New Jersey Court Finds Insurer Can Deny Or Reserve Coverage Despite Insured’s Failure To Respond To Offer Of A Defense

Charles W. Stotter | Bressler, Amery & Ross PC | April 2, 2018

In a recent decision for publication, a New Jersey intermediate appellate court clarified certain circumstances in which an insurer can deny coverage even though the insured did not respond to the insurer’s offer of a “courtesy defense.” In Northfield Ins. Co. v. Mt. Hawley Ins. Co. et al., Slip Op., No. A-1771-16T4 (App. Div. March 28, 2018), the Appellate Division of the New Jersey Superior Court, finding fact issues, held that an insurer would not be estopped from denying coverage where it offered a “courtesy defense,” received no response from the insured, and then proceeded to control defense of the underlying litigation.

The court found there was insufficient evidence to grant summary judgment to the insured on the coverage issue as a matter of law under the estoppel doctrine first recognized in Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 127 (1962). In Eggleston, the New Jersey Supreme Court had found that an insurer was estopped from denying coverage where it reserved its rights or denied coverage while at the same time it failed to request it’s insured’s consent to control the defense of the underlying action. The Court stated that “[c]ontrol of the defense is vitally connected with the obligation to pay the judgment,” that “it would be unfair to permit a carrier to control the defense without the consent of the insured and then leave the judgment for his payment,” and then ruled that “if a carrier wished to control the defense and simultaneously reserve a right to dispute liability, it can do so only with the consent of the insured.” Id.

In Northfield, a roofing contractor, CDA, insured by Northfield, did roofing work on a hotel, Empress, pre-Superstorm Sandy. The hotel was damaged by Sandy. The hotel submitted a claim to CDA, asserting the damage was due to CDA negligence. The hotel and its insurer, Mt. Hawley, subsequently sued CDA alleging that pre-Sandy roof problems leading to damage were due to CDA negligence (Empress Lawsuit).

Northfield disclaimed coverage of the Empress Lawsuit to CDA and although denying an obligation to indemnify CDA, it stated that it was “willing to provide [CDA] with a courtesy defense for this lawsuit.” Id., Slip Op. at 6. Northfield also reserved its right to withdraw from the defense of the Empress Lawsuit at any time and all other rights as to its coverage decision. CDA did not respond to the offer (the appellate court noted that based on the factual record CDA was “defunct”). Northfield then filed an action seeking a declaration that it had no obligation to defend or indemnify CDA in the underlying Empress Lawsuit (DJ Action). Empress and Mt. Hawley sought summary judgment in the DJ Action, on the ground that Northfield was estopped from denying coverage because it did not have consent from CDA to control the defense of the Empress Lawsuit. The trial court granted summary judgment to Empress and Mt. Hawley, concluding that Northfield could not deny coverage because it had not obtained consent from CDA to control the defense of the Empress Lawsuit. The appellate court disagreed and reversed that ruling on appeal.

The Appellate Division observed that Eggleston did not “impose only one way in which the insured’s rights upon a disclaimer or coverage denial may be observed.” Id., Slip Op. at 10. Rather, the court noted that here the offer of a “courtesy defense” could be viewed as the offer of a defense in the underlying action, not that the insurer was insisting on controlling the defense. That led the court to find that “if interpreted as an offer, CDA’s following silence could be interpreted as acquiescence in Northfield’s control of the defense; such a circumstance would not offend Eggleston.” Id., Slip Op. at 12. The Appellate Division concluded that the trial court’s “application of the doctrine of estoppel was precipitous and cannot stand.” Id., Slip Op. at 13. It further found that there were “too many factual uncertainties to allow for the application of estoppel as a matter of law,” and remanded the case for further proceedings. Id., Slip Op. at 14, 21.

The takeaway is that there are situations where the estoppel doctrine of Eggleston will not apply, and the issue of an insured’s consent to an insurer controlling the defense will be heavily fact-sensitive. Coverage counsel should be aware of that when advising insurers who seek to reserve rights or deny coverage, while at the same time offering to control or controlling the defense of an underlying litigation.

