’s Ins. Co. of Newark v. National Union Fire Ins. Co., 387 N.J.Super. 434, 449 (App. Div. 2006) (citations and internal quotation marks omitted). See also 4 Bruner & O’Connor Construction Law § 11:37.

A review of the decisional law advancing this principle reveals a lack of consensus with respect to its rationale and application. A particularly uneven treatment of the “business risk” distinction is found in cases where damages are confined to an insured contractor’s work product but extend, qualitatively, beyond mere faulty workmanship. Consider the following example:
A residential developer undertakes the construction of a wood-framed apartment building. The exterior of the building is clad in a synthetic stucco system, which, due to faulty workmanship, allows water infiltration into the building’s main walls. This water infiltration, in turn, causes damage to contiguous building materials (stud framing, sheathing, interior finishes, etc.), which are otherwise defect-free. No damage is sustained beyond the building itself.
Purchasers of the building file suit against the developer seeking recovery for (1) the cost of replacing the defective synthetic stucco system; and (2) the cost of repairing the consequential damages to the underlying building materials.
The developer submits to its insurer a claim for defense and indemnity under a CGL policy covering “property damage” caused by an “occurrence” and featuring the standard “business risk” exclusions.


A reoccurring controversy in insurance coverage law is whether the damages in item 2-the cost of repairing consequential loss stemming from a defective component in the insured’s work product-are covered under a CGL policy. To the extent such damages affect only the “work product itself,” they would seem, at least facially, to come within the preclusive ambit of the “business risk” doctrine-they are not damage to “other” or “third-party” property. However, a more thoroughgoing analysis, as presented in two recent Federal Circuit opinions-Stanley Martin Companies, Inc. v. Ohio Cas. Group, 2009 WL 367589 (4th  Cir. Feb. 12, 2009) and Mid-Continent Casualty Co., v. JHP Development, Inc., — F.3d —-, 2009 WL 189886 (5th Cir. Jan. 28, 2009)-leads to a different conclusion. These cases shed new light on the contours and limitations of the “business risk” doctrine, distinguishing between the defects in an insured’s work product, which generally are excluded from coverage, and the consequential injuries stemming from those defects to other parts of the same work product. According to the recent decisions, the latter category of damages is not necessarily excluded.

In Stanley Martin, decided February 12, 2009, the Fourth Circuit Court of Appeals determined that damages caused by defective trusses supplied by a subcontractor and used in the construction of new townhouses constituted a covered “occurrence” within the meaning of the general contractor’s CGL policy. In keeping with the standard coverage form, the policy at issue defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Stanley Martin, supra, at 1. The underlying litigation stemmed from mold damage, originating from the defective trusses, and spreading to other, non-defective, components of the buildings. No damage was sustained beyond the building itself.

Applying Virginia law, the lower court had determined that the alleged damages did not come within the scope of the relevant policy because the general contractor’s “remediation costs arose out of damage to [its] own ‘work’ caused by the faulty workmanship of its subcontractor[.]” Id. at 2. This exigency, in the court’s view, “was not ‘unexpected’ or an ‘accident.'” Id. It was an anticipated, and therefore uninsured, risk of doing business.

In the decision reversing the lower court’s ruling, the Court of Appeals confronted a divergence of opinion in the Fourth Circuit with respect to the proper application of the “business risk” principle to such circumstances. Four years prior, the Fourth Circuit had addressed a similar set of facts in Travelers Indemnity Co. of America v. Miller Building Corp., 142 F. App’x 147 (4th Cir. 2005). Apparently relying on the “business risk” distinction, the Miller court held that the consequential injuries to the building, which “allegedly [were] a result of the subcontractor’s defective performance,” were confined to the building itself and, therefore, “not considered to be ‘unexpected’ or caused by an ‘occurrence.'” Stanley Martin, supra, at 2 (quoting Miller, supra, at 149) (internal quotation marks omitted). Because, in the court’s view, the damage to the general contractor’s work did not constitute an “occurrence,” it did not trigger the insurers duty to indemnify.

