Source: https://njinsuranceblog.com/category/uncategorized/page/2/
Timestamp: 2019-04-22 02:24:26+00:00

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When an insurer pays an insurance claim, it becomes subrogated to the rights of its insured. The rights of the insurer, however, are no greater than the rights of its insured. Thus, any defenses that a potentially responsible party could assert against the insured can be asserted against the insurer. It is not uncommon for contracts, especially lease agreements, to contain a “waiver of subrogation” clause. A waiver of subrogation clause contained in an agreement entered into by an insured precludes an insurer from commencing a subrogation action against another party to that agreement.
An issue that recently was addressed by the Appellate Division is whether someone who is not a party to the agreement also can benefit from such a clause. Based on the facts before it, the court concluded that it could not.
In Haftell v. Busch, 2017 WL 1077045 (N.J. Super. Ct. App. Div. March 22, 2017), the insurer for a residential tenant, Mitchell Haftell, commenced a subrogation claim against another tenant, Steven Busch, after it reimbursed its insured for damages resulting from a fire started by Mr. Busch. The fire started after Mr. Busch discarded a lit cigarette while standing on the balcony of the apartment he shared with his wife and family.
Regardless of anything stated in this Lease, Tenant releases Landlord from any injury, loss or damage to personal property or persons from any cause. Landlord shall only be responsible for any acts caused by negligence of its employees, servants or agents. Tenant waives any right of subrogation by Tenant or any insurance company, which covers Tenant.
Id. at *1. The Busches argued that they were entitled to the benefit of that provision because Haftell waived “any right of subrogation” and not just its right of subrogation against the landlord. Id. The trial judge agreed and granted summary judgment in favor of the Busches. Not surprisingly, Cumberland appealed.
In the case before us, the contractual waiver of subrogation clause is contained in a lease between Haftell and the landlord. Defendants are not parties to that contract. Thus, the threshold inquiry is not whether the waiver of subrogation clause is generally enforceable, but rather whether the parties to the lease, Haftell and the landlord, “intended others to benefit from the existence of the contract[.]” Nothing in the lease suggests they did.
Id. at *3 (citation omitted).
Unlike Skulskie, here we can discern no “scheme” created by either the landlord or the residential community. Perhaps one exists, but if it does, it is not apparent from the summary judgment motion record. The motion judge granted summary judgment before the parties could develop the issue through discovery.
Id. at *3. The court further observed that, unlike the policy at issue in Skulskie, there was no evidence that Cumberland’s policy contained a waiver of subrogation provision. However, it would be surprising if it did not.
The Appellate Division reversed the trial court’s decision. Rather than rule in favor of the insurer, however, it remanded the action to give the parties “an opportunity to present their positions on the need for discovery and presentation of parol evidence.” Id. at *4.
The Busches arguably jumped the gun by moving for summary judgment before any discovery was completed. Thus, the Appellate Division had to rule on an incomplete record. However, it is unclear whether conducting discovery would have helped the Busches. It is unlikely that the owner of an apartment complex, unlike a condominium association, would have adopted a “scheme” to bar litigation by one tenant against another tenant. Moreover, given the Appellate Division’s conclusion that they were not third-party beneficiaries of the Haftell lease, the Busches will be hard pressed to establish that the insurer’s claim is barred by the waiver of subrogation provision in that lease.
Procrastinators put things off until the last minute. Waiting until “the midnight hour” to take care of important tasks, however, can have some truly negative consequences. A recent example of this can be found in Megna v. Leading Insurance Services, Inc., 2017 WL 393573 (N.J. Super Ct. App. Div. Jan. 30, 2017). There, the insureds purchased insurance to cover their business. However, the insureds failed to pay the premium for the policy. Consequently, the insurer sent out a notice of cancellation, which indicated that the policy would be reinstated if the insureds paid the premium prior to the cancellation date. The insureds failed to do that and you can guess what happened.
In accordance with Murphy’s law, one day after the cancellation date, a fire caused damage to the insureds’ property. While the fire was still burning, the insureds attempted to pay a portion of the outstanding premium electronically through the insurer’s electronic portal system. You can’t make this stuff up.
Three days later, the insureds’ insurance broker advised the insurer that there had been a fire. The insureds then made a second electronic payment.
The insurer informed the insureds’ broker that it would not reinstate the policy unless the insureds provided a statement that there were no losses between the date of cancellation and the reinstatement date. When that statement was not received, the insurer returned the two payments. One month later, however, it sent the insureds an invoice for the outstanding premium in error, which the insureds paid. That payment also was returned to the insureds.
The insurer ultimately denied the claim because the policy had been cancelled prior to the loss. The insureds then sued the insurer, arguing that the insurer waived its rights to cancel the policy, and/or was estopped from doing so, based on its “acceptance” of the electronic premium payments and the mailing of the premium invoice.
