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Recent Ruling By New Jersey Court Undermines Business Risk Defense In Construction Defect Litigation

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The New Jersey Appellate Court recently found that the unintended and unexpected consequential damages caused by the subcontractor’s defective work constituted “property damage” and an “occurrence.” Cypress Point Condo Ass’n v. Adria Towers, L.L.C., 441 N.J. Super. 369 (App. Div. 2015). This ruling marks a major departure from the existing body of case law in New Jersey, as it holds that unintended and unexpected consequential damages caused by a subcontractor’s defective work constitute both “property damage” and an “occurrence” under a standard CGL policy. The decision it reverses a long-running argument, based upon a 1979 case, Weedo v. Stone-E-Brick, Inc., that defective workmanship by subcontractors is not covered by such insurance regardless of the effects. The Cypress Point Court distinguished Weedo and a 2006 case, Firemen’s Ins. Co. of Newark v. National Union Fire Ins. Co., by pointing out that those cases involved a differently worded insurance policy (ISO 1973) and involved only replacement costs, not consequential damages caused by defective work.

In Cypress, the Plaintiff condominium association brought an action against the association’s developer, Adria Towers, L.L.C. (the “developer”), the developer’s insurers, and various subcontractors. The developer served as the general contractor on the condominium project and hired the subcontractors to perform all the construction work. Plaintiff sought coverage from the insurers under the developer’s commercial general liability (“CGL”) policy for consequential damages caused by the subcontractors’ defective construction. According to the Plaintiff, the subcontractors improperly installed the roof, flashing, gutters and leaders, brick and EIFS facade, windows, doors, and sealants (the “faulty workmanship”). The faulty workmanship caused damage to the interior structures, common areas, and unit owners’ property. Some units even experienced damage from water infiltration. The trial court held that there was no “property damage” or “occurrence” as required by the policy to trigger coverage. On appeal, the sole issue before the Court was whether consequential damages to the common areas and to the unit owners’ property, caused by the faulty workmanship, and constituted “property damage” caused by an “occurrence” under the policy.

The Appellate Division rejected the carriers’ arguments as to the lack of “property damage” and an “occurrence,” writing: “As to whether there exists ‘property damage,’ the consequential damages clearly constitute ‘physical injury to tangible property.’ The faulty workmanship damaged ‘the common areas and unit owners’ property.’ The interior structures, including the drywall, insulation, wall finishes, and wood flooring, were damaged by water infiltration from the faulty workmanship. As a result, the consequential damages constitute ‘property damage’ as defined under the policy… The insurers do not contend, and we cannot reasonably believe, that the contractors either expected or intended for their faulty workmanship to cause ‘physical injury to tangible property.’ Thus, the consequential damages constitute an ‘occurrence’ as defined in the policy.” 441 N.J. Super. at 373. 

The Appellate Division also discussed the “your work” exclusion, which, as the name indicates, precludes coverage for damage to “your work.” The 1986 ISO form of that exclusion contains an exception reading: “This 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.” While some Courts simply read that exclusion out of the policy, the Appellate Division ruled that the exception must be given effect, writing: “As a practical matter, it is very difficult for a general contractor to control the quality of a subcontractor’s work. If the parties to the insurance contract did not intend a subcontractor’s faulty workmanship causing consequential damages to constitute ‘property damage’ and an ‘occurrence’… then it begs the question as to why there is a subcontractor’s exception.” 441 N.J. Super. at 376. The Court noted: “The exception treats consequential damages caused from faulty workmanship by subcontractors differently than the damage caused by the work of general contractors.” Id.

The developer’s insurers have filed a Petition for Certification with the New Jersey Supreme Court and are awaiting a decision as to whether the New Jersey’s highest court will accept Certification.