Pulling the Continuous Trigger: Insurance Policies and Progressive Property Damage in New Jersey
When a property owner claims damages due to defective construction, the first step for a contractor is to notify its commercial general liability (CGL) insurance carrier for coverage. In most instances, this process is straightforward. However, the process becomes more complicated where the damage occurs over time, during which the contractor may have had various CGL policies.
In the recent case of Air Master & Cooling, Inc. v. Selective Insurance Co. of America (Air Master), the Superior Court of New Jersey, Appellate Division, provided clarification on coverage in a construction defect case involving progressive property damage. Between 2005 and 2008, Air Master worked as a subcontractor on the construction of a condominium building, tasked with installing condenser units on the roof. In 2008, multiple unit owners began noticing water infiltration in their windows and ceilings. In 2010, a consultant produced a report identifying moisture on the roof.
Some residents and the condominium association brought a lawsuit against the developer who joined Air Master. Air Master sought defense and indemnity from insurers that covered it under a succession of CGL policies: Penn National (June 2004-June 2009); Selective (June 2009-June 2012); and Harleysville (June 2012-June 2015). Penn National undertook to defend Air Master, while Selective and Harleysville argued they had no duty to defend or indemnify, as the property damage manifested itself before their policy periods. Harleysville was dismissed, leaving open the question of whether Selective was obligated to defend and indemnify.
Selective moved for summary judgment, arguing that it was not responsible because the water damage manifested before June 2009. Air Master argued that the court should adopt a “continuous trigger” approach to coverage where all policies are triggered until the point that it becomes reasonably known that the damage is attributable to the insured’s work. The court ruled in Selective’s favor, holding that the water damage manifested itself before June 2009.
When Air Master appealed, the Appellate Division decided two issues: 1) whether the continuous trigger theory applies to third-party claims for progressive property damages as a result of defective construction; and 2) if so, when does the “last pull” of the continuous trigger occur. Regarding the first issue, the court noted that New Jersey courts previously endorsed the continuous trigger theory in asbestos and environmental contamination cases. The court cited to the New Jersey Supreme Court case, Potomac Insurance Co. v. PMA Insurance Co., which approved the continuous trigger theory in the construction context in a dispute pertaining to contribution of costs between insurers that had issued policies in two successive years. After explaining that the policy underlying the continuous trigger theory is to increase insurance coverage for progressive injury situations, the court held the continuous trigger theory applicable for progressive property damages caused by defective construction.
Regarding the second issue, the court rejected Air Master’s argument that the end date for the continuous trigger should be delayed until it becomes reasonably known that the damage is attributable to the insured’s work. Instead, the court held that the “last pull of the trigger” occurs on the date of initial manifestation of the property damage caused by the defective construction.
After considering these issues, the court sent the case to the trial court for the parties to conduct discovery as to what information was known about the construction defects and whether that information could have reasonably been known before Selective’s policy period.
Under Air Master, we now know that New Jersey courts will apply a continuous trigger approach to coverage in the construction defect context. Therefore, all policies through the time that the property damage manifests itself could be implicated. The court did not expressly address when the initial “pull” of the trigger occurs. Based upon Penn National’s undertaking to defend Air Master, it appears that the initial pull occurs as of the date that the work is performed. The New Jersey Supreme Court’s decision in Potomac also suggested the same. However, because the courts have never expressly addressed this issue, the timing of the initial pull remains an open question.
While Air Master is helpful for contractors by providing additional insurance coverage for property defect claims, it may be a double-edged sword. The adoption of the continuous trigger theory may cause plaintiffs to bring claims more frequently knowing that there are more policies to contribute towards settlement. If multiple CGL policies are triggered but one or more refuse to provide coverage, then the contractor would be responsible for its share of defense and indemnity costs. Because this is a recent decision, its effect is uncertain. Nevertheless, in the event that you, as a contractor, are named in a complaint alleging defects in construction work in New Jersey, you should place all carriers on notice from the date of performance until the date that the damage may have manifested itself.
Beware the Performance Specification: When Design-Bid-Build Becomes Design-Build
Performance specifications in a construction contract can dramatically alter decisions about costs, pricing, and quantities, and therefore profits. Often they make a design-bid-build job feel like it is operating more like design-build, disrupting the predictable process essential to construction contracting and work. So, a contractor must properly understand and account for such specifications in bidding and performance. The following provides some considerations and measures general contractors can employ to protect their legal interests and business objectives when faced with contracts containing performance specifications.
