by Carmelo (Tony) Torraca, Esquire

On July 15, 2016, in an unpublished decision, the New Jersey Appellate Division acknowledged the liberal definition of an occurrence under Cypress Point Condo Ass’n v. Adria Towers, LLC[1], finding that the entire insurance policy must still be considered when a carrier is defending its denial of coverage pursuant to a commercial general liability (“CGL”) policy.

In the case of New Jersey-American Water Co., Inc. v. Watchung Square Associates, LLC, et al., Travelers Insurance Company denied coverage under its liability policy issued to Third-Party Defendant/Subcontractor Vollers Excavating & Construction, Inc. (“Vollers”). In this case, Watchung hired Elizabethtown Water Company (“EWC”), who, in turn, subcontracted the excavation work to Vollers. Vollers was hired to both (1) excavate the entire property and install a retaining wall under its contract with another party (site contract); and (2) relocate the water main under the EWC/Vollers agreement.

In February of 2000, the slope failed. At the time, Vollers’ crew was engaged in both excavating the specific slope that failed and trenching for the water line about 70 feet away. Although damages were not specified in the original claims, Watchung ultimately alleged that the slope failure harmed it because of the time and costs involved in properly re-evacuating the slope and installing a more substantial retaining wall. Vollers submitted this claim to Travelers under its CGL insurance policy. The carrier denied the damage.

Travelers filed a motion for summary judgment, and Vollers offered specific defenses. The Trial Court found that under the current case law, faulty workmanship is not an occurrence so the Vollers’ policy provided no coverage. Moreover, the Court determined that the particular workmanship exclusion provided an additional basis to deny coverage. On October 11, 2013, summary judgment was entered dismissing all claims against Travelers with prejudice. It is from that Order that Vollers and EWC appealed.

[1] 441 N.J. Super. 369, 372-372 (App. Div.), cert. granted, 223 N.J. 355 (2015).

The Appellate Court acknowledges that in reviewing summary judgment, it applies the same standards that the Trial Court applied in ruling upon the motion. It affords no special deference to the Trial Court’s interpretation of the law and the legal consequences that flow from the established facts. Additionally, the insurer (in this case, Travelers) bears the burden of establishing that the matter in dispute falls within the exclusionary provision of the policy. Also, the Court acknowledges that “coverage clauses are interpreted liberally, whereas exclusions are strictly construed.” (citation omitted.) Finally, the Court holds that where the meaning of the policy is subject to two reasonable interpretations, the one supporting coverage will be applied.

The Court also determined that as with any contract, construing an insurance policy requires both a broad search for the probable common intent of the parties and an effort to find reasonable meanings in keeping with the expressed general purposes of the policies. An insurance policy must be construed “as a whole and effect given to every part thereof.” (citation omitted.) Finally, the construction of the insurance policy must be consistent with the insured’s reasonable expectations.

Vollers argues that the Trial Court error in holding the claims based upon faulty workmanship did not come within the meaning and scope of Vollers’ policy. It frames the issue that the soil movement meets the current terms of occurrence causing property damage because the February slope failure was a sudden event never intended or expected by the insured.

In dealing with the definition of “insured occurrence,” the Supreme Court has held that “the accidental nature of an occurrence is determined by analyzing whether the alleged wrongdoer intended or expected to cause an injury.” Cypress Point, supra, 441 N.J. Super. at 376 (internal citations omitted). Thus, the key determination of whether the occurrence required is satisfied by what was intended. Recent Law Review articles were cited by the Court in trying to analyze an “occurrence.” One such Law Review article noted that:

When one applies the relevant rules of insurance policy interpretation to the issue of whether construction defects constitute ‘occurrence,’ the inescapable conclusion is that construction defects are ‘occurrences’ unless the insurer can prove the policyholder actually expected or intended to do the construction work defectively and cause damage. New Jersey-American Water Company v. Watchung, et al., 2016 N.J. Super. Unpub. LEXIS 1639, *12-13 (quoting, Christopher C. French, “Construction Defects: Are They “Occurrences”?, 47 Gonz. L. Rev. 1 (2011) at 46).

The Court has no suggestion within the facts that Vollers intended to cause the February slope failure. Accordingly, the Court must acknowledge it satisfied the “occurrence” elements of establishing that Watchung’s claim fell within the basic terms of the Travelers’ policy. However, the Court did not conclude its analysis there. Rather, it proceeded to determine if the “property damage” analysis was properly framed.

The Court acknowledges that had the February slope failure caused a landslide onto a highway resulting in damages to passing automobiles or personal injury to drivers or pedestrians, the Vollers’ policy would plainly cover claims arising from those injuries, even though caused by soil movement. The dispositive issue is not whether the Vollers’ policy covers property damage as resulting from soil movement, but whether the soil movement at issue here should be considered property damage under the policy. Viewing it through the prism of the Vollers’ policy, the excavation and resulting damages from the February slope failure was a business risk. It was not within the grant of coverage.

In quoting the seminal case, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), the Court explained that negligent craftsmanship can be both a business expense of repair and a loss represented by damage to personal property; however, the two consequences are vastly different in relating the sharing of cost of such risk as a matter of insurance underwriting. The Court quoted from Weedo as follows:

The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained.

The Court analyzed its business risk with a stucco application. If the discoloration and peeling and chipping of stucco landed upon the homeowner or his neighbor causing damage, then the CGL insurance policy would provide coverage. If, however, the discoloration and peeling of the stucco requires replacement and repair by the tradesman, it is not a covered event.

Thus, in Cypress Point, the Court noted that “subcontractors failed to properly install the roof, flashing, gutters and leaders, brick and EIFS façade, windows, doors and ceilings” and were claims of defective work giving rise to replacement costs that “[i]n the insurance industry . . . are usually regarded as the cost of doing business and are considered a ‘business risk.'” Cypress Point, supra, 441 N.J. Super. at 373-374. By contrast, the claims that “the faulty workmanship also caused consequential damages to the ‘common area and unit owners’ property [including] damage to steel supports, exterior sheeting and interior sheeting and sheetrock, insulation in other interior areas of the building, both visible and latent'” were “vastly than costs associated with replacing the defective work” and within the scope of coverage. Id. at 374.

In the case of Vollers, the business risk of soil movement when providing proper excavation and an appropriate retaining wall are the very business risks it was hired to do. Even though EWC made no breach of contract or warranty claim seeking to have Vollers complete repair or replacement of the relocated water line, Watchung sought to compel Vollers to redo its own faulty work or hire others to provide proper excavation and an appropriate retaining wall. The damages Watchung sought were solely to correct the alleged defects in Vollers’ work and to put the site in the condition it bargained for had the excavation been performed correctly.

While Cypress Point seems to have extended the definition of occurrences, insurance companies are still readily relying upon the workmanship exclusions in defending coverage claims.

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