THE STATE OF NEW HAMPSHIRE SUPREME COURT 2014 TERM FEBRUARY SESSION. Docket No Cogswell Farm Condominium Association

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1 THE STATE OF NEW HAMPSHIRE SUPREME COURT 2014 TERM FEBRUARY SESSION Docket No Cogswell Farm Condominium Association v. Lemery Building Company, Inc., Tower Group, Inc. d/b/a Tower Group Companies a/k/a Mountain Valley Indemnity Company, and Acadia Insurance Company APPEAL FROM FINAL ORDER ON MOTIONS FOR SUMMARY JUDGMENT ROCKINGHAM COUNTY SUPERIOR COURT OMNIBUS REPLY BRIEF FOR PETITIONER COGSWELL FARM CONDOMINIUM ASSOCIATION Gordon A. Rehnborg, Jr., #2123 McDowell & Osburn, P.A. PO Box 3360 Manchester, NH Michael J. Scott #4123 Scott & Scott, P.A. PO Box 1055 Londonderry, NH Gordon A. Rehnborg, Jr. will represent the Appellant at oral argument

2 TABLE OF CONTENTS TABLE OF AUTHORITIES... ii SUMMARY OF ARGUMENT... 1 ARGUMENT... 1 I. NEITHER ACADIA NOR TOWER GROUP APPEALED, OR OTHERWISE PRESERVED FOR APPELLATE REVIEW, THE TRIAL COURT S HOLDING THAT THE DAMAGES COMPLAINED OF BY COGSWELL FARM CONSTITUTE PROPERTY DAMAGE RESULTING IN AN OCCURRENCE AND TRIGGERING COVERAGE UNDER THEIR RESPECTIVE POLICIES... 1 A. Procedural History... 1 B. Acadia and Tower Group Waived Appellate Review As To Whether The Claims Asserted By Cogswell Farm Constitute Property Damage Resulting In An Occurrence Triggering Coverage Under Their Policies... 3 II. III. IV. THE TRIAL COURT CORRECTLY FOUND THAT THE CLAIMS MADE BY COGSWELL FARM AGAINST LEMERY CONSTITUTE PROPERTY DAMAGE RESULTING IN AN OCCURRENCE SUFFICIENT TO TRIGGER COVERAGE DURING THE ACADIA AND TOWER GROUP POLICY PERIODS THE DUTY TO DEFEND IS TRIGGERED BY THE ALLEGATIONS RATHER THAN BY THE FACTS ULTIMATELY PROVEN IN THE UNDERLYING LITIGATION DESPITE THEIR PROTESTATIONS TO THE CONTRARY, BOTH ACADIA AND TOWER GROUP APPEAR TO BE IN AGREEMENT WITH COGSWELL FARM S INTERPRETATION OF EXCLUSIONS J(1) AND J(6) V. BURDEN OF PROOF CONCLUSION i

3 TABLE OF AUTHORITIES New Hampshire Supreme Court Cases Comer v. Tracery, 156 N.H. 241 (2007)... 5 EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd s, 156 N.H. 333 (2007) Fisher v. Minichiello, 155 N.H. 188 (2007)... 5 Great American Dining, Inc. v. Philadelphia Indemnity Ins. Co., 161 N.H. 612 (2013)... 6 LaMontagne Builders v. Bowman Brook Purchase Group, 150 N.H. 270 (2003)... 3 Lassonde v. Stanton, 157 N.H. 582 (2008)... 3 McAllister v. Peerless Ins. Co., 124 N.H. 676 (1984)... 8 Northern Security Ins. Co. v. Connors, 161 N.H. 645 (2008)... 6 Progressive Northern Ins. Co. v. Argonaut Ins. Co., 161 N.H. 778 (2011)... 3 United States Fidelity & Guaranty Co. v. Johnson Shoes, 123 N.H. 148 (1983)... 6 White Mountain Cable Construction Corp. v. TransAmerica Ins. Co., 137 N.H. 478 (1993)... 6 Other Cases Acadia Ins. Co. v. Peerless Ins. Co., 679 F.Supp.2d 229 (D. Mass. 2010)... 8, 9 Century Indem. Co. v. Golden Hills Builders, Inc., 561 S.E.2d 355 (S.C. 2002)... 9 P.J. Noyes Co. v. American Motors Ins. Co., 855 F.Supp. 492 (D.N.H. 1994)... 6 Treatises 14 L. Russ & T. Segalla, Couch on Insurance 3d, 200:1, at (2007)... 6 ii

