Insurance Update August 2015

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Insurance Update August 2015
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NJ Appellate Court Addresses Key Construction Defect Coverage Issues
NJ Supreme Court Rejects Third Party Bad Faith Claim
NJ Supreme Court Rules That Civil IFPA Defendants May Demand Jury Trial

NJ Appellate Court Addresses Key Construction Defect Coverage Issues

On July 9, 2015, New Jersey’s Appellate Division issued rulings addressing important coverage issues related to construction defect claims.  In Cypress Point Condo. Assoc., Inc. v. Adria Towers, et al., --- A.3d ---, Docket No. A-2767-13T1 (N.J. App. Div. July 9, 2015), the Appellate Division held that consequential damages caused by subcontractors on a construction project constitute “property damage” caused by an “occurrence” under a comprehensive general liability (“CGL”) policy issued to the general contractor.

Plaintiff Cypress Point alleged that the developer, which also served as the general contractor on the project, together with the general contractor’s roofing subcontractor, failed to properly install a roof.  As a result of the faulty roof, water infiltration occurred and caused damage to the condominium association’s common property and the unit owners’ individual units.  Cypress Point sued the general contractor’s CGL insurers, alleging that the general contractor’s work – via the roofing subcontractor – caused covered, consequential damages.  

The trial court rejected this argument and granted summary judgment to the insurers.  The Appellate Division, however, reversed, finding that the consequential damage to the common areas of the complex and the unit owners’ property, caused by the subcontractor’s faulty work, constituted “property damage” caused by an “occurrence,” as those terms were defined under the standard 1986 ISO CGL coverage form at issue.  In reaching this conclusion, the Court distinguished Weedo v. Stone-E-Brick, 81 N.J. 233 (1979), as only addressing remediation of the insured’s faulty work – an uninsurable business risk – under the slightly different wording of the 1973 ISO CGL coverage form.  Unlike Weedo, the subcontractor’s faulty roofing work in the case at bar caused consequential “property damage” to other portions of the condo complex, such as sheetrock, steel supports and insulation.  The Court held that the cost of repairing such consequential damage is distinct from the cost of correcting the subcontractor’s faulty work itself.  The Court further held that such consequential “property damage” was neither expected nor intended, and thus, arose out of an “occurrence” as that term was defined in the 1986 ISO CGL coverage form (“an accident, including continuous or repeated exposure to substantially the same general harmful conditions”).  

The Court also distinguished Firemen’s Ins. Co. of Newark v. National Union, et al., 387 N.J. Super. 434 (App. Div. 2006), finding Firemen’s inapposite because it too, like Weedo, involved coverage under the 1973 ISO form.  That form, unlike the policy at issue in Cypress Point, defined “occurrence,” in part, as an event “which results in . . . property damage neither expected nor intended by the insured,” and does not contain the 1986 ISO form’s so-called “subcontractor’s exception” to the “Your Work” exclusion.  This “Your Work” exclusion, at issue in Cypress Point, states that the exclusion of coverage for property damage to the insured’s work “does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”  According to the Appellate Division, the presence of this exception supports the conclusion that the policy at issue was intended to “treat[ ] consequential damages caused from faulty workmanship by subcontractors differently than damage caused by the work of [the insured] general contractor[s].” 

Even though it did not find any ambiguity in the language of the “Your Work” exclusion, the Court proceeded to test its language against the reasonable expectations of the insured general contractor, and found that the insured “would reasonably expect that consequential damages caused by the subcontractors’ faulty workmanship constituted ‘property damage’ and an ‘occurrence.’”  In addition, the Court noted the current “majority rule” that construction defects causing consequential damages may constitute an occurrence.  Finally, the Court rejected the insurers’ arguments that interpreting “occurrence” to include consequential damages caused by a general contractor’s subcontractor converted the CGL policy into a performance bond.  Notably, the Court declined to rule on the insurers’ arguments that coverage was barred by applicable exclusions and other provisions, and remanded without prejudice to the insurers’ rights to argue these points before the trial court. 

