In a long awaited decision, the New Jersey Supreme Court has unanimously held that consequential property damage caused by a subcontractor’s faulty workmanship is a covered “occurrence” under a standard form CGL policy issued to a general contractor. See Cypress Point Condominium Assoc., Inc. v. Adria Towers, LLC, et al., No. 076348 (August 4, 2016). The Court characterized its decision as being consistent with a “strong recent trend in the case law.”
The case arose when a condominium complex was damaged by rain water entering through roofs and windows that were poorly constructed by subcontractors. In its suit against the general contractors and developers, the condominium association alleged that the subcontractors defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors and sealants. The resulting consequential damage included damage to steel supports, exterior and interior sheathing and sheetrock, insulation and mold in completed common areas and individual units. In the ensuing coverage dispute, the trial court granted summary judgment for the insurers on the basis that faulty workmanship does not constitute an “occurrence.” The Appellate Division reversed, holding that the unintended and unexpected consequential damage caused by the subcontractors’ faulty workmanship constituted an “occurrence.” The Supreme Court affirmed.
In its analysis, the Court first held that consequential damage post-construction resulting in loss of use of certain parts of the condominium complex fell within the definition of “property damage” under the standard 1986 CGL ISO form policies before it. It then looked to the definition of an “occurrence,” defined as “an accident, including the continuous or repeated exposure to substantially the same general harmful conditions,” noting the term “accident” was undefined. Relying upon dictionary definitions and its prior decisions, the Court concluded that an “unintended and unexpected harm caused by negligent conduct” is accidental. Applying that definition, it turned to the question of whether consequential water damage to “completed, nondefective” parts of the condominium complex “flowing from the subcontractors’ poor workmanship” was foreseeable. In answering that question, the Court noted that there were no allegations that the subcontractors intentionally performed substandard work. Therefore, the resulting damage was accidental, satisfying the definition of an “occurrence.”
The Court then turned to the “Your Work” exclusion, which eliminates coverage for property damage to the insured’s work arising out of it, or any part of it, and included in the products-completed operations hazard. It held that the exception to the exclusion for work performed by subcontractors “unquestionably” applied, restoring coverage that the Court already held existed under the initial insuring agreement. The Court also referred to the drafting history of the policies, noting an ISO circular stating that the 1986 revision was intended to cover such damages. It declined, however, to address whether the subcontractor exception created a reasonable expectation of coverage, because it concluded that doctrine was only applicable when policy language was found to be ambiguous. In closing, the Court suggested that if such damage is meant to be excluded, the insurers could simply remove the subcontractor exception to the exclusion or add other exclusionary language to the policies.
The ruling certainly provides finality for similar coverage disputes subject to New Jersey law, although it remains to be seen whether and to what extent other jurisdictions will adopt or distinguish the Court’s reasoning in the future.