The Fourth Circuit reached the opposite conclusion a year later in French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006). In that case, the court distinguished between the subcontractor’s defective work and the damage caused to the surrounding components, which were, in themselves, defect-free. The coverage dispute stemmed from the circumstances presented in the introductory fact pattern-a residential developer hired a subcontractor to clad the exterior of a new home with synthetic stucco system known as “Exterior Insulation Finishing System” (“EIFS”). Defects in the EIFS allowed moisture intrusion that caused damage to the home’s underlying structure. While acknowledging that the subcontractor’s defective work was, in and of itself, an excluded business risk, the court determined that the damage caused by that defective work to the surrounding non-defective components did constitute “an accident, and therefore a [covered] occurrence under the initial grant of coverage of the [CGL policy].” Stanley Martin, supra, at 2 (quoting French, supra, at 704-05) (internal quotation marks omitted). In reaching this conclusion, the court reasoned that, “[a]s delivered per the construction contract,” the surrounding components were “defect-free,” such that their subsequent damage was unexpected. Id.

Faced with these diverging opinions, the Stanley Martin court rejected Miller and endorsed French as the controlling iteration of the “business risk” distinction. The bifurcation of the insured’s work between defective and non-defective components was, in the court’s view, well “grounded in the plain language of the policy and the interplay between the policy’s broad definition of an ‘occurrence’ and the policy’s ‘your work’ exclusion” which excepted subcontractor work. See Stanley Martin, supra, at 2 (quoting French, supra, at 703 (internal quotation marks omitted). At oral argument, the insurer in Stanley Martin tried to distinguish French on the basis that the moisture intrusion that damaged the home’s non-defective structure was a separate event that could constitute an occurrence. The mold at issue in Stanley Martin, on the other hand, was present in the townhouses as soon as the trusses were installed. The court found this argument unpersuasive, characterizing it as a “labored distinction [that] places more weight on the policy language than it can bear.” Id. at 2. Because there was “no allegation that the general contractor either expected or intended that its subcontractor would perform defective work or that the spread of mold beyond the defective trusses was expected or intended,” the court determined that these events were “occurrences” capable of triggering coverage under CGL policy. Id. at  3 (internal quotation marks and citations omitted).

The Fifth Circuit’s January 28, 2009 decision in Mid-Continent also addressed the application of the “business risk” principle in the context of a construction defect case. Mid-Continent focused, not on the meaning of the word “occurrence,” but rather on the scope of the standard “business risk” exclusion for damage to “[t]hat particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Id. at 3. Like the Stanley Martin court, the Fifth Circuit emphasized a distinction between the defective and non-defective components of the insured’s work product. Factually, the coverage dispute stemmed from an insured developer’s construction of a four-story, wood-framed residential building with inadequate water-sealants and retaining walls. As a consequence of these deficiencies, large quantities of water penetrated the interior of the structure through the ceilings and walls, under doors, and at other points, damaging contiguous building materials, which were, in themselves, defect-free. After receiving a demand for defense and indemnity, the developer’s CGL insurer filed a declaratory judgment action seeking, among other things, a declaration that coverage was barred by the above-quoted “business risk” exclusion. Id. at 3. The Fifth Circuit Court of Appeals framed the issue in the following manner: 
Whether the exclusion bars recovery for damage to any part of a property worked on by a contractor that is caused by the contractor’s defective work, including damage to parts of he property that were the subject of only non-defective work, or whether the exclusion only applies to property damage to parts of the property that were themselves the subject of the defective work.

Id. at 6. Examining the plain language of the exclusion, the court determined that only property damage “to parts of the property that were themselves the subjects of the defective work [was] excluded.” Id. at  6 (emphasis added). The court rejected as unpersuasive the approach taken in another jurisdiction in which consequential damages to non-defective components were necessarily deemed an excluded “business risk.” Id. at 7 (declining to follow Century Indemnity Co. v. Golden Hills Builders, Inc., 384 S.C. 559 (2002)). Such an approach, the court reasoned, improperly subordinates analysis of the policy’s language to a presumption about the underlying purpose of CGL coverage. Id. at 7. “The mere fact that a policy is designated as a ‘commerical general liability’ insurance policy is not grounds for overlooking the actual language of that policy.” Id. The court therefore cabined its discussion to the terms of the policy before it and determined that the consequential losses in question went beyond the “particular part of the [the contractor’s] work” containing defects. Thus, the “business risk” exclusion was inapplicable and coverage obtained.

