Perhaps unsurprisingly to those who enjoy following the trajectory of CGL coverage for faulty workmanship around the country, New Jersey recently joined those states which recognize faulty workmanship as an “occurrence” – at least in certain circumstances.
In Cypress Point, the New Jersey Supreme Court faced the question of “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’” under a property developer’s CGL policy. Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et.al, (A-13/14-15) (076348) (N.J. Aug. 4, 2016). In Cypress Point, condo owners complained of roof leaks and water intrusion at window jambs and sills, as well as water damage to the common areas and interior structures of the buildings in the new condominium development. The condo association sued the developers, alleging faulty workmanship and consequential damages including damage to steel supports, exterior and interior sheathing, and sheetrock and insulation in both condo units and common areas. The developers’ insurer denied coverage and ultimately two of the developers’ insurers were brought into the case to determine whether the policies should provide defense and indemnity to the developers.
The Court distinguished prior cases on this issue, 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), primarily by focusing on the fact that both dealt with the 1973 ISO form, not the 1986 ISO form at issue in this case. The Court particularly focused on the fact that, in the 1986 ISO form, there is an exception to the “Your Work” exclusion which allows coverage for faulty workmanship where it is performed by a subcontractor.
After observing that courts across the country were trending toward faulty workmanship as an “occurrence” (although not discussing neighboring Pennsylvania’s fairly recent decisions), the Court turned to the definitions of “property damage” and “occurrence” in the policies at issue. The Court determined that (1) the consequential damages fell within the policies’ definition of “property damage” and (2) that ‘accident’ encompasses unintended and unexpected harms caused by negligently performed work, and thus the consequential water damage was an “occurrence.” Having determined the loss fell within the coverage grant of the policies, the Court then considered the “Your Work” exclusion and its subcontractor exception and determined that, as the work was clearly performed by a subcontractor, this was still a covered loss.
Importantly, while this case addresses a common situation of the property developer’s CGL coverage, it is not necessarily universally applicable to all contexts in which a faulty workmanship claim may arise. It remains to be seen whether New Jersey courts will apply this holding broadly or more narrowly, i.e. whether faulty workmanship be an “occurrence” in the absence of consequential damage, or where no subcontractor was involved.