Court Opinion

ID: 4669514
Source: CourtListenerOpinion
Date Created: 2021-03-19 14:09:46.709245+00
Date Added: 2024-06-11T07:59:23.303167
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE
                               APPROVAL OF THE APPELLATE DIVISION
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     internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.

                                                        SUPERIOR COURT OF NEW JERSEY
                                                        APPELLATE DIVISION
                                                        DOCKET NO. A-2490-19

TEDRA BIRCH, JOSEPH
MONACO, SR., and ALL
STATE HOME INSPECTION,
LLC,

          Plaintiffs-Respondents,

v.

THE HANOVER
INSURANCE COMPANY,

     Defendant-Appellant.
_______________________

                   Submitted February 8, 2021 – Decided March 19, 2021

                   Before Judges Sabatino, Currier and DeAlmeida.

                   On appeal from the Superior Court of New Jersey, Law
                   Division, Essex County, Docket No. L-6740-19.

                   Lewis Brisbois Bisgaard & Smith, LLP, attorneys for
                   appellant (Darcy L. Ibach, of the Illinois bar, admitted
                   pro hac vice, and Brian Deeney, on the briefs).

                   Harrell, Smith & Williams, LLC, attorneys for
                   respondent Tedra Birch and Albergo Law Group,
                   attorneys for respondents Joseph Monaco, Sr. and All
            State Home Inspection, LLC (Kenneth M. Harrell,
            Daniel J. Williams and Damian L. Albergo, on the joint
            brief).

PER CURIAM

      This appeal involves a dispute over the terms of insurance coverage in a

policy provided to a home inspection company. After examining the premises

for a home buyer, the inspector issued a written report. The report did not

mention any problems with the propane tank's connection to the house's hot

water heater. After purchasing the house, the buyer hired a vendor to replace

the propane tank. Several days later, the replacement tank exploded, allegedly

because of a leaky ball valve on the pipe connecting the tank to the heater.

      The explosion severely injured the homeowner and damaged the house.

She filed a civil action alleging negligence by various parties, including the

home inspector and his company.       The inspector and his company sought

indemnity and defense from their insurance company. The insurer declined

coverage, citing several provisions within the policy documents.

      Consequently, the homeowner, joined by the inspection company and the

inspector, pursued this declaratory action in the Law Division against the

insurer, arguing the claim is covered under the policy language. The trial court

construed the policies in favor of plaintiffs, ordering the insurer to provide a

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defense and indemnification in the underlying negligence case. This appeal by

the insurer ensued.

      For the reasons that follow, we agree the trial court correctly rejected

many of the insurer's proffered arguments. However, we reverse the finding of

coverage because we agree with the insurer that a policy exclusion for claims

"[a]rising out of or based upon . . . flammable materials" disallows coverage for

this particular claim because it stems from the explosion of propane gas, a

flammable material.

                                       I.

      We need not describe the facts and factual allegations in complete detail

since our analysis mainly turns on interpreting the language of the insurance

policy documents. In performing our appellate review in this coverage setting,

we are guided by several well-established principles.

      The interpretation of an insurance policy, like other contracts, is a

question of law for the court. Hence, we independently review the trial court's

construction of the policy documents on a de novo basis. See N.J. Transit Corp.

v. Certain Underwriters at Lloyd's London, 461 N.J. Super. 440, 453 (App. Div.

2019), aff'd per curiam, ___ N.J. ___ (2021).

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      The scope of that legal review includes deciding whether a contract

provision is clear and unambiguous. See Nester v. O'Donnell, 301 N.J. Super.

198, 210 (App. Div. 1997). A provision is ambiguous if it is "susceptible to at

least two reasonable alternative interpretations." Ibid. (citation omitted). In

such instances of apparent ambiguity, the court may consider extrinsic proofs

that may "shed light on the mutual understanding of the parties." Hall v. Bd. of

Educ., 125 N.J. 299, 305 (1991) (citations omitted); see also Conway v. 287

Corp. Ctr. Assocs., 187 N.J. 259, 270 (2006).

      Our courts have long applied a general precept that ambiguities contained

within an insurance policy are to be construed in favor of the policyholder and

against the insurer. N.J. Transit Corp., 461 N.J. Super. at 454 (citation omitted).

An ambiguity arises "where the phrasing of the policy is so confusing that the

average policyholder cannot make out the boundaries of coverage." Customized

Distrib. Servs. v. Zurich Ins. Co., 373 N.J. Super. 480, 487 (App. Div. 2004)

(citing Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 247 (1979)).

