New Jersey Insurance Blog

A third-party insurance policy provides coverage for an insured’s liability to third parties for personal injury or property damage.  This is in contrast to a first-party insurance policy, which provides coverage for damage to the insured’s own property.   An insurer generally has two obligations under a third-party policy:  (1) it must defend its insured in connection with potentially covered claims asserted against the insured; and (2) it must pay any judgments entered against its insured in connection with covered claims.

Most third-party insurance policies exclude coverage for damage to the insured’s own products or work performed by the insured.  “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.”  See Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 239, 405 A.2d 788 (1979).  Consequently, if the insured manufacturers a defective product, there will be no coverage for costs incurred to repair or replace the defective product.   Coverage may exist, however, if the defective product causes personal injury or damage to other property not manufactured by the insured.

Thus, whether coverage exists in connection with faulty work performed, or a defective product supplied, by the insured, depends on whether the damage at issue occurred to something other than the insured’s own work or product.  There is no coverage if the damages at issue consists solely of economic damages resulting from the failure of the insured to properly perform its obligations.

Titanium Indus., Inc. v. Federal Ins. Co., No. L-1043-11, 2014 WL 4428324 (App. Div. Sept. 10, 2014), involved a claim by an insured, Titanium Industries, Inc. (“Titanium”), seeking coverage under a third-party liability policy for costs incurred in connection with the sale by it of defective titanium bars to one of its customers.  It was determined that the defect in the titanium bars existed at the time they were purchased by the insured from one of its suppliers.

The insured’s customer, Biomet Manufacturing Corp. (“Biomet”), used the titanium to manufacture screws that were used in connection with orthopedic products.  Biomet recalled the screws after learning that they were defective.  With the exception of a piece of stainless steel that may have been inserted at the top of the screws, the screws were made entirely of the titanium it purchased from the insured.  The insured incurred $963,000 to settle the claims asserted against it by Biomet.

The defect in the titanium was described as “alloy separation,” which is caused by “the failure of alloys in a metal to completely melt causing the alloy to separate and undermine the strength of the finished product.”  Id. at 1.     

The insured sought coverage for its losses from its insurer, Federal Insurance Company (“Federal”).  Federal denied coverage and Titanium commenced a declaratory judgment action against it.  Federal denied coverage on the basis that “the titanium was already defective when Biomet received it, and the titanium was not added to any product which then caused property damage.”  Id. at *2.  Federal also denied coverage on the basis that the defective titanium did not cause damage to any other property.  Id.

The policy at issue provided that there was no coverage for “property damage to your product arising out of it or any part of it.”  The policy defined “your product” as “goods or products . . . manufactured, sold, handled, distributed or disposed of by” the insured.  Id. at *3.

The policy also contained an “impaired property” exclusion.  An “impaired property” exclusion comes in to play when a third-party claims that its property was impaired (i.e., it could not be used or was less useful) because it incorporated the insured’s defective product or work.  Id.

Both exclusions apply only if the insured’s product or work does not result in bodily injury or property damage to a third-party’s property.

Federal moved for summary judgment on the basis that the titanium was already defective when Biomet received it, that it was not added to any product which then caused property damage, and that the defective titanium did not cause damage to any other property.  The trial judge granted summary judgment in favor of Federal, concluding that even if coverage existed, the “your product” exclusion applied.  According to the court:

[P]laintiff’s product is not simply the titanium bars.  Your product is defined in pertinent part under the policy . . . as goods, products, manufactured, sold or distributed, and includes representations regarding . . . the quality of use of your product.

By that definition, plaintiff’s product here was titanium bars of a particular grade for use as pins and screws for orthopedic devices, and it was, in fact, the pins and screws that were in issue here.

To be sure, if the pins and screws were comprised of components other than plaintiff’s titanium, the screws and pins would be a different product and the inability to replace the titanium without destroying the other components of the screws and pins would alter the analysis.

Id. at 4.  The trial judge further concluded that the impaired property exclusion applied “because the titanium supplied by plaintiff is the only component of Biomet[’s] screws [and the] screws can be restored to use by supplying Biomet with the proper grade of titanium for use in [orthopedic] pins and screws.”  Id.