Both the insureds and the insurer moved for summary judgment. The trial court granted the insurer’s motion, and denied the insureds’ motion, concluding that the policy had been validly cancelled prior to the loss. The court also rejected the insureds’ waiver/estoppel argument. The Appellate Division affirmed.
New Jersey courts have only recognized waiver in cases where the insurer either retained a late premium payment or engaged in some other course of conduct that clearly manifested an intent on the part of the insurer to continue coverage.
We discern, however, no evidence from which it could be inferred that [the insurer] intended to reinstate the policy by retaining plaintiffs’ post-cancellation payments or otherwise.
Thus, the cancellation of a policy will be enforced as long as an insurer returns any post-cancellation payments and takes no actions clearly showing that it intends to continue coverage. The Megna case makes it clear that an insured who ignores a cancellation notice based on the non-payment of premium does so at its own peril. The insured must pay the premium before the cancellation becomes effective if it wants to continue coverage. In this case, hindsight was not 20/20.
Cases involving insurance coverage for multiple claims arising out of bodily injury or property damage resulting from exposure to toxic substances or long-term environmental damage can present extremely complex coverage issues. In such cases, insureds may have insurance coverage spanning many decades under multiple policies issued by various insurers. In Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437 (1994), and Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312 (1998), the New Jersey Supreme Court adopted a method for determining how losses should be allocated among the various insurers.
In deciding Owen-Illinois and Carter-Wallace, the New Jersey Supreme Court was trying to fashion a method for dealing with complex losses that were not contemplated by the parties to the insurance policies at the time they were issued. The method selected by the court was less than perfect. As new issues arise, the New Jersey courts try to mold the facts and policy language at issue to fit the Carter-Wallace/Owens-Illinois allocation methodology. When the policy language does not fit within the methodology adopted by the court, the policy language simply is not enforced.
In July of this year, the Appellate Division once again had occasion to address allocation issues in Continental Ins. Co. v. Honeywell Int’l, Inc., 2016 WL 3909530 (App. Div. July 20, 2016). That case involved coverage for bodily injury claims arising out of exposure to asbestos-containing products. One of the issues addressed by the court was what happens if an insured is aware of the risks posed by its products, is unable to purchase insurance covering those risks, but decides to sell its products anyway. The Owens-Illinois court previously held that an insured is required to assume a portion of the risk during those periods when coverage was available but the insured chose not to purchase it. The situation in Continental was different, however, because insurance coverage was unavailable.
The insured was sued “in tens of thousands of [personal injury] actions” and the insured and its insurers “spent over $1 billion in defending, settling, and paying asbestos-related claims.” Id. at *1. After litigating with its insurers for thirteen years, all but two high-level excess insurance carriers settled with the insured. The Continental decision concerned only the claims against those two insurers.
Surprisingly, the court held that New Jersey law applied even though the polices at issue “were brokered, underwritten, issued and delivered to [the insured] in Michigan,” its principal place of business. Id. at *9. When it comes to choice-of-law issues, New Jersey courts apply the “dominant significant relationship” or “most significant relationship” test. Under that test, a court is supposed to apply the law of the state that “has the most meaningful connections with the interests in the transaction and the parties.” NL Indus., Inc. v. Commercial Union Ins. Co., 65 F.3d 314, 316 (3d Cir. 1995). Some of the factors to be considered by a court in making its determination include the principal place of business of the insured, the principal place of business of the insurance company, the location where the policy was negotiated, the location where the policy was issued, the location where the insurance broker is located (assuming there is one), the principal location of the risk, and the location where the injury took place. Based on those considerations, it appears that Michigan, and not New Jersey, had the most meaningful connections. However, the court obviously was mindful of the fact that applying New Jersey law would maximize the available insurance coverage.
No New Jersey case has adopted the concept of assumption of the risk as advocated for by [the excess insurers]. Instead, cases applying the Owens–Illinois rule have focused on the availability of insurance and have only found that the insured assumed the risk when insurance was available and the insured chose not to purchase coverage.
Given the facts of this case, we conclude that the correct focus was whether Honeywell could reasonably have purchased insurance for asbestos-related claims. In the context of this case, the assumption of the risk language in Owens–Illinois did not refer to when an insurer sells or manufacturers a product that might lead to a claim of exposure to asbestos. Instead, the assumption of the risk occurs when an insurer fails to purchase insurance that was reasonably available.
Id. (citations omitted). Because the evidence established that insurance coverage was not available after 1987, the court concluded that the insured did not assume the risk during that period.
The Appellate Division also held that, based on the particular language of the policies at issue, the excess insurers were not required to provide coverage for the payment of defense costs and that the insured was not entitled to recover the attorneys’ fees it incurred in the coverage action.
On December 12, 2016, the New Jersey Supreme Court granted certification in the Continental case. Interestingly, the Court declined to hear an appeal in the IMO case, which involved numerous novel and significant allocation issues. Presumably, the choice-of-law ruling caught the Court’s attention, although the assumption of risk argument also presents a novel issue. Regardless of why it granted certification, the Court will now have yet another opportunity to weigh in on the Owens-Illinois/Carter-Wallace allocation method.
