January 11, 2012
EAST COAST RESIDENTIAL ASSOCIATES, LLC, PLAINTIFF,
BUILDERS FIRSTSOURCE - NORTHEAST GROUP, LLC, CHICAGO FLAMEPROOF AND WOOD SPECIALTIES CORP., AND ALL-TECH CARPENTRY, INC., DEFENDANTS, AND ALL-TECH, INC., DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT,
F. DIAS CONSTRUCTION COMPANY, WESTMINSTER HOMES, WESTMINSTER COMMUNITIES, WESTMINSTER MANAGEMENT, A DIVISION OF KUSHNER COMPANIES AND CLINTON BUILDING ASSOCIATES, LLC, THIRD-PARTY DEFENDANTS, AND PREFERRED MUTUAL INSURANCE COMPANY, THIRD-PARTY DEFENDANT-APPELLANT.
On appeal from Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-1522-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted September 12, 2011
Before Judges Parrillo, Grall and Alvarez.
All-Tech, Inc. (All-Tech) is among the defendants in a civil action to recover damages for premature deterioration and failure of 167 exterior decks in a residential apartment complex. They were built by All-Tech's subcontractor, F. Dias Construction Company (Dias). East Coast Residential Associates, LLC, the present owner of the apartment complex, commenced the litigation, which has been settled.
This appeal involves All-Tech's third-party claim for a defense and indemnification pursuant to a commercial general liability (CGL) policy issued to Dias by third-party defendant Preferred Mutual Insurance Company (Preferred). All-Tech is an "additional insured" under an endorsement to that policy, but the insurance does not apply to property damage "occurring after" the completion of Dias's work or "occurring after" the decks were put to their "intended use" by the customer.
On cross-motions for summary judgment, the trial court determined Preferred's policy required it to defend All-Tech. Preferred did not comply. Following the settlement of East Coast's lawsuit, the court entered a $169,072.53 judgment against Preferred on All-Tech's third-party claim. It includes All-Tech's costs of a defense and its $62,500 contribution to the settlement.
Preferred appeals from that judgment. Because East Coast alleges property damages occurring after the events that terminate All-Tech's coverage as an additional insured and because the additional facts developed prior to summary judgment do not show damage at an earlier point in time, Preferred owed All-Tech no duty of defense or indemnification. Abouzaid v. Mansard Gardens Assocs., 207 N.J. 67, 79-81 (2011). Accordingly, we reverse.
The facts asserted in the complaint and disclosed in the record on summary judgment are as follows. East Coast purchased the apartment complex in 2007. The prior owner had hired AllTech to install 167 apartment decks in 2002. All-Tech retained Dias as the subcontractor, and the subcontract required Dias to defend, indemnify and hold All-Tech harmless for "all liability and damages, losses, claims and expenses resulting directly or indirectly from or in connection with [Dias's] performance [under the subcontract]." It further obligates Dias to maintain "contractual insurance coverage, naming All-Tech, Inc. as an additional insured as required under [their] contract to protect or indemnify All-Tech, Inc. against all such liabilities and claims which may arise."
All-Tech purchased and Dias installed flame-safe lumber that was marketed as suitable for exterior decks by the manufacturer and distributor, and All-Tech also advised the property owner that the lumber was appropriate for the project. All-Tech's work consisted of framing the structure of the decks and installing the decking and the posts to secure railings. That work was completed in 2003. The manufacturer of the lumber was first called to inspect the decks after a complaint of deterioration in August 2006. In 2007, the prior owner sold East Coast the premises and its right to pursue claims against those responsible for the decks.
In East Coast's civil action, it alleged that the lumber utilized was not suitable for the purpose as represented and was improperly installed, which led to the deterioration of the decks and made them unsafe. According to East Coast's expert, construction errors contributed to the decks' premature deterioration by creating an environment promoting mildew, fungus and rotting. Specifically, the decks' boards were placed too close together and wrong-side-up, which allowed water to pool on and penetrate the surface, and the nails used were prone to rusting, which also allowed water to seep into the boards.
East Coast sought the cost of total replacement and other unspecified consequential damages. It did not identify damage to structures other than the decks, their walking surfaces and the destabilization of the posts for the railings.*fn1 East Coast also claimed that the decks and railings posed a risk to persons, but it did not allege that anyone had been injured.