Appellate Division Ruling in Construction Defect Case Highlights Importance of Timely Expert Testimony and Adherence to Discovery Schedules

John D. North and Charles J. Vaccaro | Greenbaum, Rowe, Smith & Davis LLP | April 23, 2018

A recent decision by the Superior Court of New Jersey Appellate Division underscores the fact that in construction defect litigation, where general contractors, project managers, architects and engineers are the primary defendants, it is imperative that qualified experts be retained and properly utilized by the parties in a timely manner. The failure of a party to timely make use of a qualified expert and abide by the trial court’s discovery schedule can be fatal to a plaintiff’s claims for construction defects, and can also severely hamper the defense of such claims.

This principle was exemplified by the Appellate Division’s February 2018 ruling in Riva Pointe at Lincoln Harbor Condominium Association, Inc. v. Riva Pointe Development, LLC, in which the plaintiff, a condominium association, filed suit against the developer, general contractor/project manager, architect, and other parties involved in the construction of a condominium complex. The association’s complaint, which was first filed in October 2012 and amended five times, alleged that defective construction caused water infiltration into condominium units and common areas, causing extensive damage.

After “numerous” extensions for the deadlines of expert reports, the association served a “preliminary” expert report setting forth the negligence of each defendant. The association thereafter told the trial court and defendants that this report would be final. As a result, the Court said the association could only submit a supplemental expert report for the sole purpose of addressing the defense experts’ reports, and not to introduce any new issues or opinions. The submission deadline for any such supplemental report was June 24, 2015.

Over a month after the supplemental expert report was due, the association submitted a report that, contrary to the Court’s earlier ruling, set forth new issues, opinions and conclusions regarding construction defects and increased the claim for damages by $8 million. The Court then threw out the portions of the report that raised new issues and increased the association’s damages claim. When the association failed to produce their expert for depositions, the judge precluded the expert from testifying at trial.

On the day of trial, the association’s counsel argued that “it would be fruitless and futile to continue with the case given that we don’t have a liability expert” as the Court precluded him from testifying. The Court then dismissed the association’s case.

The association filed an appeal. The Appellate Division affirmed all of the trial court’s rulings and added a few brief comments. The three judge panel ruled that the trial court had not abused its discretion. The panel highlighted that the trial court held multiple case management conferences and issued five case management orders specifying discovery deadlines, which were adjusted as necessary to accommodate reasonable delays. The Appellate Division also affirmed the trial court’s refusal to allow the association’s expert to add new issues and $8 million to his calculation of damages only three months prior to trial.

Expert testimony is often needed in construction defect litigation to establish and explain how design and construction work was deficient and how it can be corrected, as well as the cost of corrective work. Expert testimony assists the jury on issues related to building codes and compliance, building delays, construction costs, and construction defects. With respect to architects and engineers, expert testimony is needed to establish the higher professional standard of care that must be followed and any deviations from that standard.

The holding in Riva Pointe should serve as a cautionary tale to community associations and builders alike that they should not drag their feet in prosecuting claims for construction defects. Experts should be retained early so that they can provide comprehensive input and set forth all of their opinions and conclusions before critical deadlines have passed.

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
____________________
1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

The Proper Standard for Evaluating “Actual Cash Value” Under New Jersey Law

Jennifer Van Voorhies | Property Casualty Insurance Law Blog | April 12, 2018

One of the most common questions we hear from our clients has to do with the differences between “actual cash value” and “replacement cost value.” Replacement cost value on its face seems relatively straight forward, but what is “Actual Cash Value” determined under New Jersey law?

This topic was visited by Shane Smith following Super Storm Sandy in Calculating Actual Cash Value, Part 5: New Jersey and New York, and I was curious if the criteria had changed following such an influx of first party property damage claims.

There are typically three general ways to determine Actual Cash Value:

  1. market value;
  2. replacement cost less depreciation; and
  3. the broad evidence rule.1

The Broad Evidence Rule, in layman’s terms, is a combination of Market Value (what it’s selling for now) and Replacement Cost less Depreciation (how much it costs to replace minus age/wear & tear/condition, etc.).2 In Messing v. Reliance Insurance Company, the court found “that the broad evidence rule was most consistent with the principle of indemnity.”3

The Supreme Court of New Jersey agreed. In Elberon Bathing Company v Ambassador Insurance Company,4 a fire case that went to appraisal, the Court held:

“[T]hat (1) appraisal based on replacement cost without consideration of depreciation does not measure actual cash value; (2) the proper standard for evaluating ‘actual cash value’ under New Jersey standard form policy is broad evidence rule. . . .”