4 SUMMARY OF ARGUMENT Acadia and Tower Group argue at great length the issue of whether the trial court was correct in ruling that the allegations made by Cogswell Farm against Lemery in the underlying lawsuit constitute claims for property damage resulting in an occurrence triggering coverage under their policies. The trial court s ruling on this issue was never appealed to this Court and may not now be considered or reviewed. 1 The arguments raised by the two insurance companies suggest that despite their protestations to the contrary, they recognize that Exclusions J(1) and J(6) do not operate to exclude the coverage which Cogswell Farm believes the companies are obligated to provide to Lemery. ARGUMENT I. NEITHER ACADIA NOR TOWER GROUP APPEALED, OR OTHERWISE PRESERVED FOR APPELLATE REVIEW, THE TRIAL COURT S HOLDING THAT THE DAMAGES COMPLAINED OF BY COGSWELL FARM CONSTITUTE PROPERTY DAMAGE RESULTING IN AN OCCURRENCE AND TRIGGERING COVERAGE UNDER THEIR RESPECTIVE POLICIES. A. Procedural History. There is no dispute as to the procedural history in this case. In response to a motion for summary judgment filed by Acadia, the trial court issued an Order dated April 18, App. at 365. In that Order, the trial court ruled that there is no coverage for the breach of contract claim (App. at 370) nor is there coverage for the claim alleging negligent supervision. App. at 371. The court then noted that there was a question of fact as to whether there was an occurrence within the meaning of the insurance policies and scheduled an evidentiary hearing 1 Furthermore, it should be noted that many of the documents contained in the Appendix filed by Tower Group are not part of the official record in this declaratory judgment action. These items include, but are not necessarily limited to the depositions of George Lemery and Raymond Green and the affidavit of Mark Sakakeeny. 1

5 2 as to whether or not tangible evidence of property damage existed during the policy period. App. at 317. The evidentiary hearing was held on May 28, 2013 resulting in the trial court s Supplemental Order on Acadia Insurance Company s Motion for Summary Judgment. App. at 373. The trial court held that the negligence alleged by the plaintiff, if proven, would in fact constitute an occurrence as that term is used in Acadia s policy. App. at 376. In that Order, the trial court specifically declined to rule as to whether Exclusions J(1) and/or J(6) are operable in this case. App. at Both Tower Group and Acadia filed motions for reconsideration urging the trial court to reconsider its decision to defer ruling as to the applicability of J(1) and J(6). Those motions for reconsideration resulted in the trial court s Order on Defendants Acadia and Tower s Motion for Reconsideration dated August 1, App. at 382. In that Order, the trial court held that J(1) and J(2) were, as a matter of law, applicable and that no further evidentiary proceedings were required. The trial court then granted summary judgment in favor of Acadia and the Tower Group based on its belief that Exclusions J(1) and J(2) were applicable and that Cogswell Farm had not sustained its burden of proof as to the existence of coverage. Cogswell Farm filed a Notice of Appeal on August 28, In its Notice of Appeal, Cogswell Farm asked this Court to review four specific issues. Those issues are set forth on page 3 of 5 of the Notice of Appeal and on page IV of Cogswell Farm s opening brief. Specifically, Cogswell Farm asked this Court to review whether the trial court correctly applied Exclusions J(1) and J(6) to the allegations made by Cogswell Farm against Lemery in the underlying case and whether the trial court erred when it held that Cogswell Farm was required 2 The trial court scheduled an evidentiary hearing notwithstanding the fact that at this stage in the proceeding the focus should have been on whether the claims made in the underlying lawsuit were sufficient to trigger coverage and not whether those allegations could ultimately be proved. 3 By Order dated June 27, 2013 (App. at 379), the court held that its rulings in the two prior orders applied to Tower Group as well as Acadia. 2

