As a follow up to Don Brenner’s earlier post on the recent Appellate Division decision in Firemen’s Insurance Company of Newark v. National Union Fire Insurance Company, it is important to stress that the success of a construction defect case depends on the plaintiff’s claims triggering insurance coverage for the defendants.
Generally, contractors take advantage of the corporate form to shield their personal assets from victimized homeowners, and if they haven’t, you can be sure that they don’t have enough assets available to pay for the damage they have caused. That is why insurance coverage is important. If a claimant can get the contractor’s insurance company to step to the plate and agree to defend and indemnify the contractor, the insurance policy provides a ready source of cash to pay settlements or judgements. The key is to make a claim that will “trigger” that insurance policy. One of the most important factors that should be considered is the concept of “resultant damage”. Unless there is some sort of damage to the structure that has resulted from the defective workmanship of the builder or his subcontractors (rotted walls, deteriorated structural members, cracking, collapse) or some damage to the contents of the building, a construction defect plaintiff may have a difficult time getting the contractors’ insurance carriers to pay.
The Appellate Division of the Superior Court of New Jersey recently decided an insurance case where a Condo Association successfully sued the developer and contractors who built the project. The Association got a verdict of almost $1 Million against the builder. One of the Association’s primary claims had to do with improper or missing fire blocks (fire-resistant partitions in attics and between floors designed to slow the spread of fires). The Association’s Complaint did not allege that any damage resulted from the improper construction.
One insurance company agreed to pay, and then brought suit against the other insurance companies to force them to contribute. The insurance carriers argued that, since the Association had only proven that the contractors had performed their work incorrectly, but had not proven that the incorrect workmanship caused any damage, then there was no “occurrence” of property damage which would trigger insurance coverage. Furthermore, the carriers argued, even if the faulty workmanship amounted to “property damage” under the policies, the “your work” exclusion in the applicable polices excluded coverage for damage to the contractors’ work product, which was the buildings themselves.
The Superior Court declined to make a ruling on whether or not the “your work” exclusion would prohibit coverage since it determined that there was no “property damage,” there was no reason to decide whether the exclusion applied. The Court held, in line with previous New Jersey cases, that since the improper fire block construction had not caused any damage to the property yet, and the only problem was that the fire blocks were improperly done, and that they might cause damage in the future, this was not “property damage” and therefore there was no insurance coverage. “The risk of replacing and repairing defective materials or poor workmanship has generally been considered a commercial risk which is not passed on to the liability insurer. Rather liability coverage comes into play when the insured’s defective materials or work cause injury to property other than the insured’s own work or products.”
We will watch this issue as it continues to arise in New Jersey cases, and will continue to argue that innocent homeowners should be given the benefit of the doubt in insurance coverage cases, since there is often no other source of funds to help them repair poorly constructed and damaged homes.