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Aetna Casualty & Surety Co. v. Ply Gem Industries

August 02, 2001


On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, whose opinion is reported at Before Judges Stern, Collester and Fall.

The opinion of the court was delivered by: Stern, P.J.A.D.

As amended September 4, 2001.


Argued March 20, 2001

Third party defendant Commercial Union Insurance Company ("CU") appeals from a February 7, 1997 order denying its motion for summary judgment and granting the cross-motion of defendant- third party plaintiff Hoover Treated Wood Products, Inc. ("Hoover") for summary judgment on coverage issues, a March 17, 1998 order granting Hoover's motion for partial summary judgment requiring that CU pay certain unreimbursed defense costs relating to litigation in the State of Maryland, and a November 19, 1998 order granting Hoover's motion for partial summary judgment (certified as a final judgment) requiring CU to pay $76,361.75 in costs relating to that litigation. CU contends that there was no coverage for the claims made against Hoover, a manufacturer of fire retardant plywood ("FRTP").

Hoover asserts that the February 7, 1997 order establishing coverage is interlocutory and leave to appeal has not been granted. CU challenges that order on the grounds that the claims do not constitute "an occurrence" and did not cause "property damage" or damage to property of a third party and, in any event, did not do so within the policy period, and were excluded from coverage under the "your product" and "business risk" exclusions. CU also challenges the March 17, 1998 and November 19, 1998 orders with respect to the Maryland litigation, asserting that the trial judge improperly used choice-of-law principles to apply the law of New Jersey and that Hoover is collaterally estopped from re-litigating certain factual issues concerning coverage. It also asserts that Hoover already received payment in full for all defense costs relating to the Maryland litigation and that, in any event, it should be required only to pay its pro rata share. Hence, CU contends that, even if we do not reverse the February 7, 1997 order, we must reverse the grant of summary judgment relevant to the costs of defense in Maryland.


Between 1986 and 1991, eighty-five law suits had been filed in New Jersey courts by builders, developers, and home owners associations against Hoover and other FRTP manufacturers and distributors. The suits sought to recover damages caused by the incorporation of FRTP in the roofing systems of townhouses and condominiums built and purchased by those plaintiffs. By order dated January 14, 1991, the Chief Justice consolidated all of the pending and future FRTP litigation and transferred it to a single judge in Middlesex County for purposes of discovery and management. Additional cases were subsequently added to the consolidated proceedings.*fn1

On April 18, 1990, Aetna, excess insurer of Hoover and defendant Ply Gem Industries, Inc. (of which Hoover is a division or wholly owned subsidiary), filed a "complaint for declaratory judgment" seeking an order that its policies provided no coverage for the claims arising out of the FRTP litigation and that it was not obligated to defend or indemnify Hoover.*fn2 On August 2, 1990, Hoover filed an answer which contained counterclaims and cross- claims as well as a third-party complaint against its fifteen insurers, including CU. In its answer Hoover generally denied the material allegations of the complaint and sought, by way of counterclaim, costs of defense, indemnity, and damages for breach of contract. In its third party complaint against CU and other insurers, Hoover asserted the same cause of action and sought the same relief. Ultimately, seventeen carriers were brought into the action.

CU responded to Hoover's third party complaint by generally denying the material allegations of the complaint and asserting by way of defense, among other things, failure to comply with the terms and conditions of CU's policies, application of exclusionary provisions in the policies, the absence of any covered bodily injury or property damage, and that the rights and remedies of the parties were controlled by Georgia, not New Jersey, law. CU contends that Georgia law applies because Hoover's offices are located there and the policy was issued to Hoover at its address in Thomson, Georgia.

On February 7, 1997, the trial judge denied CU's motion for summary judgment on the coverage issue and granted Hoover's cross-motion for defense and indemnification. Thereafter, on March 17, 1998, the judge granted Hoover's motion for partial summary judgment and determined that Hoover was "not collaterally estopped" from seeking coverage as a result of the jury verdict against Hoover in a Florida case (Pulte Home Corp., Inc. v. Ply Gem Industries, Inc., Case No. 89-205-CIV-T-17A (Mid. Dist. Fla. 1993)). He ordered CU to "reimburse Hoover for all of its unreimbursed costs incurred in defending" the eight Maryland FRTP suits. Finally, by order dated November 19, 1998, the judge directed that CU pay Hoover a total of $76,361.75 which he determined constituted Hoover's "reasonable costs of defending" the Maryland FRTP suits and which remained outstanding from other carriers. As already noted, the judge certified this order as final. There is no contest as to that order's "finality." See R. 4:42-2.


