New Jersey Opinion Focuses on the “Nature and Scope” of Damage to Determine Trigger for Coverage

Recently, a New Jersey appeals court ruled that insurance coverage for construction defect liability claims extends until the nature and the scope of the property damage becomes apparent. Thus, a new grey area has been created for insurers to assess time on risk. The result of the opinion leads one to believe that insurer will more likely than not lose on summary judgment as to “trigger” because the court seemingly requires a rigorous and fact-intensive analysis of when the “last pull” of the trigger occurs.

The underlying matter involved a condominium building that was built between November 2005 and April 2008. As early as February 2008, homeowners noticed water damage in their windows, ceilings and other portions of the units. In May 2010 the unit owners hired an expert to perform a moisture survey of the development and he identified 111 spots of moisture damaged areas that need to be removed and replaced. The unit owners alleged the HVAC contractor was to blame for the moisture intrusion at the project.

Selective issued an “occurrence based” general liability policy that covered bodily injury and property damage taking place during the policy period of June 2009 through June 2012 for the HVAC contractor. Selective disclaimed coverage on the grounds the alleged property damage had occurred prior to the inception of its policy because the homeowners were aware of the problems in 2008. The trial court agreed with Selective and found that the continuous trigger applied to the claims against the HVAC contractor, but still held that Selective had no coverage obligations because the damage had in fact manifested before June 2009.

The HVAC contractor appealed and argued, “the end date for the continuous trigger doesn’t occur until an expert report or some other proof definitively establishes that the policyholder’s faulty work caused the alleged damage.” The court disagreed and stated that “an attribution analysis could be highly fact-dependent, and difficult to resolve when an insured makes a request for defense and indemnification after being named in a complaint.” In sum, HVAC contractor argued that the trigger began when the expert analysis was performed in 2010. Conversely, Selective argued that , based on the hearsay statements of the homeowners, the triggering event occurred in 2008. The appellate court found that information about the building defects was or reasonably could have been revealed at any time between the time of the unit owners’ complaints until the start of Selective’ s policy in June 2009 and the case should be reopened to allow for discovery to explore the critical factual issues outlined in the opinion regarding the discovery of the damage.

The ruling muddies the water as to triggering events and the parties have been ordered to complete more discovery to determine when the essential manifestation occurred in this instance. For insurers in this jurisdiction, this means they will need to pursue discovery as to the nature and scope of the damage to attempt demonstrate when the last trigger pull occurred if they are seeking to avoid providing coverage. Conversely, insureds will likely attempt to undercut this evidence as inadmissible or too vague to warrant a “trigger pull.” Those who represent insureds in this jurisdiction may find this case inconsistent with spirit of the New Jersey Supreme Court’s landmark 1994 ruling in Owens-Illinois Inc. v. United Insurance Co., which applied the continuous trigger in a dispute over coverage for asbestos-related bodily injury claims to maximize coverage.

This case is Air Master & Cooling Inc. v. Selective Insurance Co., case number A-5415-15T3, in the Superior Court of the State of New Jersey, Appellate Division. Our office intends to follow this case and will update with a blog post regarding significant decisions.

Eleventh Circuit holds that Standard for Georgia ROR is “Adequacy”

In evaluating whether an insurer made a proper reservation of rights (ROR), the Eleventh Circuit Court of Appeals, in an unpublished opinion, held that whether the insurer fairly informed the insured of its coverage position is the proper standard in assessing whether coverage defenses were properly reserved.Wellons, Inc. v. Lexington Ins. Co., 2014 WL 1978412 (11th Cir. May 16, 2014).

Lexington insured Wellons, a company that designed and installed an Energy System for Langboard Industries, Inc., a company that manufactures oriented strand board. On November 20, 2004, during the construction phase of the Energy System, a tube bundle collapsed, resulting in extensive property damage. The Energy System was ultimately placed in service by June 2005.

On September 23, 2005 Wellons provided notice to Lexington, pursuant to the 2004 policy, of the tube bundle collapse. Lexington issued a reservation of rights letter on September 30, 2005. The reservation of rights stated, “this letter is not to be construed as a waiver of any of the terms, conditions, or provisions of the Lexington Insurance Company policy, or of any right or policy defense now or hereafter available to the Lexington Insurance Company.”

Wellons was sued, and on September 18, 2007, Lexington sent a second reservation of rights letter. The second reservation of rights stated, “there may be additional policy conditions that may also preclude coverage and this should not be construed as a waiver of other terms and conditions that may apply.” But Lexington retained counsel to defend Wellons against Langboard, and eventually paid limits under the 2004 policy to resolve this suit.

