THE INSURABLE INTEREST®
September 2010, Volume III, Issue I
 
 
Featured Article
 
Your Drug Exclusion May Not Be Broad Enough
 
 
 NJ Supreme Court Finds Duty To Defend
 
In This Issue
Insurer Ordered To Defend Host Who Supplied Illegal Drugs
Agreement Between Contractors Doesn't Determine Who's Insurer Is Primary
Condo Sidewalks Are "Residential"
 
The Insurable Interest Team
Joseph M. Powell
Managing Partner
 
Thomas J. Mooney
Of Counsel
&
Article Contributor
Jose D. Roman
Partner,
Layout, Editing, &
Article Contributor

Join Our Mailing List
From Powell & Roman, LLC
 
The Insurable Interest is a newsletter by the attorneys of Powell & Roman, LLC.  We specialize in Insurance Defense and Insurance Coverage law in New Jersey and New York. We strive to keep ourselves informed of new developments relevant to our practice and the needs of our clients.  This newsletter is our way of sharing this valuable information with our clients and colleagues in the insurance industry.
 
Insurer Ordered To Defend Host Who Supplied Illegal Drugs: NJ Supreme Court Says Drug Exclusion Insufficient to Deny Defense
 

The New Jersey Supreme Court recently considered the issue of whether a homeowner's insurer owed a duty to defend and indemnify a policyholder when the policy excluded claims arising out of the use, transfer or possession of controlled dangerous substances. The issue was whether the exclusion in the particular policy was broad enough to exclude coverage when the role that the controlled dangerous substances played in bringing about the plaintiff's injury was in dispute.

 

The case Flomerfelt v. Cardiello involved injuries to a young woman who attended a Saturday night party at the home of the defendant. The plaintiff admitted to smoking marijuana prior to arriving at the party. She claimed that she could not recall what she consumed at the party, though she claimed that the defendant provided her with alcohol and drugs, including prescription drugs containing opiates. She became unresponsive during the party, but was not found until Sunday morning after the defendant woke up. The plaintiff claimed that there was a delay in calling for help because the defendant was worried that the police would find illegal drugs in his parents' home. The plaintiff's injuries included liver and kidney failure. A hospital toxicology report found alcohol, marijuana, opiates and cocaine in the plaintiff's system. The hospital discharge summary noted that her condition was "probably secondary to drug overdose." One of the plaintiff's experts concluded that her injuries were caused by ingesting multiple drugs and alcohol, and were worsened by a delay in treatment.

 

After the defendant host was served with the plaintiff's complaint, he sought coverage from his parents' homeowner's insurer, Pennsylvania General Insurance Company. Pennsylvania General refused to provide defense and indemnification based on an exclusion in the policy for claims "arising out of" the use, transfer or possession of controlled dangerous substances. The defendant host then filed a declaratory judgment action against Pennsylvania General seeking a declaration that it was obligated to defend and indemnify him. The trial court granted summary judgment to the defendant host. Pennsylvania General appealed, and the Appellate Division found the exclusion to be unambiguous and broad enough to exclude coverage. The New Jersey Supreme Court, however, found that judgment should not have been entered in favor of the insurer at this point in the litigation because it found that the exclusion was not broad enough to exclude other potential causes, including a delay in treatment. The court upheld a prior ruling in Salem Group v. Oliver. In that case, it was found that the use of the phrase "arising out of" with no further qualification of its meaning is ambiguous when there are concurrent causes of an injury. The court found that a reasonable insured would expect coverage where multiple causes of the injury are alleged in the complaint, but not all are explicitly excluded by the policy.  The Court noted that it is incumbent on the insurer to add additional language which clarifies that the exclusion will preclude coverage for all concurrent causes.  Finally, it is important to note that the Court's decision only required a defense at this point in the litigation because the duty to defend is broader than the duty to indemnify.

 
Agreement Between Contractors Doesn't  Determine Who's Insurer Is Primary: Appellate Court Finds Policy Unchanged by Insured's Contract with Third Party
 

It is fairly common in commercial contracts for one party to be required to name the other as an additional insured on its liability policy. The New Jersey Appellate Division recently addressed the issue of whether such a contract can be read to expand the coverage available in an otherwise unambiguous additional insurance clause. The shorthand answer is, "No."

 

The facts in the matter of, Brown v. Interstate Fire & Casualty Company, are fairly routine. A general contactor hired a subcontractor to provide certain construction work at the site of a new condominium project. The contract stated that "[subcontractor] shall procure and maintain, at its own expense, insurance. . . . [subcontractor 's] policy must name Owner and [general contractor] as additional insureds and shall be the primary policy." The general contractor was insured through Zurich American Insurance Company, and the subcontractor was insured by Interstate Fire & Casualty Company. The Interstate policy contained an additional insured endorsement which provided that coverage was "excess over any other insurance." The Interstate policy was purchased before the subcontractor entered into the contract with the general contractor, and neither its existence, nor its terms, was transmitted to Interstate. However, the Interstate policy had a clause which defined insureds as "any entity that the named insured is required in a written contract to name as an additional insured."

