On August 4, 2016, the New Jersey Supreme Court affirmed an intermediate court's ruling that where a subcontractor's defective work causes physical damage to other, nondefective parts of a general contractor’s project, it constitutes "property damage" caused by an "occurrence" under the general contractor's standard CGL policy. Cypress Point Condominium Association Inc. v. Adria Towers LLC (076348).
In Cypress, insured Adria Towers LLC, after completing construction of a condominium complex, was sued by the Cypress Point Condominium Association (the Association), which alleged that several residents were experiencing problems such as roof leaks and water infiltration around windows in units and common areas.
Adria Towers sought coverage from its CGL insurers. The insurers, Evanston Insurance Company and Crum & Forster, denied coverage, contending that defects damaging an insured’s own work cannot be a covered “occurrence” in a CGL policy.
The Association then sought a declaratory judgment for coverage under the policies. The Association argued that “the event resulting in damage—water from rain flowing into the interior of the property due to the subcontractors’ faulty workmanship – is an 'occurrence' under the plain language of the CGL policies at issue." Further, since Adria Towers’ subcontractors failed to properly install the roof, gutters, windows, doors and other components in the complex, the “Your Work” exclusion did not apply due to its exception for damage caused by the work of subcontractors.
Contesting coverage, the insurers—and the trial court, which adopted their arguments—relied on a case frequently cited in New Jersey and elsewhere for the proposition that CGL policies do not cover the cost of rectifying an insured’s defective work. Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979). If such repairs do not trigger the policy’s insuring agreement, then language in an exclusion is not relevant and does not independently create coverage.
Meanwhile, the Association contended—and the appellate courts agreed—that Weedo is no longer controlling precedent with regard to the post-1986 CGL form. In 1986, the Insurance Services Office (ISO) inserted the language at issue (excepting damages caused by the insured’s subcontractors from the Your Work exclusion) into its basic CGL form. Such coverage had previously been available through a “broad form” property damage endorsement, available for an additional premium. As a result, most courts have agreed that the 1986 changes evidence an intent to create coverage for general contractors in this situation. Enforcing this intent, the New Jersey Supreme Court found coverage for the resulting damages. Importantly, the court did not extend coverage to the cost of remedying the defective work itself.
While New Jersey is now diametrically opposed to its neighboring states of Pennsylvania and New York on this issue, by our count, 31 states currently agree with New Jersey’s conclusion. To further complicate matters, six states have divided rulings among their intermediate and/or federal courts, and four states have passed statutes to mandate coverage (retroactively and/or proactively). For the nationwide situation, and the relevant precedent in each state, please see our interactive map.
It now seems, however, that this issue, perhaps the most frequently litigated one in construction defect insurance disputes over the past decade, is or will soon become a dinosaur akin to the “pollution exclusion - ‘sudden and accidental’ exception” debate of our era. While the rulings have not gone the ways insurers would have liked, they have provided clarity, which may be better in the long run. The focus of construction coverage disputes has now shifted to new battlegrounds: contested claims of “additional insured” coverage, debates over "trigger of coverage" standards for occurrence and accident based policies, and disputes over coverage for “rip and tear” costs to remove undamaged work for access to covered damage. The ink above includes a map pertaining to the latter issue.