6 to quantify the damage that occurred during the respective insurance company s policy periods in order for the insurance companies to be required to provide insurance coverage to Lemery. Neither Acadia nor Tower Group appealed the trial court s order finding that the allegations made by Cogswell Farm against Lemery in the underlying case constitute claims for property damage caused by an occurrence nor did Acadia or Tower Group filed cross-appeals. B. Acadia and Tower Group Waived Appellate Review As To Whether The Claims Asserted By Cogswell Farm Constitute Property Damage Resulting In An Occurrence Triggering Coverage Under Their Policies. Supreme Court Rule 7 affords a moving party thirty days to appeal a superior court decision on the merits. It also allows any other party to the proceeding an additional10 days in which to file a notice of cross-appeal. Cogswell Farm filed its Notice of Appeal on August 28, Neither Acadia nor the Tower Group filed an appeal or cross-appeal. Appellate questions not presented in a notice of appeal are generally considered waived by this court. Lassonde v. Stanton, 157 N.H. 582, 587 (2008). See also, Progressive Northern Ins. Co. v. Argonaut Ins. Co., 161 N.H. 778, 784 (2011); LaMontagne Builders v. Bowman Brook Purchase Group, 150 N.H. 270, 276 (2003) (arguments not included in notice of appeal are deemed waived). Both Acadia and Tower Group devote the majority of their briefs to the issue of whether Cogswell Farm has alleged property damage resulting in an occurrence sufficient to trigger coverage under their policies. Since neither the Tower Group nor Acadia preserved these issues on appeal, these issues are deemed waived and should not be considered by this Court. II. THE TRIAL COURT CORRECTLY FOUND THAT THE CLAIMS MADE BY COGSWELL FARM AGAINST LEMERY CONSTITUTE PROPERTY DAMAGE RESULTING IN AN OCCURRENCE SUFFICIENT TO TRIGGER COVERAGE DURING THE ACADIA AND TOWER GROUP POLICY PERIODS. 3

7 Even if Acadia or Tower Group had preserved the issue of whether Cogswell Farm has alleged a claim for property damage resulting in an occurrence, the trial court s findings in that regard should not be disturbed. Cogswell Farm s construction expert, Michael Willett, testified that the condominium units were constructed with defective weather barriers resulting in water perpetration each time it rained or snowed following the completion of the barriers. App. at 280. Thereafter, the damage progressed and got worse every time it rained or snowed and the defective weather barriers permitted additional water to penetrate the units with damage progressing and continuing to this date. App. at 302. The damage included damage to portions of the units that had been properly constructed including insulation, framing studs, interior drywall, trim, millwork, windows, doors, hardwood floors and exterior and interior finishes. App. at , 281. The trial judge, after reviewing the various reports and affidavits submitted by Willett and hearing his testimony, noted that, according to Willett, the water intrusion which caused the plaintiff to bring this lawsuit began from the moment the alleged defective roof and siding construction were completed. App. at 374. The trial judge noted that the expert s testimony was that damage occurred almost immediately to both the exterior and interior finishes of the condominium units, more specifically the sheathing, framing, insulation and drywall of roof and side walls and in some cases exterior doors, windows and decking. Id. The trial judge found his opinions on the issues involved are highly credible, are common sense and that many of the defects he considered to be latent from the point of view of the average person for several years. Id. This Court gives great weight to findings of fact made by the trial judge in a bench trial and will uphold those findings unless they are lacking in evidential support or tainted by error of 4

8 law. Comer v. Tracery, 156 N.H. 241, 246 (2007) quoting from Fisher v. Minichiello, 155 N.H. 188, 190 (2007). Acadia makes much of the fact that Willett testified that if one were to place a bucket of water upside down on a piece of plywood it would take between 3-10 years for the water to degrade the board sufficient to let water through. Acadia Brief at 5. This example is interesting but irrelevant and has no relationship to what actually happened. Here the defects in the water barriers were many including the absence or improper installation of flashing and the other defects discussed on page 4 of Cogswell Farm s opening brief. How long it would take an inverted bucket of water to work its way through plywood is irrelevant. III. THE DUTY TO DEFEND IS TRIGGERED BY THE ALLEGATIONS RATHER THAN BY THE FACTS ULTIMATELY PROVEN IN THE UNDERLYING LITIGATION. This is a declaratory judgment action. Neither the trial court nor this Court is engaged in a search for the truth. That comes later. When third party coverage is disputed the proper analysis is to examine the allegations asserted against the insured and compare those allegations with the coverage provided by the insurance policy. Whenever the allegations, if ultimately proven to be true, would create an obligation on the part of the insurance company to pay indemnity benefits then the company is obligated to defend its insured. Only after the facts have been litigated in the underlying action and the truth decided can there be a final determination as to the insurance company s obligation to pay damages on behalf of its insured. Simply put, the impact of J(1) and J(6) on the damages that might be assessed against Lemery, and recoverable from the insurers, is irrelevant at this stage in the proceedings. An insurer will have a duty to defend the insured in a suit if the complaint against the insured contains allegations that, if proved, would be covered under the policy. 5