Stanley Martin and Mid-Continent continue a discernable trend in favor of coverage where an insured contractor’s faulty workmanship results in damage to otherwise non-defective work product. While it can generally be said the faulty workmanship is, itself, an anticipated risk of doing business, the consequences flowing from such workmanship are not so easily categorized. The Fourth and Fifth Circuit decisions reflect a growing recognition across jurisdictions that broad-stroked applications of the “business risk” rule-which is essentially an insurance industry trade concept-must not supercede analysis of the plain language of insurance contracts. See Zacarias v. Allstate Ins. Co.  168 N.J. 590, 595 (2001) (“In the first instance, the words of an insurance policy are to be given their plain, ordinary meaning.”) See also 4 Bruner & O’Connor Construction Law § 11:37. Absent a particular policy exclusion, the logical basis for differentiating between consequential loss to an insured’s work product and consequential loss to other property remains tenuous, and all but a shrinking minority of jurisdictions have either abandoned or qualified the distinction.

Plaintiff WHP9, the developer of a multi-building residential project in North Bergen, secured a builder’s risk policy from defendant Centennial Insurance and liability insurance from another carrier before beginning construction. WHP 9, Inc. v. Centennial Ins. Company, A-1454-06T1 (App. Div. October 23, 2007). Plaintiff’s application for the builder’s risk coverage stated the development’s value when complete as $6 million, without reporting the municipality’s sewer pipe or its cost in any way.

While driving piles for footings, a subcontractor punctured a 36-inch cast iron sewer line that ran beneath the property. The damage was discovered in 2002, and the municipality issued a stop work order in March 2003. Plaintiff’s liability insurer defended plaintiff in the municipality’s damage suit, ultimately settling with the municipality.

Asa a result of the stoppage, Plaintiff incurred lost rental income and other expenses exceeding $3 million. Defendant denied coverage under the builder’s risk policy, maintaining that the sewer pipe was not covered property within the policy’s terms:

Covered property means your property or the property of others for which you are liable, consisting of
a. Buildings or structures as described in this Coverage Form Declarations while under construction, erection, or fabrication, including the cost of foundations and underground property such as pipes, flues, drains, electrical wires, piers, and pilings; and excavation, grading, and filling; if such costs are included in the completed value of the project.

But this does not include existing buildings or structures to which improvements, alterations, repairs or additions are being made.

Plaintiff contended that the sewer pipe was covered as “property of others for which you are liable.” The trial court disagreed, and the Appellate Division affirmed, noting that the sewer pipe was not declared as property under construction, erection or fabrication and that the policy explicitly excluded coverage for “existing . . . structures to which . . . alterations, repairs or additions are being made . . . . ” Finding the policy language to be clear and unambiguous, and within an insured’s reasonable expectations, the appellate court confirmed the trial court’s denial of coverage.

In an unpublished decision, the Appellate Division recently enforced an insurer’s duty to indemnify and defend a condominium association for damages resulting from an occurrence during the policy period even though they were not discovered until after the policy had expired. Steinbauer v. East Coast Acquisitions, LLC, 2007 WL 2593007 (App. Div. September 11, 2007).

In March 2003, Ramapo Ridge Condominium Association Phase II (“the association”) discovered that a pipe had burst and flooded an abandoned unit. After the municipality declared the unit unsafe, Sirius American Insurance Co. (“Sirius”), which insured the association under a property damage and general liability policy effective from July 2002 through July 2003, undertook to repair and remediate the damaged unit, which was thereafter acquired by East Coast Acquisitions (“East Coast”) at a foreclosure sale. After additional repairs and upgrades, East Coast conveyed the unit to the plaintiff in July 2004. When plaintiff’s plumber entered a common area crawl space to install a dryer vent line, he discovered mold. Ultimately, in November 2004, plaintiff sued East Coast and the association, among others.