On appeal, the Appellate Division affirmed “for reasons slightly different than those expressed by the motion judge.”  Id. The court concluded that there was no coverage under the policy as a matter of law because the only damage was to the defective product itself.  The court went on to note that it was not necessary to even consider (as the trial court did) whether the loss fell within one of the policy exclusions.  Nonetheless, the court indicated, albeit in dictum, that the “your product” exclusion would also bar coverage.

The court distinguished the case before it from one in which an insured faces tort liability arising out of personal injury or property damage to other property.  In Titanium, the insured’s liability was essentially contractual in nature.  The court specifically rejected the insured’s argument that the damage was to Biomet’s screws and not to the titanium bars sold by the insured.

The court noted that “[i]mplicit in [the insured’s] argument is the assertion that plaintiff’s property—the titanium bar material—has been sufficiently transformed so that it is something else, that is, some other property that was damaged.”  Id. at *7.  However, as noted by the court:

Here, plaintiff’s product—raw titanium—was fashioned into screws, a process anticipated by the parties’ relationship and the terms of the long-term supply agreement.  Plaintiff’s titanium was otherwise unaltered and was not appended to other property that was itself, damaged.

Id. at *8.  The court went on to note:

Biomet’s claims were for breach of plaintiff’s warranties regarding the intended use of its titanium, and the risk of any replacement or repair of plaintiff’s faulty goods was a risk assumed by plaintiff as a cost of doing business, not a risk passed onto [plaintiff’s insurer] via the policy.

Id.

Thus, under New Jersey law, in order for a loss arising out of the sale of a defective product manufactured by an insured to be covered, it must be shown that the defective product caused personal injury or damage to the property of others.  There must be something other than a purely economic loss resulting from the insured’s failure to properly perform its obligations.   In other words, coverage depends on whether the damage at issue is of a type typically recoverable in a breach of contract action or whether the insured’s actions also caused tort liability.

© William D. Wilson and NJInsuranceBlog.com, 2014.  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 or NJInsuranceBlog.com with appropriate and specific direction to the original content.

Most first-party property insurance policies contain a suit-limitation provision, which limits the amount of time an insured has to commence an action against its insurer.  The time generally ranges from one to two years.  Under New Jersey law, certain types of insurance policies are required by statute to contain suit-limitation provisions.

Courts have uniformly enforced suit limitation provisions.  Consequently, when a loss occurs it is necessary to first determine whether the policy at issue contains such a provision.  If it does, the period set forth in the suit-limitation provision and not the general six-year statute of limitations applicable to contracts will govern when an action has to be commenced.

It is important to distinguish between suit-limitation and late notice defenses.  If an insured fails to give timely notice of a claim to its insurer, coverage for that claim may be precluded, but only if the insurer suffered appreciable prejudice as a result of the late notice.  In connection with a suit-imitation defense, on the other hand, an insurer is not required to show appreciable prejudice in order to avoid coverage.  A suit-limitation defense is similar to a statute of limitations defense in that respect.

Typically, the time to commence an action against an insured will start to run on the date of the loss.  Thus, in most jurisdictions, an action seeking recovery under a first-party property insurance policy will have to be commenced within one or two years of the date of the loss depending on the particular language at issue.

New Jersey courts, however, have adopted a rule that tolls the running of the time to sue from the time notice of the loss is given to the insured until the claim is denied.  See, e.g., Peloso v. Hartford Fire Ins. Co., 56 N.J. 514, 267 A.2d 498 (1970).  The purpose of tolling the running of the time to sue is to give the insurer an opportunity to investigate the claim without having to worry about being sued if its investigation is not completed within a certain period of time.

Application of a suit-limitation provision was recently addressed by the New Jersey Appellate Division in Rihanna Corp. v. Certain Underwriters at Lloyd’s, No. A-2643-12T2, 2014 WL 4450422 (App. Div. April 30, 2014).  The policy at issue in that case provided coverage for a restaurant owned and operated by Rihanna Restaurant, Inc. (“Rihanna”).  The shares of Rihanna were owned by four individuals.  Shortly after the restaurant opened the four owners had a “falling out.”  One owner, Maher Moussa, subsequently agreed to purchase the interests of the other three owners.  As part of the sale, the other three shareholders retained a security interest in the restaurant to guarantee payment for their shares.