9 14 L. Russ & T. Segalla, Couch on Insurance 3d, 200:1, at (2007) (cited with approval in Great American Dining, Inc. v. Philadelphia Indem. Ins. Co., 161 N.H. 612, 626 (2013). Northern Security Ins. Co. v. Connors, 161 N.H. 645, 650 (2008)(doubt as to coverage must be resolved in favor of insured); United States Fidelity & Guaranty Co. v. Johnson Shoes, 123 N.H. 148, 152 (1983)(duty to defend broader than duty to indemnify); White Mountain Cable Construction Corp. v. TransAmerica Ins. Co., 137 N.H. 478, (1993); P.J. Noyes Co. v. American Motors Ins. Co., 855 F.Supp. 492, 496 (D.N.H. 1994)(insurer must defend entire case when there is coverage for only some of the claims). Why there was an evidentiary hearing in this declaratory judgment action is unclear. The allegations asserted by Cogswell Farm against Lemery are that the weather barriers were defectively constructed permitting water to enter the units and damage other property that had been properly constructed and which did not belong to Lemery and that the damage, or some of it, occurred while Lemery was insured by Acadia and Tower Group. A final ruling has been made that these allegations constitute claims for property damage caused by an accident and resulting in an occurrence sufficient to trigger a duty on the part of Acadia and Tower Group to defend Lemery. App. at 376. Whether J(1) or J(6) will have an impact on either insurance company s duty to pay can only be determined after the underlying facts with respect to ownership and the timing of the damage have been determined IV. DESPITE THEIR PROTESTATIONS TO THE CONTRARY, BOTH ACADIA AND TOWER GROUP APPEAR TO BE IN AGREEMENT WITH COGSWELL FARM S INTERPRETATION OF EXCLUSIONS J(1) AND J(6). Neither Acadia nor Tower Group spends much time in their briefs dealing with Exclusion J(1). As Acadia points out J(1) excludes coverage for damages that occur when Lemery still owned the condominium units. Acadia Brief at 17. That is the same position taken by Tower 6

10 Group in its brief at pp That is exactly the position taken by Cogswell Farm in its brief at pp In general, when the weather barrier on each unit was constructed Lemery owned that unit. Damage to non-defectively constructed material started the first time water penetrated the completed barrier, and that damage continues to date. There is no coverage because of J(1) for the damage that occurred while Lemery remained the owner of each unit. However, J(1) has no effect with respect to the damage sustained by each individual unit after it was sold. For example, according to the chart on page 3 of Acadia s Brief, Unit 13A became Weather-Tight on May 6, Lemery sold that property four days later on May 10, Acadia continued to insure Lemery 110 days after the sale and Tower Group insured Lemery for an additional 457 days. If it rained between May 6 and May 10, 2002, 4 there would be no coverage for the damage that occurred during that 4 day period. However, there is coverage for the damage that occurred during the 567 days between May 10, 2002 and November 23, 2003 while Lemery was insured by either Acadia or Tower Group. According to Acadia, Unit 18B was made water-tight 56 days before it was sold by Lemery. Thereafter Lemery was insured by Acadia or Tower Group for an additional 851 days. During this 907 day period Lemery has coverage for the damage that occurred on all but 56 of those days. A similar analysis will need to be made with respect to all of the other units. Furthermore, Tower Group admits that four of the units built during the Tower Group policy period were not owned by Lemery. Tower Brief at 15. Accordingly, as to those units J(1) has no applicability at all. In order to determine the applicability of J(1) a rather detailed analysis as to each unit will ultimately have to be undertaken after the facts are fully developed in the underlying trial. 4 A fact which can easily be determined. 7

11 The court s blanket application of J(1) in the declaratory judgment proceeding was grossly inappropriate as was the trial court s focus on the date of the defective construction as opposed to the date(s) the defective construction caused property damage. App. at 383. Similarly, there appears to be no real dispute as to the meaning of J(6) although the two insurance company defendants argue that there is. J(6) excludes coverage for that part of any property that must be restored, repaired or replaced because your work was incorrectly performed on it. App. at 69, 112. The exclusion does not apply after the insured s work has been completed or the unit has been put to its intended use. App. at 79, 120. Acadia suggests that while this Court has not specifically addressed J(6) it has effectively done so in McAllister v. Peerless Ins. Co., 124 N.H. 676 (1984). It is true that in McAllister this Court noted that liability for faulty workmanship is not the subject of coverage for completed operations. Id. at 678. However, it is important to note that in McAllister the claimant was seeking coverage only for the damages associated with correcting the faulty workmanship. Coverage was not being sought for the damage caused by the faulty workmanship to property that had been properly installed or constructed in the first instance. This Court noted that when coverage is sought for faulty workmanship the defect is complete when the work is complete. Id That is true. It is also indisputably true that the consequential damages resulting from faulty workmanship can, and in the case of Cogswell Farm did, take place well after the faulty workmanship was complete triggering coverage under the policy or policies then in effect. Had coverage for consequential damages, as opposed to coverage for the costs associated with repairing the faulty workmanship itself, been sought the result would undoubtedly been different. The same is true with respect to the First Circuit case of Acadia Ins. Co. v. Peerless Ins. Co., 679 F.Supp.2d 229 (D. Mass. 2010)(applying New Hampshire law). There the court noted 8

