The state of the law across the U.S. regarding insurance for construction defects under commercial general liability (CGL) coverage is an ever-changing landscape. Although numerous coverage issues continue to be debated, including the fundamental issue of whether faulty workmanship is sufficiently fortuitous to rise to the level of an “occurrence” (which can vary from jurisdiction to jurisdiction), one area that has significant implications for both insurers and insureds is the trigger of coverage in the case of arguably progressive losses, such as pervasive water intrusion. Particularly in the case of large-scale residential developments, such losses can give rise to numerous claims by home or unit owners against project developers, general contractors and subcontractors and potentially implicate years of the defendants’ insurance coverage.
In an October 10, 2017 decision, Air Master & Cooling, Inc. v. Selective Insurance Company of America, 2017 WL 4507547, — A.3d — (2017) (“Air Master”), New Jersey’s Appellate Division addressed construction defect coverage issues that were, in its own words, “completely novel” or had not been definitively addressed under state law. The court first endorsed the view that a continuous trigger could be applied to third-party liability claims of progressive damage to property as the result of defective construction. This trigger theory, traditionally applied in the case of mass toxic torts or environmental pollution, brings into play all CGL coverage in effect from initial “exposure” to “manifestation” of the injury or damage. The Appellate Division then addressed the equally important issue of what constitutes the “last pull,” or temporal end point, of the continuous trigger in such cases, a question that is not always easily answered in the case of progressive losses where much time may pass before damage is first reported and then the full extent and cause or causes ascertained. On this issue, the Air Master court set forth what can be seen as a sort of middle ground: progressive property damage from defective construction does not necessarily “manifest” for the purposes of a continuous trigger upon initial reports of damage but “when the essential nature and scope of the property damage first becomes known, or when one would have sufficient reason to know of it,” a standard that does not require a definitive expert or other report on the cause and origin of the problem. Finally, the court rejected the insured’s argument that this “last pull” of the continuous trigger does not take place until there is proof that attributes the property damage to the actions of the particular insured.
The Air Master decision has a number of implications for CGL coverage of claims arising from defective construction. Not only can it be seen as confirmation that a continuous trigger may be applied to third-party construction defect claims in New Jersey (thus expanding this doctrine beyond its traditional areas of application), it also sets the stage for protracted, fact-intensive inquiries to determine the “last pull” of the trigger, and which insurers will and will not have to respond, given the lack of a bright-line rule on when progressive property damage losses can be said to manifest.
The Air Master Decision – Background
The Air Master case arose out of lawsuits by a condominium association and certain unit owners for the remediation of progressive water infiltration at a seven-story, 101-unit condominium. The plaintiff in the coverage action was Air Master & Cooling, Inc. (“AM&C”), an HVAC subcontractor who had worked on the roof and other parts of the building between November 2005 and April 2008.
Residents had begun noticing water infiltration and damage in their units, including to windows and ceilings, in early 2008, as later reported by a local newspaper article that appeared in November 2010. The general contractor and developer of the project had begun to respond in the form of investigations and remedial measures. An expert consultant conducted a moisture survey of the roof of the building in April 2010 and issued a report in May 2010, which identified 111 areas of the roof that had been damaged by moisture from water infiltration, and recommended removal and replacement of those areas. The report also noted that it was not possible to determine when the moisture infiltration had taken place but did raise a potential link to the previously reported water infiltration on the floors below.
The condominium association and the two unit owners that had been featured in the 2010 news article brought suit against the project developer and other defendants. After the lawsuits were consolidated, the defendants brought a third-party complaint against AM&C and other subcontractors. AM&C then turned to its CGL insurers for defense and indemnity: Penn National Insurance Company (“Penn National”), which provided coverage from June 2004 to June 2009; Selective Insurance Company of America (“Selective”), which provided coverage from June 2009 to June 2012; and Harleysville Insurance Company (“Harleysville”), which provided coverage from June 2012 to June 2015.