Moussa defaulted on his payment obligations and an action was commenced against him by the three selling shareholders (“the shareholder litigation”).  The prior owners were seeking reinstatement of their interests in the corporation and possession of the restaurant.  On October 3, 2008, while the action was pending, a fire occurred at the restaurant.  The fire was suspicious in nature.

Moussa gave notice of the fire to Rihanna’s insurer, Certain Underwriters at Lloyds of London (“Lloyd’s”).  Although the restaurant open in June 2006, the insurance policy had been obtained approximately one month prior to the fire.  After reporting the loss, Moussa met with the insurer’s adjuster at the restaurant on October 7, 2008, and signed a hand-written statement prepared by the adjuster.

On October 15, 2008 – just 12 days after the fire – an order was issued in the shareholder litigation awarding ownership of the restaurant and the right to possession to the prior shareholders.  One day later, on October 16th, the “new” owners reported to the police that the restaurant had been vandalized.  They indicated that they had a dispute with Moussa concerning the ownership of the restaurant after issuance of the court’s order.

Lloyd’s issued a reservation of rights letter in connection with the fire loss on January 7, 2009.  On October 29, 2009 – a little over one year after the loss – Lloyd’s denied coverage for the loss.

On August 29, 2011 – almost three years after the fire and almost two years after the claim was denied – an action was commenced against Lloyd’s seeking recovery under the policy.  The insureds later moved to amend the complaint to add a claim seeking recovery in connection with the vandalism loss.

Prior to a decision on the motion to amend, Lloyd’s moved for summary judgment based on the suit-limitation provision in the policy, which provided:

No suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with, and unless commenced within twelve months next after inception of the loss.

Id. at *2.

The motion for summary judgment was granted by the trial court.  On appeal, the insureds argued that the delay in commencing the action should be excused given the circumstances and the fact that the insurer did not sustain appreciable prejudice as a result of the late filing.  The Appellate Division summarized the insured’s arguments as follows:

 To support their position to excuse the delay in filing, plaintiffs argue that they changed counsel, and their efforts to obtain copies of the policy and the file were thwarted.  Plaintiffs also argue that they had no knowledge of the policy’s terms and believed substituted counsel acted diligently, filing the action once the documentation was obtained.  As to the lack of prejudice, plaintiffs point out defendant was immediately notified of the fire and plaintiffs fully cooperated with all aspects of defendant’s investigation, submitted to an examination under oath and supplied any requested documents.  Finally, plaintiffs [contend] that the failure to file the lawsuit within the one- year time period was “a technical violation” and argue, as a matter of equity, defendant’s statute of limitations defense should not bar suit.

Id. at *3.  The Appellate Division rejected each of those arguments.

The court began its analysis by noting that suit-limitation provisions are valid and enforceable under New Jersey law. Although noting – albeit incorrectly – “that consideration of whether the delay caused prejudice to the insurer is also required,” the court went on to note that “plaintiffs’ complaint was not initiated within one year after being informed coverage was disclaimed.” Id. at 4. The court further noted that “[p]laintiffs inexplicably waited nearly two years after the claim was rejected, which was nearly three years after the fire, to file [the] action.”  Id.  The court further found “no basis in the record justifying” the relaxation of the suit-limitation provision.  Id.

The court noted:

Plaintiffs identify no action by defendant interfering with their filing.  Rather, plaintiffs’ contentions focus on delay attributed to the attorney first engaged to represent them.  Plaintiffs suggest counsel’s foot dragging when asked to surrender the file to substituted counsel precluded their filing.  The file was made available on November 23, 2010 but not retrieved until surrendered in December 2010.  Suit was not filed for another eight months.  Thereafter, plaintiffs’ conduct is not compatible with diligence and these reasons do not justify application of equitable tolling.

Id. at *5.  Finally, the court rejected plaintiffs’ argument that it was unaware of the suit-limitation provision, noting that “[t]he policy clause is not a special contractual clause specific to this policy; rather it is a standard clause mandated to be included in every New Jersey fire insurance policy by N.J.S.A. 17:36-5.20.”  Id.

