On appeal from the Superior Court of New Jersey, Law Division, Burlington County.
Michels, Skillman and Landau. The opinion of the court was delivered by Michels, P.J.A.D.
[218 NJSuper Page 397] Defendant Atlantic Mutual Insurance Company (Atlantic Mutual) appeals from a judgment of the Law Division which declared that it had a duty to defend and indemnify plaintiffs Kelly, Messick, Schoenleber & Miller Associates (KMSM) and Martin P. Schoenleber (Schoenleber), Leonard Miller (Miller) and Frank Kelly (Kelly) in a separate civil action for damages
brought against them by the purchasers of units in the Bienvenue Condominiums.
The pertinent facts giving rise to this appeal may be summarized as follows. In conjunction with Kelly, Schoenleber and Miller, in April 1979, Messick formed the real estate partnership of KMSM. The partnership was established specifically to purchase condominiums at two projects: Bienvenue Condominiums in Burlington, New Jersey, and Florence Tollgate Condominiums in Florence, New Jersey. At the time of its formation, the partnership purchased approximately 150 units at each location. It was Messick's understanding that the condominium units consisted of everything from "the drywall in." He testified that the condominium association owned the heating system. Although Messick was aware that each condominium owner enjoyed a share of the common elements, he did not know if such an interest constituted ownership.
Several years prior to purchasing these condominiums, Messick and Schoenleber conducted a study of them for Commonwealth Federal Savings and Loan (Commonwealth). Commonwealth had acquired the properties from the original owner, Woodlane Realty, by deed in lieu of foreclosure. Because, at that time, the condominiums were unsaleable, Commonwealth requested Messick and Schoenleber to prepare various "sales and marketing strategies." This work, as well as an investigation as to necessary maintenance and repairs, was performed in 1977 or 1978 by GMS Management (GMS), a partnership formed by Messick and Schoenleber for purposes of managing distressed real estate.
Among the areas which GMS investigated were the underground central heating systems at Florence Tollgate and Bienvenue. The discovery of extensive corrosion in the main distribution pipes at Florence Tollgate engendered concern about the Bienvenue system; since the same developer was involved with the central distribution system used at each project, Commonwealth was worried that a corrosion problem might also exist at
Bienvenue. However, upon excavating parts of the Bienvenue heating system, GMS discovered that the pipes were not corroding. In light of this discovery, prior to KMSM taking title, Commonwealth agreed to provide funds to repair the heating system only at the Tollgate Condominiums; appropriating funds for repairs at the Bienvenue Condominiums was deemed unnecessary.
KMSM obtained insurance coverage for the condominiums it purchased at both projects. The policy was underwritten by Atlantic Mutual and secured for KMSM by Atlantic Mutual's agent, Flanigan & O'Hara. Messick met with a representative from Flanigan & O'Hara and explained to him that KMSM wanted fire and theft coverage on the individual units and general liability coverage for the partnership. Additionally, Messick testified that the agent was aware that KMSM had purchased the condominiums in order to resell them.
The policy issued to KMSM was a safeguard policy, providing first-party coverage on the real property and comprehensive general liability coverage. It had effective and expiration dates of July 15, 1980 and July 15, 1983, respectively. However, as there was no need to maintain insurance on condominiums which KMSM no longer owned, someone from the partnership would report to Flanigan & O'Hara how many units were sold each calendar quarter. As a result, the insurance was canceled on those units, an adjustment was made to the policy and/or a return premium was sent to KMSM. The policy itself did not indicate how many units the partnership owned.
The policy did specify that the coverage was for "Dwelling -- one family," "vacant building -- not one or two family" and for "lessor's risk only." However, "lessor's risk" is not defined in the policy, and Messick testified that he did not understand the meaning of that term. Charles W. Brownholtz (Brownholtz), the claims supervisor for Atlantic Mutual, opined that lessor's risk described KMSM's insurable interest in the property: as long as KMSM was the lessor, it retained an interest in the
condominiums; however, upon the sale of the units, the risk shifted to the purchaser.
On September 7, 1982, suit was instituted against KMSM and others. Messick testified that plaintiffs in that action had alleged that the Bienvenue condominium units which they purchased from KMSM had damaged heating systems. Messick conceded that, while he was involved with Bienvenue, there were commonplace mechanical problems which were fixed. Moreover, he stated that one section of the heating system required extensive repair work because the elbows (a portion of the heating lines) were corroded. But even in that area of the system, the main lines were sound. Thus, the corrosion problem which gave rise to the suit was neither expected nor intended by KMSM. Indeed, to Messick's knowledge, there was never a break in the underground distribution line at Bienvenue because of corrosion. However, sometime after February 1982, the central heating system at Bienvenue was abandoned when 63% of the condominium owners voted to convert to individual gas-fired heating units.
