National Union Fire Insurance v. Turner Construction Co.

Citations: 119 A.D.3d 103; 986 N.Y.S.2d 74

Court: Appellate Division of the Supreme Court of the State of New York; May 15, 2014; New York; State Appellate Court

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A declaratory judgment action regarding insurance coverage has arisen from a lawsuit by GSJC 30 Hudson Urban Renewal, LLC (GSJC), the property owner, against its contractors following a failure in the curtain wall of a 42-story office building under construction in Jersey City. GSJC hired Turner Construction Company as the general contractor, which subcontracted Permasteelisa North America Corporation to design and construct the curtain wall. On January 25, 2010, a segment of the pipe rail system fell from the eighth floor, prompting an investigation that revealed significant defects in over 20% of the connections, including inconsistencies in attachment methods and structural failures.

GSJC filed claims against Turner and Permasteelisa for breach of contract, warranty, and negligence, citing defects in the curtain wall’s design and installation. The project was insured under an Owner Controlled Insurance Program (OCIP) by National Union Fire Insurance Company, which provided coverage for GSJC, Turner, and Permasteelisa. National Union's policy defined "occurrence" as an accident or event causing property damage but included a professional liability exclusion for design-related issues.

After receiving notice of the claims from Turner and Permasteelisa, National Union agreed to defend them with a reservation of rights, indicating potential coverage limitations. Subsequently, National Union initiated this action seeking a declaration that the policy does not cover the underlying claims and requested reimbursement for defense costs. The insurer contended that GSJC’s claims did not meet the definitions of "property damage" or "occurrence," that the policy excluded coverage for breach of contract and warranty claims, that Turner and Permasteelisa failed to comply with notice requirements, and that coverage for defective design claims was barred by the professional liability exclusion. National Union moved for summary judgment to confirm the absence of coverage.

Permasteelisa and Turner contended that they had negotiated an 'expanded' definition of 'occurrence,' arguing that the loss in question should be covered based on the dictionary meanings of 'event' and 'happening.' However, the motion court determined that the insurance policy did not cover GSJC's claims against them, granted the requested declaration, and ordered National Union to be reimbursed for defense costs incurred for Turner and Permasteelisa.

New Jersey law governs the interpretation of the insurance policy, and it aligns with New York law on the relevant issues. Under both legal frameworks, construction defects like faulty design, fabrication, or installation are not considered 'occurrences' under commercial general liability insurance policies. Such policies typically do not cover breaches of contract, fiduciary duty, or warranty, but instead focus on bodily injury and property damage.

New Jersey law specifies that commercial liability insurance does not cover faulty workmanship that damages the insured’s own work; it only covers accidents resulting from faulty workmanship. The principle established in Weedo v. Stone-E-Brick, Inc. has been applied to determine whether a risk is within the policy’s insuring clause. If faulty construction damages only the insured's work, it is not classified as an 'occurrence.' Additionally, faulty workmanship by subcontractors does not qualify as covered property damage for general contractors, as the entire project is regarded as the contractor’s work. 

Relevant case law supports these interpretations, including Baker Residential Ltd. Partnership v. Travelers Ins. Co., where damages from defective installation did not arise from an 'occurrence' affecting third-party property, and Direct Travel v. Aetna Cas. Sur. Co., which affirmed that claims for economic loss due to breach of contract are not covered under policies limited to 'bodily injury' or 'property damage' caused by an 'occurrence.'

Turner and Permasteelisa contend that the revised definition of 'occurrence' in their commercial liability policy, which now includes 'event' and 'happening' alongside 'accident,' should cover GSJC’s claims against them, or at least render the definition ambiguous. The court disagrees, affirming that the amended definition does not extend to cover faulty workmanship, which lacks the necessary element of fortuity required for coverage under both New Jersey and New York law. The court emphasizes that while the insurance industry's inclusion of 'event' or 'happening' was intended to address gradual occurrences, it does not eliminate the requirement of fortuity. Consequently, faulty workmanship is not considered an 'occurrence' under the policy. The court declines defendants’ request to apply different legal reasoning from other jurisdictions that might treat faulty workmanship as an 'occurrence,' asserting that doing so would improperly transform the insurance policy into a surety or performance bond. The court upholds the summary judgment that National Union is not obligated to defend or indemnify Turner and Permasteelisa. Additionally, it orders the reimbursement of defense costs incurred by National Union for claims later determined not to be covered, citing New Jersey law that allows insurers to seek reimbursement to prevent unjust enrichment of the insured.

An insurer's right to recover defense costs from its insured is constrained by the specific language of the insurance policy. According to the policy endorsement MS #00004, the insurer cannot seek recourse against the insured for expenses related to any claims made under the policy, without distinction between covered and uncovered claims. The court determined that the endorsement unequivocally prohibits the insurer from recouping defense costs, leading to the conclusion that the insurer's reimbursement request is not permitted. Consequently, the Supreme Court's order from June 19, 2012, which granted a summary judgment in favor of the insured parties, Turner Construction Company and Permasteelisa North America Corporation, and directed them to reimburse the insurer for defense costs, was modified to vacate the reimbursement requirement. The decision was affirmed in all other respects and without costs.