Hoover is a producer of pressure treated lumber, plywood, and specialty wood (FRTP). It chemically treats wood resulting in products which include fire retardant treated lumber, plywood, shingles and shakes for both interior and exterior use. Its fire retardant plywood sheathing was used as a roofing component of condominiums and other types of multi-unit residences nationwide. FRTP was intended to retard the spread of fire from one dwelling unit to another. It was chemically treated such that the high heat of a fire would cause it to char instead of igniting and spreading the flames. The nature of the treatment of FRTP varied depending on the chemicals used. Generally, plywood was impregnated with chemical salts that produced acid in the presence of heat and moisture. It was the acid which caused the FRTP to blacken and char, reducing the flame spreading capability of the plywood. The heating process also caused the chemical salts to generate gases and water which further retarded the spread of the fire. The FRTP wood was cheaper than constructing parapets and allowed architectural changes in roof designs. Consequently, it was incorporated in "approximately 100,000 townhouses or condominium units in New Jersey" alone.

In 1987 the American Plywood Association published two reports which warned of defects when FRTP was used as roof sheathing. Studies revealed that FRTP "may suffer severe structural degradation" when exposed to high temperatures. Subsequently, additional literature "indicated problems associated with the use of FRT Plywood in roof systems." Ultimately, about 170 law suits were instituted against Hoover by builders and homeowners organizations associated with multi- family housing construction. They sought recovery for property damage caused by the installation of the allegedly defective FRTP treated by Hoover and the costs of remediation. In addition to litigation, claims for property damage were filed, seeking recovery from Hoover.

The trial judge has concisely stated the background as follows:

The underlying FRT claims filed against Hoover sought damages for physical injury to property. These claims for property damage grew out of the manufacture of Pro-Tex, a brand name for an FRT chemical used to treat wood products including plywood roof sheathing. The FRT wood was installed into roof systems of certain multi-family residential structures, schools, nursing homes, and even a prison. The manufacturing process consisted of treating raw wood obtained from lumber vendors with a chemical substance, Pro-Tex, which inhibited burning. Typically, a 4' x 8' FRT plywood sheet was placed in the roof on either side of the common wall between adjoining dwelling units forming a fire retardant barrier designed to slow the spread of fire from one unit to another. Prior to the availability of these FRT products builders were required to erect masonry parapet walls which extended above the roof line. These parapet walls were costly and often interfered with the aesthetic design of the residential buildings. In New Jersey and other states, building codes were amended to permit the use of FRT wood to meet fire retardant standards. Some building and construction officials required that FRT wood be incorporated into roof systems. Either because construction officials required it or because FRT wood lowered cost and gave builders flexibility of design, FRT wood and in particular FRT plywood sheathing was widely used starting in the early 1980's.

In the FRT litigation plaintiffs have alleged continuous and progressive physical injury to property caused by the incorporation of allegedly defective FRT wood treated and or sold by Hoover into the roofs of the structures involved. The law suits allege that defective FRT wood installed in the roofs degraded and eventually became too weak to support the roof structure. Damage to property occurred because of leaks caused by the weakened structure or by the destruction of other roof components when it was necessary to remove and replace the defective FRT wood. Apparently degradation did not affect all roof systems nor was the degradation process uniform. The degradation process may have been enhanced if the FRT wood was exposed to sun, moisture, excessive heat in an attic or by faulty plumbing.

In response to this background, Aetna commenced this declaratory judgment action,*fn3 and as we have already noted, CU appeals the trial court's coverage determinations against it.

CU issued three comprehensive general liability ("CGL") policies to Hoover for annual periods between November 1984 and November 1987. CU also issued two umbrella policies covering Hoover between November 1985 and November 1987. The CGL policies provided Hoover with coverage for "bodily injury" and "property damage" liability as follows:

The company will 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, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent and may make such investigation and settlement of any claim or suit as it deems expedient but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements.

The policies define a covered "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured." "Property damage" is defined as either

(1) physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or (2) loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.

The umbrella policy provisions followed the same form as the CGL policies.

The plaintiffs in the underlying actions (builders, developers and homeowner associations) against Hoover and others, alleged that the FRTP damaged residential roofing systems, and sought recovery on a variety of theories including breach of contract, breach of express and implied warranties, common law fraud, New Jersey Consumer Fraud Act violations, New Jersey Product Liability Act violations, fraudulent concealment, intentional misrepresentations, and strict liability in tort, as well as negligence. The plaintiffs claimed that the defendant FRTP manufacturers, chemical treaters and suppliers negligently manufactured, inspected, and marketed FRTP, negligently failed to warn of its dangers, and were thus strictly liable in tort for placing FRTP in the stream of commerce. The complaints alleged that when the FRTP degraded, it lost strength, flexibility, resilience, and structural integrity, posing a risk of physical injury to individual homeowners and property damage to their units and other roof components. Replacement or repair of the defective sheathing involved more than simply removal of the wood. The removal process itself resulted in destruction and necessitated replacement of other components of the roofing system separate from that of the FRTP sheets. The complaints also alleged that FRTP deterioration damaged parts of the residential units and could cause further damage in the future.