Although it correctly enforced the suit-limitation provision, the court seemed to get a number of things wrong.  First, the court stated that “consideration of whether the delay caused prejudice to the insurer is also required.”  Id. at *4.  Most courts that have considered the issue have held that prejudice is not a consideration when it comes to the enforcement of a suit-limitation provision.  Indeed, although the Rihanna court made reference to prejudice, it never considered whether the insurer was prejudiced by the delay.  It merely concluded that there was no justification for the delay.

Second, the court stated that an insured has twelve months from the denial of a claim to commence an action.  This is not correct.  The suit-limitation period begins to run on the date of the loss and is tolled from the time notice is given until the claim is denied.  Thus, if, for example, an insured waits two months to give notice of a loss to its insurer, it will only have ten months to commence an action against its insurer once the claim is denied.  The running of the suit-limitation period is not tolled until notice is given.  Similarly, if an insured waits more than one year to give notice of a claim to its insurer, the time to sue will have already passed and the giving of notice will not reinstate the twelve-month period.

Despite these apparent errors, the Rihanna decision is important in that it reaffirms the well-established rule that suit-limitation provisions are valid and enforceable under New Jersey law and an insured’s failure to timely commence an action may preclude coverage for an otherwise covered loss.  In addition, ignorance on the part of the insured as to the existence of a suit-limitation provision is no excuse.

© William D. Wilson and NJInsuranceBlog.com, 2014.  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 or NJInsuranceBlog.com with appropriate and specific direction to the original content.

In a commercial lease agreement it is very common for the landlord and the tenant to agree to defend and indemnify each other in connection with certain claims.  Generally, the tenant will agree to defend and indemnify the landlord in connection with claims arising out of the use of the leased premises and the landlord will agree to defend and indemnify the tenant in connection with claims arising out of the use of the common areas, such as parking lots.  Commercial lease agreements also commonly require each party to obtain insurance covering their potential liability and to name the other party as an additional insured under the policies.

The duty to defend and indemnify typically is not dependent on obtaining insurance coverage.  Thus, if a party fails to obtain insurance coverage, or does not obtain insurance coverage coextensive with its obligation under the lease, that party may still be required to defend and indemnify the other party.  In addition, failure to obtain the insurance coverage called for under the lease may give rise to a breach of contract claim.

The duty to defend and indemnify in the landlord-tenant context recently was addressed by the New Jersey Appellate Division in American States Ins. Co. v. Philadelphia Ins. Co., No. A-3693-12T3, 2014 WL 4098135 (App. Div. Aug. 21, 2014).  In that case, the tenant, Elite Fitness Centers, LLC (“Elite”), leased space in a shopping mall from Trans Equity Realty, LLC (“Trans Realty”).  The lease provided that the leased premises did not “extend beyond the rear wall or window of the proposed store or beyond the actual storefront.”  Id. at *1.  The lease also required the landlord “to maintain the common areas, which included the stairways, in good condition.”  Id.

With respect to the tenant’s obligations to the landlord, the lease provided, in pertinent part:

SECTION 8.01—Tenant, at its sole expense, shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises. All such insurance shall insure performance by tenant of the indemnity provisions of Article XV and shall name landlord, tenant . . . as the insureds.

ARTICLE XV—In addition to any and all other obligations of tenant to indemnify and save landlord harmless as set forth in this lease, tenant will indemnify and save harmless landlord against and from all liabilities, obligations, damages, penalties, claims, costs, charges, and expenses, including without limitation, any and all architect’s and attorney’s fees, which may be imposed upon or incurred by or asserted against landlord by reason of any of the following occurring during the term of the lease:

*          *          *

(c)        any injuries to persons occurring on or about the demised premises;

*          *          *

Id.  In accordance with the lease terms, Elite obtained a liability insurance policy from Philadelphia Insurance Company (“Philadelphia”) and named the landlord as an additional insured.  The policy obtained by Elite provided:

WHO IS AN INSURED—[The policy] is amended to include as an insured [the landlord] but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tenant.]

Id.  Brett Pessel, a part owner of Elite, was injured while descending a staircase located outside the rear door of the leased premises.  The landlord admitted that it was responsible for maintaining the staircase and that it was aware that it was in need of repair prior to the incident.