 

A fairly significant workplace accident occurred, severely injuring three parties. Suit was filed, and Zurich initially entered an appearance for the general contractor and assumed its defense. However, shortly thereafter, it attempted to tender these obligations to the subcontractor's carrier, Interstate. Interstate declined. A declaratory judgment action was thereafter filed.

 

In the Declaratory Judgment action, Zurich argued that the contract entered between the general contractor and the subcontractor should obligate Interstate to act as primary coverage for the general contractor, or at a minimum, co-primary. The court rejected this argument. It found that where there is no ambiguity in an additional insured clause. The clause cannot be modified by a contract entered into between the insured and a third party. The court distinguished previous similar case law which seemed to suggest the contrary, by noting that the language in the third-party contract only served to help "interpret" an additional insured clause if the clause is ambiguous. Finding that the clause was clear on its face in the underlying suit, the court enforced it and found Interstate to be excess only. The underlying suits had settled for an amount that was within the Zurich limits, and accordingly, Interstate had no exposure.

 

The court cited, with approval, a quote from a leading insurance treatise that stated "An insurer's duties are defined by what it contracted to do, not by what the insured contracted to do." Since the subcontractor apparently breached its contractual obligation to provide primary coverage by not procuring the appropriate endorsement on the Interstate policy, the court noted that the parties were free to pursue the subcontractor directly on that basis.  

 

Click Here For A Copy Of The Court's Opinion

 

Condo Sidewalks Are "Residential"

Court Defines Sidewalk Liability Exposure for Condominium Associations
 

In what the court described as a "novel issue," the Appellate Division of the New Jersey Superior Court addressed the issue of whether a condominium association owes a duty to maintain abutting public sidewalks. The case, Luchejko v. The City of Hoboken, arises from a routine sidewalk fall down on ice and snow.

 

Under existing New Jersey case law, the owners of commercial property which abut public sidewalks are obligated to reasonably maintain them and are subject to liability exposure if they fail to do so. The owners of residential property do not owe the same duty. Residential property owners have no affirmative obligations to maintain or repair their abutting public sidewalks and expose themselves to liability only if they voluntarily undertake such an action and perform it negligently.

 

New Jersey case law is replete, therefore, with opinions determining whether a particular structure is residential or commercial in nature. With this new opinion, the Appellate Division has decided that a condominium association falls into the "residential" category.

 

The facts in Luchejko were essentially uncontested. The plaintiff slipped and fell on ice on a public sidewalk that abutted a 104 unit condominium complex in Hoboken. He sued the City of Hoboken, the condominium association, its property manager and a snow plowing company which had been engaged by the property manager to provide snow removal.

 

Discovery revealed that the units in the condominium complex were all individually owned and that the premises were controlled and operated by the association solely for the use of the residents. There was no retail space located in the premises and, most importantly, no profits were generated from the condominium association's activities. The plaintiff contended that the condominium association should be considered a commercial entity for purposes of sidewalk liability. The court rejected that argument. It noted that the key issue in determining whether a property is commercial is its "capacity to generate income." Plaintiff noted that multiple-unit apartment buildings have long been considered commercial under the existing sidewalk liability scheme and pointed out the obvious similarities between these two types of entities. However, the court rejected this analysis indicating that an apartment building owner has the capacity to generate income from the property while a condominium association of residential units presumably does not. Notably, the court did not address the issue of individual unit owners renting out their premises for profit. Presumably, this is because no individual unit owners were named in the suit. The association itself makes no profits from the individual endeavors of any particular unit owner.

 

The plaintiff also argued that the local municipal ordinance requiring snow removal should be a factor in assessing liability to the condominium association. However, the court reiterated previous case law that "municipal ordinances do not create a tort duty, as a matter of law."

 

 

As a footnote the court noted that the independent snow removal contractor settled out of the case (because the contractor owed a duty regardless of whether the property was residential or commercial).

 

Therefore, it appears that the general rule is that condominium associations are not required to maintain abutting sidewalks. However, challenges may still be brought if the association has a profit making function and/or if convincing arguments can be made that the units within the building are not primarily owner occupied.

Click Here For A Copy Of The Court's Opinion
 
 
 

  PLEASE CONTACT US WITH YOUR QUESTIONS AND COMMENTS
 
 
Firm Logo
 
131 White Oak Lane
Old Bridge, NJ 08857
(732) 679-3777
Fax: (732) 679-6433
The Insurable Interest is a registered trademark of Powell & Roman, LLC.