The New Jersey Supreme Court held on Aug. 4, 2016 that a commercial general liability policy covers property damage caused by subcontractors’ allegedly flawed work.
The justices unanimously found that “The consequential damage caused by the subcontractors’ faulty workmanship constitutes ‘property damage’ and the event resulting in the damage … is an ‘occurrence’ under the plain language of the commercial general liability policies at issue here.”
The case, Cypress Point Condominium Association v. Adria Towers, (A-13/14-15), centered on a 53-unit luxury condominium complex in Hoboken.
The complex’s condominium association sued the developer/general contractor, contending that defective work by subcontractors led to rainwater damage, such as roof leaks and water infiltration around windows.
The association also sued the developer’s CGL insurers, contending that claims against the developer were covered by the policies.
It was the first time the state’s highest court had directly addressed an important exception in the 1986 Insurance Services Office, Inc. (ISO) standard form CGL policy. That exception states that a business-risk exclusion does not apply if a subcontractor does the work.
Previous seminal cases on whether construction defects are covered under CGL policies – Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006) – focused on the 1973 ISO form CGL policy.
In reaching its conclusion, the court looked at the meaning of the term “accident,” which is not defined in the policies. Based on the term’s plain meaning and case law, the court found that “accident” encompasses unintended and unexpected harm caused by negligent conduct. Under the court’s interpretation of the term “occurrence” in the policies, consequential harm caused by negligent work is an “accident.”
“Therefore, because the result of the subcontractors’ faulty workmanship here – consequential water damage to the completed and nondefective portions of Cypress Point – was an ‘accident,’ it is an “occurrence” under the policies and is therefore covered so long as the other parameters set by the policies are met,” the unanimous court found.
Key to the decision was the exclusion in the 1986 ISO form eliminating coverage for business risks, including the cost of repairing damage to the contractor’s own work – known as the “Damage to Your Work” exclusion.
However, an exception states that the exclusion does not apply ‘if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.’”
As a result, the loss at hand is covered, the court found.
The court also looked to decisions elsewhere to support its holding. For example, the Supreme Court of Florida has held that a subcontractor’s defective work can constitute “property damage” caused by an “occurrence” under the 1986 policy.
In addition, the Fourth U.S. Circuit Court of Appeals has held that the 1986 policy provides coverage for damages caused by a subcontractor’s faulty workmanship, but not for the cost of replacing and/or repairing the faulty workmanship.
The New Jersey Supreme Court said these cases, while not controlling, represent a “strong recent trend” of interpreting the term “occurrence” to “encompass unanticipated damage to nondefective property resulting from poor workmanship.”
Read the opinion here.
If you have questions about this topic or would like to discuss your land-use law needs, John Wisniewski may be reached at 732-651-0040 or [email protected].