The Elberon the New Jersey Supreme Court found broad evidence to be the standard because it requires the fact-finder to consider the same evidence an expert would consider relevant to an evaluation; fair market value and replacement cost minus depreciation. The Court does allow the fact-finder to use the criteria as guidelines if the facts of the case are appropriate.
____________________
1 See Note, “Valuation and Measure of Recovery Under Fire Insurance Policies,” 49 Colum. L. Rev. 818, 820-823 (1949); Cozen, Op. cit., supra, 12 Forum at 648-658; Hinkle, “The Meaning of ‘Actual Cash Value,’” 1967 Ins.L.J. 711. See generally Annot., 61 A.L.R.2d 711 (1958).
2 Messing v. Reliance Ins. Co., 77 N.J.Super. 531, 187 A.2d 49 (1962).
3 Id. at 534.
4 Elberon Bathing Co. Inc. v Ambassador Ins. Co., 77 N.J. 1, 389 A.2d 439 (1978).

New Jersey Court Adopts Continuous Trigger for Construction Defect Claims

Tred Eyerly | Insurance Law Hawaii | November 15, 2017

    The New Jersey Superior Court, Appellate Division, adopted the continuous trigger for establishing which insurers were on the risk for construction defect claims. Air Master & Cooling, Inc. v. Selective Ins. Co. of Am., 2017 N.J. Super. LEXIS 144 (N.J. Super. Ct., App. Div. Oct. 10, 2017).

The insured, Air Master, worked as a subcontractor on the construction of a condominium building. Air Master performed HVAC work in the building between November 2005 and April 2008. Air Master’s 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 in their windows, ceilings, and other portions of their units. On April 29, 2010, an expert consultant, Jersey Infrared Consultants, performed a moisture survey of the roof for water damage. A report identified 111 spots on the roof damaged by moisture from water infiltration. The report noted it was impossible to determine when moisture infiltration occurred. The expert recommended that these damaged areas of the roof be removed and replaced.

Two unit owners and the condominium association each sued the developer and other defendants for property damage and remediation costs. The three lawsuits were consolidated. Third-party complaints were filed against Air Master and other subcontractors. Air Master sought defense and indemnity from its various insurers who had issued a succession of CGL policies. Air Master was insured by Penn National for the policy period form June 22, 2004 through June 22, 2009. Selective Insurance Company of America insured Air Master from June 22, 2009 through June 22, 2012.

Penn National defended the third party complaint, but Selective disclaimed coverage. Selective argued that the property damage had already manifested before its policy period began.

Air Master sued Selective for declaratory judgment. Selective moved for summary judgment. The motion judge decided on reconsideration that the continuous trigger doctrine applied. But the court ruled that Selective was not liable for coverage or a duty to defend because damage to the building had manifested before Selective’s policy period began in June 2009. The judge rejected Air Master’s argument that the CGL coverage period continued until damages attributable to the insured were discovered, or reasonably could have been discovered.

On appeal, the appellate division noted that no reported decisions in the state addressed the appropriate manner for identifying the date of manifestation of property damage that progressively advanced within a multi-unit building for purposes of third-party liability claims under a CGL policy.

The court held that a continuous trigger theory of CGL coverage applied to claims for third-party, progressive property damage in construction defect cases. The progressively-worsening nature of a variety of construction defects, such as water infiltration or mold, supported the application of the continuous trigger doctrine.

The court, however, rejected Air Master’s theory that the end date for a continuous trigger should be delayed until it first appeared, or reasonably could be known, that the damage was attributable to the conduct of the specific insured. It would be unwise to delay the coverage trigger date to a date by which there was sufficient information to link 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 made a request for defense and indemnification after being sued. By contrast, using a date of initial manifestation that was common to all parties – regardless of which contractor or subcontractor was “at fault” for the occurrence – promoted efficiency and certainty.

Finally, on the limited record presented, the court could not determine when the property damage due to water infiltration in the building had sufficiently manifested to comprise the “last pull” of the coverage trigger. Air Master urged that the May 2010 report provided an appropriate demarcation of the time of manifestation. By contrast, Selective argued that the point of manifestation happened much earlier when residents had first noticed and reported water infiltration in their units, prompting remedial investigations. There were genuine issues of material fact concerning when the water infiltration problems on the roof first became known, or reasonably could have been know.

Therefore, summary judgment in favor of Selective was vacated and the case remanded for further proceedings.