Design and Performance Specifications
Specifications for construction projects come in primarily two types: design and performance. Design specs are a roadmap to the construction. They describe—often in precise detail—the materials the contractor must use, the quantities for such materials, the location and requirements for installing such materials, and certain measurements and tolerances. For example, for a water treatment facility, design specs would require a specific type of water pump, the precise installation location, and its particular connection to other equipment. However, they stop short of directing a contractor’s means and methods—how a contractor performs its work, such as scheduling and manpower.
In contrast, performance specs outline or set a standard or objective for the final construction, leaving the contractor to select the design, methods, and materials necessary to achieve that objective. Performance specs can even include how a project performs over time after construction has been completed, as LEED energy efficiency standards illustrate. As an example, a performance specification for a water treatment facility may require certain flow rates and pressure standards for water systems, but leaves it to the contractor to select the pumps, determine their installation, and create a system that meets these flow rates and pressure standards.
Each type of specification has inherent advantages and disadvantages. Design specs ensure great precision and predictability. The owner has a very exact expectation of the finished product it will receive, and the contractor can determine with reasonable certainty the labor, materials, and equipment needed for the job. Conversely, because a contractor must comply with design specs it cannot modify, should the contractor discover more effective or efficient means of construction as the project progresses, it cannot undertake such cost-savings work unless all parties agree in writing. Accommodating such changes requires going through an often slow and tedious change order process.
Performance specs trade predictability for flexibility. Because the contractor determines the design, the contractor can explore different construction options and determine the most effective and efficient methods, thus delivering the best product at the best value. Also, the contractor can quickly and independently make small design changes to handle unforeseen developments. Despite these advantages, the contractor bears full responsibility for whether the project as designed and built meets the performance standards set, and thus, the costs to get the project right.
Project Delivery Methods: Design-Bid-Build v. Design-Build
The type of project specifications bear direct relationship to the project delivery method: design-bid-build (“D-B-B”), which typically relies on design specifications, or design-build (“D-B”), which uses primarily performance specifications. In a D-B-B project, an owner hires an architect or engineer to design the construction based on the owner’s instructions (or wishes). At the owner’s invitation, contractors review the design and submit bids to perform the work. The contractor awarded the project has the obligation to build according to that design, subject to owner-approved changes. Because a contractor needs only to follow the design, the owner and the designer have responsibility for any design problems.
The D-B model flips the D-B-B model on its head in some respects. Essentially, the owner contracts with one entity to perform the entire project, both its design and construction. The contractor will often form a design-build team to work together to understand the owner’s goals and complete construction accordingly. Because the contractor has control over project design, it bears responsibility for any design problems, a risk contractors need to consider in negotiating design-build jobs.
The D-B model creates synergies and efficiencies for contractors and owners. Unifying project design and construction under one team eliminates the tension between designer and contractor about causes of project failure. Also, design changes require a less formal process. On the other hand, design-builders need to allocate for extra costs should the project require multiple re-designs and re-constructions to achieve performance objectives. An owner may also find that a contractor employs a design that works to its advantage in terms of cost and efficiency, but not necessarily the owner’s. These advantages and disadvantages of either delivery method play a significant role in contractors’ expectations in entering a construction project contract, in particular, cost, time, planning, and profits.
How Specifications Can Make Design-Bid-Build Feel Like Design-Bid
Unfortunately, not all D-B-B projects use only design specs, and not all D-B projects use just performance specs. More often, contracts contain a mix of both. Although D-B-B projects feature mostly design specs, they also rely on performance specs. For example, in a wastewater treatment plant project, the contract would likely specify acceptable water pumps by size, type, makes, and models and delineate installation requirements—all design specs. The contract may also require that such pumps achieve or deliver certain flow rates—a performance specification. Presumably, where the system does not deliver such flow rates, the contractor has breached the contract and must investigate and correct the problem, even if the system as constructed meets all design specs.