New Jersey passed the Insurance Fraud Prevention Act (“IFPA”) to aggressively address the problem of insurance fraud in New Jersey. To that end, the IFPA provides for the imposition of both civil and criminal penalties in connection with the commission of insurance fraud. In State v. Goodwin, 224 N.J.102 (2016), the New Jersey Supreme Court addressed the requirements for a criminal conviction under the IFPA. In that case, the defendant, Robert Goodwin, ended up with a seven-year prison term because he facilitated the filing of a false insurance claim in an attempt to hide that he was cheating on his live-in girlfriend.
Mr. Goodwin was convicted of second-degree insurance fraud, N.J.S.A. § 2C:21-4.6, for falsely reporting that his girlfriend’s SUV had been stolen. Mr. Goodwin actually borrowed his live-in girlfriend’s SUV to visit his other girlfriend. The SUV was vandalized and severely damaged by fire while parked overnight down the street from his second girlfriend’s apartment. Upon discovering the damage to the SUV, Mr. Goodwin returned to the apartment he shared with his first girlfriend. He convinced her to report the SUV as stolen to the police department and the insurance company. During an examination under oath conducted by the insurance company, Mr. Goodwin admitted that he lied about the SUV being stolen. Based on Mr. Goodwin’s misrepresentation about the theft, the insurer denied the claim.
Mr. Goodwin was later charged with second-degree aggravated arson, third-degree attempted theft by deception, and second-degree insurance fraud. The jury found Mr. Goodwin guilty of second-degree insurance fraud and not guilty on the other counts. The trial judge instructed the jury that a person is guilty of insurance fraud if he “knowingly makes or causes to be made a false … or misleading statement of material fact … in connection with a claim for payment, reimbursement, or other benefit from an insured’s company.” Id. at 107-08. The judge further instructed the jury that “[a]n insured’s misstatement is material if when the statement was made, a reasonable insurer would have considered the misrepresented [fact] relevant to its concerns and important in determining its course of action.” Id. at 108. Finally, the judge instructed the jury that “the statement of fact is material if it could have reasonably affected the decision by an insurance company … to pay a claim.” Id.
A person violates the insurance fraud statute … even if he does not succeed in duping an insurance carrier into paying a fraudulent claim. A false statement of material fact is one that has the capacity to influence a decision-maker in determining whether to cover a claim. If the falsehood is discovered during an investigation but before payment of the claim, a defendant is not relieved of criminal responsibility.
224 N.J. at 104-05. The Court held that because Mr. Goodwin falsely reported that the SUV was stolen, “[i]t was for the jury to determine whether the series of false statements about the theft generated by defendant had the capacity to influence the insurance carrier in deciding whether to reimburse for the damage caused by the arson.” Id. at 105. The Court further held that it was not necessary for the defendant to have been convicted of arson or theft to support his conviction of insurance fraud. Id. at 115.
Thus, a person can be convicted of insurance fraud regardless of whether the insurer actually was influenced to pay the claim by the defendant’s false statements. In other words, it is not necessary to show that the insurer actually relied on the defendant’s statements. The State merely has to show that the defendant’s actions “had the capacity to influence the insurance carrier” to pay the claim.
In this case, the jury found Mr. Goodwin not guilty on the claims that he stole or vandalized the SUV. It appears that his only false statement was the SUV was stolen and he made that statement because he was trying to hide his actions from his live-in girlfriend. That deception cost him seven years in prison.
An insured generally is required to provide its insurer with timely notice of a loss that may be covered under its insurance policy. Failure to provide timely notice may preclude coverage for the loss. Under New Jersey law, an insured’s failure to provide timely notice will preclude coverage only if the insurer shows that it sustained appreciable prejudice as a result thereof. There is one exception, however: Failure to provide timely notice of a loss under a claims-made policy will bar coverage even in the absence of prejudice. The notice requirements of a claims-made policy are strictly enforced.
A claims-made policy provides coverage for claims first made against the insured and reported to the insurance company during the policy period or shortly after the expiration thereof. It does not matter when the conduct giving rise to the claim occurred as long as any claim arising therefrom is first asserted against the insured during the policy period and reported to the insurer within the time period set forth in the policy. This is because it is the making of the claim that triggers coverage and not the occurrence of the damage that gave rise to the claim. Thus, insurers can limit the time during which they will be subject to claims being made under a particular policy to a certain finite period.
This is in contrast to the more typical occurrence-based policies. In order for a loss to be covered under an occurrence-based policy, the damage at issue must “occur” during the policy period. In most instances, it does not matter when a claim is actually asserted as long as the damage took place during the policy period.
The most common type of claims-made policy is a professional liability and/or malpractice policy issued to a doctor, lawyer, architect, engineer, or other professional. Such a policy provides coverage for claims arising out of “professional services” rendered by the insured. In addition to a claims-made policy, a professional typically also will purchase an occurrence-based policy to provide coverage for claims that do to arise out of the rendering of professional services.