Selective and Harleysville both disclaimed coverage, arguing that the property damage had already manifested before their coverage incepted. Penn National, which provided coverage during the period AM&C had worked on the condominium project, assumed the defense of the suits under a reservation of rights. AM&C filed a declaratory judgment action against Selective and Harleysville. Harleysville, whose coverage did not commence until 2012, obtained summary judgment on the ground that the leaks had materialized long before its policy period began. AM&C did not appeal that decision.
Selective also moved for summary judgment, arguing that it likewise had no defense or indemnity obligations for water damage that had materialized or manifested before its coverage began in June 2009. AM&C countered that a continuous trigger should be applied to its insurance and that, under this doctrine, coverage should be available until the “last pull” of the trigger takes place. According to AM&C, this “last pull” was the attribution of the damage to the work of the insured, which in this case was said to be the May 2010 roof moisture report.
The trial court initially granted summary judgment to Selective because it found that the continuous trigger did not apply to first-party claims. AM&C moved for reconsideration. The trial judge amended its ruling on the application of a continuous trigger since third-party claims were in fact at issue but still found for Selective on the ground that the damage had manifested before its policy period began, rejecting AM&C’s arguments that manifestation does not take place until damage is attributed to the insured. AM&C appealed.
Continuous Trigger and Third-Party Construction Defect Claims
On appeal, AM&C argued that the appellate court should recognize as a predicate matter that a continuous trigger applies to third-party construction defect claims involving progressive damage. While acknowledging that courts generally interpret insurance policies by looking at their literal terms and enforcing plain and unambiguous provisions, the Appellate Division explained that the Supreme Court of New Jersey has also considered certain public policy factors in the context of CGL coverage, including when addressing whether losses occurred “during” the term of a particular policy period, setting the stage for an extension of the continuous trigger doctrine to non-traditional contexts.
Citing to the New Jersey Supreme Court’s seminal decision in Owens-Illinois, Inc. v. United Insurance Co., 650 A.2d 974 (N.J. 1994), the Air Master court noted the three most frequent theories of trigger of coverage in other jurisdictions: the exposure theory (which posits the trigger date of a bodily injury occurrence as when the injury-producing agent first makes contact with the body); the manifestation theory (which looks at the point in time when an injury or disease first manifests) and the continuous trigger theory (which is applied to diseases that progress over time and deems the date of the “occurrence” to be a continuous period running from exposure until manifestation). According to Owens-Illinois, public policy supporting the application of a continuous trigger included its maximization of coverage for meritorious claims and its encouragement to insurers “to monitor progressively-developing risks and to charge appropriate premiums for those risks.” Conceptually, the manifestation theory and the continuous trigger theory also had the same endpoints (that is, when the injury or harm becomes sufficiently apparent), with the distinct difference that the former theory will limit coverage to the insurer on the risk when manifestation takes place while the latter theory implicates all coverage from exposure to manifestation.
According to the Air Master court, while Owens-Illinois had recognized that a continuous trigger was “most readily justified” in the case of progressive bodily injury, it had also “sensibly applied” the doctrine to progressive property damage, in that case, alleged property damage as the result of the installation of asbestos-containing products. Since Owens-Illinois, New Jersey courts had also applied a continuous trigger to a number of other third-party losses, such as environmental contamination and exposure to food flavorings like diacetyl, a toxic chemical.
Noting that the continuous trigger doctrine had been created to address the difficulty of determining to a scientific certainty when the harm of a progressive disease or injury takes place, the Air Master court appealed to the beneficial effect of the doctrine’s “promot[ing] the availability to the general public of coverage in such progressive injury situations.” For insurers, it was also not “fundamentally unfair” because insurers on the risk as the injury progressed to final manifestation would simply be bearing a portion of the overall coverage burden. Moreover, according to the Air Master court, the Supreme Court of New Jersey had implicitly approved the application of a continuous trigger for claims involving construction defects in Potomac Insurance Co. v. PMA Insurance Co., 215 N.J. 409, 73 A.3d 495 (2013). Although the Potomac case had concerned the allocation of past defense costs among insurers, the Air Master court found “no principled reason” to prevent the application of a continuous trigger to cases involving both past and future defenses costs and indemnity. Because it believed that latent, progressively deteriorating property damage from construction defects implicated the same public policies that supported a continuous trigger in the case of progressive bodily injuries, such as those caused by asbestos, the Air Master court expressly endorsed the application of a continuous trigger in the case of construction defects involving such progressive damages as water infiltration or mold.
