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Hartford Fire Insurance Co. v. Riefolo Construction Co.

January 17, 1980

THE HARTFORD FIRE INSURANCE COMPANY, PLAINTIFF-RESPONDENT,
v.
RIEFOLO CONSTRUCTION CO., INC.; THE CONDITIONING CO., INC.; FLUORO ELECTRIC CORPORATION; ELIZABETH IRON WORKS, INC.; GROVE PLUMBING & HEATING CO.; THE HOME INDEMNITY CO.; EMPLOYERS COMMERCIAL UNION INSURANCE CO.,; THE MARYLAND CASUALTY CO. ; AND THE AMERICAN INSURANCE CO., DEFENDANTS- APPELLANTS, AND THE BOARD OF EDUCATION OF THE VOCATIONAL SCHOOLS IN THE COUNTY OF ESSEX AND UNITED STATES FIDELITY & GUARANTY CO., DEFENDANTS, AND SENTRY INSURANCE, DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 161 N.J. Super.. 99 (1978).

Before Mr. Chief Justice Wilentz, Mr. Justice Sullivan, Mr. Justice Pashman, Mr. Justice Clifford, Mr. Justice Schreiber, Mr. Justice Handler, and Mr. Justice Pollock.

Pashman

The opinion of the court was delivered by PASHMAN, J.

This case involves questions of contract interpretation arising from a fire at a public construction project. Preliminarily, we consider the right of plaintiff insurance company to sue in subrogation on its insured's contract claims. Finding that such a suit may be maintained, we next determine which of the

parties to the construction contracts should bear the risk of loss due to fire occurring prior to completion of construction. We hold that the risk lay with defendant contractors, and that their sureties, also defendants, may be held liable should the contractors fail to satisfy plaintiff's claims.

In April 1972, the Board of Education of Vocational Schools in Essex County (Board) engaged the five defendant contractors*fn1 to construct the Essex County Technical Careers Center in Newark, New Jersey. The contracts between the Board and each builder incorporated a set of "General Conditions" and "Special Conditions." The General Conditions were promulgated by the Economic Development Administration of the United States Department of Commerce (EDA), which was financing the construction. The Special Conditions had been drafted by the building's supervising architect.

Section 28(e) of the General Conditions obliged each contractor to procure and maintain builder's risk insurance "during the life of [the] contract on the insurable portion of the project." Before construction began, each builder notified the Board that it had secured all necessary insurance. Section 29 of the General Conditions required each contractor to obtain a performance bond in an amount equal to its contract price as security for complete performance. Each obtained such a bond, executed on a standard EDA form, from one of the surety defendants.*fn2 Section 13 of the General Conditions and 1.39 of the Special Conditions obligated the contractors to repair any and all damage to the building occurring prior to its acceptance, unless such damage was due to fault of the Board. Section 1.37 of the

Special Conditions stated that acceptance occurred only when all work, including all minor punch-list items, was complete.

In April 1972, each contractor received a written "Notice to Proceed," which stated that the scheduled completion date was October 2, 1973. Construction was still not complete on April 1, 1974. At that time the Board determined that it needed to assign employees to the Careers Center to prepare for the 1974-1975 school year. On May 17, 1974, the architect wrote the Board that its staff could use the executive office area but that "no educational process may be carried on until the building is 100% complete and inspected and approved by the Division of School Building Services of the State Department of Education." In June 1974 certain personnel were assigned to the building. By August 8, the day before the fire, 16 persons, including 6 teachers, had been assigned to the building, and Board employees occupied the entire first floor and the library on the second floor. Portions of the third floor were being used to store furniture. Employees were interviewing prospective students at the site but no classes had been held there.

Construction continued while the Board was using the building. By August 8 the building was between 90% and 95% complete. On that date, the Board ordered casualty insurance from Hartford for the project's completed portion Hartford supplied such coverage and a binder was issued evidencing coverage in the amount of $6,500,000 commencing that same day.

On the next day, August 9, a fire of undetermined origin started on the third floor of the building, causing $250,000 in damage. After two subsequent job site meetings, the Board notified all contractors to begin repair work. In a telegram sent to four of the builders, the Board stated that its payments for the work would be reimbursed by its own insurer and the

contractors' builder's risk carriers.*fn3 The Board and Hartford later reached an agreement whereby Hartford would advance repair monies on condition that it be subrogated to the Board's claims against the contractors. The contractors were paid with the monies so advanced.

When the Board and Hartford sought reimbursement from the contractors' builder's risk insurers, they found that Elizabeth, Fluoro and Riefolo had allowed their policies to lapse in July 1973, July 1974 and April 1974 respectively, without giving the Board prior notice as required by section 28(f) of the General Conditions. Only Grove and possibly Conditioning*fn4 and continued their coverage. Harford then notified the contractors and their sureties of its intention to assert claims against them.

On April 11, 1975, Hartford brought suit in Superior Court, Chancery Division, to recover the monies it had paid to the Board which had in turn paid the contractors. The complaint named as defendants the five contractors, their sureties and the Board. Hartford alleged that the contractors had breached their agreements by failing to repair the fire damage at their own expense, and that all contractors except Grove were also in breach for failure to maintain builder's risk insurance.

The defendant contractors claimed that an insurer could be subrogated only to tort and not to contract claims, and that therefore Hartford could not bring the present suit. They further asserted that Hartford was estopped from enforcing the right to subrogation due to its "inequitable" conduct following the fire.

In addition to these defenses, defendants challenged their underlying liability to the Board on numerous other grounds.

The contractors asserted that since either the "substantial completion" of the building or its occupancy by the Board at the time of the fire would have voided builder's risk coverage, any failure to maintain such insurance did not injury the Board. By reason of the alleged unavailability of builder's risk coverage, defendants claimed that a proper construction of the contract shifted the risk of loss to the Board.*fn5 Alternatively, defendants urged that because the fire had started among cartons stored by the Board, it was responsible for the damage and must absorb the loss. The defendants also alleged that the Board had breached section 57 of the General Conditions by occupying the building ...


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