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Continuous Trigger Theory of Insurance Coverage Applied to Third Party Liability Claims Involving Progressive Damage to Property in Construction Defect Case

By on October 13, 2017 in Liability with 0 Comments

In a case of first impression, the Appellate Division in Air Master & Cooling, Inc. v. Selective Insurance Company of America, 2017 N.J. Super. LEXIS 144 (App. Div. October 10, 2017), in a published decision, ruled that the continuous trigger theory of insurance coverage may be applied in New Jersey to third party liability claims which involve progressive damage to property caused by an insured’s allegedly defective construction work.  Further, the Appellate Division ruled that the “last pull” of that trigger, for the purposes of ascertaining the end of the 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.

The insured, Air Master, worked as a subcontractor on the construction of a seven story, 101 unit, a mostly residential condominium.  The construction manager hired Air Master to perform HVAC work, which was performed between November 2005 and April 2008.  Its work consisted of installing condenser units on rails on the building’s roof and also HVAC devices within each individual unit.

Starting in early 2008, some of the unit owners began to notice water infiltration and damage into their units.  Eventually, on April 29, 2010, an expert consultant performed a moisture survey of the roof for water damage and documented it in a May 3, 2010 report.  The report identified numerous spots on the roof damaged by moisture from water infiltration and recommended that these damaged areas of the roof be removed or replaced.  According to this report, the expert stated that it was impossible to determine when moisture infiltration occurred.

Two unit owners and the Condominium Association each sued the project’s developer and other defendants for property damage and the costs of remediation.  The three suits were consolidated.  The defendants, in turn, brought third party complaints against Air Master and other subcontractors that had worked on the project.  Air Master then sought defense and indemnification from its various insurers that covered it under a succession of CGL policies.

Air Master was insured by Penn National Insurance Company for the policy period from June 22, 2004 through June 22, 2009.  Thereafter, Air Master had a policy with Selective covering June 22, 2009 through June 22, 2012.  Last, it had a policy with Harleysville Insurance Company from June 22, 2012 through June 22, 2015.  Both Selective and Harleysville disclaimed coverage and argued that the property damage had already manifested before their respective policy periods began.

Penn National, which insured Air Master during the November 2005 to April 2008 time frame when it worked on the building, assumed the defense of the third party complaints, subject to a reservation of rights.  Harleysville obtained summary judgment because its policy did not commence until June 2012, long after the leaks had materialized.  However, the issue remained as to the middle carrier, Selective, as to whether it might owe coverage.

Selective’s CGL policy stated that it provided coverage for bodily injury or property damage that occurred during the policy period.  Its policy defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”  Property damage is defined as including loss of use of the property.  “Loss of use” was deemed to have occurred under its policy at the time of the physical injury that caused it.

Air Master filed this declaratory judgment action against Selective and Harleysville in September 2014.  Selective moved for summary judgment, arguing that it was not responsible for water damage that had materialized or manifested before the beginning of its coverage period in June 2009.  In opposition, Air Master countered that under a continuous trigger theory, coverage by all applicable insurers continued until the “last pull” of the trigger of an injury occurs.  Air Master argued that the manifestation does not happen until it becomes known, or reasonably known, that such damage is attributable to the work of the insured.  According to Air Master, the “last pull” of the coverage trigger here was in May 2010 when the consultant issued its moisture report.

Initially, the motion judge found that the continuous trigger theory did not apply but then she reversed herself upon reconsideration.  However, she ruled that Selective was not liable for coverage because she found that the damage to the building had manifested before Selective’s policy period began in June 2009.

Upon appeal, the Appellate Division first had to determine whether the continuous trigger theory would apply to this scenario.  Prior to this case, the continuous trigger theory was utilized in asbestos claims, environmental contamination cases, and cases involving harmful exposure to substances, such as food flavorings containing harmful chemicals.  These cases, however, did not address the appropriate manner for identifying the date of manifestation of property damage that progressively advances within a building for purposes of third party liability claims under a CGL policy.  However, that issue was resolved in this case.

