Insurance

A New Jersey appellate court ruled in Lopez v. Palin Enterprises, Associated, No. A-0886-17T4 (N.J. App. Div. December 5, 2018) that a tenant’s insurance policy was not the primary coverage for an injury to its employee which occurred within its leased premises.

The defendant in the case, Palin Enterprises, Associated (“Palin”) owned a commercial building and leased a portion of it to Agile Trade-Show Furnishings, Inc. (“Agile”). Agile employed the plaintiff, Teodoro Lopez (“Lopez”). Lopez was injured using a freight elevator located within the leased premises and sued Palin for damages. Palin tendered the defense to Agile’s insurance company, Wausau Insurance (“Wausau”), arguing that the Wausau policy was the primary insurance coverage for Lopez’s claim. Palin was named as an additional insured under the Wausau policy. The Wausau policy provided “[t]his insurance shall be excess over any other insurance available to the additional insured whether such insurance is on an excess, contingent or primary basis, unless you are obligated under a written agreement to provide liability insurance for that additional insured on any other basis. In that event, this policy will apply solely on the basis required by such written agreement.”

The lease between Palin and Agile required Agile to procure “a comprehensive policy of liability insurance protecting [Palin] . . . against any liability whatsoever, occasioned by any occurrence on or about the Demised Premises.” The lease did not require such policy to be the primary liability coverage for such occurrences. The Court found that Wausau was not required to defend the Lopez lawsuit as its coverage is not to all claims, only as to all liability. The Court ruled that due to the failure of the lease to specify that Agile’s liability insurance policy must be primary, per the terms of the Wausau policy it provides excess coverage and Palin’s liability insurance policy provides the primary coverage.

This case underscores the necessity of carefully drafting indemnity and insurance provisions in contracts to properly allocate risks between the parties thereto, specify the types of insurance each party must carry to cover such risks, and designate the insurance which is primary or excess.

Lawsuits by homeowners against their own insurance companies for failing to pay on damage claims that homeowners believe and argue are covered by their policies of insurance are quite common in Florida. Frequently these involve claims for water-related damages—a typical example being a slow leak from piping in a kitchen or bathroom sink that is unknown to the homeowner but that occurs over an extended period of time and that ultimately causes damage to adjoining cabinets or perhaps even flooring. As a plumber who came to inspect such damage in my own house once remarked, when I asked him what all this meant, “Water has to go somewhere.”

A homeowner’s insurance policy is, in its most basic form, a contract of insurance. Each party to any contract has certain rights, duties and obligations under the contract. If a party breaches his or her contractual obligations, the other party may have a claim for damages. Under these circumstances, while other claims may exist, the homeowner’s primary claim against her own insurance carrier, resulting from the carrier’s refusal or failure to pay for damages that the homeowner maintains are covered by her insurance policy, is a claim for breach of contract.

From a homeowner’s perspective, one of the advantages that perhaps minimizes the risk of a lawsuit against her own insurance company is the one-way attorney’s fee provision set forth in Florida Statutes Sec. 627.428. Subsection (1) of this statute provides:

Upon the rendition of a judgment or decree by any of the courts of this state against an insurer and in favor of any named or omnibus insured or the named beneficiary under a policy or contract executed by the insurer, the trial court or, in the event of an appeal in which the insured or beneficiary prevails, the appellate court shall adjudge or decree against the insurer and in favor of the insured or beneficiary a reasonable sum as fees or compensation for the insured’s or beneficiary’s attorney prosecuting the suit in which the recovery is had.

Thus, if a homeowner sues her insurance company for failing to pay for a loss that the homeowner feels is covered by her policy and wins that lawsuit, she will be awarded her reasonable attorney’s fees. If, however, the homeowner loses that lawsuit, she will not be required to pay the company’s attorney’s fees. That is why Florida Statutes Sec. 627.428 is a one-way attorney’s fee statute.

If attorney’s fees are awarded, those fees become part of the actual judgment under subsection (3) of Florida Statutes Sec. 627.428. In addition, if an appeal is filed and the homeowner prevails in that appeal, the attorney’s fees associated with the appeal are recoverable.

