The Supreme Court of New Jersey recently held that a subcontractor’s faulty workmanship is covered under a developer’s commercial general liability policies (CGL). The decision in Cypress Point Condominium Association v. Adria Towers provides much-needed clarity regarding one of the most common types of insurance disputes involving construction defects.
The Facts of the Case
The insurance dispute centered on the construction of Cypress Point, a luxury condominium complex in Hoboken. Co. Defendants Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC (collectively, the developer) served as the project’s developer and general contractor, and subcontractors carried out most of the work. During construction, the developer obtained four general liability policies from Evanston Insurance Company and three from Crum & Forster Specialty Insurance Company .
After the complex was completed, several residents began experiencing problems, such as roof leaks and water infiltration around windows in units and common areas. Plaintiff Cypress Point Condominium Association sued the developer and several subcontractors, alleging faulty workmanship during construction and claiming various consequential damages. The central question in the lawsuit was whether the Association’s claims were covered by the insurers’ general liability CGL policies.
The Commercial General Liability Policies
The policies were all modeled after the 1986 version of the standard form CGL policy promulgated by the Insurance Services Office, Inc. (ISO). They provided 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.”
Under the policies, “property damage” was defined to include “[p]hysical injury to tangible property including all resulting loss of use of that property.” Meanwhile, an “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies also contained an exclusion, for “Damage to Your Work” (the “your work” exclusion), which eliminated coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Notably, the exclusion stated it “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 Court’s Decision
The New Jersey Supreme Court held that the CGL carriers must provide coverage. "The consequential damage caused by the subcontractors' faulty workmanship constitutes 'property damage' and the event resulting in the damage ... is an 'occurrence' under the plain language of the commercial general liability policies at issue here," Justice Lee Solomon wrote.
In reaching its decision, the court noted that the seminal New Jersey insurance cases addressing whether construction defects are covered under CGL policies construed the 1973 ISO standard form CGL policy and not the 1986 version. It also highlighted that courts across the country have held that faulty workmanship constitutes an “occurrence” based on the exception to the “Your Work” exclusion in the 1986 version.
The New Jersey Supreme Court followed the trend in holding that the post-construction consequential damages, which resulted in loss of use of the affected areas by residents, were covered “property damage” under the terms of the policies. As Justice Solomon explained, “because the result of the subcontractors’ faulty workmanship – 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 provided an initial grant of coverage.”
The court next turned to the relevant exclusions under the policies, as well as their exceptions. It concluded that while the 1986 “your work” provision eliminated some coverage for water damage to the completed sections of Cypress Point, “an exception to this exclusion, which was added to the 1986 ISO standard form CGL policy, narrowed the exclusion by expressly declaring that it does not apply if the damaged work or work out of which the damage arises was performed by a subcontractor.”
Are you still unsure about these commercial general liability policies? Would you like to discuss the matter further? If so, please contact me, Charles Yuen, at 201-806-3364.
