The New Jersey Supreme Court’s August 4, 2016 holding in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC is the latest decision to fall in line with the “strong recent trend” by state and federal courts to recognize that standard commercial general liability (CGL) insurance policies provide coverage for property damage caused by the faulty work of the insured’s subcontractor.
In Cypress Point, a condominium association filed suit against the developer and general contractor who had built the condominium project using subcontractors. The suit alleged that water infiltration, such as roof leaks and infiltration at interior window jambs and sills, had caused damage to steel supports, exterior and interior sheathing and sheetrock, and insulation. The association claimed that this water infiltration was caused by faulty construction work, including defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.
The question in Cypress Point was whether there was coverage under the relevant CGL policies issued to the developer, which were based on the 1986 standard CGL form prepared by the Insurance Services Office, Inc. (ISO). The policies contain the standard form policy language providing 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.” The policies define “property damage” as “[p]hysical injury to tangible property including all resulting loss of use of that property.” “[O]ccurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies also contain an exclusion that eliminates coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operation hazard’” (the “Your Work Exclusion”). But the policies also specifically provide that 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 “Subcontractor Exception”).
The trial court initially granted summary judgment in favor of the insurers, holding that there was no coverage under the insuring agreement because faulty work does not qualify as an “occurrence” and consequential damages caused by faulty work are not “property damage” as defined in the policy. The Appellate Division reversed, 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] polic[ies].” The Supreme Court granted certification to consider the question of whether the standard form CGL policies provide coverage to a developer/general contractor when a subcontractor’s faulty work causes consequential damage to the project.
The Supreme Court affirmed the Appellate Division, holding 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 the interior of the property due to the subcontractors’ faulty workmanship—is an ‘occurrence’ under the plain language of the CGL policies at issue here.”
The Court rejected the insurers’ argument that faulty work can never be an “accident” because it is one of the normal, frequent, and predictable consequences of the construction business. The Court also rejected a frequent argument made by insurers that breach of contract claims are not within the CGL policy’s initial grant of coverage. The Court explained that “accident” as used in the policies “encompasses unintended and unexpected harm caused by negligent conduct.” Thus, the Court held that “consequential harm caused by negligent work is an ‘accident.’” “Therefore, because the result of the subcontractors’ faulty workmanship here—consequential water damage to the completed and non-defective portions of Cypress Point—was an ‘accident,” it is an ‘occurrence’ under the policies and is covered so long as the other parameters set by the policies are met.”
The Court went on to explain that, when viewed in isolation, the Your Work Exclusion would seem to eliminate coverage—after all, to the developer or general contractor, the entire condominium is “your work.” However, the Court further explained that the Subcontractor Exception “unquestionably applies,” holding that “because the water damage to the completed portions of Cypress Point is alleged to have arisen out of faulty workmanship performed by subcontractors, it is a covered loss.”
While the Supreme Court’s decision left outstanding issues that will have to be resolved through future litigation (such as whether there is coverage for the cost of repairing or replacing the defective work)Cypress Point is an important victory for developers and general contractors. Under the 1986 ISO standard form CGL policy, when a subcontractor’s faulty work causes consequential damage to other, non-defective portions of a project, the developer or general contractor’s insurance must respond with coverage.