A perennial issue in insurance coverage for construction defect claims is whether the standard commercial general liability insurance policy applies to the cost of repairing damage to other property caused by the insured’s defective work. Relying on the New Jersey Supreme Court’s decision in Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) and the Appellate Division’s opinion in Firemen’s Insurance Co. of Newark v. National Union Fire Ins. Co., 904 A.2d 754 (App. Div. 2006) insurers have contended that neither the cost of repairing or replacing the insured’s defective work nor the cost of repairing resulting damage to other work is covered. The Appellate Division’s decision in Cypress Point Condominium Ass’n, Inc. v. Adria Towers, LLC, July 9, 2015, would appear to put an end to the dispute.
The plaintiff in the case was a condominium association. The association sued the developer (who also served as general contractor), the developer’s insurers and various subcontractors for consequential damages caused by subcontractors’ alleged defective work on the condominium. The claim was that the subcontractors failed to properly install the roof, flashing, gutters and leaders, brick and EIFS façade, windows, doors and sealants. These defects allegedly caused damage to common areas and unit owners’ property, including damage to steel supports, sheathing and interior sheathing, sheetrock, insulation.
The developer’s insurers denied coverage, contending that neither the defective work nor the resulting damage constituted claims for “property damage” caused by an “occurrence.” The trial court agreed relying on Weedo and Firemen’s Insurance.
The sole question before the Appellate Division was “whether consequential damages to the common areas of the condominium complex and to the unit owners’ property caused by the subcontractors’ defective work constitute “property damage” and an “occurrence” under the policy.”
The Appellate Division held that under the plain language of the policy the consequential damage was “property damage,” a physical injury to tangible property, and it was caused by an “occurrence” because it was an unexpected and unintended continuous or repeated exposure to substantially the same general harmful conditions.
The Appellate Division also explained that the trial court’s reliance on Weedo and Firemen’s Insurance was misplaced. First, those cases were distinguishable because the damage in those cases was limited to the insured’s work. In addition, those cases considered the 1973 version of the ISO CGL policy form, whereas the policy at issue in the case used the 1986 version which has different language, notably in the definition of “occurrence” and in the form of the subcontractor exception to the “your work” exclusion. The Appellate Division explained that it had rejected any attempt to separate a subcontractor’s faulty workmanship from that of a general contractor in prior cases because those cases considered the 1973 policy form. But that separation was appropriate under the 1986 policy due to the subcontractor’s exception to the “your work” exclusion.
Comment: The Court expressly disavowed the reasoning of the Third Circuit Court of Appeal’s decision in Pennsylvania National Mutual Cas. Ins. Co. v. Parkshore Development Corp, 403 Fed. App’x 770 (3rd Cir. 2010), a case in which the court held that faulty workmanship, whether performed by a contractor or subcontractor, which causes damage to the general contractor’s work, is not an occurrence. The Appellate Division explained that Parkshore had relied on Firemen’s Fund. As explained in the opinion, that reliance was misplaced.
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