Policy Covered Subcontractor’s Faulty Work, New Jersey Supreme Court Decides

The New Jersey Supreme Court has ruled that rain water damage allegedly caused by a subcontractor’s faulty workmanship constituted “property damage” and an “occurrence” under a property developer’s commercial general liability (“CGL”) insurance policy.

The Case

A condominium association in New Jersey sued its developer and general contractor for damage to the interior structure, residential units, and common areas of the condominium complex, which damage allegedly was the result of defective work performed by subcontractors. The condominium association also sued the developer’s CGL insurers, seeking a declaration that claims against the developer were covered by the policies.

The trial court granted summary judgment to the insurers, finding that there was no “property damage” or “occurrence” as required by the policies to trigger coverage.

The condominium association appealed, and an intermediate appellate court reversed, concluding that “consequential damages caused by the subcontractors’ defective work constitute[d] ‘property damage’ and an ‘occurrence’ under the polic[ies].”

The dispute reached the New Jersey Supreme Court.

The insurers argued that the appellate court’s holding conflicted with established law that CGL policies only were intended to provide coverage for damage caused by faulty workmanship to other property and not to the project itself, as was the case here. They also asserted that damage to any portion of the project caused by defective construction was not accidental because it was one of the normal, frequent, and predictable consequences of the construction business.

For its part, the condominium association contended that, although a construction defect itself was not covered under a CGL policy, the damage caused as a consequence of the defect was covered. Thus, the condominium association argued, consequential damages stemming from faulty workmanship constituted a covered “occurrence.”

The New Jersey Supreme Court’s Decision

The court affirmed the appellate court’s judgment.

The court held that the consequential water damage to the completed, nondefective portions of the condominium allegedly caused by the subcontractors’ faulty workmanship constituted “property damage,” and the event allegedly resulting in that damage – water from rain flowing into the interior of the property due to the subcontractors’ allegedly faulty workmanship – was an “occurrence” under the developer’s CGL policies.

The court specifically disagreed with the insurers’ view that a developer’s failure to ensure that a subcontractor’s work was sound resulted in a breach of contract, not a covered “accident” (or “occurrence”) under the terms of the policies. Rather, the court said, because the result of the subcontractors’ allegedly faulty workmanship – consequential water damage to the completed and nondefective portions of the condominium – was an “accident,” it was an “occurrence” under the policies and, therefore, was covered so long as the other parameters set by the policies were met.

The court then found that the “your work” exclusion in the policies – modeled after the 1986 standard form CGL policy promulgated by the Insurance Services Office, Inc. (“ISO”) – contained an exception that narrowed the exclusion by declaring that it did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

The court concluded, therefore, that because the water damage to the completed portions of the condominium was alleged to have arisen out of faulty workmanship performed by subcontractors, it was a covered loss.

The case is Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C. (A-13/14-15) (076348) (N.J. Aug. 4, 2016).