Damages caused by faulty workmanship has always been a hot topic in insurance law. In the Fall of 2015, the New Jersey Appellate Court stated that insurers are liable for damages arising out of a subcontractor’s defective work.1 Given this is such highly debated topic, it is not surprising that the Supreme Court of New Jersey has agreed to weigh in on whether consequential damages stemming from a subcontractor’s faulty work on a condominium complex constitute an occurrence under a general contractor’s insurance policy.
By way of background, Plaintiff, Cypress Condominium Association, Inc., (“Cypress”) hired Defendant, Adria Towers, LLC (“Adria”) as its general contractor to develop a condominium project. Adria, in turn, hired multiple subcontractors to perform the construction work. Those subcontractors “failed to property install the roof, flashing, gutters and leaders, brick and EIFS façade, windows, doors and, sealants (the 'faulty workmanship')." This faulty workmanship led to water damage in common areas, individual units and concealed interior areas of the building.
Cypress brought claims against, its developer, Adria Towers, LLC, the developer’s insurers and various subcontractors, seeking coverage from the developer’s insurer under the developer’s commercial general liability (CGL) insurance policies for consequential damages caused by the subcontractors’ defective work. The trial court agreed with Defendants and granted summary judgment, holding there was no property damage or occurrence, at which point, Plaintiff appealed.
The New Jersey Court of Appeals held that “the unintended and unexpected consequential damages caused by the subcontractors’ defective work constitute “property damage” and an “occurrence”” under the plain language of the policy.2 The appellate court explained that “consequential damages flowing from defective work are vastly different than the costs associated with replacing the defective work” itself.
In reaching its decision, the appellate court distinguished the two cases relied upon by Defendants. In distinguishing Weedo v. Stone-E-Brick, Inc.,3 the court stated that the Weedo court held,
[T]here was no insurance coverage for “faulty workmanship” … where the damages claimed [were solely] the cost of correcting the work itself. … Here, unlike in Weedo, the consequential damages are not defective-work damages.
In distinguishing Firemen’s Insurance Company of Newark v. National Union Fire Insurance Company,4 the court explained that it “concluded that there was … no insurance coverage, for damages that were solely related to replacing sub-standard firewalls because the damages were a business risk, not consequential damages.”
In Cypress, the Plaintiff did not argue that replacement costs constitute “property damage” and an “occurrence” under the policy. Rather, Plaintiff argued that the faulty workmanship caused consequential damages to Plaintiff’s property. As the court noted, “the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.”
The Cypress court emphasized that its conclusion—that Cypress alleged property damage and an occurrence—did not automatically mean coverage exists, as on remand the insurers can still claim certain exclusions apply. As such, parties should review the respective CGL policies to determine the applicability of this case.
The New Jersey Supreme Court granted certification in Cypress. If the Supreme Court affirms the Appellate Division’s decision, it will provide some protection to homeowners who currently have little to no recourse against negligent contractors.
1 Cypress Point v. Adria Towers, 441 N.J.Super. 369, 375, 118 A.3d 1080 (App.Div.).
2 1986 ISO Form.
3 Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979).
4 Firemen’s Ins. Co. of Newark v. National Union Fire Ins. Co., 387 N.J.Super. 434, 904 A.2d 754 (App.Div.2006).