On certification to the Superior Court, Appellate Division, whose opinion is reported at 155 N.J. Super. 474 (1977).
For reversal -- Chief Justice Hughes and Justices Mountain, Sullivan, Clifford, Schreiber and Handler. For affirmance -- Justice Pashman. The opinion of the court was delivered by Clifford, J. Pashman, J., dissenting.
We granted certification, 75 N.J. 615 (1978), to review the Appellate Division's determination that the appellant insurance carrier was obliged to defend two claims brought against its assureds. Weedo v. Stone-E-Brick, Inc., 155 N.J. Super. 474 (1977). Resolution of both cases, argued here together, calls for construction of the same comprehensive general liability provisions of a policy issued to a masonry contracting concern. Specifically, the question is whether that policy indemnifies the insured against damages in an action for breach of contract and faulty workmanship on a project, where the damages claimed are the cost of correcting the work itself. The Appellate Division held that certain exclusions of the policy, when read together, were ambiguous and hence had to be resolved against the insurer. We reverse.
Pennsylvania National Mutual Insurance Company (hereinafter Pennsylvania National) issued a general automobile liability policy to Stone-E-Brick, Inc., a corporation engaged in masonry contracting. As part of the policy there was included Comprehensive General Liability Coverage (hereinafter CGL). During the term of the policy Calvin and Janice Weedo contracted with Stone-E-Brick to pour a concrete flooring on a veranda and to apply stucco masonry to the exterior of their home. The completed job revealed cracks in the stucco and other signs of faulty workmanship, such that the Weedos had to remove the stucco and replace it with a proper material. Thereupon the Weedos instituted suit against Stone-E-Brick and its principal, defendant Romano, alleging in pertinent part that
[a]s a result of the defective and unworkmanlike manner in which the defendants applied the said stucco, plaintiffs were compelled to and did cause the defects existing therein to be remedied, where possible, and the omissions to be supplied, and, in general, were compelled to and did furnish all the work, labor, services and materials necessary to complete the application of the said stucco in accordance with the contract and were compelled to and did expend large sums of money for that purpose in excess of the price which plaintiffs agreed to pay defendants for the application of said stucco, all of which was to plaintiffs' damage. [Emphasis supplied.]
While the same CGL policy was in effect, Stone-E-Brick performed roofing and gutter work on a house being constructed for plaintiffs Gellas, under a sub-contract agreement with the general contractor, defendant Vivino. After completion of the home the Gellases brought suit against Vivino based on breach of contract due to defects in workmanship and seeking recovery of costs "in connection with the repair and/or replacement of material necessary to correct the * * * defects in construction." Vivino in turn sought indemnification from Stone-E-Brick by way of third-party complaint, contending that plaintiffs' damages were the result of Stone-E-Brick's "faulty workmanship, materials or construction * * *."
Thereafter Stone-E-Brick requested that Pennsylvania National take over the defense and indemnify it in regard to both complaints. The carrier refused, asserting that the policy of insurance did not furnish coverage for the claims made or, in the alternative, that exclusionary clauses specifically precluded coverage. By way of third-party complaint in the Weedo case and fourth-party complaint in the Gellas suit, Stone-E-Brick demanded judgment against Pennsylvania National for all sums found due as against the insured and in favor of the respective plaintiffs. Cross-motions for summary judgment in each case produced contrary results, namely, an order dismissing Stone-E-Brick's third party complaint against the carrier in the Weedo case and an order in favor of the insured compelling coverage in the Gellas suit. On appeal the Appellate Division, as already noted, found coverage in both instances.