In moving for summary judgment in Hoover's third-party action, CU argued that, since the trial judge had already determined that the underlying actions for which coverage was sought constituted solely economic losses recoverable under the Uniform Commercial Code ("UCC"), those claims fell within the business risk exclusion of CU's policies, and as such did not constitute a covered "occurrence" within the meaning of CU's policies. The exclusion provided that the coverage "does not apply . . . to property damage to the named insured's products arising out of such products or any part of any such products."

In a November 22, 1996 letter opinion denying CU's motion and resulting in the February 1997 order, the judge explained that in ruling on the "economic loss" issue in the underlying FRTP litigation, his "sole focus" was on the relationship between the plaintiffs in those suits and the treaters, manufacturers, chemical suppliers, and builders involved in FRTP manufacture, sale, and distribution. However, when he considered the insurance coverage issues in the declaratory judgment action, "the focus [was] on the contractual relationship between Hoover, a treater of FRTP, and [Hoover's] insurance carriers." He concluded that the "economic loss" ruling in the underlying litigation was not "based upon a finding that there was no damage to other property" within the meaning of the pertinent insurance policies. Thus, a judgment in the underlying FRTP litigation did not preclude a finding of a duty by a carrier to defend and indemnify its insured pursuant to a CGL policy. The judge emphasized that the "economic loss" ruling he made in the underlying action simply asserted that the damages to those plaintiffs arose from a failure of the FRTP to perform properly or as warranted, and that those plaintiffs had an adequate remedy for their damages within the UCC. The judge pointed out "that a variety of damages can result from such a failure [to perform], including damages to another's property or person."

Consequently, the court denied CU's claim that the "own product" exclusion barred coverage. The court thus ruled that, while the exclusion precluded indemnification for Hoover's own cost of repair or replacement of its defective products, it did not bar indemnification for claims of damage to "other property" caused by the insured's poor workmanship or defective products. However, the court noted that whether or not damage to other property existed in a given case was a factual issue which could not be decided on a motion for summary judgment.

The court also rejected CU's claim that the "sistership exclusion," which denied coverage for the cost of preventive or curative action when the insured withdrew a product "from the market or from use because of any known or suspected defect" or dangerous condition, barred Hoover's claims for indemnification. The court observed that that exclusion did not bar coverage "for actual damage caused by the very product giving rise to curative action." Furthermore, Hoover never recalled any of its FRTP.

The court also found meritless CU's claim that no covered "occurrence" took place. The judge reasoned that if there was damage to other property, as alleged by the plaintiffs in the underlying action, there was an "occurrence" as defined by the policy. Finally, the February 7, 1997 order provided that CU must defend Hoover in the underlying FRTP litigation against allegations that Hoover's product caused damage to the plaintiffs' property.

Following entry of the February 7, 1997 order, Hoover moved for an order directing CU to defend Hoover's FRTP claims and to pay all unreimbursed defense costs. Hoover specifically pointed to eight cases emanating from the State of Maryland which remained unresolved and for which Hoover required a defense. Hoover argued that the plaintiffs in the eight Maryland cases sought recovery for damage to property other than the FRTP itself. In support of its assertions that it was entitled to a defense and costs in those cases, Hoover submitted selected pages from the respective complaints as evidence of the allegations contained therein. Although not in the record before us, Hoover's motion papers represented that, in each of these cases, the FRTP was installed during the policy periods between 1984 and 1987.

In a written opinion filed on October 22, 1997, Aetna Casualty & Surety Co. v. Ply Gem Industries, Inc., 313 N.J. Super. 94, 101-02 (Law Div. 1997), the trial judge rejected CU's choice-of-law arguments with respect to the duty to defend since he concluded that there was no conflict between the law of Georgia and New Jersey. Id. at 100-02. Comparing the policy language with the underlying complaints, the judge found that CU's duty to defend was triggered by the complaints' assertions of property damage to other parts of the roofs and building. Id. at 102-04. Finally, the judge ruled that principles of collateral estoppel did not apply to bar coverage on the basis of the Florida jury ...

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