Contractors faced with such situations typically turn to the project designer for assistance. Unfortunately, design professionals sometimes simply demand that builders comply with the contract, including the performance specs. Doing so may require the contractor to redesign parts of the project, usually at the risk of increased costs—time, labor, materials—far beyond expectations when the builder entered the contract. Further, redesign to satisfy specific performance specs may result in breaching certain design specs. A design-bid-build project suddenly looks much more like design-build.
Courts’ Treatment of Specifications
Issues surrounding performance specifications have confounded courts as well. Some clarity came with the development of the Spearin Doctrine. Based on the Supreme Court’s holding in United States v. Spearin, the doctrine provides that plans and specifications provided by an owner or the owner’s designer carry an implied warranty of producibility (or accuracy). The designer implicitly guarantees that if the contractor follows the plans without deviation, the design will yield the intended building. That means that if in constructing the project a contractor follows the plans and specifications provided, that contractor satisfies its contractual obligations and would face no liability for design failures or other defects. Instead, the designer has that responsibility.
The difficulty comes when a contractor complies with the design specs, but the project still fails to achieve the obligations set forth in the performance specs, as the above water pump example illustrates. However, if the design specs restrict the contractor so much that it no longer has sufficient discretion to meet design objectives, courts should find the contractor not liable under the Spearin Doctrine. Contractors, however, cannot rely on a court reaching this result in every instance. So contractors should look to proactive measures to manage and mitigate this risk.
How to Handle Performance Specifications
Contractors can manage the risks and potential liabilities of performance specs during both the bidding process and once the project is underway.
Identify Performance Specifications: In reviewing the contract and bidding documents, contractors should keep a keen eye for performance specs, assess their cost implications, and modify the bid amount accordingly. Language that refers to measurable standards or testing requirements—such as flow rates and water pressure in a wastewater system—often indicate performance specs.
Seek Clarification: The pre-bid questioning period provides an excellent opportunity to resolve confusion and add precision to contract specs. By taking advantage of this process, contractors can better understand and refine contract terms. In particular, questions about performance specs should seek to make contractual language and, thus, expectations as well.
Assess Cost and Factor Into Bid: Bid amounts should account for expected costs from an initial design failing to comply with performance specs. Those costs should anticipate redesign, testing, and additional construction expenses.
During Performance and After
Contract Review: Reviewing the proposed agreement should include identifying all performance specs and preparing for potential related design and construction issues.
Keep Written Records of Design Issues: Industry practices afford many ways to document design issues related to performance specs. Contractors should make use of all those available, such as RFIs, meeting minutes, change order requests, correspondence, and email communications.
Focus on Intent: Some legal commentators have suggested that rather than sorting specs into design and performance buckets, courts should look at the contract’s overall intent about who has design responsibility—the designer (like in a D-B-B project) or the contractor (like in a D-B project). Confirming that intent in writing can help to resolve ambiguity in the contract.
Determine Whether Performance Specifications Set Impossible Expectations: For contracts with a mix of performance and design specs, design restrictions may rob the contractor of the necessary discretion to comply with performance specs. That would allow the contractor to argue the owner cannot enforce such performance specs. To provide the proper factual support for this argument, contractors should document how the design and performance specs conflict as thoroughly (and as often) as possible and communicate that analysis to the owner and designer.
Performance specs can cause confusion for both construction professionals and legal practitioners alike. The above provides only a general framework of this problem and some broad directives on how to handle this issue. Given some uncertainty in this area of the law, however, cases involving performance and design specs are often resolved on a fact-specific basis. Further, what a contractor does on a project today can have consequences for future legal disputes. As a result, contractors faced with such issues should consult with their legal counsel for day-to-day advice with an eye towards the potential end-game resolution.
Getting Paid or Getting Stayed? Recent Judicial Decisions in Maryland, Virginia, and Pennsylvania Limit Surety Attempts to Delay Miller Act Claims
In order to ensure the financial health of construction companies working on federal jobs, Congress has provided first and second tier subcontractors and suppliers with a potent remedy. Under the federal Miller Act, 40 U.S.C. § 3133, prime contractors are required to post a payment bond upon which subcontractors can assert claims for payment for unpaid work. If a subcontractor is forced to wait 90 days or more for payment, it is are within its rights to file a lawsuit seeking payment for the overdue amounts. This lawsuit can be filed against just the prime contractor’s surety, or, depending upon the terms of the subcontract, can include the prime as well. The payment bond litigation is often referred to as a “Miller Act Claim.”