The action by the purchasers of the Bienvenue Condominiums against KMSM was turned over to Atlantic Mutual for defense. However, Brownholtz determined that coverage should be denied. Upon reading the complaint filed against KMSM, Brownholtz felt that the charges, if true, were descriptive of "intentional acts which would not meet the general definition of occurrence." With respect to the count in the amended complaint which charged KMSM with negligently failing to investigate or fulfill its duty, Brownholtz testified that there was "no accident or occurrence as far as [he was] concerned." However, in his deposition taken March 14, 1984, Brownholtz stated that coverage should have been extended for those counts charging KMSM with negligence.
Upon considering this testimony, the exhibits and the briefs submitted, the trial court noted that the complaint filed against KMSM charged myriad wrongdoing, including intentional torts,
consumer fraud, fraud and negligence. The claim asserted by KMSM was to force Atlantic Mutual to provide a defense for the negligence counts. Although many of the contracts for sale and closings with respect to the Bienvenue Condominiums were consummated within the period in which KMSM's policy was in effect, Atlantic Mutual denied coverage on the ground that the complaint charged KMSM with intentional conduct and the policy only covered KMSM for negligence.
In regard to the term "lessor's risk," the trial court observed that it was not defined in the policy. Furthermore, the trial court could not "recall any testimony that money was given back or that premiums stopped when the units were sold." Thus, the trial court apparently rejected Atlantic Mutual's argument that, after a unit was sold, the insurance on said unit was canceled and any subsequent loss was not covered.
The issue of whether the common elements, including the heating system, were covered by the policy was likewise resolved against Atlantic Mutual. The trial court explained that the policy neither describes exactly what parts of the property were covered nor expressly excludes the heating system from coverage. According to the trial court, this ambiguity had to be construed against Atlantic Mutual and, therefore, concluded that the heating system was covered.
Finally, the trial court noted that several counts of the amendments to the complaint charged KMSM with negligently failing to test for and warn of the defect in question. These failures were alleged to have occurred prior to the sale of the condominiums to the parties suing KMSM. As the policy required Atlantic Mutual to defend claims of alleged negligence, the trial court held that Atlantic Mutual had a duty to defend by supplying counsel and, since it failed to do so, to pay any counsel fees incurred by KMSM in providing its own defense. In addition, the trial court determined that Atlantic Mutual was required to pay any judgment rendered against KMSM based upon its negligence. This appeal followed.
Was There Coverage for the Central Heating System Under the Atlantic Mutual Policy Issued to KMSM?
Viewed in its entirety, the record does not support the trial court's conclusion that the central heating system falls within the ambit of coverage under the policy. As the trial court correctly noted, the policy is silent as to whether or not the heating system is covered. Similarly, Messick's testimony on this point is unclear. Although stating that the condominium units consisted of everything from "the drywall in," Messick also noted that each owner enjoyed a share of the common elements. He was not certain if such an interest constituted ownership.
Any ambiguity about whether the central heating system should be covered under the policy may be resolved with reference to the master deed for the Bienvenue Condominiums. The following provisions of the deed make clear that KMSM, like all other condominium owners, owned a proportionate share of the common elements (including the heating system) and thus had an insurable interest therein:
Every Unit, together with its undivided Common Interest in the Common Elements, shall for all purposes be and it is hereby declared to be and to constitute a separate parcel of real property and may be dealt with by the Unit owner thereof in the same manner as is otherwise permitted by the laws of the State of New Jersey for any other parcel of real property. The Unit Owner of a Unit shall be entitled to the exclusive ownership and possession of his Unit subject only to the covenants, restrictions, easements, By-Laws, rules, regulations, resolutions and decisions affecting the same and relating thereto as may be contained in the Condominium Documents or as may from time to time be passed in accordance with this Master Deed and the By-Laws. Each Unit may be held and owned by one or more Persons in any form of ownership, real estate tenancy or relationship recognized under the laws of the State of New Jersey.
The Common Interest of a Unit in the Common Elements shall be inseparable from such Unit, and any conveyance, lease, devise or other disposition or mortgage or other encumbrance of any Unit shall extend to and include the Common Interest in the Common Elements, whether or not expressly referred
to in the instrument affecting the same. The Common Interests of the Units in the Common Elements and the fee titles to the respective Units conveyed therewith, shall not be separately conveyed, transferred, alienated or encumbered and each of said Common Interests shall be deemed to be conveyed, transferred, alienated or encumbered with its respective Unit notwithstanding the description in the ...