Pessel subsequently sued the landlord and the landlord’s property manager.  The landlord notified its insurer, American States Insurance Company (“American”), of the lawsuit.  Approximately 18 months later American notified Philadelphia of the lawsuit and took the position that Philadelphia was required to provide a defense and indemnification to the landlord as an additional insured under Elite’s insurance policy.

Philadelphia refused to defend the landlord, noting that the incident took place outside of the leased premises.  In addition, it claimed that it was not obligated to provide a defense or indemnification because Elite was not legally responsible for the injuries.  American settled the underlying personal injury action and then commenced a declaratory judgment action against Philadelphia, seeking payment of the settlement amount and attorney’s fees.

The trial court granted summary judgment in favor of American, holding that Philadelphia was required to reimburse American for the amount of the settlement and those attorney’s fees incurred after American “tendered” the lawsuit to Philadelphia.  Under New Jersey law, an insurer is not liable for any pre-tender attorney’s fees.  The court also held that Philadelphia was liable for the attorney’s fees incurred by American in the declaratory judgment action it commenced against Philadelphia.

On appeal, the Appellate Division affirmed the decision of the trial court.  The court rejected Philadelphia’s argument that it was not liable because Elite had no obligation to indemnify the landlord.  The court reasoned:

Here, although the landlord was responsible for the common areas, the lease did not confine the tenant’s responsibility to indemnify the landlord to the area within the demised premises.  The lease states that the tenant “shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises.” Consistent with that responsibility, the tenant obtained the additional insured endorsement to the Philadelphia policy, which states the landlord is an insured with respect to liability arising out of the ownership, maintenance or use of the leased premises.  In addition, the lease did not state that the landlord would indemnify the tenant for any accident that occurred in a common area.

Id. at 3 (emphasis in original).  The court noted that use of the rear staircase “was essential to use of the leased premises.”  Id. at 4.  Thus, because Mr. Pessel was injured while “using” the leased premises, the court concluded that Philadelphia was required to defend and indemnify the landlord in accordance with the terms of the lease and the insurance policy it issued to Elite.

The court distinguished the facts before it from the facts at issue in Pennsville Shopping Center Corp. v. American Motorists Ins. Co., 315 N.J. Super. 519, 719 A2d 182 (App.Div.1998), certif. denied, 157 N.J.647 (1999).  In Pennsville, the lease at issue provided that the tenant was required to indemnify the landlord in connection with liability arising out of conditions “on” the leased premises.  The lease further provided that the landlord was solely responsible for the common areas.  In that case, a customer of the tenant tripped and fell into a pothole in the parking lot.  The Pennsville court held that:

[a]bsent an express and unambiguous contractual undertaking to do so, a tenant cannot logically be seen to be providing insurance to a landlord in respect of a liability for which the landlord has assumed sole responsibility and has agreed to indemnify the tenant . . . . Its undertaking to name landlord as an additional insured must be taken to be coextensive with the scope of tenant’s own liability.

Id. at 523.

In both American States and Pennsville the Appellate Division considered both the terms of the lease and the terms of the insurance policy.   There is some support, however, for the proposition that courts should  not look to the terms of the underlying agreement where the terms of the insurance policy are unambiguous and self-evident.  See, e.g.   Jeffrey M. Brown Assocs., Inc. v. Interstate Fire & Cas. Co., 411 N.J. Super. 160, 997 A.2d 1072 (App. Div.), certif. denied, 204 N.J. 41 (2010); Harrah’s Atlantic City, Inc. v. Harleysville Ins. Co., 288 N.J. Super. 152, 159, 671 A.2d 1122 (App. Div. 1996).

In situations where a court does not look to the terms of the underlying contract, the available coverage may be different from what the parties to the underlying agreement actually intended.  Regardless of whether a court considers the terms of the underlying agreement, if the insurance policy clearly excludes coverage, a court will not find coverage simply because the insured may be held liable under the lease.  Thus, it is important for a party to a lease agreement containing an insurance/indemnification provision to closely review the terms of both the agreement and its insurance policy prior to any loss to confirm that the extent of coverage provided is co-extensive with that party’s obligations under the lease.

© William D. Wilson and NJInsuranceBlog.com, 2014.  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 or NJInsuranceBlog.com with appropriate and specific direction to the original content.