      Additionally, in general, insurance policies are liberally construed to

afford coverage that a fair interpretation will allow. Villa v. Short, 195 N.J. 15,

23-24 (2008); Am. Wrecking Corp. v. Burlington Ins. Co., 400 N.J. Super. 276,

282 (App. Div. 2008). Based on an insurance company's unique expertise in its

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                                        4
field and its unilateral preparation of the industry's "varied and complex

instruments," Allen v. Metro. Life Ins. Co., 44 N.J. 294, 305 (1965), a court, to

protect the unversed policyholder, must assume a vigilant role in ensuring

insurance policies conform to public policy and principles of fairness.

Progressive Cas. Ins. v. Hurley, 166 N.J. 260, 272 (2001) (citation omitted).

      When, as here, an insurance company relies on an exclusion in the policy

for a denial of coverage, it carries the burden of bringing the case within the

exclusion. Burd v. Sussex Mut. Ins. Co., 56 N.J. 383, 399 (1970). In contrast

to provisions extending coverage, which are interpreted broadly, exclusions are

read narrowly. Search EDP, Inc. v. Am. Home Assurance Co., 267 N.J. Super.

537, 542 (App. Div. 1993).

      That said, where the language of an insurance policy plainly excludes

coverage, we are bound to enforce that exclusion. "An exclusion clause serves

the purpose of delimiting and restricting coverage." Doto v. Russo, 140 N.J.

544, 559 (1995) (citation omitted). "Exclusionary clauses are presumptively

valid and are enforced if they are 'specific, plain, clear, prominent, and not

contrary to public policy.'" Flomerfelt v. Cardiello, 202 N.J. 432, 441-42 (2010)

(quoting Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95 (1997)). Where the

words used in an exclusionary clause are clear, "a court should not engage in a

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strained construction to support the imposition of liability." Id. at 442 (quoting

Longobardi v. Chubb Ins. Co., 121 N.J. 530, 537 (1990)).

                                       II.

      With these principles in mind, we turn to the circumstances of this case.

      The Inspection

      In the fall of 2016, in anticipation of purchasing a single-family residence

in Hopatcong, Tedra Birch retained the services of All State Home Inspection,

LLC ("All State") and its owner Joseph Monaco, Sr. to perform a home

inspection at those premises.

      On September 29, 2016, Birch and All State entered into a Pre-Inspection

Agreement. That agreement stated, in relevant part: (1) "a Home Inspection

means a visual, functional, non-invasive Home Inspection conducted without

operating systems or components which are shut down, inoperable, or not

responding to normal operating controls," but including the plumbing and

heating systems; (2) the home inspection would be conducted in accordance with

the standards of practice set forth in the New Jersey regulations regarding home

inspectors, i.e., pursuant to N.J.A.C. 13:40-15;1 (3) the home inspection was not

1
  The Pre-Inspection Agreement cites to "N.J.S.A. 13:40-15," which appears to
be a typographical error, as the Home Inspection Professional Licensing Act is
contained in N.J.A.C. 13:40-15.1 to -24 and N.J.S.A. 45:8-61 to -81.
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required to determine "future conditions that may occur including the failure of

systems and components"; and (4) "any and all claims [arising out of breach of

contract and negligence, among others] must be submitted to [All State], in

writing, before any repairs are performed, not later than one year from the date

of the inspection."

      That same day, the home inspection was performed by Monaco. He

provided Birch with a fifty-three-page Inspection Report, inclusive of numerous

photographs he took of the premises.

      The Inspection Report

      In his report, Monaco noted he had visually examined numerous portions

of the house, including the water heater and plumbing system. He classified

these components with codes, designating either: (1) "Inspected (IN)," meaning

he "visually observed the item, component or unit and if no other comments

were made then it appeared to be functioning as intended allowing for normal

wear and tear"; (2) "Not Inspected (NI)"; (3) "Not Present (NP)," meaning the

component or unit was not in the home or building; or (4) "Repair or Replace

(RR)," meaning "[t]he item, component or unit is not functioning as intended,

or needs further inspection by a qualified contractor."

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                                        7
      For the plumbing system, Monaco included a photo of the propane tank

that was then on site. Among other things, he undertook to observe: piping

materials, supports, and insulation; leaks; "[h]ot water systems including: water

heating equipment"; "[f]uel storage and distribution systems"; and operated "all

plumbing fixtures . . . except where the flow end of the faucet is connected to

an appliance."    However, Monaco noted the water was not turned on for

inspection, and thus the hot water systems were designated in the report as NI,

i.e., not inspected.