There typically are two different notice requirements under a claims-made policy: (1) the claim must be reported within the policy period; and (2) the claim must be reported “as soon as practicable” or “immediately.” The first notice requirement was addressed by the New Jersey Supreme Court in Zuckerman v. National Union Fire Ins. Co., 100 N.J. 304 (1985). The second notice requirement was addressed by the Court in Templo Fuente De Vida Corp. v. National Union Fire Ins. Co., 224 N.J. 189 (2016), which was the subject of a February 15, 2016 blog post. Unless an insured meets both of the notice requirements, there will be no coverage under the policy.
In S.M. Electric Co. v. Torcon, Inc., 2016 WL 6091256 (App. Div. Oct. 19, 2016), the Appellate Division dealt with the issue of what constitutes a claim sufficient to trigger the notice requirements. In that case, Torcon, Inc. (“Torcon”) was insured under two separate Professional and Pollution Liability-General Contractors policies issued by Greenwich Insurance Company (“Greenwich”). The policies were claims-made policies, which provided coverage for liability arising out of the insured’s rendering of professional services. Each policy provided coverage for any claims first made against the insured and reported to the insurer, in writing, during the policy period. The first policy was in effect from November 11, 2007 through February 1, 2009 and the second policy was in effect from February 1, 2009 through February 1, 2010.
Claim was broadly defined as a “demand received by the INSURED for money or services that arises from PROFESSIONAL SERVICES or CONTRACTING SERVICES.” Id. at *1 The policies further provided that a claim was “not necessarily … limited to lawsuits, petitions, arbitrations or other alternative dispute resolution requests filed against the INSURED.” Id. The word “demand” was not defined in the policy, however.
Torcon was the construction manager for a project being built by the New Jersey Economic Development Authority (“NJEDA”). Torcon subcontracted with S.M. Electric Company (“SME”) to provide electrical work. Due to problems with SME’s work, on May 7, 2008, NJEDA issued a notice of violation to Torcon. On May 14, 2008, Torcon, in turn, declared SME in default of its obligations under the subcontract. In response, SME claimed that Torcon was at fault and informed Torcon that it intended to submit a claim seeking compensatory damages.
By letter dated August 19, 2008, SME informed Torcon that it was seeking in excess of $15 million “as compensation for the additional costs of performing work at the . . . project.” Id. at *2. The letter was entitled “A Request for Equitable Adjustment” and requested the issuance of various change orders.
After receipt of the letter, Torcon’s representatives met with SME’s principals. Torcon claimed that it was advised by SME at the meeting that SME no longer intended to pursue the claim, which was not supported by any backup. However, on September 17, 2009, approximately a year later, SME sent Torcon an “amended claim” for “cost adjustment.” Id. In January 2010, SME sued Torcon. Torcon subsequently informed Greenwich of the filing of the complaint.
Greenwich denied coverage on the basis that the claim was first set forth in the August 19, 2008 letter, which fell under the first policy period. In other words, the claim was not first asserted under the then current (i.e., second) policy. It did not matter that Greenwich also was the insurer at the time the claim was made because it was not reported to Greenwich at that time.
Judge Grispin found that the “practical and logical” interpretation of the letter, “in the context of the overall dispute” among the parties, “can lead to no other conclusion but that it was a demand for money arising out of professional services.” Since the letter was a claim for which notice should have been provided under the 2007 policy, Torcon was prevented from seeking coverage in the 2009 term.
The letter clearly conveyed a demand. This was not a request for change orders regarding future conduct, but a claim for equitable compensation by one party seeking, as a matter of right, the payment of money in connection with the other party’s alleged wrongdoing.
Notice requirements of a claims made policy are strictly enforced without regard to an insured’s subjective assessment of the merits. Even if Torcon’s subjective perception was relevant to the analysis, it does not outweigh the evidence supporting the construction of the letter as a claim.
The letter was withdrawn in the context of an ongoing dispute regarding millions of dollars. It is not credible that anyone would have considered SME’s demand for nearly two-thirds of the contract amount in additional payment to have been actually “withdrawn” as a result of the failure to adequately document their claims. Judge Grispin was unconvinced about this argument; so are we. Once the letter was presented, at that snapshot of a moment, it was Torcon’s responsibility under the terms of the policy to provide notice to Greenwich.
The claim was made during the 2007 policy term, and Torcon did not provide notice. It was not until the 2009 lawsuit that Torcon conveyed the claim to Greenwich. Greenwich’s denial is therefore proper.
The lesson to be learned from S.M. Electric is that an insured needs to put its insurer on notice even if it doubts whether a demand may ripen into an actual claim, questions the merits of the potential claim, or believes the claim will be resolved without litigation. The rule here is better safe than sorry.
Insurance policies typically contain what are known as other-insurance clauses. Other-insurance clauses set forth a methodology for apportioning liability when multiple insurers have issued policies that provide coverage for a loss. There are three basic types of other-insurance clauses: pro-rata, escape, and excess. Deciding how different other-insurance clauses apply is like a game of rock-paper-scissors.