Temporal End Point of the Continuous Trigger
Once a continuous trigger is applied, a temporal end point must be identified in order to determine which CGL policies should respond. As noted by the Air Master court, no reported New Jersey decisions had specifically addressed the identification of a manifestation date for progressive property damage in a multi-unit building in the case of third-party claims under a CGL policy. In approaching this question, the Air Master court, however, categorically rejected the insured’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.”
AM&C argued that requiring attribution to an insured would be consistent with the public policy of maximizing coverage. The Air Master court rejected the argument on several grounds. First, there was no published opinion to be found to support such an attribution requirement. (The court did not name or discuss at any length two unpublished decisions that AM&C appears to have relied on, but simply noted in a footnote that they were not binding and, in any event, concerned scenarios unhelpful to AM&C in that the initial manifestation dates had preceded the dates of attribution.) Second, agreeing with the trial court and the insurer, Selective, the Air Master court described the potentially significant repercussions of delaying the end of a continuous trigger until that time when the insured’s conduct has been sufficiently linked to an alleged progressive injury. Such an attribution analysis would be highly fact-dependent and create complications not only when an insured initially seeks defense and indemnity from a particular insurer or insurers after being named in a complaint but, in cases where multiple parties are sued, would also require a defendant-by-defendant determination of when each one was found to have been at fault. This would likely entail protracted and expensive discovery and motion practice. In contrast, the Air Master court found, applying an initial manifestation date common to all parties and defendant would result in efficiency and certainty. It would also be “unfair and inappropriate” to apply what was in essence an equitable tolling concept in such situations to make insurers potentially liable under occurrence- based policies for years after an injury had manifested, which might substantially increase premiums or even deter insurers from writing CGL policies.
The Air Master court then turned to what it called the most pivotal aspect of the case before it, which was the determination of the proper end date, or “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.” For guidance, the court relied on the analysis in its prior decision in Winding Hills Condominium Association, Inc. v. North American Specialty Insurance. Co., 332 N.J. Super. 85, 752 A.2d 837 (App. Div. 2000), a first-party coverage decision which applied the manifestation theory of coverage. In Winding Hills, the Appellate Division had determined that the issuance of a first expert report which set out the “essential” nature of foundation damage to buildings — and not additional expert reports following it or the initial discovery of damages that preceded it — constituted the manifestation date for purposes of coverage. The Winding Hills decision did not, however, define the term “essential,” so that the Air Master court turned to dictionary definitions to conclude that the term as applied in the case before it should “connote the revelation of the inherent nature and scope of the injury.” This meant that manifestation would be something more than “merely tentative,” such as initial observations, but at the same time something less than “definitive or comprehensive.”
While the insured, AM&C, argued that the 2010 expert report should be looked to for the manifestation date, its insurer, Selective, pointed to events in 2008, when the two unit owners who later sued had reported water infiltration in their units. The Air Master court found that the issue could not be decided on the record before it and remanded the case for further proceedings, including the reopening of discovery at the discretion of the trial court.