      Under the "Heating/Central Air Conditioning" section of the report,

Monaco specifically noted the "vent pipe for . . . water heater fails to rise 1/4

inch per foot and may need re-locating or a power vent installed. Consult a

qualified plumber for repair/replace as needed for safety."

      In the "Water Heater" section, Monaco noted the water heater is propane

fired. He classified it as IN, i.e., Inspected, and used the same classification for

the gas and fuel lines at the unit. However, Monaco noted the vent connector

and safety valve were RR, i.e., in need of repair. On that topic, he stated "[t]he

existing piping for T&P valve on water heater fails to extend downward to

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                                         8
within six inches of floor. This is a safety issue and should be repaired. Consult

a qualified person for repair as needed."2

      Birch's Purchase of the Home and Replacement of the Propane Tank

      Allegedly in reliance on the Inspection Report, Birch purchased the

property in February 2017. Nearly a year later, on January 24, 2018, Birch hired

a vendor, Combined Energy Services Inc. ("CES") to install a new propane tank

at her home, for the purpose of fueling the hot water heater. The new tank was

installed by CES and the old tank removed.3

      The Explosion

      On January 28, 2018, four days after the new propane tank was installed,

Birch was at her home when that tank exploded. As a result of the explosion,

Birch suffered severe burns and other allegedly permanent injuries.

      An inspection by the police following the explosion revealed a leak in

what is known as the "ball valve" on the pipe supplying propane to the water

2
  It is not clear whether this identified safety issue bears upon the claim of a
negligent inspection, or whether an entirely different safety issue is involved in
the Underlying Action.
3
  We do not address here whether All State and Monaco have a viable defense
in the Underlying Action of a lack of proof of proximate causation because of
the post-inspection installation of a new tank.
                                                                            A-2490-19
                                        9
heater. The police report stated it was "very possible the explosion occurred due

to a propane gas leak."

      The Underlying Civil Action

      In April 2019, Birch filed a civil complaint against multiple defendants,

including All State and its owner, Monaco, seeking damages for bodily injury,

property damage, and economic loss related to the propane explosion at Birch's

home ("the Underlying Action").

      In an amended complaint, Birch asserted a single claim for negligence

against All State and Monaco for: (1) conducting the home inspection in a

"negligent manner"; (2) producing an Inspection Report which "contained

inaccuracies which contributed to the happening of the explosion"; and (3)

Birch's detrimental reliance "upon the inspection and findings" of All State and

Monaco when purchasing her home.

      The Insurance Policy

      Pursuant to N.J.A.C. 13:40-15.8, home inspectors in New Jersey are

required to maintain errors and omissions insurance in an amount not less than

$500,000 per occurrence. Defendant Hanover Insurance Company ("Hanover")

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                                      10
issued a miscellaneous professional liability policy, 4 to All State, on January 29,

2019 with an effective policy period from January 29, 2019 to January 29, 2020. 5

The Policy is a $1,000,000 claims-made-and-reported policy.             It contains

separate endorsements and exclusions, including an Asbestos Exclusion, Signed

Pre-Inspection Agreement Endorsement, Professional Home Inspection

Services Coverage Endorsement, and General Liability Endorsement.

      The Declarations Pages provide in Item 5 that the retroactive date of

effectiveness of the Policy is ten years prior, January 29, 2008, and Item 6 states

the Policy covers Professional Services, defined as "Professional Home

Inspection Services." There is no dispute that All State and Monaco reported

Birch's claim after the retroactive date and during the Policy period, and the

underlying incident also occurred during the time period covered by the Policy.

      Denial of Coverage

      Having been sued, All State and Monaco sought coverage from Hanover

for the claims made against them by Birch in the Underlying Action.

4
  The Policy does not appear to be in a standard industry form issued by the
Insurance Services Office ("ISO"). Its pages bear no notation indicating they
are from an ISO form, and no brief contends they are.
5
  Henceforth, the aggregate of all the documents issued by Hanover to All State
on January 29, 2019 shall be referred to as the "Policy."
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                                        11
      On May 16, 2019, Hanover issued a letter denying coverage and refusing

to provide a defense to All State and Monaco based on a pollution exclusion

contained in an Asbestos Endorsement of the insurance policy and an exclusion

contained in the Professional Home Inspection Services Coverage Endorsement

for claims arising out of or based on asbestos, fire retardant treatments, toxic or

flammable materials, formaldehyde, including but not limited to "Chinese

Drywall."

