On August 4, 2016, the Supreme Court of New Jersey issued a decidedly pro-policyholder ruling in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., holding that water damage caused by a subcontractor’s faulty workmanship was covered under the property developer’s Commercial General Liability policies. Evanston Insurance Company and Crum & Forster Specialty Insurance Company issued the policies, which were modeled after the 1986 CGL form published by the Insurance Services Office. The key holdings were that the subcontractor’s faulty workmanship was “property damage,” consequential water damage to the completed non-defective portions of the work was an “accident” or “occurrence,” and the damage fell within the “subcontractor exception” to the “your work” exclusion.
In Cypress Point, a condominium association sued its developer for damages arising from water damage both to individual units and to common areas of the condominium complex, which arose from faulty work performed by one of the developer’s subcontractors. The association also brought a declaratory judgment claim against the developer’s insurers seeking coverage.
The trial court granted summary judgment for the insurers on the declaratory judgment action, ruling that the water damage did not constitute “property damage” as defined in the policy and that there had been no “occurrence.” The Appellate Division reversed and found coverage, holding that “unintended and unexpected consequential damages to the common areas and residential units caused by the subcontractors’ defective work constitute ‘property damage’ and an ‘occurrence’ under the CGL policies.” The insurers then appealed to the Supreme Court of New Jersey.
The New Jersey Supreme Court had not previously decided whether negligent work by a subcontractor could give rise to coverage under the 1986 ISO CGL form. The court had previously held that the older, 1973 CGL form would not confer such coverage. See Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979). The Cypress Point court distinguished Weedo because it dealt with a breach of contract claim in which the policyholder sought damage for the cost of replacing sub-standard materials the contractor installed, whereas Cypress Point involved a claim for negligence and a demand for consequential damages. The court further distinguished Weedo on the basis that it did not decide whether there had been an “occurrence” under the terms of the insuring agreement because the court found a “business risk” exclusion barred coverage. The court similarly distinguished a prior Appellate Division holding in Fireman’s Insurance Co. of Newark v. National Union Fire Ins. Co., 387 N.J. Super. 434 (App. Div. 2006).
The supreme court, affirming the court of appeals, determined that post-construction consequential damages, and the resulting loss of use, were covered “property damage” as defined in the policy. The court then found that faulty workmanship by a subcontractor constituted an “accident,” and thus an “occurrence” under the policy. Accident was not defined, so the court construed it according to plain meaning: “the term ‘accident’ in the policies at issue encompasses unintended and unexpected harm caused by negligent conduct.”
Finally, the court examined the “your work” exclusion, which eliminates coverage for property damage to “your work,” as defined in the policy. Significantly, in the 1986 form at issue in Cypress Point (unlike the 1976 ISO form in Weedo), the “your work” exclusion contained the “subcontractor exception,” which does not bar coverage for work performed by a subcontractor. The court found that because the “property damage” was caused by the subcontractor’s work, the “your work” exclusion did not bar coverage.
This is a favorable decision for policyholders, and follows an strong national trend, as we have previously reported here, here and here. Insurers have typically contended that CGL policies issued to a developer or general contractor provide coverage for damages only to other property, and not the property that is the subject of the construction project. The New Jersey court followed the Florida Supreme Court’s decision in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 877-78 (Fla. 2007), in which that court found coverage for the defective work of a subcontractor under the 1986 CGL form. See also, French v. Assurance Co. of America, 448 F. 3d 693, 704 (4th Cir. 2004) (applying Maryland law and finding coverage for consequential damages but not the defective work itself); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 16 (Tex. 2007) (holding that claim of faulty workmanship against a homebuilder was a claim for “property damage” caused by an “occurrence” under a CGL policy).
The case is Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C., A-13/14 September Term 2015, 076348. It is available at 2016 N.J. LEXIS 847.