A pro-rata clause typically provides that each insurer will pay its proportional share of the loss based on total available policy limits. An escape clause provides that an insurer will have no liability to the insured when other insurance coverage is available. The excess clause provides that the insurer will be liable only after the exhaustion of the limits of any other applicable insurance. In cases where other-insurance clauses can be reconciled, the clauses will be enforced pursuant to their terms and conditions.
For instance, if two policies each contain pro-rata clauses, the insurers will share in the payment of a loss on a pro-rata basis based on the overall limits of the policies. If one policy contains a pro-rata clause and the other contains an excess clause, the policy with the pro-rata clause will be exhausted before the other policy is triggered.
Other-insurance clauses will not be enforced, however, if they conflict and cannot be reconciled. For instance, if there are two policies and each contains an excess other-insurance clause, neither clause will be enforced. In that case, each insurer will share equally in the payment of the loss until the limit of the smallest policy is exhausted.
The New Jersey Appellate Division addressed application of dueling other-insurance clauses in Foerster v. Meckel Enterprises, LLC, 2016 WL 5922746 (Oct. 12, 2016). The plaintiff in that case was injured when he slipped and fell on the bathroom floor of space leased by Robert S. Foerster Optician, Inc. (“RFO”). The space was leased from Meckel Enterprises, LLC and Ann Arbor Associates, Inc. (collectively, “Meckel”).
If there is other insurance covering the same loss or damage, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, whether you can collect on it or not. But we will not pay more than the applicable Limit of Insurance.
Business Liability Coverage is excess over any other insurance that insures for direct physical loss or damage.
2) Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an additional insured by attachment of an endorsement.
If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer’s share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.
There was no question that there was coverage under both policies. The only question was how the two policies should contribute toward the loss.
Meckel claimed that Penn National’s other-insurance clause did not apply. According to Meckel, Penn National had to provide primary coverage and the Citizens policy was triggered only after coverage under the Penn National policy was exhausted. Penn National obviously made the opposite argument. The trial judge agreed with Penn National and Meckel appealed. On appeal, the Appellate Division affirmed.
Meckel argued that paragraph 2 of the Penn National other-insurance clause limited application of the clause to claims involving “direct physical loss or damage.” According to Meckel, the claim at issue involved bodily injury and not direct physical loss or damage. Thus, the Penn National other-insurance clause did not apply. The Appellate Division rejected that argument, noting that paragraph 1 of the other-insurance clause clearly stated that the Penn National policy provided excess coverage over “other insurance covering the same loss or damage.” Id. at *2.
The court then noted that the Citizens other-insurance clause called for pro-rata allocation when other primary insurance is available. The court failed to note, however, that the pro-rata allocation applies only when there is other excess coverage.
The court further noted that the Citizens clause provided that “[w]hen, as here, the other-insurance does not permit contribution by equal shares,” each insurer will contribute its proportional share of the loss based on total policy limits. Id. at *3. Once again, the court failed to note that this provision applies only when there is other excess coverage.
where one policy has an excess other-insurance clause and another policy on the same risk does not, the former policy will not come into effect until the limits of the latter policy are exhausted.
because the Penn National policy contains an excess other-insurance clause and the other-insurance provision in the Citizens policy provides for pro-rata sharing of the insurance obligation, the Penn National policy does not come into effect until the Citizens policy limits are exhausted.
Id. Therefore, the court affirmed the trial court’s ruling. The court essentially ruled that the Penn National clause was the rock to Citizens’s scissors.
The court appears to have misinterpreted the Citizens clause. There is no question that the Citizens clause was an excess other-insurance clause. Indeed, it clearly states that the Citizens policy “is excess over . . . any other primary insurance available to you.” Thus, the two clauses arguably should have cancelled each other out and the insurers should have shared in the loss. The court seemed a bit confused, however, by the pro-rata language in the Citizens clause, thereby mistaking the clause for a pro-rata and not an excess clause. The court seems to have missed the fact that the pro-rata language clearly provides that it applies only when there is excess coverage.
It should be noted that the court did not quote Citizens’s entire other-insurance clause. Based on the portion of the clause that was quoted, Penn National and/or Meckel could have argued that the Citizens clause was meant to apply only when there was “other primary insurance available.” Thus, it would have no application in this case because there was no other primary insurance. In other words, Citizens would have to provide primary coverage, which is the same result the court reached, albeit for a different reason. It does not appear, however, that anyone made the argument that the clause did not apply at all.
© William D. Wilson and NJInsuranceBlog.com, 2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson and/or NJInsuranceBlog.com with appropriate and specific direction to the original content.
Application of a particular state’s law can have a significant impact on the determination as to whether a loss is covered. Given the impact choice-of-law decisions may have, insureds and insurance companies may “forum shop” to pick the jurisdiction most favorable to resolution of their claims. This is especially true when it comes to a late notice defense.