First, the Appellate Division did agree that the continuous trigger theory for CGL coverage should apply to claims for third party progressive property damage in a construction defect case.  Thus, the Court agreed that the motion judge correctly presumed as much in her reconsideration decision.

Second, the issue that the Appellate Division needed to decide was when the property damage, due to water infiltration into the condominium building, had first sufficiently manifested to apprise the “last pull” of the coverage trigger.  The Court was guided by a prior case, called Winding Hills, which applied the manifestation theory of coverage, although in a first party case.

In the Winding Hills case, the court determined that the last pull was when the condominium association in that case obtained an expert report which identified deficiencies in the project’s on-site drainage system that had led to structural failures in the buildings’ foundations.  The court in Winding Hills fixed the date of manifestation for insurance coverage purposes as of the date of that expert report.

Similarly, in the within case, the Appellate Division found the Winding Hills holding instructive.  Winding Hills held that the issuance of the expert report delineated the “essential” nature of the harm and that date was the appropriate trigger date for coverage, as opposed to the initial discovery of the foundation problems which had preceded the report.

Air Master argued that its consultant expert report in May 2010, which delineated the nature and extent of the rooftop moisture damage, was similar to the expert report that was issued Winding Hills.  It argued that the May 2010 report was the date that should be used as the time of manifestation.  Selective, on the other hand, argued that the point of manifestation happened much earlier in 2008, when unit owners noticed and reported water infiltration into their units, prompting remedial investigations.

The Appellate Division ruled that there were insufficient facts to resolve the manifestation issue in question and remanded the matter back to the trial court to conduct discovery and further develop the record.  However, it commented that if the initial complaints were to be deemed dispositive, then in the Winding Hills matter, the preliminary discovery of structural defects before the issuance of the expert report would have been deemed to be the date of manifestation.  Instead, Winding Hills court ruled that the date of the expert report, delineating the nature and extent of the problems, comprised the proper date of manifestation.

However, because the Court could not tell with any confidence what, if any, 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 the Selective policy in June 2009, the case must be remanded to ascertain that information.  Hence, the matter was remanded back to the trial court to more fully develop the factual record so as to be able to establish the “last pull” date so that it can be determined whether or not the Selective Insurance Company policy covered this claim.



About the Author

About the Author:

Ms. Ramos is an Executive Committee Member and Co-Chair of the Litigation Department at Capehart Scatchard, P.A. located in Mount Laurel, New Jersey. She is an experienced litigator with over 30 years experience handling diverse matters. Practice areas include tort defense, business litigation, estate litigation, tort claims and civil rights defense, construction litigation, insurance coverage, employment litigation, shareholder disputes, and general litigation.

For the years 2020-2023, Ms. Ramos was selected for inclusion in The Best Lawyers in America© in the practice area of Litigation - Insurance. The attorneys on this list are selected based upon the consensus opinion of leading lawyers about the professional abilities of their colleagues within the same geographical area and legal practice area. A complete description of The Best Lawyers in America© methodology can be viewed via their website at: https://www.bestlawyers.com/methodology.

In 2021, Capehart Scatchard and Ms. Ramos received the “Best Law Firm” ranking in the area of Litigation – Insurance (Metro, Tier 3) published by U.S. News & World Report and Best Lawyers®. Law firms included on the list are recognized for professional excellence with consistently impressive ratings from clients and peers. To be eligible for a ranking, a firm must have at least one attorney who has been included in the current edition of Best Lawyers in America, which recognizes the top five percent of practicing lawyers in the United States. Betsy Ramos (Litigation – Insurance) was recognized for this prestigious award in the 2021 edition. For a description of the “Best Law Firm” selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

“Best Law Firms” is published by Best Lawyers in partnership with U.S. News & World Report. For a description of the selection methodology please visit: https://bestlawfirms.usnews.com/methodology.aspx.

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