New Jersey courts are continuing their trend of extending insurance coverage for third-party construction defect claims. Following last year’s NJ Supreme Court decision in Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, 226 N.J. 403 (2016), which broadly interpreted the standard CGL policy to extend an insured developer’s coverage to include claims of damage caused by the work of subcontractors, the New Jersey Appellate Division recently issued a published decision approving a trial court’s use (though not its application) of the “continuous trigger” theory of insurance coverage to third-party construction defect claims, thereby, potentially extending coverage in such cases over multiple policy years.

In Air Master & Cooling, Inc. v. Selective Insurance Co., A-5415-15T3 (N.J. App. Div. October 10, 2017), the Appellate Division reviewed a trial court’s decision in a declaratory judgment action filed by a subcontractor against two of its insurers. Those insurers had declined coverage and refused to defend the subcontractor in a construction defect litigation filed by the condominium association (the “Association”), on whose 101-unit building the subcontractor had performed certain HVAC work on the roof and in each individual unit. The Association and certain unit owners claimed damage due to progressive water infiltration, which they attributed to defective workmanship, and the subcontractor was joined in the litigation as a third-party defendant.

The subcontractor had performed work at the building from November 2005 through April 2008. In early 2008, unit owners began to notice water infiltration into their units and resulting damage. A newspaper article published 2010 detailed the 2008 discovery of leaks by the unit owners. In May 2010, the Association’s consultant issued a report identifying certain areas of the roof in need of replacement though noting it could not determine when the infiltration had occurred.

The subcontractor had three insurers from 2005 through 2015. The insurer for the period November 2005 through June 2009, agreed to defend the subcontractor under a reservation of rights, as it was the insurer during the period the work was performed and at the time the first water infiltration was alleged to have been discovered. The next insurer, Selective Insurance, provided coverage from June 2009 through June 2012, and disclaimed coverage, on the basis that the property damage was alleged to have manifested before the policy periods had begun. The third insurer, with coverage from June 2012 through June 2015, also disclaimed coverage, and was dismissed from the subcontractor’s declaratory judgment case, without appeal, on the basis that its 2012 coverage commenced long after any leaks had started and any resulting damage manifested.

After some discovery was conducted, Selective moved for summary judgment, which was granted by the trial court. The trial court applied the continuous trigger doctrine of insurance coverage in analyzing whether Selective owed the subcontractor a duty to defend the construction defect claim. It determined conclusively, however, that the damage to the building had manifested itself before Selective’s June 2009 coverage began.

On appeal, the Appellate Division, while agreeing that the continuous trigger doctrine was applicable in the construction defect context, disagreed with the ultimate determination – or at least found that the record was not sufficiently developed to make that determination. The appellate court, therefore, reversed the judgment in favor of Selective and remanded the case back to the trial court with guidance on the application of the continuous trigger doctrine in the construction defect coverage context.

The continuous trigger effectively grants continuous coverage to an insured in connection with a third-party damage claim from the date of the initial exposure to the harm through the date of the manifestation of the injury resulting from the harm. The appeals court rejected the subcontractor’s attempt to extend the doctrine even further to extend to the date of “attribution” – that is, when the particular damage could be attributed to a particular insured. Doing so would be akin to transforming policy to claims made policy from occurrence-based, and likely escalate premiums or deter policies from being written. Instead, the court determined that the endpoint of the coverage, or manifestation (or “last pull of the trigger”), should be the date when the harm has sufficiently become apparent or manifests itself to trigger a covered occurrence.

The Appellate Division, guided by the precedential first-party coverage case, Winding Hills Condo Ass’n v. North American Specialty Ins. Co., 332 N.J. Super. 85 (App. Div. 2000), held that the manifestation occurs at that time of the “essential” manifestation of the injury, and not necessarily at the initial discovery of the injury. The essential manifestation is “the revelation of the inherent nature and scope of that injury.” In examining whether the May 2010 report (during Selective’s policy period) or 2008 unit owner observations of water infiltration (before Selective’s policy period) should be used as the manifestation or end date of coverage, the court found the record too sparse to make that determination. There were no depositions, or other evidence, revealing who knew what and when about these construction defects, and the court refused to rely on hearsay statements of the unit owners in the newspaper article.

