NJ Appellate Court Agrees Permasteelisa Can’t Recoup Costs of Curtainwall Repair
April 29, 2010

Yesterday a New Jersey appellate court affirmed an earlier decision that an insured party does not become “legally obligated to pay” until the entry of a judgment against it, leaving Permasteelisa Corp. unable to recoup from insurer Columbia Casualty Company (CNA) the costs of repair work performed for a curtainwall project installed in 2002.

According to court documents, the case began when in January 2000 Goldman Sachs hired Turner Construction Co. as the general contractor for the construction of its 42-story office tower in Jersey City. Permasteelisa was subcontracted to design, fabricate and install a decorative glass and metal curtainwall for the building. Installation began in January 2002 and, according to CNA, defects in the curtainwall came to light as early as March 2002. According to court documents, “consultant Israel Berger Associates observed that certain grillwork components known as ‘sag rods’ had become loose or detached from their ‘collars.’”

The problems continued, according to CNA, until May 2004, when Turner instructed Permasteelisa to cease work and representatives of the two companies met with the owner and consultants to discuss the condition of the curtainwall. According to Permasteelisa, Turner and Goldman Sachs demanded that the glazing contractor repair the grillwork problems at its own cost on numerous occasions—which Permasteelisa did eventually do at a cost of approximately $5.5 million.

The appellate court documents also state that upon receiving the curtainwall contract, Permasteelisa had enrolled in the Owner Controlled Insurance Program (OCIP) that Goldman Sachs procured for the project. The policy covered Permasteelisa only for third-party claims and claims by and against Goldman Sachs. Permasteelisa also had obtained a Contractors’ Professional Liability Policy issued by CNA, with a policy period from November 1, 2003, through November 1, 2004. The CNA policy’s coverage agreement stated in part:

We will pay all amounts in excess of the self-insured retention up to our limit of liability, which you become legally obligated to pay as a result of … a wrongful act … that results in a claim anywhere in the world … Under the Policy, a “wrongful act” is defined as “a negligent act, error or omission in the performance of professional services for others by you …”

Another provision, the court documents report, makes the CNA Policy excess insurance over any “other collectible insurance.”

According to those court documents, Permasteelisa says it informed CNA in April 2004 of a “potential claim” arising from problems with the curtainwall. The subcontractor requested preclaim assistance, but stated that “no formal claim has yet been filed.” CNA responded with a letter reserving its right to deny coverage. Later, at a jobsite meeting in July 2004, CNA directed Permasteelisa not to “admit liability . . . [or] say you’re going to do anything,” the court documents report.

Meanwhile, however, Permasteelisa finalized a remediation proposal, all parties involved incorporated the agreed-upon repairs and design modifications and Permasteelisa began to repair the curtainwall.

In January 2005, CNA provided Permasteelisa with its “preliminary” determination that “no claim yet has been asserted.” The letter suggested that coverage was foreclosed by the CNA Policy’s “other collectible insurance” clause, which made the CNA Policy excess insurance over Permasteelisa’s project-specific insurance covered by the OCIP policy. In October 2005, CNA sent Permasteelisa a “supplemental” coverage determination, essentially repeating its earlier position that the repair work was not covered by the policy.

Once the repair was complete in December 2005, Permasteelisa sought to recover the costs of the repair from Lexington Insurance Co., which issued the OCIP policy. According to court documents, Lexington denied coverage on the ground that no “claim” had been made, as required under the policy. After Permasteelisa requested arbitration, the arbitrators found in favor of Lexington, ruling that Goldman Sachs had not made a claim against Permasteelisa.

In April 2006, Permasteelisa filed suit against CNA “alleging breach of contract… and seeking a declaratory judgment that CNA is obligated to defend, indemnify and cover Permasteelisa for the remedial work done to the curtainwall.”

In October 2008, after the close of discovery, both parties filed motions for summary judgment. Permasteelisa sought summary dismissal of various affirmative defenses raised by CNA, while CNA sought a ruling that it was not ultimately liable to indemnify Permasteelisa for its repair work. In its opinion in June 2009, the District Court declared that “the dispositive issue was the interpretation under New Jersey law of the CNA Policy phrase ‘[w]e will pay all amounts . . . which you become legally obligated to pay.’”

The District Court ruled that the policy term “legally obligated to pay” requires “‘the presentation of proofs in a court of competent jurisdiction and a finding by the court or jury of liability.’” Because Permasteelisa was not subject to a final judgment, the court ruled that it was not “legally obligated” to repair or pay for repairs to the curtainwall. According to the court, Permasteelisa had voluntarily assumed responsibility for the repairs—and so could not recoup the costs of the repair work.

Documents from the most recent ruling state, “Permasteelisa’s principal contention is that the District Court erred in applying Bacon [a precedent ruling on the phrase ‘legally obligated to pay’], to hold that under New Jersey law an insured becomes ‘legally obligated to pay’ only after entry of a final judgment establishing its liability. Permasteelisa first argues that Bacon is distinguishable, and next argues that Bacon was wrongly decided. We cannot agree with either contention.”

The Bacon ruling noted in its conclusion:

Absent the presentation of proofs in a court of competent jurisdiction and a finding by the court or jury of liability, it cannot be said that the seller is “legally obligated” to pay damages.

Permasteelisa argued that the “meaning of ‘legally obligated’ includes contractual obligations, and necessarily includes its contractual obligation to provide a functioning curtainwall,” the documents show. To this argument the court replied: “Not so. Although a contract is indisputably a legal obligation, under New Jersey law, a professional liability policy does not transfer the risk of breach of contract from the insured to the insurer.”

The court concluded “that the District Court did not err in applying Bacon to hold that, in the absence of a final judgment, Permasteelisa was not ‘legally obligated to pay’ for the remediation of the curtainwall.”

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