The association demanded defense and indemnification from Sirius. All parties agreed that the damages were caused by the 2003 flooding. Nonetheless, Sirius declined coverage, arguing that its indemnification was only triggered if the property damage occurred during the policy term and the third party sued during the policy term. It relied on the following policy language:

COVERAGE E [-] LIABILITY TO OTHERS A. We pay for the benefit of the insureds, up to the applicable limit(s) of liability (See Part II D) shown in the Declarations, those sums that insureds become legally liable to pay as damages because of bodily injury or property damage insured here.
Such bodily injury or property damage must:
• Occur during the policy term, and • Be caused by an occurrence that takes place within the applicable coverage territory: See General Conditions 6.

. . .

Occurrence Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

. . .

Property Damage Property damage means the following, caused by a covered occurrence:
• Direct physical injury to tangible property, including loss of use of such property (the loss of use is deemed to occur at the time of such direct physical injury).
• Loss of use of tangible property that is not physically injured: all such loss of use is deemed to occur at the time of the occurrence causing the loss.

The court rejected Sirius’s argument. Because the occurrence (the flooding) occurred within the policy period, the court held Sirius liable for all resultant damages, even remediation of the crawl space mold that was not discovered until after the end of the policy period.

In an unpublished case addressing a peculiar repair, the Appellate Division recently reiterated one of the basics of common interest ownership: When in doubt, read your documents. Waldstein v. Highview at Hawthorne Ass’n, Inc., A-2281-05T1 (June 12, 2007).

Shortly after purchasing their town home as a resale in 2003, Plaintiffs Jay and Kathleen Waldstein discovered a broken sewer pipe was leaking water and sewage below the concrete slab that formed the lowest floor of their town home. Further investigation revealed that the pipe had ruptured when the slab failed as a result of a construction defect: the interior foundation of the home had never been built. Plaintiffs repaired the sewer pipe and rebuilt the floor slab, then requested reimbursement from the Homeowners’ Association.

After the Association declined payment, the plaintiffs brought a declaratory judgment action, asking the court to determine that the Association was responsible for the cost of the repairs and to award them fees and costs. The trial judge declined to do so, finding that, the Declaration of Covenants and Restrictions applicable to the development included no provision making the Association responsible for such a repair. On appeal, the Appellate Division agreed.

Plaintiffs relied on a provision of the Declaration that reads as follow:

Each townhouse Owner, by acceptance of ownership, agrees and covenants that if his townhouse, including any party walls, shall be fully or partially destroyed by fire or otherwise, the Association shall reconstruct said townhouse expeditiously, pursuant to plans approved by the Board of Trustees. Any such reconstruction shall be subject to all other applicable provisions of this Declaration and applicable governmental regulations.

Plaintiffs also pointed out Declaration provisions requiring the Association and the Owners to carry fire and casualty insurance as well as extended coverage.

The appellate judges rejected Plaintiff’s argument, limiting the Association’s responsibility to reconstruct under the cited provision to situations in which a townhouse is fully or partially destroyed by fire or similar casualty. Because Plaintiff’s repairs were necessitated by defective construction, the Association was not required to repair or reconstruct.

The court also rejected Plaintiff’s alternative argument that the Association was required to reimburse them since it maintained a reserve account for repair, replacement and improvement. Analyzing the Declaration as a whole, the judges concluded that the reserves were explicitly intended to fund repair, replacement and improvement of common property and the exteriors of the townhouses. No provision required the Association to fund the repair and reconstruction of an interior structural flaw in a town home, caused by a construction defect.

Finally, the court rejected Plaintiff’s argument that an easement provision granting the Association the right to enter a town home to repair breaks of leakage in the water, sewer or sprinkler systems that threaten damage to common property obligated the Association to reimburse them, finding that no evidence suggested that the leak below Plaintiff’s town home threatened the common property in any way.

The Waldsteins’ futile attempt to pass their repair bills on the Association is another reminder that no one formula sets forth responsibility for repairs and maintenance in common-interest communities. New Jersey law permits sponsors and developers great flexibility in designing the maintenance provisions of their communities, and the many variations in governing documents reflect factors such as marketing decisions, architectural requirements, and site anomalies, among others. Careful reading and analysis of the governing documents, that is, the Declaration or Master Deed, is always the first step in determining responsibilities for performing and paying for repairs.