Accordingly, the court remanded the case back to the trial court for a determination of what information about the building defects at issue were or reasonably could have been revealed between the time of the unit owner complaints and the start of Selective policy in June 2009. The appeals court also noted that the matter was further complicated by the fact that the water infiltration associated with the roof was not discovered until the May 2010 expert report, while the newspaper article does not mention the roof. Thus, there were genuine issues of material fact as to, among other issues, when water infiltration problems on the roof first became known or reasonably could have been known.

The Air Master decision continues a trend in New Jersey jurisprudence of expanding, within reason, CGL coverage to insureds. In particular, in construction defect cases, the courts have recently liberally interpreted policies and legal theories to afford more coverage to insureds. Where construction defects cause progressive property damage, as in the common case of water infiltration, Air Master will help to guide insurers, insureds and their respective counsel in analyzing whether, based on the facts alleged by a third-party, coverage is available for particular policy years. It is also likely to spawn additional discovery and expense in the underlying construction defect cases specific to those issues.

The creditors’ rights exclusion under a title insurance policy is intended to make clear that a title insurance policy does not provide protection for post-policy challenges to the insured title or to the validity, enforceability, or priority of the lien of the insured mortgage arising solely out of the insured transaction (not one in the past chain of title), whereby the transfer to the insured owner or lender of its interest in the land is determined to be a fraudulent transfer or conveyance, or a preferential transfer, under either state or federal law. With respect to the loan policy only, the creditors’ rights exclusion also confirms that no protection is provided to the insured lender if a challenge is made to the priority of the lien of the insured mortgage based on the bankruptcy doctrine of equitable subordination.

Over the past decade, the request by owners and lenders to delete the creditors’ rights exclusion under a title insurance policy has become standard practice. In 2004, ALTA adopted Endorsement Form 21, which insures against loss under an owner’s or loan policy because of the occurrence, on or before the date of the policy, of a fraudulent transfer or preference under federal bankruptcy law or state insolvency or creditors’ rights laws. It also confirms that the title insurer will pay all costs, expenses and attorneys’ fees to defend the insured against such claims. It expressly excludes coverage for such loss, however, if the insured knew that the transfer was fraudulent or was not a purchaser in good faith. The benefit of this endorsement is that it expressly provides affirmative coverage for creditors’ rights matters.

The ALTA 2006 Loan Policy does give some limited coverage with respect to preferences for the insured mortgage itself. Covered Risk, Section 13(a) of the ALTA 2006 Loan Policy insures against “The invalidity, unenforceability, lack of priority, or avoidance of the lien of the Insured Mortgage” resulting from a prior transfer constituting a fraudulent or preferential transfer, but does not cover that risk for the “transaction creating the lien of the Insured Mortgage.” Exclusion 6 of the ALTA 2006 Loan Policy makes it clear that it only applies to those creditors rights’ issues affecting “the transaction creating the lien of the Insured Mortgage” that are not stated in Covered Risk 13(b). Lender’s generally will not find comfort with this limited protection against creditor’s rights matters from prior transactions and require affirmative coverage against the invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured mortgage. To fill the “gap” created by Covered Risk 13(a) and Exclusion 6, when available the title company will issue affirmative coverage under a Creditors’ Rights Endorsement with respect to the transaction.

Creditors’ rights coverage places additional risk on the title insurer and therefore an additional risk premium for the endorsement is required. Normally, in a deed-in-lieu transaction, reasonably equivalent value will have been given for the deed because the value of the property will have been established by appraisal (supplied to the title insurer) to be less than the amount of the outstanding mortgage debt. Where a creditors’ rights issue has been identified because a transfer is being made without the transferor receiving reasonably equivalent value, the title insurer is required to conduct non-title-related due diligence with respect to underwriting the transaction, including an analysis of the transferor’s business and financial statements; its capitalization both before and after the transfer; the amount of secured and unsecured credit obtained by the transferor both before and after the transfer; and a determination of whether the delivery of the deed in lieu of foreclosure will render the borrower insolvent. If the title insurer is willing to issue creditors’ rights coverage in such a situation, it may need to charge a significant additional risk premium to cover the potential liability. In addition, the title company may require that an independent third party with a demonstrated and substantial net worth indemnify the title insurer for the costs of defending an action based on a creditors’ rights defense.

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