East Coast charged All-Tech with breaches of the express and implied warranties and the warranty of suitability for a particular purpose, breach of contract, unjust enrichment, strict liability, fraud and consumer fraud and negligence. East Coast did not name Dias as a defendant.
The scope of an insurance policy's coverage presents a question of law, which we address de novo and without deferring to the trial court's determination. Ohio Cas. Ins. Co. v. Island Pool & Spa, Inc., 418 N.J. Super. 162, 168 (App. Div.), certif. denied, 206 N.J. 329 (2011); Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). We also review summary judgments de novo, viewing the facts in the light most favorable to the party resisting judgment. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995).
An insurer's duty to defend requires a comparison of the "allegations set forth in the complainant's pleading and the language of the insurance policy." Flomerfelt v. Cardiello, 202 N.J. 432, 444 (2010). "[T]he nature of the claim asserted, rather than the specific details of the incident or the litigation's possible outcome, . . . governs the insurer's obligation." Ibid. An insurer may also be obligated to defend on the basis of facts disclosed before the court decides the issue. Abouzaid, supra, 207 N.J. at 81.
On the question of coverage, well-settled principles guide the court's interpretation of an insurance policy. They are succinctly stated in S.T. Hudson Engineers, Inc. v. Pennsylvania National Mutual Casualty Company, 388 N.J. Super. 592, 603-04, (App. Div. 2006), certif. denied, 189 N.J. 647 (2007). "Generally, the insured has the burden 'to bring the claim within the basic terms of the policy.'" Id. at 603 (quoting Reliance Ins. Co. v. Armstrong World Indus., Inc., 292 N.J. Super. 365, 377 (App. Div. 1996)). Conversely, "[w]here an insurer claims the matter in dispute falls within exclusionary provisions of the policy, it bears the burden of establishing that claim." Ibid.
In discerning the meaning of insurance policies, where "language . . . supports two reasonable meanings . . . the interpretation supporting coverage will be applied." Ibid. "Coverage clauses are interpreted liberally, whereas exclusions are strictly construed." Id. at 604. The policies are read "'to find a reasonable meaning in keeping with the express general purposes of the policies,'" ibid. (quoting Royal Ins. Co. v. Rutgers Cas. Ins. Co., 271 N.J. Super. 409, 416 (App. Div. 1994)), and interpreted "to effectuate the reasonable expectations of the insured." Ibid. (citing Zuckerman v. Nat'l Union Fire Ins. Co., 100 N.J. 304, 320-21 (1985)).
Applying the foregoing rules and principles, we consider the provisions of this policy.
As noted at the outset, All-Tech claims a right to coverage as an "additional insured under Dias's policy," and for that reason, the endorsement insuring All-Tech is critical. The CGL policy under which All-Tech seeks coverage was issued to Dias. Dias obtained an endorsement from Preferred naming All-Tech as "an insured . . . but only with respect to liability arising out of [Dias's] ongoing operations performed for [All-Tech]." AllTech's liability for defects in and misrepresentations about materials does not arise out of Dias's operations. All-Tech, not Dias, purchased the lumber and made the misrepresentations. In contrast, because Dias installed the decks, All-Tech's liability for the installation arises from Dias's "ongoing operations" performed for All-Tech. Thus, All-Tech is an insured on East Coast's claims for property damage attributable to poor workmanship.
Nevertheless, the insurance afforded to All-Tech as an additional insured forecloses coverage for the property damage East Coast alleges. The endorsement states:
This insurance does not apply to "bodily injury" or "property damage" occurring after:
1) All work . . . to be performed by or on behalf of the additional insured(s) at the cite of the covered operations has been completed; or
2) That portion of [Dias's] work out of which the injury or damage arises has been put to its intended use by any person . . other than a contractor or subcontractor engaged in performing operations . . . as a part of the same project. [(Emphasis added).]
Preferred argues that these exclusions apply. We agree. These exclusions are unambiguous and stated in a manner that is not in the least confusing. They plainly state that the insurance for All-Tech "does not apply" to "property damage" that occurs after Dias's work is completed or put to its intended use.