Implications of the Air Master Decision
The Air Master decision solidifies a perceptible shift, at least in New Jersey, in the application of the continuous trigger theory and the public policies underlying it when it comes to claims of defective construction, extending this trigger theory beyond its traditional application to mass torts and environmental pollution. In an unpublished 2010 decision, Selective Way Insurance Co. v. Arthur J. Ogren, Inc., 2010 WL 5347962 (N.J. App. Div. Dec. 13, 2010), the New Jersey Appellate Division had expressly left open the question of whether a continuous trigger should be applied to such third-party claims, in that case, a claim of pervasive, ongoing water intrusion at a renovated courthouse attributed to the contractor’s faulty workmanship. In Ogren, the Appellate Division found it did not need to decide between a manifestation trigger and continuous trigger since discovery had resulted in the undisputed fact that the damage had manifested two years before the insurer’s coverage of the contractor began. Nevertheless, citing to the Winding Hills decision it would later rely on in Air Master, the Appellate Division noted that some of the same reasons for applying the manifestation trigger to first-party property damage claims applied in the case of the third-party claim involving water intrusion at the courthouse: for one, damages sustained by property owners did not “‘invoke ‘the law’s solicitousness for victims of mass toxic torts and the environmental contamination’” and, in addition, while the interests at issue did extend beyond those of the property owner and its insurance company, the owner had the ability to require that the contractor obtain sufficient insurance coverage when negotiating the work contract. In Air Master, on the other hand, public policy was now found to support the application of a continuous trigger, perhaps influenced by the fact that that case concerned more of the “public at large” in that multiple unit owners would be affected. Since construction defect suits may often concern large-scale residential housing projects, involving hundreds of homes, it is not unlikely that such public policy concerns will continue to play a role. In addition, depending on the availability of coverage, insureds may be motivated to characterize construction defect losses as “progressive” even beyond the more intuitive scenario of ongoing water intrusion.
In terms of when such coverage will end once a continuous trigger is applied, however, the standard articulated by the Air Master court leaves considerable room for lengthy, fact-driven disputes, calling into question whether summary judgment can now even be efficiently obtained on trigger issues in the case of progressive damage resulting from defective construction. Initial reports or complaints by various homeowners, who are generally non-experts, may not be sufficient (even if it is those particular homeowners who later bring suit, as seen in the Air Master case). On the other hand, a definitive expert report would also not seem necessary, but rather something in between regarding what is known of the “nature and extent” of the damage at issue, a determination that will necessarily differ from case to case.
- [*] Andrea Fort is an associate at Mound Cotton Wollan & Greengrass LLP in Long Island.
-  Air Master, 2017 WL 4507547, at *1.
-  Id., at *4.
-  Id.
-  Id., at *5.
-  Id., at *6.
-  Id., at *7.
-  Id.
-  Id., at *7, n.6.
-  Id., at *8.
-  Id.
-  Id., at *9.
-  Id.
-  For example, in 2008, a federal district court construing New Jersey law expressly declined to extend the “powerful” continuous trigger doctrine to construction defect claims, in that case, a structural collapse of a retaining wall which was argued to have been precipitated by approximately three years of cracking, water seepage, missing mortar and falling stones. See Langan Eng’g & Envtl. Servs., Inc. v. Greenwich Ins. Co., Civil Action No. 07-2983 (JAG), 2008 WL 940803, at *7 (D.N.J. Apr. 7, 2008) (“[T]his Court is unwilling to extend the theory beyond application to asbestos, toxic tort, environmental spills, and related cases.”)
-  Selective Way Insurance Co. v. Arthur J. Ogren, Inc., 2010 WL 5347962 at *2 (N.J. App. Div. Dec. 13, 2010) (citing Winding Hills Condo. Assoc., Inc. v. North American Specialty Ins. Co., 332 N.J. Super 85, 91 (App. Div. 2000)).
-  According to one authority, the trend in construction defect cases may be the adoption of the injury-in-fact trigger (which looks to when actual injury or damage takes place), although the “the continuous injury trigger is very much alive.” Moreover, in certain contexts, particularly that of progressively deteriorating damage, the two theories may effectively lead to the same result. Bruner and O’Connor on Construction Law, §11:362 (2017).
-  See note 13, supra.
-  This fact was stressed by a federal district court applying New Jersey law in a decision handed down some six months prior to Air Master. See American Fire and Casualty Company v. Crum & Forster Specialty Ins. Co., Civil Action No. 2:14-cv-04696, 2017 WL 1377681 (D.N.J. Apr. 12, 2017). In that construction defect case, the parties apparently agreed that a continuous trigger applied to the third-party claims but disagreed about the manifestation date of the damage. The district court denied summary judgment to the insurer on the ground that there was evidence from which a factfinder could conclude that the damage manifested after the insurer’s damage commenced, which it framed in terms of when damage had become reasonably apparent or known to the insured subcontractor in that case.