In February of 2006, after the Energy System had been in operation, leaks developed. Wellons retained a consultant, but the superheater ultimately failed. Langboard demanded that Wellons design and install a new superheater. Wellons agreed, but failed to notify Lexington. On August 17, 2006 Wellons notified Lexington of Langboard’s claim for a new superheater, but also of the consultant’s suit filed June 16, 2006, for non-payment for its services to repair the superheater.

On March 2, 2007, Lexington responded to the August 2006 notice by noting two separate claims were embedded in the notice. And, on March 3, 2007, Lexington sent a third reservation of rights letter – noting that Lexington was investigating this matter under a reservation of rights. Lexington further noted the policy required, for coverage to trigger, that “property damage” be caused by an “occurrence” and also highlighted certain exclusions for “Damage to Property,” “Damage to Your Product”, and “Damage to Your Work.” Lexington also stated that the agreement to replace the superheater was without authorization.

On April 25, 2007, Lexington supplemented its March 2007 letter with another reservation of rights letter. This letter stated there was no duty to indemnify or defend Wellons. Specifically, as no suit was filed, the duty to defend was not triggered. Regarding the duty to indemnify, there was no demand beyond the demand to replace the superheater. This letter also quoted pertinent portions of the policy including definitions of “property damage,” “occurrence” and various exclusions – as in the March reservation of rights letter. This position, however, was disputed by Wellons.

Langboard eventually filed a second suit against Wellons, and Lexington defended Wellons under the aforementioned reservation of rights. A jury awarded Langboard $8.5 million in damages. Wellons sued Lexington for indemnification, arguing that Lexington waived its coverage defenses because it did not adequately reserve its rights.

The Eleventh Circuit thoroughly reviewed Georgia law. Specifically, the court examined World Harvest Church, Inc. v. GuideOne Mutual Ins. Co. 287 Ga. 149, 695 S.E.2d 6, (2010) and Hoover v. Maxum Indemnity Co., 291 Ga. 402, 730 S.E.2d 413 (2012). The Eleventh Circuit held that it did not read World Harvest to overrule Georgia authority on specificity. It noted that Georgia law has repeatedly held that an “insurer” is not required to list each and every basis for contesting coverage in the reservation of rights letter. Kay-Lex Co. v. Essex Ins. Co., 286 Ga. App. 484, 649 S.E.2d 602 (2007).

The Court then held that Lexington’s reservation of rights letters were adequate; “a reservation of rights need not specify each and every potential basis for contesting coverage, as long as the reservation fairly informs the insured that, notwithstanding the defense of the insured, the insurer does not waive its coverage defenses.” The Court also noted that Wellons’ failure to object to the defense provided in the second suit provided implied consent to the defense under a reservation, and thereby implicitly consented to the terms of the reservation, including the non-waiver clauses.

The use of multiple reservations of rights with non-waiver clauses proved critical to avoiding costly indemnity obligations for the insurer, Lexington. Most important to the Court’s analysis was that the reservation of rights letters contained non-waiver clauses that specifically reserved Lexington’s right to assert additional coverage defenses. Caution should be noted with respect to reliance on this opinion as it is not binding precedent upon a Georgia Court. The reasoning, however, is very instructive and useful.

Hoover: A Follow-Up to Forshee

In Hoover v. Maxum Indem. Co., 2011 WL 2506455 (2011), the Georgia Court of Appeals held that the insured’s two year delay in notifying its insurer of an accident was unreasonable as a matter of law.  The insured’s independent contractor sustained a catastrophic brain stem injury of which the insured was aware on the date it occurred. Id. at *1.  That same day, the plaintiff’s father requested insurance information from the insured and told the insured that he intended to contact the insurer regarding coverage. Id.  A week later, the father spoke with the insured again regarding the possibility of coverage and stated that he had “put in a call to somebody and was waiting to hear back.” Id.  Nearly two years later, after the plaintiff filed suit, the insured notified its insurer. Id. at *2.

The court held that the delay in notifying the insurer was unjustified, as a matter of law, because “on the date of the occurrence [the insured] was aware of the occurrence and the life-threatening injuries that [the plaintiff] had sustained.  [The insured] also was aware that a claim against [it] was expected to be filed on [the plaintiff’s] behalf.” Id. at *3.  Furthermore, the court rejected the insured’s contention that the insurer had received timely notice from the plaintiff’s father because there was no evidence that the “somebody” with whom the father had allegedly spoken with was an agent of the insurer; further, there was no evidence that the substance of the father’s conversation with that “somebody” provided notice of the occurrence. Id.

Despite the differing outcomes, Hoover is consistent with the court’s holding in Forshee.  In Forshee, the insured was not aware of the severity of the accident at any point until it was served with the complaint and, as such, the question of whether the delay in notifying its insurer was unreasonable was a question of fact.  In Hoover, the insured was well aware of the severity of the injury and knew that the plaintiff likely would make a claim, making the nearly two-year delay in reporting the accident unreasonable as a matter of law.