Continuous Trigger of Coverage for Progressive Construction Defect Losses
Defense Digest, Vol. 24, No. 1, March 2018
By Lila T. Wynne, Esq.*
Finally, the New Jersey Appellate Division addressed the appropriate trigger of coverage for progressive construction defect lawsuits. In Airmaster & Cooling, Inc. v. Selective Insurance Company of America, 171 A.3d 214 (N.J.Super. App. Div. 2017), certain coverage issues arose out of lawsuits brought by a condominium association and unit owners to remediate construction defects within a residential building. The insured, Airmaster & Cooling, Inc., had performed work as a subcontractor on the roof and elsewhere in the building. The construction defects concerned property damage resulting from, among other things, the apparent progressive infiltration of water within the building.
After Airmaster was named as a third-party defendant in the underlying construction defect cases, Airmaster sought a defense and indemnity from Selective Insurance Company of America. Selective was one of a series of different insurers that had issued CGL policies to Airmaster over successive policy periods.
The trial court granted summary judgment to Selective in a declaratory judgment action. It agreed with the insurer that the property damage to the building had already manifested before Selective’s policy period commenced.
In its appeal, Airmaster raised several legal issues. Some, according to the court, were either completely novel or had not been definitively addressed under New Jersey law.
The Appellate Division held that a “continuous trigger” theory of insurance coverage may be applied in New Jersey to third-party liability claims involving progressive damage to property caused by an insured’s allegedly defective construction work. The court held that the “last pull” of that continuous trigger—for purposes of ascertaining the temporal endpoint of a covered occurrence—happens when the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it. Finally, the court rejected Airmaster’s novel argument that the last pull of the continuous trigger does not occur until there is expert or other proof that “attributes” the property damage to faulty conduct by the insured. This was the policyholder’s attempt to maximize insurance coverage by extending the manifestation period.
More particularly, Airmaster had argued on appeal that the court should recognize that the continuous-trigger principles should govern third-party liability coverage analyses in construction defect cases that involve progressive property damage, such as water infiltration. Next, Airmaster contended that continuous-trigger principles extend coverage to all insurance policies in effect from the time of the insured’s work on the construction project through the time by which it was known, or there was sufficient reason to know, that the manifested property damage was attributable to the insured’s work. Based on these predicates, Airmaster argued that summary judgment in favor of its insurer should be reversed because it was not until May 2010, when an expert consultant’s roof study was issued, that property damage attributable to Airmaster’s work on the roof was first ascertained.
The Appellate Division addressed the continuous-trigger theory utilized in the seminal case of Owens-Illinois, Inc. v. United Insurance Co., 650 A.2d 97 (N.J. 1994), in which the New Jersey Supreme Court adopted the continuous-trigger theory for property damage insurance claims that arise from the installation of asbestos-related products. The court explained that, unlike the manifestation theory, the continuous-trigger approach requires multiple excessive insurers up to the point of manifestation to cover a loss. Therefore, more coverage is available to pay claims. According to the court, the continuous-trigger approach also encourages insurers to monitor progressively developing risks and to charge appropriate premiums for those risks.
The court also noted that the continuous-trigger theory shares the same coverage end point as the manifestation theory, i.e., the date when the harm has sufficiently become apparent to trigger a covered occurrence. The difference between the two approaches, however, is that the manifestation theory confines coverage to the CGL insurer that happens to be on the risk at the time the manifestation occurs, whereas the continuous-trigger theory will aggregate coverage from all insurers that were on the risk from the date of first exposure through the manifestation date. Therefore, if the property damage started during Penn National’s policy period, but progressively advanced or worsened through Selective’s policy period up to the time of “manifestation,” then both Penn National and Selective would be liable to provide a defense and coverage to Airmaster, subject to potential allocation or apportionment between the carriers.
The Appellate Division noted that none of the reported decisions cited in the opinion had specifically addressed the key issue. The issue before the Appellate Division involved the appropriate way to identify the date of manifestation of property damage that progressively advances within a multi-unit building for purposes of third-party liability claims under a CGL policy.
The court noted that the Supreme Court had implicitly approved the use of continuous-trigger coverage principles in a construction defect context in Potomac Ins. Co. v. PMA Ins. Co., 73 A.3d 465 (N.J. 2013). In Potomac, the court examined whether an insurer may assert a claim for costs incurred in defending litigation over construction defects in a school roof against a co-insurer. In that case, the property damage to the roof had manifested over a period of years, during which time the insured was insured by successive carriers. Relying on its prior opinions, the court found that a continuous-trigger analysis in that particular setting was appropriate. In doing so, the court observed that the Owens-Illinois methodology had been applied to a “variety” of disputes between policyholders and insurers.
Although Potomac specifically concerned the allocation of past defense costs incurred in a construction case by a common policyholder of several insurers, the Appellate Division discerned no reason to refrain from applying continuous-trigger principles to cases like the one before it, where issues of both past and future defense costs and indemnification were implicated. The Appellate Division also cited to a very recent case, The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisades, LLC, 169 A.3d 473 (N.J. 2017), wherein the Supreme Court had stated that “[m]any construction defects will not be obvious immediately.” The Appellate Division noted that the progressively worsening nature of a variety of construction defects, such as water infiltration or mold, logically support the application of the continuous-trigger doctrine. Therefore, the court endorsed the doctrine’s use in Airmaster.
