Having construction work or renovations done on your home is certainly an exciting, but undoubtedly stressful time. In fact, the process from selecting a suitable (and experienced) contractor to completion of the project can be downright daunting at times. As a homeowner myself, who coincidentally is going through this very process as we speak, I know the difficulties of sifting through countless potential contractors, negotiating prices, and coordinating schedules and the like. As daunting as it may seem, there are certain steps a homeowner can take at the outset that will mitigate potential pitfalls during construction, ensure your project is constructed properly, mitigate construction disputes, and alleviate unnecessary stress.
Stark & Stark Shareholders Thomas J. Pryor and Donald B. Brenner have successfully settled the Bay View Condominium construction defect case for $3.1M. Shareholder Randy Sawyer, along with Associates Gene Markin, John Prisco, and Tara Speer were all part of the team effort that achieved this settlement.
The case involved design and construction defect claims which caused damage to common elements from water infiltration through and around brick and other exterior cladding systems, plus roofs, windows and a plaza over a parking garage. Stark & Stark is particularly proud of this result because the case involved challenging insurance coverage issues related to the lack of proof of consequential damage to sheathing and framing.
Generally speaking, a contractor’s commercial general liability (“CGL”) policy is designed to cover personal injury or property damage caused by an accident resulting from the contractor’s work. The policy is not meant to be a guarantee of the contractor’s work and therefore does not cover damages to the work itself – instead, these are known as “business risk” damages. The concept that is inherent in every agreement for the performance of construction work is the risk that the work will be done improperly.
By selecting a particular contractor, the owner has to make a business judgment as to the qualifications and reliability of the selected contractor, and therefore assumes the risk that the work will be done incorrectly. If the work is done improperly and needs to be corrected, the contractor, and ultimately the owner, bears the burden of repairing or fixing that faulty work. The contractor’s insurance is not a performance bond guaranteeing the work; instead, the commercial general liability insurance is designed to cover any unexpected damages that arise from the contractor’s work, such as damage to other property caused by the faulty work.
Consider a roofer hired to install a new roof on a building. Once completed, the roof is the roofing contractor’s “work.” If the roofer installs the wrong type of shingles, but does everything else correctly, the only “damage” to speak of would be to the roof shingles themselves, i.e. the roofer’s work. The cost of replacing the shingles is therefore that “business risk” not covered by insurance.
A New Jersey trial court granted summary judgment in favor of Selective Insurance Company holding that the “continuous trigger” theory does not provide insurance coverage subsequent to the manifestation of damages that arose from a subcontractor’s negligence in the construction of a condominium development. The issue arose in the matter of Cypress Point Condominium Association v. Selective Way Insurance Company, et al., Docket No. HUD-L-936-14, 2015 N.J. Super. Unpub. LEXIS 721 (N.J. Super., Hudson Cnty. Mar. 30, 2015) (“Cypress Point”).
“The ‘continuous trigger’ theory holds that an occurrence occurs under an insurance policy each time damage accrues over a continuous period of time, from ‘exposure to manifestation’.” Cypress Point, at *12. Courts developed the “continuous trigger” theory to counter scientific uncertainties surrounding initial manifestations of damages typically at issue in environmental, toxic tort, and delay manifestation property damage claims. Id.
In Cypress Point, the Cypress Point Condominium Association (the “Association”) filed a Declaratory Judgment Action against Selective Way Insurance Company (“Selective”) seeking a declaratory judgment that Selective owed a duty to indemnify its insured, MDNA Framing, in connection with an underlying construction defect action filed by the Association. The Association filed an amended complaint in the underlying action on June 12, 2012, bringing claims against MDNA Framing, which was contracted to perform framing and window installation work in connection with the construction of the Cypress Point condominium development. Construction of the development commenced in 2002 and was substantially completed in 2004. Subsequent to the completion of construction, unit owners began to experience water infiltration around the interior windows. The Association’s liability expert found numerous defects related to MDNA Framing’s work, including missing flashings, a lack of a continuous water management system, and improper sealant application around the windows. The Association’s liability expert issued his initial report opining on these deficiencies on June 30, 2012.
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.”
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.