Cypress Point is important because it appears to depart from the long-standing rule set forth in the Weedo line of cases regarding the absence of CGL coverage for damage to the insured’s faulty work, which in the case of general contractors, includes the entire project.  It has already influenced several additional unpublished construction defect coverage decisions issued by the Appellate Division.  In both Belmont Condominium Association, Inc., v. Arrowpoint Capital Corporation, Docket No. L-1848-11 (N.J. App. Div. July 21, 2015) and Bob Meyer Communities, Inc. v. James R. Slim Plastering, Inc., Docket No. L-3988-08 (N.J. App. Div. July 21, 2015), a different Appellate Division panel adopted the reasoning of Cypress Point, but remanded for consideration of a number of other issues.  A petition for certification to the Supreme Court of New Jersey has been filed.   In addition, the U.S. Court of Appeals for the Third Circuit recently certified a question to the New Jersey Supreme Court on this issue in Travelers Property Casualty Co. of Am. v. USA Container Co., No. 14-3685 (D.C. No. 2:09-cv-01612) (3d Cir. July 10, 2015).

The full text of the Cypress PointBelmont Condominium and Bob Meyer cases may be downloaded by clicking on the links below.  
Cypress Point
Belmont Condominium
Bob Meyer

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NJ Supreme Court Rejects Third Party Bad Faith Claim

On August 6, 2015, a majority of the New Jersey Supreme Court issued a precedential decision addressing the contours of an insurer bad faith claim.  In Ross v. Lowitz, A-101-13 (074200), the Court held that an insurer’s duty of good faith and fair dealing does not extend to a third party who is neither an assignee of the insured nor a third-party beneficiary under the insured’s policy.  

Alleging private nuisance and trespass, the plaintiffs in Ross sued their current and former neighbors for damages sustained when Plaintiffs’ property was contaminated by the migration of home heating oil from a leaking underground storage tank on the neighbors’ adjacent property.  Plaintiffs also sued the insurers who had provided homeowners’ coverage to their neighbors, alleging bad faith.  Following the insurers’ remediation of the contaminated property, the trial court dismissed plaintiffs’ claims against the neighbors and their insurers on summary judgment.  The Appellate Division affirmed.  

On appeal, the Supreme Court agreed with the Appellate Division on all issues.  With respect to the insurer bad faith claim, the Court observed that there was nothing in the insurance policies at issue to indicate that the policyholders had intended to make plaintiffs, their neighbors, third-party beneficiaries of those policies.  The Court also noted that the migration of oil onto plaintiffs’ property did not retroactively confer any third-party beneficiary status on plaintiffs.  In the absence of any third-party contract rights and applicable public policy mandating otherwise, the Court held that the insurer’s duties of good faith and fair dealing run solely to its insureds, and not to the injured third party.

The Court’s decision in Ross may be downloaded by clicking here

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NJ Supreme Court Rules That Civil IFPA Defendants May Demand Jury Trial

In a precedential decision issued on July 16, 2015, the New Jersey Supreme Court ruled that defendants sued in civil actions by private insurers under the state’s Insurance Fraud Prevention Act, N.J.S.A. 17:33A-1, et seq. (the “IFPA”), have the right to demand a trial by jury.  In Allstate N.J. Ins. Co. v. Lajara, A-70-13 (073511), the Court held that such defendants have the right to a civil jury trial under the State Constitution.

Under the IFPA, an insurance company damaged as the result of a defendant’s insurance fraud “may sue . . . to recover compensatory damages, which shall include reasonable investigation expenses, costs of suit and attorneys fees.”  N.J.S.A. 17:33A-7(a).  Allstate and its affiliates, therefore, brought claims under the IFPA against dozens of doctors, chiropractors and other health industry professionals and entities which had allegedly engaged in a “broad, multi-faceted scheme to defraud” Allstate of $8.4 million in personal injury protection benefits under the N.J. Automobile Reparation Reform Act, N.J.S.A. 39:6A-1, et seq.  Although the trial court granted Allstate’s motion to withdraw its own initial jury trial request, it denied defendants’ request for a jury trial.  That denial was upheld on appeal, based on the fact that the IFPA does not provide an express right to trial by jury, and on prior case law which had held that insurers’ civil IFPA claims are equitable in nature and thus do not give rise to a right to trial by jury.

The Supreme Court reversed.  First, it confirmed that the state constitutional right to a jury trial applies to all causes of action – including statutory causes of action – which sound in law rather than in equity.  Second, the Court determined that the remedies available to insurers in civil IFPA actions incorporate compensatory damages, which are a legal remedy.  As a result, the Court held that civil IFPA defendants do, in fact, face claims which are legal in nature, and thus have a right to trial by jury under New Jersey constitutional law.  

In light of Lajara, an insurer should expect to try its case before a jury if it sues under the IFPA in hopes of recovering its claim investigation expenses, costs of suit and attorneys’ fees incurred as a result of defendants’ insurance fraud. 

The Court’s decision in Lajara may be downloaded by clicking here.  

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