NJ Construction Defectshoke2013
NJ Supreme Court finds coverage for subcontractor’s faulty workmanship under general contractor’s CGL policy.
In a unanimous opinion, the New Jersey Supreme Court, applying New Jersey law, held that consequential damages resulting from a subcontractor’s defective work on a condominium complex triggered coverage under the general contractor’s comprehensive general liability policy.
The underlying dispute stems from the construction of Cypress Point, a luxury condominium complex in Hoboken New Jersey. Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC (collectively, the “General Contractor”) served as the project’s developer and general contractor, and subcontractors carried out most of the work. During the construction, the General Contractor obtained four comprehensive general liability policies from Evanston Insurance Company covering a four-year period and three from Crum & Forster Specialty Insurance Company covering a subsequent three-year period (collectively, the “Policies”). The condo association sued the General Contractor for damage to the interior structure, residential units, and common areas of the condo complex, due to water leaks which were allegedly the result of defective work performed by subcontractors. The condo association also sued the General Contractor’s comprehensive general liability insurers seeking a declaration that its claims against the General Contractor were covered under Policies.
The trial court granted summary judgment for the insurers finding that the condo’s association’s claims did not include “property damage” or “occurrence,” which are required by the policies in order to trigger coverage. The appellate court reversed, concluding that “unintended and unexpected consequential damages caused by the subcontractors’ defective work constituted ‘property damage’ and an ‘occurrence’ under the CGL policies.”
The Policies are modeled after the 1986 standard form CGL policy created by the Insurance Services Offices, Inc. (“ISO”). The Policies provide coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ … caused by an ‘occurrence’ that takes place in the ‘coverage territory’ … and … occurs during the policy period.” “Property damage” includes “physical injury to tangible property including all resulting loss of use of that property.” “Occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Policies also contain an exclusion for ‘Damage to Your Work’ (the “Your Work Exclusion”) which eliminates coverage for “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Notably, however, the Your Work 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.”
The New Jersey Supreme Court affirmed the appellate court and held that “the consequential damages caused by the subcontractors’ faulty workmanship constitute ‘property damage,’ and the event resulting in that damage – water from rain flowing into interior of the property due to the subcontractors’ faulty workmanship – is an ‘occurrence’ under the plain language of the CGL policies at issue here.” Based on the plain language of the Policies, the court found no merit in the insurers’ argument that CGL policies are only intended to provide coverage for damage caused by faulty workmanship to other property and not to the project itself. Moreover, the court disagreed with the insurers’ argument that a subcontractor’s faulty workmanship does not have the fortuity element required to constitute an “accident.” According to the insurers, “damage to any portion of the project caused by defective construction is not accidental because it is one of the normal, frequent, and predictable consequences of the construction business.” In ruling against the insurers, the court interpreted “accident” to “encompass unintended and unexpected harm caused by negligent conduct.” The court then found that the water damage that resulted from the faulty workmanship was an “accident,” and therefore, the water damage was an “occurrence” under the Policies. Lastly, the court examined the Your Work Exclusion. On its face the exclusion appears to eliminate the Policies’ coverage obligations for the condo association’s claims; however, due to the subcontractor exception to the exclusion, the court held that the claims were a covered loss.
This is a case of first impression for the New Jersey Supreme Court, because it interprets the 1986 standard form CGL policy compared to other cases which had interpreted earlier versions. The most relevant distinction between the 1986 standard form and the standard form which pre-dated 1986 is the inclusion of the subcontractor exception to the Your Work Exclusion. The New Jersey Supreme Court examined other jurisdictions’ opinions regarding the interpretation of the 1986 standard form CGL policy and noted that they “represent ‘a strong recent trend in the case law of most federal circuit and state courts interpreting the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.’” Cypress Point Condo. Assoc. Inc. v. Adria Towers, L.L.C., No. (A-13/14-15) (076348) (N.J. Aug. 4, 2016).