A federal district court in Houston, interpreting Texas law, found that an insurance company had a duty to defend its insured, a manufactured home builder, against claims brought by a lender which funded 676 loans used to purchase homes. The case is Nautilus Insurance Co. v. ABN-AMRO Mortgage Group, Inc. Slip Op. 2006 WL 3545034 (S.D.Tex. 2006). Emerson Manufactured Homes, Ltd. and a related group of entities were defendants in two lawsuits. One suit was brought in state court by 928 individuals against Emerson for negligence and defective construction, among other claims. The other suit was brought by ABN-AMRO Mortgage Group, the lender for 676 of the homes in the state court matter, which alleged that Emerson negligently sold defective homes at inflated prices. Emerson’s insurance company, Nautilus, denied all coverage, claiming that neither of the two underlying suits alleged facts that are potentially covered by the applicable policies, therefore Nautilus had no duty to defend or indemnify Emerson in those matters. Nautilus filed the instant action in federal court seeking a court determination that there was no coverage under its policies, and therefore no duty to defend or indemnify. Id. at *1.

Generally speaking, an insurance company must defend its insured (hire a lawyer) if, looking at the “four corners” of the complaint, there are any claims that are potentially covered by the policy. If the pleadings against the insured allege anything that could possibly be covered, the insured is owed a defense. The duty to indemnify is separate, and not as broadly construed. The duty to indemnify arises once facts are established that the insured is liable for damages that are covered by the policy. Id. at *2-3. The Nautilus policy in question is a fairly standard General Liability policy, which obligates the insurance company to “pay those sums that the insured becomes legally obligated to pay as damages because of property damage.” The policy only applies to “property damage caused by an occurrence.” “Occurrence” means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. at *3. Nautilus argued that ABN-AMRO had not alleged anything accidental about Emerson’s conduct. The Court disagreed, finding the allegations of “negligent construction” to be sufficient to count as allegations of non-intentional or accidental conduct. Id. at *4-5
Next, the Court analyzed whether or not the damages amounted to covered “property damage” under the policy. ABN-AMRO did allege that the homes were negligently constructed, and negligently attached to their foundations. It also claimed that the defects caused water damage to the homes and other types of damage to the structures. Id. at *5. However, the actual damages to the structures were not suffered by ABN-AMRO, who was only a lender, rather those damages were suffered by the homeowners themselves. ABN-AMRO argued that it was damaged because the homes were worth far less than they should have been due to the defects, and that since this diminution in value was caused by the property damage, for which Nautilus’s insured was responsible, then the language of the policy which extends coverage for damages that the insured is obligated to pay “because of property damage”, then it covers all those damages that flow from the property damage caused by Emerson. The Court agreed. Id. *5-6
Unfortunately for ABN-AMRO, its run of good luck stopped there. The Court found that the damage was excluded under the “your work” and “your product” exclusions. These exclusions disclaim coverage for damage to the insured’s work or his product. The “your work” exclusion has an exception for work done by a subcontractor. Tragically, there was no evidence that Emerson used any subcontractors to either build or place the homes. Id. at *7. The Court found that it was possible to interpret ABN-AMRO’s complaint such that it alleged damage to property that would not be considered Emerson’s “work” or “product”, but that was limited to the ground itself. There would be no coverage for defects to the homes, the cost to repair those defects, and the damage that they caused to the buyers or to the lender. Id. at *8.

Finally, the court analyzed Nautilus’ duty to defend under the complaint in the Homeowner lawsuit. For the same reasons, the Court found that the damages were excluded from coverage by the “your work” and “your product” exclusions in the policy. However, the Court found that the diminution in value of the property, excluding the homes themselves, may be covered. Id. at *9-10.

This is yet another example of how coverage restrictions and exclusions can gut a construction defect claim. In this case, these manufactured homes were poorly built, then poorly erected on site, obviously causing massive damage to themselves and the contents of the homes. Many of the homes were so bad that the buyers abandoned them, leaving them for the bank. But because of the wording of the policy, and because the home builder did not use subcontractors, the bank and the buyers are literally left out in the cold. The good news is that this analysis can assist other homeowners in later cases. If the diminution in value of the property is covered under a standard CGL policy, and the standard measure of damages for diminution is cost to repair, then a builder may be liable for the overall cost to repair on a project, without the need to find “consequential” or “resultant” damage.