An insured is required to provide its insurer with timely notice of a loss. Insurance policies typically require that notice be provided “as soon as practicable” or, in some cases, “within a reasonable time.” The purpose of a notice provision is to give the insurer an opportunity to conduct a full investigation of the facts and circumstances concerning a claim while the evidence and the witnesses’ memories are still fresh. Once it receives notice, the insurer can decide whether to compromise or defend the claim.
The failure to provide timely notice may bar coverage for a claim. However, the standard that applies differs from state to state. For instance, under New Jersey law, an insurance company generally must establish that it sustained appreciable prejudice to avoid coverage under a late notice defense. Under New York law, on the other hand, a showing of prejudice is not always required. Moreover, a delay in providing notice of just 22 days has been found to bar coverage under New York law with respect to a first-party policy.
The issue of whether to apply New Jersey or New York law to a late notice defense was addressed by the New Jersey Appellate Division in Waldorf Holding Corp. v. Chartis Claims Inc., 2016 WL 4651436 (Sept. 7, 2016). The plaintiff in that case, Waldorf Holding Corp. (“Waldorf”), was a demolition and construction company incorporated in New York. Defendant Illinois National Insurance Company (“INIC”), an AIG company, issued a commercial umbrella policy to Waldorf. The policy listed a Mount Vernon, New York, location as Waldorf’s mailing address. The INIC policy provided coverage in excess of that provided by a policy issued to Waldorf by Arch Specialty Insurance Company (“Arch”).
Under the policy, the insured was required to notify INIC “as soon as practicable of an Occurrence that may result in a claim or Suit under this policy.” The insured was further required to “immediately send . . . copies of any demands, notices, summonses or legal papers received in connection with the claim or Suit.” Notice was to be provided to AIG Domestic Claims, Inc. (“AIG”) at an address in New York.
An employee of a Waldorf subsidiary was injured in May 2008 while working on a construction project in New York. The employee sued the owner of the project and the general contractor. Those parties, in turn, filed a third-party compliant against Waldorf. Waldorf apparently notified Arch of the lawsuit and Arch agreed to provide a defense and indemnification to Waldorf. Arch sent a copy of its letter accepting the tender of the claim by Waldorf to AIG at a Georgia address. The letter was not sent to the New York address as required under the INIC policy.
In August 2010, more than two years after the injury occurred, Arch sent a letter to AIG at the New York address listed in the policy, advising AIG of the pending action and indicating that it served as formal notice of the loss. AIG was further notified that the Arch policy had a limit of $1 million and the plaintiff recently made a $6 million settlement demand. On September 1, 2010, INIC notified Arch and Waldorf that it was denying coverage based on the failure to provide INIC with timely notice of the loss.
After the personal injury action was settled, Waldorf commenced an action against INIC, Arch, and an insurance broker in state court in New Jersey. After engaging in some discovery, INIC and Waldorf both moved for summary judgment. INIC argued that New York law applied and Waldorf argued that New Jersey law applied. According to Waldorf, although it was incorporated under New York law, its only place of business was in Englewood, New Jersey. Waldorf claimed it had not used the Mount Vernon address since 2006. Waldorf further claimed that the policy had been procured through a New Jersey insurance broker and delivered to Waldorf in New Jersey.
There was no question that the more than two-year delay in providing notice would bar coverage under New York law. A more detailed factual analysis would have to be performed to see if coverage was barred under New Jersey law.
[w]hile the contract was signed in New Jersey through a New Jersey insurance broker, [it] does not outweigh the other contacts which lean in favor of New York. The policy was issued to Waldorf, a New York corporation with a New York address, which had not changed regardless if the plaintiff asserted the principal place of business of the company is now Englewood, New Jersey and the New York address had not been used for some years. Nothing set forth before the court indicated the New York address was invalid at the time the policy was executed.
Absent authority to the contrary, of which there appears to be none, that the insurer may have been copied on a letter does not absolve the insured of its obligations under the agreement it signed to timely send notice.
Id. at *3. On appeal, the Appellate Division affirmed “substantially for the reasons expressed by Judge Steele as reflected in her well-reasoned, thorough written opinion.” Id.
Waldorf appears to be a classic case of forum shopping. Realizing its claim would be barred under New York law, the insured commenced an action in New Jersey and argued that New Jersey law applied. The court correctly rejected that argument.
When making travel arrangements, you often have the option of purchasing travel insurance, which also is known as trip insurance. Travel insurance can be purchased directly from the travel agent or trip provider, or from an independent company. Several of the major insurance companies allow you to purchase trip insurance online after your travel has been booked.
Trip insurance provides coverage in the event you have to cancel your trip last minute due to some unforeseen circumstances. The insurance typically provides coverage for any cancellation penalties you may incur. Some insurance also provides coverage for medical expenses incurred while on the trip and will reimburse you for costs incurred in connection with baggage loss or delay.
