On appeal from Superior Court, Chancery Division, Essex County.
Lynch, Bischoff and Kole. The opinion of the court was delivered by Bischoff, J.A.D.
The chief issue presented by this appeal calls for a determination of the nature and extent of the contractual liability of prime contractors to repair and replace damage caused to a school building under construction by a fire of undetermined origin at a time when the structure was more than 90% but less than 100% completed.
On or about April 14, 1972 the Board of Education of the Vocational Schools of Essex County (board) contracted with five prime contractors (contractors) for the construction of a vocational school building to be known as the Essex County Technical Careers Center at West Market and Wickliffe Streets in Newark. The five prime contractors, Riefolo Construction Company, Inc. (Riefolo), The Conditioning Co., Inc. (Conditioning), Fluoro Electric Corporation (Fluoro), Elizabeth Iron Works, Inc. (Elizabeth) and Grove Plumbing & Heating Co. (Grove), are five of the defendants herein. The contracts incorporated both General and Special Conditions.
The General Conditions required, among other things, all contractors to furnish "a performance bond in an amount at least equal to 100% of the contract price." Each of the prime contractors complied with this provision, and the sureties on said bonds are also defendants in this action.
The base contract signed by all contractors provided that the work should be commenced on or before a date specified in a written "Notice to Proceed," and be completed within 540 consecutive calendar days thereafter. Each contractor received a written "Notice to Proceed" in April 1972, notifying it that the scheduled completion date was October 22, 1973. Two of the General Conditions and Special Conditions, relevant to the issues herein, provided:
PROTECTION OF WORK AND PROPERTY -- EMERGENCY
The Contractor shall at all times safely guard the Owner's property from injury or loss in connection with this contract. He shall at all times safely guard and protect his own work, and that of adjacent property, from damage. The Contractor shall replace or make good any such damage, loss or injury unless such be caused directly by errors contained in the contract or by the Owner, or his duly authorized representative. * * * [§ 13, General Conditions]
(a) All contractors shall exercise precaution for the protection of all work under this project and each and all will be held responsible for all breakage or other damage up to the time the building is accepted by the Owner. * * * [§ 1.39, Special Conditions]
The General Conditions (§ 28) also required the contractors to maintain various types of insurance "during the life of the contract," including builder's risk insurance on "a 100% completed value basis on the insured portion of the project."
At the beginning of the contract period each contractor notified the board that it then had insurance coverage in effect, including Builder's risk policies as required by the contract.
Construction was not completed by the scheduled completion date in October 1973 and, in April 1974, the board began to assign personnel to the building.*fn1
On May 17, 1974 the architect wrote to the board, advising that its staff could use the executive office area in the building, but that no educational processes could be carried on in the building until it was 100% completed and accepted.
In June certain custodians, clerks and guidance counsellors were assigned to the building and, on July 2, 1974, the architect again wrote to the board, advising that the Department of Education would now permit occupancy of any part of the building for staffing and registration. Prior to August 9, 1974 a total of 16 people were assigned to the school. Commencing on or about June 9, 50 to 100 prospective students were interviewed on the premises daily. However, no classes were held on the premises prior to August 9, 1974.
On August 8, 1974 the board ordered insurance coverage on the school from plaintiff Hartford Fire Insurance Company (Hartford). Coverage was approved the same day and a binder was issued evidencing coverage in the amount of $6,500,000. The coverage was added to existing policies. At the time of the issuance of the binder, the agent of Hartford knew the building was but 90% to 92% completed. The board had previously obtained insurance coverage on furniture and other personal property which it had placed in the building.
On the afternoon of August 9, 1974 a fire started in the third-floor hallway of the school and caused considerable damage. The fire apparently started among some cartons
holding equipment belonging to the board, but no determination has ever been made as to the origin of the fire.
On August 21, 1974 the architect sent a telegram to all prime contractors but Elizabeth, notifying them they should proceed at once to "remove and replace in kind all work of your trades damaged by" the fire and "the funds for this work will be reimbursed to the board by the respective insurance underwriter-obligees of the Owner and the four involved prime contractors."
Defendant Elizabeth's builder's risk insurance was permitted to lapse on July 1, 1973; defendant Fluoro permitted its builder's risk to lapse in July 1974; defendant Riefolo permitted its builder's risk insurance policy to lapse on April 9, 1974. Defendant Grove had a builder's risk policy in effect at the time of the fire. While Conditioning initially had a policy in effect terminating on January 30, 1974, a dispute exists with respect to whether it was renewed for another year. That dispute is in litigation in a pending third-party action between Conditioning, defendant Sentry Insurance and Alfred Harris. That issue is not now before us.
The contractors made the necessary repairs and submitted bills for the work totalling $258,757.36. The board submitted the bills to Hartford, pursuant to the policy issued by it, and ultimately the contractors were paid by the board after the board was paid by Hartford. Hartford demanded reimbursement from the contractors, computed pursuant to the provisions of § 1.39(b) of the Special Conditions, providing:
The contractors, their sureties and builder's risk insurance carriers refused to pay and this suit followed.
Following a pretrial conference, the case was submitted on a stipulation of facts and briefs.
The trial judge, in a letter opinion, stated that essentially two issues were presented to him for determination: (1) whether Hartford possessed any subrogation rights against defendants and, (2) if so, whether defendants possessed any defenses, sufficient to defeat Hartford's subrogation claim.
On the first issue the trial judge held that Hartford did have a right of subrogation but, as to the second, he held the duty of the contractors to repair and replace the damage to the work was coextensive with the duty of the contractors to maintain builder's risk insurance; that while the contractors did breach their contractual duty to maintain builder's risk insurance, any insurance company on such a policy would have a valid defense to an action brought on it because (a) the building was substantially complete at the time of the fire and (b) the board had occupied the building without the permission of the insurance carrier; therefore, the board did not sustain any damage because of this breach.
In stating why he concluded that § 13 of the General Conditions, which required the contractors to make good all losses except that caused by the board or by the contract, and § 28(e) of the General Conditions, which required the contractors to maintain builder's risk insurance during the life of the contract, where coextensive, the trial judge said:
The purpose of requiring the contractors to supply insurance is to provide for the necessary source of security in the event of a loss during construction. To require that contractors retain liability for loss even when there is no longer the possibility of maintaining builder's risk insurance would certainly constitute an unconscionable result, especially where insurance can be easily procured by the owner and where actions taken by the owner have contributed to the property ceasing to be insurable by the contractors.
The two paragraphs must be read together to require contractors to make good any losses to the property while the premises are or may be insured by them. The failure to provide adequate insurance
while such insurance is or may be available pursuant to Paragraph 28(e) would subject the contractors to liability for restoration of the premises pursuant to Paragraph 13. Therefore, to the extent that actions taken by the Board may be defenses against claims based on the breach of the duty to insure, they are ...