As we have written before, an ancient legal principle known as the Economic Loss Doctrine is often trotted out by defendants in Construction Defect cases as a way of avoiding responsibility for their actions. The rule is used differently in different states. In some states, you cannot make a negligence (tort) claim for anything other than personal injury or damage to personal property. Tort claims for damage to real property are out. In other states, like New Jersey, the Economic Loss Doctrine is interpreted to says that you cannot make a negligence (tort) claim for damage to a product, when the product only harms itself. See DiIorio v. Structural Stone and Brick Company, Inc., 368 N.J. Super.134 (App. Div. 2004).

I. Harris
Two recent cases in Oregon involved the Economic Loss Doctrine as well. First, Harris v. Suniga, et. al., 209 Or.App.410, 149 P.3d 224 (Ct. App. 2006) the owners of an apartment complex sued the builder over defects in the buildings. The owners had bought the complex from the original owner, but they had no dealings with the original builder, and did not have a contractual relationship with the builder that would have given rise to a breach of contract claim. Id. at 413. The complex was built in 2002, then sold by the original owner to the plaintiffs. Soon after the sale, the plaintiffs discovered that the builder had failed to install the required flashing on the decks, concrete walkways, landings, gutters, laminates and bellybands. They also claimed that the builder had improperly installed certain wall caps, and trim around the windows. As a result of these defects, the plaintiffs alleged that the buildings suffered significant dry rot, which would cost $376,000 to repair. Id. Defendants answered, then claimed that the negligence claim was barred by the Economic Loss Doctrine.

The Court began its analysis with the general rule of negligence: All persons are liable in negligence if their conduct unreasonably creates a foreseeable risk of harm to others. Id at 415. The Court then traced the history of the Economic Loss Doctrine, discussing cases that held that a plaintiff could not recover in tort for injuries to a third person, and where the alleged beneficiary of a will could not sue an attorney who failed to draft the will to include a gift to the plaintiff. The general rule is that one seeking recovery for only “economic losses” in negligence can only do so if there has been a breach of duty beyond the ordinary tort duty to exercise reasonable care to avoid foreseeable harm. Id. at 417. “Economic Loss” under Oregon law refers to “financial losses such as indebtedness incurred, or financial losses to intangibles, as distinguished from damages for injury to person or property. Relying on an earlier case where negligence claims by subsequent purchasers were allowed against a builder, the court held “we know of no reason why the ambit of liability for negligence in the transfer of real property should be limited by privity of contract.” The court concluded that damage to real property was not “economic loss”, even where the property was an apartment complex, and the purchasers clearly did not intend to live in the property. This analysis undercuts the flawed reasoning in an often-cited case Easling v. Glen-Gery Corp., 804 F.Supp. 585 (D.N.J. 1992), where the court barred tort claims against the builder as asserted by the subsequent purchaser of an apartment complex.

II. Bunnell
In another opinion issued just 11 days later, the Oregon Court of Appeals again refused to dismiss a homeowner’s claim against the builder on Economic Loss grounds. In Bunnell v. Dalton Construction, Inc., 210 Or.App. 138, 149 P.3d 1240 (Ct. App. 2006), the Court held that subsequent purchasers of a single family home (not the original owners) could sue the builder in negligence for defects in the home, even when they knew of the defects when they purchased the home. Citing the Harris case above, the Court stated “[D]eterioration to the physical structure of a building because of defective construction is property damage and not economic loss.” Id. at 142. The trial court’s dismissal of the homeowner’s negligence claim was reversed.

The Bunnell case goes a long way toward protecting consumers and encouraging responsible builders to take appropriate steps when building homes and to stand behind their work if defects are discovered later. The fact that Oregon’s Court of Appeals has not seen fit to delve into the murky issues of the UCC and product liability law as they relate to construction defects makes these two decisions much easier to understand and better law. New Jersey’s case law on this subject is over complicated by discussions of alternate remedies, the existence of UCC or contract claims, and a perverse desire to define a “product”. As these Oregon opinions show, the New Jersey courts have gone down a road that results in much less clarity and predictability in the law. Local courts would do well to review these Oregon opinions and to adopt the Court of Appeals’ reasoning.

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