Travel insurance can be purchased at the time or book you trip or anytime thereafter up until the time you leave for your trip. One thing you cannot do, however, is purchase such insurance after you learn that you need to cancel your trip as a result of a medical condition. Travel insurance policies typically contain an exclusion barring coverage for cancellations due to pre-existing medical conditions. The New Jersey Appellate Division recently upheld such an exclusion in Dombrovskiy v. Travel Guard, 2016 WL 5335258 (N.J. App. Div. Sept. 23, 2016).
In that case, Victor Dombrovskiy booked a family trip to St. Lucia on March 19, 2014. He did not purchase travel insurance at the time he booked his trip. However, on May 19, 2014, two days before his departure, he decided to purchase travel insurance from the defendant Travel Guard. The following day – May 20th – he went to see a dentist, complaining of “very strong continuous pain on the left side of [his] mouth.” His dentist diagnosed him with acute pericoronitis and advised him not to travel. Thus, Mr. Dombrovskiy canceled his trip. He subsequently filed a claim under his travel insurance policy because he was unable to obtain a full refund for his trip.
The policy went into effect on May 20, 2014, just one day prior to Mr. Dombrovsky’s scheduled departure and the same day he went to visit his dentist. As is typical with travel insurance policies, the Travel Guard policy contained an exclusion for a “pre-existing medical condition,” which “was defined as a medical condition that manifested itself 180 days immediately preceding the policy’s effective date, and included the effective date of the policy.” Id. at *1. Because Mr. Dombrovskiy was diagnosed with acute pericoronitis on the policy’s effective date his medical condition constituted a pre-existing condition. Thus, Travel Guard denied coverage.
Mr. Dombrovsky subsequently sued Travel Guard. Following a bench trial, the trial judge dismissed the complaint, concluding that the pre-existing medical condition exclusion unambiguously precluded coverage. On appeal, the Appellate Division “agree[ed] with the trial court that Dombrovskiy’s claim came within an exclusion from coverage that was clear and not ambiguous, requiring the dismissal of his claim.” Id. at *2.
The court noted that although the exclusion barred coverage for a pre-existing medical condition that manifested itself 180 days prior to the policy’s effective date, there was a provision “by which the pre-existing medical condition exclusion could be waived if an insured purchased the travel insurance policy within fifteen days of making the initial trip payment.” Id. at *3. Mr. Dombrovskiy was unable to take advantage of that provision because he paid for his trip two months prior to purchasing the policy.
The purpose of the pre-existing condition exclusion is to prevent fraud. Specifically, it precludes someone who is already feeling ill from going out and purchasing insurance. Insurance policies are meant to cover only fortuitous losses, i.e., those happening by chance or which are unexpected. You cannot purchase fire insurance for your home once it is already on fire, nor can you purchase flood insurance as the flood waters are approaching your home. Similarly, you cannot purchase travel insurance once you are already sick and realize you may have to cancel your trip.
As the concurring judge observed, “the sequence of events here might have supported a reasonable circumstantial inference that appellant was indeed already developing symptoms when he purchased the coverage months after he made his flight reservations and only two days before his scheduled departure.” Id. at *5 (Sabatino, P.J.A.D., concurring). The court did not need to address that issue, however, because the policy clearly excluded coverage.
By declaring the policy’s effective date to be 12:01 a.m. on the date after the insured traveler pays the premium, and excluding coverage for the full day of that effective date, the policy treats as a disqualifying “pre-existing” medical condition one that first manifests itself at a time that can be as late as forty-seven hours after the coverage was purchased. Literally construed, the policy would, for instance, exclude coverage if the insured paid for the coverage at 12:02 a.m. on a Monday and suffered a sudden heart attack at 11:59 p.m. on Tuesday.
Id. at *4 (Sabatino, P.J.A.D., concurring). Judge Sabatino noted that at least two other states preclude insurers from defining pre-existing medical conditions “to exclude coverage for a condition that manifests after the insurance has been purchased.” Id at *5. However, he went on to note that certain other states had adopted contrary legislation. Id.
It would appear based on the majority’s decision that a condition that manifests itself after insurance has been purchased, but within the pre-existing condition window, would be excluded based on the clear and unambiguous policy language. Expressing “serious reservations,” Judge Sabatino did not join in that portion of the majority’s opinion that would support such a conclusion.
The takeaway from this case is that if you want to purchase travel insurance you should do so at the time the trip is booked or shortly thereafter. As noted by the court, the Travel Guard policy waives the pre-existing condition exclusion if coverage is purchased within 15 days of booking the trip. Unfortunately, that is something Mr. Dombrovskiy failed to do. Instead, it appears he waited until his tooth already started hurting and he knew it was unlikely he could travel.
Where the work performed by the insured-contractor is faulty, either express or implied warranties, or both, are breached. As a matter of contract law the customer did not obtain that for which he bargained. The dissatisfied customer can, upon repair or replacement of the faulty work, recover the cost thereof from the insured-contractor as the standard measure of damages for breach of warranties.
