Action Item: Developers and contractors, as well as commercial and residential property owners and occupants, must be aware of a recent New Jersey Supreme Court decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, which finally gave some relief to those seeking coverage under commercial general liability (“CGL”) policies for faulty workmanship claims. In so doing, the High Court broke from decades-old precedent that insurers had routinely used to thwart policyholder’s ability to obtain coverage for consequential damages caused by subcontractors’ faulty workmanship. At long last, insurance coverage is available for those losses in the State of New Jersey.

In Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al., the New Jersey Supreme Court unanimously affirmed the Appellate Division’s previous holding that consequential damages caused by subcontractors’ faulty workmanship constitutes “property damage,” and the resulting damage—in this case, rain water flowing into the interior of the property—is an “occurrence” under the plain language of the CGL policies at issue. The Court’s ruling is a long-awaited, major victory for policyholders. With this opinion, New Jersey has now joined the majority of other jurisdictions finding that consequential damages caused by a subcontractor’s faulty workmanship can be covered under a general contractor’s CGL policy.

The Cypress Decision

Facts

Cypress Point is a condominium in Hoboken, New Jersey, that was constructed from approximately 2002 to 2004. Subcontractors were hired to carry out a majority of the work. After construction was complete, several owners began to experience problems. The condominium association brought suit against the developer and its subcontractors, alleging among other things that the subcontractors failed to properly install the roof, gutters, windows, doors, and other components, allowing rain to seep into the buildings in the complex. The developer in turn sued its insurers, arguing that the subcontractors’ faulty workmanship caused consequential damages to common areas and unit owners’ property, and that those damages were therefore covered by the CGL policies obtained by the developer for the four-year construction project.

The policies were modeled after the standard 1986 ISO form and 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.”

Procedural History

The trial court entered summary judgment for the insurers, and agreed with the insurers that the subcontractors’ faulty workmanship and resulting consequential damages constituted neither an “occurrence” nor “property damage” within the meaning of the policies.

In reversing, the Appellate Division found the consequential damages that resulted from the subcontractors’ substandard workmanship in fact met the policies’ definition of “property damage.” In reaching its conclusion, the Appellate Division expressly found that Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1973), upon which insurers in New Jersey had relied for over 40 years to defeat coverage for faulty workmanship claims, did not defeat coverage. In particular, the appellate court found that because the policy language from the 1973 ISO at issue in Weedo was distinct from that in the 1986 ISO form before it, the reasoning of Weedo was inapplicable.

The Supreme Court’s Ruling

The High Court agreed with the Appellate Division’s analysis distinguishing Weedo and affirmed. The Court held that “the consequential damages caused by the subcontractors’ faulty workmanship constitute ‘property damage.’” The Court thus further found that “the event resulting in that damage—water from rain flowing into the interior of the property due to the subcontractors’ faulty workmanship—was an ‘occurrence’ under the plain language of the CGL policies at issue.” The Court also reasoned that “accident” as used in the policies includes both “unintended and unexpected harm caused by negligent conduct,” such that the consequential damages resulting from the subcontractors’ poor workmanship, was an “accident,” and therefore an “occurrence” under the policies. Finally, the Court distinguished the so-called “your work” exclusion in the 1986 policy form from that in the 1973 policy form at issue in Weedo and its progeny. The Court pointed out that unlike the exclusion in the 1973 form, the exclusion in the 1986 form contains an exception that expressly declares the exclusion will not apply if the damaged work or the work out of which the damage arises was performed by a subcontractor.

Potential Impact

The Cypress decision is a major victory for real estate developers, general contractors, and other policyholders seeking coverage for faulty workmanship claims in New Jersey. With the Cypress decision, New Jersey has at long last joined the current majority of states holding that construction defects causing consequential damages give rise to an “occurrence” and “property damage” that are covered by today’s commercial general liability policies. Additionally, aggrieved parties now have additional recourse to recover for resulting damage, rather than being limited to only the insurance and limited assets of the subcontractor. Developers need to be mindful of this decision and ensure that insurance coverage placed for future projects continues to include protection against losses caused by the faulty workmanship of their subcontractors.