Insured businesses and carriers alike have been operating in a gray area when it comes to determining who is liable for damages resulting from a subcontractor’s faulty workmanship, but a unanimous opinion by the New Jersey Supreme Court has brought clarity to this area of law.
The case, Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., et al., was filed by a condominium association against its developer, the developer’s insurer, and several subcontractors that constructed the property. The association claimed that shoddy work done by the subcontractors had resulted in water damage to the condominium complex.
The trial court dismissed claims against the developer’s commercial general liability (CGL) insurer, finding that there was no “property damage” or “occurrence” as defined in the policies, to trigger coverage, but the Appellate Division reversed that decision, and the New Jersey Supreme Court agreed to take that decision up on appeal.
Justice Solomon authored the court’s unanimous opinion, which focused on the new language adopted in the 1986 standard CGL policies. The court found that the under the revised policy, the faulty work of an insured’s subcontractor constitutes an “occurrence,” and the policy covers the consequential damages resulting from that faulty work.
The court followed a three step process in its analysis to determine the scope of coverage provided by the policy: whether coverage for the consequential damages was generally granted; whether a policy exclusion precluded coverage; and finally whether an exception to the policy exclusion restored coverage.
It found that under the newer 1986 version of the standard contract promulgated by the ISO, the construction-related water damage and resulting loss of use were covered “property damage.” It further found that the subcontractor’s faulty workmanship and the resulting consequential damages should generally be considered a covered “occurrence.” An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” and the court reasoned that damages resulting from faulty work are accidental, not intentional.
The court next considered the exclusion of property damage resulting from the policy holder’s own work, the “your work” exclusion, which would seem to preclude coverage, absent any exceptions.
However, in its final step, the court considered the subcontractor exception, which was added as part of the 1986 changes. The exception provides for coverage “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor providing that work.” The court therefore concluded that where damage results from faulty workmanship performed by subcontractors, it is a covered loss.
“Prior to this decision, the leading New Jersey case on the question, Weedo v. Stone-E-Brick, Inc., was based on the 1973 CGL language, and we had several Appellate Division courts interpreting the newer language differently,” said Alida Kass, the chief counsel at the New Jersey Civil Justice Institute. “Absent a definitive answer from the supreme court it was difficult to know the precise scope of what risks were covered. This decision will allow insurance carriers to properly price the CGL coverage they are providing, and insured businesses will know the scope of the coverage they are purchasing. That sort of clarity is essential for the industry and policy holders.”
This ruling aligns New Jersey’s law with the majority of other states that have considered this same issue.
Judge Cuff, who was temporarily assigned to fill a vacancy on the court when this case was heard, did not participate.