      The Present Declaratory Action

      Following the coverage denial, Birch brought the present summary

coverage action, pursuant to Rule 4:67-1 to -6, against Hanover by filing an

Order to Show Cause and Verified Complaint. In this declaratory action, Birch

sought to compel Hanover to defend and indemnify All State and Monaco in the

Underlying Action as a third-party beneficiary of the Policy.          Birch also

requested an award of counsel fees and costs. All State and Monaco joined the

lawsuit as co-plaintiffs.

      The trial court heard oral argument from the parties regarding the Order

to Show Cause, and reserved decision. One week later, on January 30, 2020,

the trial court issued an oral decision and written order declaring that the Policy

provided coverage to All State for Birch's claims in the Underlying Action. The

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                                       12
court denied, however, plaintiffs' requests for reimbursement of their previously

incurred counsel fees. 6

        The Appeal

        On appeal, Hanover asserts several arguments. First, it contends the trial

court committed harmful error by ignoring that: (a) coverage under the Hanover

Insurance Company Policy Bodily Injury and Property Damage Coverage p art

requires an "occurrence" committed by the insured, and the occurrence is solely

the propane explosion rather than any conduct by the insured; and (b) any

coverage for the bodily injury and property damage claim is excluded in the

Professional Services Part of the Hanover Policy by Exclusion 6, excluding any

claims "arising out of bodily injury or property damage."

        Second, Hanover maintains the trial court erred by ignoring that the bodily

injury and property damage occurrence arises out of: (1) a propane explosion

that is excluded by Exclusion 10, the "toxic or flammable materials" exclusion

in the Policy; and (2) the escape of a "pollutant" which is disallowed by

Exclusion 4 in the Policy.

        Third, Hanover contends the trial court overlooked that the Professional

Services Coverage part of the Policy only extends coverage for claims arising

6
    Plaintiffs have not cross-appealed the counsel fee denial.
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                                        13
from a wrongful act in the rendering or failure to render "professional home

inspection services," which Hanover argues does not include inspection of a hot

water system that was turned off at the time of the inspection.

      Fourth and finally, Hanover argues the trial court deviated from New

Jersey case law, which does not permit the rewriting of insurance policies by the

courts to provide coverage where clear policy terms and exclusions exist within

a policy.

      Analysis

      As we have already noted, we are unpersuaded by most of Hanover's

arguments of non-coverage.      We affirm the trial court's rejection of those

arguments, substantially for the reasons expressed by the motion judge.

      Addressing Hanover's losing points very briefly, we are first satisfied that

there was an "occurrence" here within the scope of the Policy language . The

occurrence encompasses the insured's allegedly negligent inspection of the

house, which is claimed in the Underlying Action to have a substantial nexus to

and, in essence, serve as a "but for" cause of a failure to prevent the subsequent

propane explosion.

      We are likewise satisfied that Birch's claims for bodily injury and property

damage are covered under the Policy, unless some other specific exception

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                                       14
applies.   Section G of the General Liability Endorsement, which extends

coverage for bodily injury and property damage, expressly replaces Paragraph 6

of the general Policy language otherwise disallowing such coverage.

      In addition, we agree with plaintiffs that the exclusionary provisions in

Section E(4) of the Professional Liability Insurance Policy and Section H(1)(f)

of the General Liability Endorsement for claims of damage caused by

"pollutants," do not pertain here, when that term is understood with its ordinary

meaning. See Nav-Its, Inc. v. Selective Ins. Co., 183 N.J. 110, 124 (2005)

("[T]he scope of the pollution exclusion should be limited to injury or property

damage arising from activity commonly thought of as traditional environmental

pollution," thus reflecting "the exclusion's historical objective-avoidance of

liability for environmental catastrophe related to intentional industrial

pollution.") (citation omitted). The explosion of this homeowner's propane tank

is not such a traditional "industrial pollution" event.

      We reach a different conclusion, however, with respect to the Policy's

language excluding coverage caused by "flammable materials." The pertinent

passages are as follows.

