As a matter of first impression, the Supreme Court of New Jersey, in Cypress Point Condo. Ass'n v. Adria Towers, L.L.C., 226 N.J. 403 (N.J. 2016), determined that rain water damage caused by a subcontractor's faulty workmanship constituted "property damage" and an "occurrence" under the 1986 standard ISO commercial general liability ("CGL") insurance policy. Furthermore, the Court held that the term "accident," within the definition of "occurrence," is an unintended and unexpected harm caused by negligent conduct.
In Cypress, Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction, LLC, (collectively, "General Contractors"), served as the general contractors to the construction of Cypress Point—a luxury condominium complex located in Hoboken, New Jersey. Cypress, 226 N.J. at 408. The General Contractors hired subcontractors to manage a majority of the work. Id. During construction, the General Contractors obtained CGL Policies (the “Policies”) from Evanston Insurance Company and Crum & Forster Specialty Insurance Company (collectively, the "Insurers"). Id. at 409.
The Policies issued by the Insurers to the General Contractors provide 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." Cypress, 226 N.J. at 410-11. The Policies define "property damage" to include "physical injury to tangible property including all resulting loss of use of that property." Id. at 410. Additionally, the Policies define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful condition." Id. The Policies also contain a "your work" exclusion that bars coverage for "property damage" resulting from the General Contractor's own work to the completed project. Id. Notably, the "your work" exclusion contains an exception to the exclusion where the damaged work or the work out of which the damage arose was performed by a subcontractor. Id.
After completion of the Cypress Point complex, several condominium owners experienced roof leaks and water infiltration through windows, as well as water damage to the interior structures of the building and common areas. Cypress, 226 N.J. at 410. The Cypress Point Condominium Association ("Association") then sued the General Contractors, alleging faulty workmanship during construction, and claiming consequential damages. Id. The General Contractors sought indemnification from the Insurers for the Association's claims. Id. at 411. The Insurers denied coverage and argued that they were not liable because the subcontractors' faulty workmanship did not constitute an "occurrence" that caused "property damage" as defined by the Policies. Id.
The trial court agreed and granted summary judgment in favor of the Insurers. The Association appealed, and the Appellate Division reversed. Cypress, 226 N.J. at 412. The Appellate Division found that "unintended and unexpected consequential damages caused by subcontractors' defective work constitute[d] 'property damage' and an 'occurrence' under the Policies." Id. The Insurers appealed the Appellate Division's decision to the New Jersey Supreme Court. Id. The Insurers argued that (1) CGL Policies are not intended to provide coverage for the project itself, (2) the Appellate Division failed to apply the correct definition of "accident" as it related to a covered "occurrence," and (3) the Appellate Division inappropriately invoked the "subcontractor exception" to the "your work" exclusion, as faulty workmanship was not "property damage" or an "occurrence." Id. at 413. The Association argued that the Appellate Division's decision was both in line with precedent and with the plain language of the Policies. Id.
The Supreme Court of New Jersey affirmed the Appellate Division, holding that the association's claims of consequential water damage resulting from defective workmanship performed by subcontractors constituted both an "occurrence" and "property damage" under the terms of the Policies. Cypress, 226 N.J. at 429. In upholding the Appellate Division's decision, the New Jersey Supreme Court first distinguished the difference between the 1973 and the 1986 ISO standard CGL Policies. Id. at 417. The Court noted that the most significant difference was that the 1986 ISO policy contained the "subcontractor exception" to the "your work" exclusion. Id.
The Court noted that it was the first time they addressed questions of coverage for consequential damages caused by faulty workmanship under the 1986 standard CGL policy. Cypress, 226 N.J. at 420. As such, the Court turned to other jurisdictions to assist them in determining the issue. Id. at 421-24. The Court recognized that the jurisdictions who have decided coverage issues under a 1986 CGL standard policy represented a strong trend in case law interpreting "occurrence" to include unanticipated damage to non-defective property resulting from poor workmanship. Id. at 423. Guided by these holdings, the Court applied a three-step process to determine whether the subcontractors' faulty workmanship was covered under the policy. Id. at 424-25.
Under the first step, the Court determined if the Policies provided an initial grant of coverage by finding whether there was "property damage" caused by an "occurrence." Cypress, 226 N.J. at 425. As stated, supra, the Policies define "property damage" as "physical injury to tangible property." The Court held that the water infiltration that caused the post-construction consequential damages to Cypress Point qualified as "physical injury to the tangible property" and, thus, was covered "property damage" under the Policies. Id. Next, the Court addressed whether the subcontractors' faulty workmanship constituted an "occurrence" under the Policies. Id. The Court first defined the term "accident" – doing so for the first time in the context of a CGL Policy. Id. The Court defined "accident" to encompass unintended and unexpected harm caused by negligent conduct. Accordingly, the Court held that the subcontractors' faulty workmanship was an "accident" and, thus, was an "occurrence" under the Policies because the consequential damages were not foreseeable. Id. at 428.
In the second and third steps of their analysis, the Court examined the Policies’ exclusions to determine if they contained any exceptions. Cypress, 226 N.J. at 429. The Court determined that the Policies contain the "your work" exclusion and the "subcontractor exception." Id. at 430. Interestingly, the Court recognized that the "your work exclusion" would likely have barred coverage, except for the operation of the subcontractor exception in the "your work" exclusion. Id. Indeed, the Court ultimately held that the water damage to Cypress Point that arose from the faulty workmanship by the subcontractors was a covered loss. Id.
This opinion follows the recent national trend of finding coverage for unanticipated damage to non-defective property resulting from faulty workmanship. See U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007); French v. Assurance Co. of America, 448 F.3d 693 (4th Cir. 2006). This case of first impression in New Jersey may impact the way insurers and policyholders negotiate CGL Policies as it relates to the subcontractor exception.
Thank you to the New Jersey Insurance Coverage Group and legal intern Derek Prevete for their contributions.