On August 4, 2016, the New Jersey Supreme Court issued a unanimous decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al. (A-13/14-15) (076348), affirming the judgment of the Appellate Division and holding that consequential water damage caused by the subcontractors’ faulty workmanship constitute “property damage” caused by an “occurrence,” as defined by the property developer’s commercial general liability (“CGL”) insurance policies which follow the 1986 Insurance Services Office, Inc.’s (“ISO”) form. This decision represents a significant change in New Jersey law, and should be carefully considered by insurers.
This case arose from the construction of Cypress Point, a condominium complex in Hoboken, New Jersey. Adria Towers, LLC, Metro Homes, LLC and Commerce Construction Management, LLC (collectively, “the developer”) served as Cypress Point’s developer and general contractor and hired subcontractors to perform most of the construction work. After the completion of the condominium complex, roof leaks and window water infiltration permeated through several residential units and common areas as a result of defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants. As a result, Cypress Point Condominium Association, Inc. (“the Association”) sued the developer and several subcontractors for damages caused by the faulty workmanship. In turn, the developer requested that Evanston Insurance Company (“Evanston”), its insurer covering the time period from May 30, 2002 to July 15, 2006, defend and indemnify it against the Association’s claims. Following Evanston’s refusal to defend and indemnify the developer, the Association filed an amended complaint to determine whether its claims against the developer were covered under Evanston’s CGL policies. Evanston, by way of third-party complaint against Crum & Forster Specialty Insurance Company (“Crum & Forster”), the developer’s insurer covering the time period from July 15, 2006 to July 15, 2009, alleged that if it owed any obligation under the policies, Crum & Forster’s obligations should similarly be adjudicated. The insurers filed motions for summary judgment arguing that the subcontractors’ faulty workmanship did not constitute an “occurrence” that caused “property damage.” The trial courtagreed, and ruled that there was no “property damage” or “occurrence” as required by the policies to trigger coverage. The Appellate Division reversed the trial court, 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].” (quoting Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, 441 N.J. Super. 369, 373 (App. Div. 2015)).
The New Jersey Supreme Court unanimously affirmed the Appellate Division. After examining the Association’s claims, the Court found that the claims of faulty workmanship satisfy the insuring agreement of the policies. As to whether there exists “property damage,” the Court found that the consequential water damage constitutes “[p]hysical injury to tangible property including all resulting loss of use of that property,” citing to mold growth, other damage to common areas and units, and the loss of use of the affected areas. As to whether there exists an “occurrence,” the Court found that, because the consequential water damage to the completed and non-defective portions of Cypress Point constitutes an “accident”, which it defined as an unintended or unexpected event, it is an “occurrence” under the policies. Having determined that the Association’s claims are covered under the policies’ insuring agreement, the Court went on to examine the policies’ pertinent exclusions. The Court examined the “your work” exclusion, precluding coverage under the policies for “‘property damage’ to ‘your work’ arising out of it or any part of it,” but applied the subcontractor exception to that exclusion, and concluded that the faulty workmanship claims are covered losses due to the subcontractor exception.
Cypress Point represents a significant development in New Jersey insurance law. Insurers can no longer deny claims of faulty workmanship against a developer or general contractor on the basis that they do not constitute “property damage” caused by an “occurrence” under policies with the post-1986 ISO form. The key question for insurers is to what extent Cypress Point will be extended to other types of faulty workmanship claims outside of the construction context. Regardless, it is important to recognize that although faulty workmanship claims may now be considered to meet the insuring agreement under policies with post-1986 ISO forms, insurers may still deny coverage on the basis of business risk exclusions to the extent applicable. The New Jersey Supreme Court’s decision specifically notes, for instance, that if insurers remove the subcontractor exception to the “your work” exclusion, there would be no coverage for claims to repair or replace faulty workmanship against a developer or general contractor.
A copy of the decision may be downloaded here.