      The Professional Home Inspection Services Coverage Endorsement

amends "Section D – Definitions" of the Policy to add the following definitions:

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                                        15
            Professional home inspection services means the non-
            invasive visual examination of the readily accessible
            installed systems and components of a dwelling, as
            identified and agreed to in writing by the client and
            home inspector prior to the inspection process,
            performed for a fee and the written home inspection
            report generated.

            Professional home inspection services do not include:

                   1.    Any architectural or engineering
                   inspections or services or opinions
                   pertaining to the adequacy of any structural
                   system or component; or

                   2. Inspections performed for the purpose
                   of ascertaining compliance with any laws,
                   codes or regulations; or the failure to
                   inspect for, discover or disclose any
                   noncompliance with such laws, codes or
                   regulations.

            [(Emphasis added).]

The same endorsement amends "Section E – Exclusions" of the Policy to

provide, in relevant part:

            This policy does not apply to claim(s):

                   ....

                   10. Arising out of or based upon asbestos,
                   fire retardant treatments, toxic or
                   flammable     materials,    formaldehyde,
                   including but not limited to "Chinese
                   Drywall."

                                                                    A-2490-19
                                       16
             [(Emphasis added).]

       This Endorsement amends "Section E – Exclusions" for the entire policy,

not merely for the coverage pertaining to Professional Services Coverage.

       Plaintiffs point to the fact that the General Liability Endorsement does not

contain a flammable materials exclusion. They argue this means coverage for

"general liability," as distinct from "professional services," can extend to claims

arising from damages caused by an explosion of flammable materials. That

argument fails, however, because the General Liability Endorsement does not

stand on its own. Instead, as is clearly stated on its first page, the General

Liability   Endorsement     "modifies    the    following:   MISCELLANEOUS

PROFESSIONAL LIABILITY POLICY."                 With respect to exclusions, the

General Liability Endorsement literally "replaces" only Paragraph 6 of the

Policy, concerning bodily injury and property damage. It does not say anywhere

that it replaces or amends the exclusion for flammable materials.

       It is quite clear that propane gas is a flammable material. See, e.g., Roche

v. Floral Rental Corp., 95 N.J. Super. 555, 560 (App. Div. 1967) (describing

propane as "highly flammable"); see also N.J. Dep't of Health, Right to Know

Hazardous Substance Fact Sheet: Propane (2015).7 Moreover, the explosion at

7
    Available at https://www.nj.gov/health/eoh/rtkweb/documents/fs/1594.pdf.
                                                                             A-2490-19
                                        17
Birch's house that caused her harm manifestly "arose out of" or was "based

upon" the use of that flammable material within the meaning of those terms in

Exclusion 10. As case law instructs, the phrase "arising out of" within insurance

policies generally connotes "conduct 'originating from,' 'growing out of' or

having a 'substantial nexus' with the activity" in question. Records v. Aetna Life

& Cas. Ins., 294 N.J. Super. 463, 468 (App. Div. 1996) (citations omitted).

Here, as Birch essentially asserts in the Underlying Action, the explosion

originated from, grew out of, and had a substantial nexus with, the propane tank

and its allegedly faulty connection to her hot-water heater, which the inspector

failed to spot and report.

      In sum, the flammable material exclusion is expressed with sufficient

clarity in the Policy documents and must be enforced. Flomerfelt, 202 N.J. at

442-43. We reject plaintiffs' alternative argument that the exclusion should be

nullified because it allegedly is contrary to the insured's reasonable

expectations. For one thing, the reasonable-expectations doctrine does not apply

where the policy language is, as we have shown here, unambiguous. Oxford

Realty Grp. Cedar v. Travelers Excess & Surplus Lines Co., 229 N.J. 196, 208

(2017). It is not the courts' role to rewrite or negate the clear terms of an

exclusion.

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                                       18
      In addition, under the pertinent regulations, a licensed New Jersey home

inspector is not required to inspect propane tanks or underground storage tanks.

See N.J.A.C. 13:40-15.16(j)(1)(iii). As his report to Birch indicated, on the day

of his inspection Monaco was unable to observe the operation of the hot water

heating system fueled by the propane tank because the water was shut off. Thus,

even if, hypothetically, the Policy language excluding claims arising from

flammable materials was deemed ambiguous, a home inspector could not have

reasonably expected to be covered for such claims in this particular situation.

      For these reasons, we are constrained to reverse the trial court and grant

Hanover's request for a declaration of no coverage. Any issues concerning

whether Hanover should be reimbursed for defense costs it may have paid to

date are for the trial court to resolve.

      Reversed. We do not retain jurisdiction.

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