Despite the stated purpose behind payment bonds, contract provisions are often used as a basis to temporarily avoid litigation. Frequently, sureties (and the prime contractor that posted the bond) will respond to a Miller Act Claim by asking the court to “stay” the case (i.e., hit the pause button) in order to avoid immediate payment obligations. This delay is significant, as it could be years before the subcontractor’s Miller Act Claim can resume. Sureties will cite either the government claims process with the prime contractor or arbitration language in the subcontract between the prime and the subcontractor as the basis for staying the case. Sureties also may attempt to avoid their payment obligations by citing pay-if-paid clauses in the subcontract.
In the past, there has been a great deal of inconsistency among courts in deciding whether to stay federal Miller Act Claims. More recently, however, a number of courts in the Mid-Atlantic region have shown some consistency in refusing to stay cases pending outcome of the prime contractor’s claims process. In doing so, the courts have held that the overriding purpose of the Miller Act is to ensure that subcontractors are timely paid for their work. Where sureties have cited pay-if-paid clauses, the courts recently have held that, because such clauses inhibit a subcontractor’s right to timely payment, they are void as against public policy and unenforceable.
For instance, in United States v. Zurich Am. Ins. Co., the U.S. District Court for the Eastern District of Pennsylvania held that a stay would subject the subcontract to “a substantial, indefinite delay as [the prime contractor]’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against [the prime].” The surety and prime argued that the subcontractor agreed to allow the government claims process to proceed first based on language in the subcontract incorporating the claims process. The court disagreed, citing a 1999 amendment to the Miller Act providing that a subcontractor cannot waive its Miller Act rights before work commences on the project. Because the subcontract was signed before any work commenced, the government claims process language operated as an invalid waiver and could not be invoked as the basis for a stay. In issuing this ruling, the Court emphasized the importance of not just payment, but timely payment, of claims asserted under the Miller Act.
Increasingly, other courts in the Mid-Atlantic region have followed this same line of reasoning. In United States for use & benefit of Tusco, Inc. v. Clark Constr. Grp., LLC, the U.S. District Court for the District of Maryland also denied a request by a surety for a stay of a Miller Act Claim. The District Court of Maryland held that any provisions of the subcontract that required the subcontractor, Tusco, “to wait for an indefinite period prior to suing on the Bond [were] unenforceable because they contravene the purpose of the Miller Act.” The court also took note of the recent line of cases trending against a stay, saying that “federal courts have enforced the right of subcontractors to collect on payment bonds after they have completed their work on a federal project, especially in the face of attempts by sureties to delay litigation.”
Many of these recent cases have been in the Fourth Circuit, which includes the states of Maryland, North Carolina, and Virginia. In a recent case, United States v. Continental Casualty, the prime contractor argued that allowing the subcontractor to proceed could lead to inconsistent decisions because the prime’s litigation against the government could be unsuccessful whereas the subcontractor’s claim could be successful. The District Court of Maryland rejected this argument, holding that “a stay would be inconsistent with the plain text and congressional purpose of the Miller Act.”
More recently, in Kitchens to Go v. John C. Grimberg Co., the Eastern District of Virginia echoed the reasoning of the Tusco and Continental Casualty decisions. In that case, the court held that the Miller Act precluded the surety from relying on the dispute resolution in the subcontract to stay the subcontractor’s Miller Act lawsuit against the surety. The court reasoned that the surety’s invocation of the disputes clause operated as an impermissible waiver of the subcontractor’s Miller Act rights. Notably, the court also held that the surety could not rely on the no‑damages-for-delay clause in the subcontract to preclude the subcontractor’s delay claim against the surety.
The Miller Act is designed to protect subcontractors and suppliers by ensuring that they can obtain timely payment for claims they present to a surety. While courts are increasingly recognizing the importance of allowing timely enforcement of such claims through the court system, a number of time-sensitive requirements in the Miller Act make doing so difficult. Moreover, there is no way to know whether courts will continue on this trend or eventually limit how far they will go to strike contract language in favor of public policy. Accordingly, subcontractors on federal projects should obtain experienced counsel to advise them on presenting any Miller Act claim as soon as they become aware of any payment issues.