[T]he insured-contractor can take pains to control the quality of the goods and services supplied. At the same time he undertakes the risk that he may fail in this endeavor and thereby incur contractual liability whether express or implied. The consequences of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers.
Id. at 239. Consequently, the insured-contractor and not the insurer is liable for any costs incurred to correct the faulty workmanship. In Firemen’s Insurance Co. v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006), the Appellate Division extended the holding in Weedo to faulty workmanship performed by a subcontractor.
Consistent with this reasoning, most CGL policies contain an exclusion providing that there is no coverage for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” This exclusion, which is referred to as the “your work” exclusion, applies to work performed “by or on behalf of” the insured-contractor and, therefore, would encompass work performed by a subcontractor.
CGL policies typically provide coverage for the insured’s legal liability for property damage arising out of an occurrence covered under the policy. Occurrence is commonly defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” or “an accident … which results in … property damage neither expected nor intended from the standpoint of the insured.” Although not addressed by the Weedo court, some courts have held that even in the absence of an express exclusion, there is no coverage for damage resulting from faulty workmanship because such damage did not result from an “accident.” The reason for this is that faulty workmanship is the natural consequence of “not performing well” and is an inherent part of the construction business.
While there is no coverage for damage to the insured’s work, there may be coverage if the insured’s faulty workmanship causes damage to other property. Thus, if an insured-contractor is sued for faulty workmanship, and there are no allegations that the faulty workmanship caused damage to anything other than the project itself, an insurer likely will have no duty to defend or indemnify its insured. On the other hand, if the faulty workmanship results in damage to other property, an insurer may have a duty to defend or indemnify its insured. Because a general contractor’s work consists of completing the entire project, there generally will be no coverage for damage to any portion of the project even if that damage was caused by faulty workmanship on a different portion of the project.
An issue that often arises is whether coverage exists under the general contractor’s CGL policy for damage caused by a subcontractor’s faulty workmanship. Because a subcontractor typically works on discrete portions of a project, it is possible that the subcontractor’s faulty workmanship can cause damage to other portions of the project. For instance, the improper installation of a window can result in water leaking around the window, causing damage to the interior finishes of the project. Whether coverage exists for such damage was addressed by the New Jersey Supreme Court in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. Aug. 4, 2016). In a well-reasoned and well-supported decision, the Court concluded that there was coverage under the contractor’s CGL policy for such damage.
Cypress Point involved a claim by a condominium association against its developer/general contractor, seeking recovery for damage to the interior structures, common areas, and individual residential units, including damage to steel supports, exterior and interior sheathing and sheetrock, and insulation. Id. at *2. The condominium association also sued the contractor’s CGL insurers, seeking a declaration that the damage was covered under the policies they issued. The damage at issue resulted from roof leaks and water infiltration around the windows. It was alleged that the damage was caused by “faulty workmanship during construction, including but not limited to, defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.” Id.
The policies at issue were based on standard form policies developed by the Insurance Services Office, Inc. (“ISO”), an insurance industry trade organization. The policies provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of … property damage … caused by an occurrence.” Occurrence was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. The policies also contained a “your work” exclusion, which provided that there was no coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it ….” The exclusion contained an exception, however, providing that the exclusion did “not apply if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.” Id. The ISO first added this exception to the exclusion to the 1986 version of the standard form policy. The 1973 version of the exclusion, which was the prior version, did not contain the exception.
The trial court ruled in favor of the insurers, finding that neither faulty workmanship nor the consequential damages resulting therefrom was covered. The Appellate Division reversed, concluding that damage to other property caused by a subcontractor’s faulty workmanship was covered. On further appeal, the New Jersey Supreme Court framed the issue before it as “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’ under a property developer’s commercial general liability (“CGL”) insurance policy.” Id. at *1. The Court held that it did.
According to the Court, damage to other property caused by a subcontractor’s faulty workmanship met the definition of “occurrence” and “property damage” under the policies. The Court rejected the argument that faulty workmanship can never result in a covered loss under a CGL policy. The Court also held that while the “your work” exclusion “would seem to eliminate coverage,” the exception to the exclusion reinstated coverage. Id. at *13.
In Cypress Point, unlike in Weedo, the faulty workmanship was performed by a subcontractor and there was no question that the faulty workmanship resulted in damage to other portions of the project. In addition, the policy at issue was based on the 1986 ISO form, whereas the Weedo policy was based on the 1973 version. Given these differences, and the decisions by courts in other jurisdictions that have considered the issue, the Court’s decision is not surprising. Indeed, to hold otherwise would have rendered meaningless the subcontractor’s exception to the “your work” exclusion.
It is important to emphasize that the Court did not back away from Weedo, which remains good law. Thus, there still is no coverage for the costs to correct the faulty workmanship itself regardless of whether that work is performed by the general contractor of a subcontractor. The Cypress Point decision is limited to damage to other property resulting from a subcontractor’s faulty workmanship. Under the Court’s decision, that damage is covered absent some other exclusion.

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