12 that J(6) would not exclude coverage if the damage occurred after completion of the operations. Id. at 244. In fact, neither insurance company cites to a single case where J(6) was found to exclude coverage for damage to non-defectively installed or constructed materials caused by the faulty construction of other materials where the damage occurred after the work by the insured had been completed or the work put to its intended use. The closest the insurance companies come is the case of Century Indem. Co. v. Golden Hills Builders, Inc., 561 S.E.2d 355 (S.C. 2002). However, in that case the court specifically found that the product-completed operations hazard exception to J(6) did not apply since in that case [t]he work had clearly not been completed. Id. at 359. Exclusions J(1) and J(6) are intended to enable the insurance company to avoid coverage for the costs associated with repairing or replacing defective work that takes place while the insured is in possession of the property and for costs associated with repairing the insured s faulty workmanship before the project is finished and put to use for its intended purpose. These exclusions, by their own terms, simply have no applicability to damage that occurs after the insured gives up its ownership interest in the property or after the property has been put to its intended use. With that in mind, it is important to note that Cogswell Farm is claiming that Acadia and Tower Group are obligated to provide coverage for Lemery and that the coverage is limited to the damage that occurred after the units were no longer owned by Lemery but while Lemery was insured by Acadia or Tower Group. 5 V. BURDEN OF PROOF. 5 This is so notwithstanding Tower Group s comment in footnote 10 of its brief to the effect that the fact that Cogswell Farm is seeking damages in excess of $1.5 million means that it is seeking coverage for more than the consequential damages. Lemery is not the only defendant in the underlying lawsuit from whom damages are being sought. 9

13 Both Acadia and Tower dismiss as inconsequential the comments made by the trial court regarding its belief that Cogswell Farm did not meet its burden of proving what damage occurred during the time when each company insured Lemery. The fact that the trial court noted that this was an additional grounds (App. at 387) being urged for a finding of no coverage indicates that the misapplication of the burden of proof was an important factor in the court s decision. While it is clear that some of the damages complained of by Cogswell Farm in the underlying lawsuit constitute damages for which insurance coverage is available to Lemery, calculating the damages for which each insurance company is responsible will be complicated. Conceptually the coverage situation is clear. Acadia and Tower Group are each responsible for damage to non-defectively installed materials caused by the defectively installed weather barrier. They are responsible for the damage that occurred after the ownership of each unit was transferred from Lemery to the new unit owner or some other entity and their responsibility ends when their respective policy period ends. The damages analysis will necessarily have to be unit specific and will need to take into account the amount of time the unit was owned by Lemery after the weather barrier was completed, the damage that took place, and the amount of time the two insurance policies were in effect. The formula discussed in EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd s, 156 N.H. 333 (2007) is simply an example of one way to construct a formula to allocate damages. Ultimately, the trial court will have to construct a formula appropriate to the specific facts of this case. CONCLUSION For the reasons set forth in Cogswell Farm s opening brief and in this reply brief, it is respectfully requested that this Court vacate the decision of the trial court and remand the case for further action. 10

14 Respectfully submitted, COGSWELL FARM CONDOMINIUM ASSOCIATION By its attorneys, Dated: April 25, 2014 By: /s/ Gordon A. Rehnborg, Jr. Gordon A. Rehnborg, Jr. #2123 McDowell & Osburn, P.A. 282 River Road PO Box 3360 Manchester, NH Dated: April 25, 2014 /s/ Michael J. Scott Michael J. Scott #4123 Scott & Scott, P.A. PO Box 1055 Londonderry, NH CERTIFICATE OF SERVICE I hereby certify on this day two copies of the foregoing have been mailed, postage prepaid, to Doreen F. Connor, Esquire and Katherine M. Strickland, Esquire. Dated: April 25, 2014 /s/ Gordon A. Rehnborg, Jr. Gordon A. Rehnborg, Jr. #