Under the CGL provisions of the policy in question Pennsylvania National agreed to pay "on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of * * * bodily injury * * * or property damage to which this insurance applies, caused by an occurrence * * *." (Emphasis supplied). This is the standard language found in the great majority of CGLs written in this country. These provisions, developed by casualty rating bureaus over a period of nearly fifty years, have become an established norm of underwriting policy. Tinker, "Comprehensive General Liability Insurance -- Perspective and Overview" 25 Feder.Ins.Coun.Q. 217, 218-21 (1975); Henderson, "Insurance Protection for Products Liability and Completed Operations -- What Every Lawyer Should Know," 50 Neb.L.Rev. 415, 418 (1971).*fn1
These agreements set forth, in fundamental terms, the general outlines of coverage, e.g., "for property damage to which this insurance applies." The qualifying phrase, "to which this insurance applies" underscores the basic notion that the premium paid by the insured does not buy coverage for all property damage but only for that type of damage provided for in the policy. The limitations on coverage are set forth in the exclusion clauses of the policy, whose function it is to restrict and shape the coverage otherwise afforded.*fn2 Capece v. Allstate Ins.
Co., 88 N.J. Super. 535, 541 (Law Div.1965); Tinker, op. cit., supra, 25 Feder.Ins.Coun.Q. at 264. For example, a tavern-owner's liability coverage under the CGL is limited by force of the "dram shop" exclusion, where personal injury or property damage results from service of intoxicants to an incapacitated patron. See generally Mt. Hope Inn v. Travelers Indemnity Company, 157 N.J. Super. 431, 436-38 (Law Div.1978).
We set forth these basic principles simply to emphasize that, semantical rules of construction aside, contracts of insurance do contain relevant language (frequently developed, as here, see n. 1, supra, over the years after experience with different terms of expression) which serves to define the risks underwritten. In the present instance Pennsylvania National's policy undertook to furnish certain coverage to Stone-E-Brick as a concern engaged in masonry contracting. In order to determine whether the claims of plaintiffs fall within the coverage provided, we start with an examination of the insured's business relationships with its customers.
In the usual course of its business Stone-E-Brick negotiates with homeowners to provide masonry work. As part of the bargaining process the insured may extend an express warranty that its stone, concrete and stucco products and services will be provided in a reasonably workmanlike fashion. See, e.g., Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 370 (1960). Regardless of the existence of express warranties, the insured's provision of stucco and stone "generally carries with it an implied warranty of merchantability and often an implied warranty of fitness for a particular purpose." McDonald v. Mianecki, 79 N.J. 275, 284 (1979); see also Hodgson v. Chin, 168 N.J. Super. 549
(App.Div.1979). These warranties arise by operation of law and recognize that, under common circumstances, the insured-contractor holds himself out as having the capacity to apply the stonework in a workmanlike manner, and further, that the homeowner relies upon the representation and anticipates suitable goods and services. McDonald v. Mianecki, supra, 79 N.J. at 289-90.
Where the work performed by the insured-contractor is faulty, either express or implied warranties, or both, are breached. As a matter of contract law the customer did not obtain that for which he bargained. The dissatisfied customer can, upon repair or replacement of the faulty work, recover the cost thereof from the insured-contractor as the standard measure of damages for breach of warranties. Id. at 282 n. 1; 525 Main Street Corp. v. Eagle Roofing Co. Inc., 34 N.J. 251, 255 (1961).
As explained in McDonald v. Mianecki, supra, a principal justification for imposing warranties by operation of law on contractors is that these parties are often "in a better position to prevent the occurrence of major problems" in the course of constructing a home than is the homeowner. 79 N.J. at 288-89. The insured-contractor can take pains to control the quality of the goods and services supplied. At the same time he undertakes the risk that he may fail in this endeavor and thereby incur contractual liability whether express or implied. The consequence of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers. See Tinker, op. cit., supra, 25 Feder.Ins.Coun.Q. at 224; Henderson, op. cit., supra, 50 Neb.L.Rev. at 441.
There exists another form of risk in the insured-contractor's line of work, that is, injury to people and damage to property caused by faulty workmanship. Unlike business risks of the sort described above, where the tradesman commonly absorbs the cost attendant upon the repair of his faulty work, the accidental
injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly ...