Cypress Point Condo Assoc. v. Adria Towers, et al., involved claims arising from water infiltration and mold growth, damage to steel supports, exterior and interior sheathing and sheetrock, and insulation to common areas, interior structures and residential units of a 53-unit luxury residential condominium in Hoboken called Cypress Point. The Association sued the developer/general contractor, its Comprehensive General Liability (“CGL”) insurance carriers, and various subcontractors whose work was allegedly defective. At the trial court level, the developer’s carriers convinced the court that they were not liable and entitled to summary judgment because the subcontractors’ faulty workmanship did not constitute an “occurrence” that caused “property damage” as defined by the 1986 ISO form CGL policy. The carriers effectively argued that because the damage arose entirely from faulty work performed by or on behalf of the developer/GC, such risk was not covered.

The Appellate Court reversed, finding that under the plain language of the policies, the unintended and unexpected consequential damages to the common areas and residential units constituted “property damage” caused by an “occurrence.” The Supreme Court affirmed after a lengthy analysis of the history of the 1986 ISO form changes from the 1973 ISO form GLC policies, case law in New Jersey and a review of other jurisdictions’ findings.

The Court conducted a three step analysis. First, the court examined the facts of the Association’s claims to ascertain whether the policies provide an initial grant of coverage. If coverage is found, the second step is to consider any policy exclusions. If there are exclusions, the third step is to determine whether there are exceptions to the exclusions.

In implementing step one, the Court noted that the policy insures against liability for “property damage” that is caused by an “occurrence.” Property damage includes physical injury to tangible property including all resulting loss of use of that property. Based on a plain reading of the policy, the Court found that the Association’s damages caused by water infiltration from rain after the completion of construction of the condo met the definition of “property damage.” The court also had to determine whether there had been an “occurrence” which is defined in the policy as an “accident, including continuous or repeated exposure to substantially the same general harm conditions.” The court discussed numerous meanings of “accident,” e.g., an unforeseen and unplanned event or circumstance, an event without one’s foresight or expectation, an event occurring by chance or arising from unknown or remote causes, --- and ultimately concluded that unintended and unexpected harm caused by negligent conduct is an accident. The court rejected the carriers’ argument that a subcontractors’ negligent work is foreseeable and a predictable risk of doing business. Having decided step one, the court then turned to step two: whether the policy had a relevant exclusion.

The CGL policy contained numerous exclusions to eliminate coverage for a variety of business risks including the cost of repairing damage to the insured’s own work (called the “your work” exclusion). The reason for the exclusion is to hold insureds responsible for their own negligent work, as they are in the best position to prevent the harm. Thus, step two eliminated the coverage for water damage to the completed portions of Cypress Point. But, step three revived the claim. An exception to the “your work” exclusion is a provision that states that the exclusion does not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” This ‘subcontractor exception’ was the result of market demands that specifically sought coverage for liability arising from faulty work by subcontractors.

The court bolstered its opinion by noting that the insurance industry and the policyholder community intentionally provided this coverage. By incorporation the subcontractor exception into the “your work” exclusion, the insurance industry specifically contemplated coverage for property damage caused by a subcontractor’s defective performance.

The court suggests that if carriers do not want to extend this coverage, or developers/general contractors do not want to insure for this type of risk, the exception can be eliminated. “Insurers are of course free to amend CGL agreements or offer riders so as to reallocate the risk of subcontractor negligence.”

To view the decision, please click here.

Going forward, contracting parties should be particularly mindful of whether their policies provide coverage for subcontractor negligence.