The phrase "liability arising out of [Dias's] ongoing operations" limits the instances of liability that are covered; in contrast, the exclusion of coverage for property damage "occurring after" the specified events is a limitation on coverage for liability based on the date of the damage. There is coverage for property damage occurring before the work was completed and the construction project was put to use, but not for property damage that occurs thereafter. These exclusions incorporate the general rule that comports with common understanding - "the time of the occurrence of an accident within the meaning of an indemnity policy is not the time the wrongful act is committed but the time when the complaining party is actually damaged." Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 452 (1994); Hartford Accident & Indem. Co. v. Aetna Life & Cas. Ins. Co., 98 N.J. 18, 19-20 (1984). This policy plainly incorporates the rule by defining property damage as "physical injury to tangible property" that occurs at the time of the injury that caused it. Here the injury is the water damage. All-Tech's reliance on cases involving exposure to environmental hazards, which have not been extended to construction contracts in other contexts, is misplaced.
Our interpretation of this endorsement is consistent with those of other courts and commentators considering exclusions appearing in various ISO forms of the "additional insured" endorsement. See United Fire & Cas. Co. v. Boulder Plaza Residential, LLC, 633 F.3d 951, 959 (10th Cir. 2011) (construing an endorsement with similar effect stated in different terms and noting that the physical manifestation of damage is the trigger for coverage); 3-30A Daven Lowhurst, et al., New Appleman Insurance Law Practice Guide § 30A.40 (2011) [hereinafter Lowhurst] (discussing the evolution of additional insured endorsements and this exclusion and a perceived ambiguity in the "ongoing operations" clause that is clarified by exclusions of damage occurring after operations are concluded).
Because nothing in East Coast's complaint or evidence relates to claims for damage to the decks that occurred before completion of Dias's work and within All-Tech's coverage, Preferred did not have a duty to defend All-Tech and no duty to indemnify. Kent Motor Cars, Inc. v. Reynolds and Reynolds, Co., 207 N.J. 428, 453-54 (2011).
For the sake of completeness, we address All-Tech's argument that Preferred had a duty to defend because of Dias's subcontract with All-Tech. That contractual duty was the basis for the trial court's determination in favor of All-Tech. Even if All-Tech were an "additional insured" with respect to contractual liability, the policy's coverage would not apply to All-Tech. The policy covers contractual liability assumed by an insured in an "insured contract," and under the policy definition of "insured contract," coverage would be available to All-Tech only if the contract required All-Tech to defend and indemnify Dias for Dias's tort liability. That was not the situation; under the subcontract, All-Tech was the indemnitee. Thus, even if All-Tech were an "additional insured," Preferred had no duty to defend or indemnify All-Tech based on the subcontract.
In order to avoid any potential confusion, we identify questions we have not addressed because our decision rests on the narrow ground that All-Tech is not an "additional insured" for damage "occurring after" Dias's work was completed and the decks were put to their intended use.
The first unaddressed question is whether a contractor's improper installation or use of unsuitable material is an "occurrence" within the meaning of the policy. In Firemen's Insurance Company of Newark v. National Union Fire Insurance Company, 387 N.J. Super. 434, 448 (App. Div. 2006), we indicated that it was not, but the statement arguably was not necessary to the court's decision and dicta. See generally Lyerla v. AMCO Ins. Co., 536 F.3d 684, 689 & n.2 (7th Cir. 2008) (noting that the courts of the various states disagree on the point and listing the cases). Preferred did not rely on Firemen's. Our opinion should not be understood as addressing that issue.
The second question is whether the business risk exclusion in this policy would apply to foreclose all coverage if the endorsement afforded All-Tech coverage as an "additional insured" applied. In Weedo v. Stone-E-Brick, 81 N.J. 233, 240-41 (1979), the Supreme Court held that the business risk exclusions in standardized ISO CGL policies then in effect precluded coverage for property damage caused to and arising from the contractor's work. But as the Court noted, the standardized ISO forms for CGL coverage are frequently revised, id. at 237 n.1, and the business risk exclusion has been amended to except damage to the contractor's work arising from the work of a subcontractor since Weedo. See 21 Holmes' Appleman on Insurance 2d, § 132.9(E) (2002) (discussing revisions to exclusions for business risk since 1973). We offer no view on the relevance of Weedo to a proper interpretation of the scope of that exception.