The Appellate Division next addressed what it perceived to be Airmaster’s “novel conceptual argument” that the end date for a continuous trigger should be delayed until it first appears, or reasonably could be known, that the damage is “attributable” to the conduct of the specific insured. Airmaster contended that such an attribution requirement is consistent with the public policies underlying the continuous-trigger doctrine. Airmaster asserted that adding such a requirement would have the coverage-maximizing impact of extending the aggregate period of coverage to the point in time when a manifested injury could be reasonably linked to the particular conduct of an insured.
The Appellate Division rejected this attribution argument. Airmaster did not cite any published opinions. Nor could the court find any decision in which courts had engrafted such an attribution element upon a continuous-trigger analysis.
In addition, the Appellate Division declined to accept the attribution argument, finding it would be unwise to delay the coverage trigger date to a date when sufficient information links an insured’s faulty conduct to the progressive injury. Such 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. It would also require a defendant-specific determination as to when each defendant reasonably could be deemed to be at fault and to have contributed to the progressive harm. Those sorts of defendant-specific inquiries could easily spawn lengthy and expensive collateral discovery and motion practice, according to the court. The court noted that more than two dozen subcontractors were named as third-party defendants in the litigation, and it would be a huge undertaking to conduct a defendant-by-defendant analysis of when the property damage first became attributable to each of them. By contrast, using a date of initial manifestation common to all parties—regardless of which contractor or subcontractor may be “at fault” for the occurrence—would promote efficiency and certainty. Therefore, the Appellate Division rejected Airmaster’s attribution theory as “unsound and unsupported in the law.”
Finally, the Appellate Division addressed the most pivotal aspect of the appeal, the determination of when the property damage due to water infiltration in the condominium building had first sufficiently “manifested” to comprise the “last pull” of the coverage trigger. In approaching this issue, the court was guided by the illustrative analysis of Judge Pressler in her opinion in Winding Hills Condo Ass’n. v. N. American Spec. Ins. Co., 752 A.2d 837 (N.J.Super. App. Div. 2000).
In that opinion, the Appellate Division affirmed the trial judge’s decision to fix the date of manifestation for insurance coverage purposes as of January 1991, the month when an engineering expert report evaluating the extent and cause of deficiencies at a condominium project was issued. Judge Pressler noted: “While it might have been arguable that the [condominium] association should have been charged with notice of the loss as early as 1989 when Trinity [Dynamics] first reported to it that there were foundation problems, we do not see how there can be any other conclusion, respecting the effect of the 1999 report.” She added, “Certainly, the later Becht report, which uncovered additional problems, cannot reasonably impune the extent of [the association’s] awareness of the essential difficulties in January 1991.” Consequently, the panel in Winding Hills held that the issuance of Trinity’s engineering expert report in 1991 delineating the “essential” nature of the harm—not its initial discovery that preceded it in 1980-1990—was the appropriate trigger date to use for coverage analysis.
The Appellate Division in Airmaster noted that the Winding Hills opinion did not define “essential” as that term was used within its discussion. The Appellate Division presumed the panel contemplated a meaning consistent with standard dictionary definitions for “essential,” i.e., “constituting or part of the nature of something,” “inherent” or “basic.”
In the present insurance context involving the “essential” manifestation of an injury, the Appellate Division indicated that the term connoted the revelation of the inherent nature and scope of that injury. On one end of the spectrum, manifestation cannot be merely tentative. Nor must the manifestation be definitive or comprehensive. The Appellate Division, therefore, held that the critical term “essential” as used in this coverage context should be understood and applied consistent with such concepts.
Here, Airmaster likened Jersey Infrared’s May 2010 expert report, which delineated the nature and extent of the rooftop moisture damage, to Trinity’s expert report in Winding Hills. Airmaster argued that the May 2010 report provided an appropriate demarcation of the time of manifestation. By contrast, Selective urged that the point of manifestation happened much earlier in 2008, when residents had noticed and reported water infiltration in their units, prompting remedial investigation.
The Appellate Division in Airmaster believed that the sparse record in the case provided an insufficient basis to resolve the manifestation question.
The Appellate Division, therefore, remanded to ascertain vital information about what other information about the building defects was or reasonably could have been revealed between the time of the unit owners’ complaints to the time of the start of Selective’s policy in June 2009. For these many reasons, the Appellate Division vacated summary judgment in favor of Selective and remanded for further proceedings.
The Airmaster decision demonstrates that a carrier in a declaratory judgment action will need to possess facts regarding the building defects and about what happened between the time of a unit owner’s complaints through the end of the coverage. This extensive factual discovery will have to be developed in the underlying litigation via depositions, requests for production, requests for admissions, and expert reports or within the context of a declaratory judgment action. Without an extensive factual scenario, carriers will be denied summary judgment based upon an insufficient record.
*Lila, a shareholder, works in our Mt. Laurel, New Jersey office. She can be reached at 856.414.6026 or email@example.com.
Defense Digest, Vol. 24, No. 1, March 2018. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2018 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact firstname.lastname@example.org.