By: Eric S. Schlesinger, Esq. and Hristo Zevilkaris, Esq.
In a recent published opinion, Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., et al. (A-13/14-15) (076348) the New Jersey Supreme Court ruled that water damage caused by a subcontractor’s faulty workmanship constituted “property damage” and an “occurrence” under a property developer’s commercial general liability (CGL) insurance policy. In doing so, the Court distinguished the present matter from the seminal cases on this issue, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 as the cited cases were based upon the 1973 ISO form CGL policy and not the current 1986 ISO form CGL policy. The distinction is significant as the 1986 ISO form contains a subcontractor exception to the “your work” exclusion that was not included in the 1973 ISO form.
Cypress Point involved the construction of a luxury condominium complex in Hoboken, New Jersey. The developer served as the project’s developer and general contractor and hired subcontractors to complete the work in question. In all, the developer was issued six standard form CGL polices promulgated by the ISO, which 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.” Property damage was defined as “[p]hysical injury to tangible property including all resulting loss of use of that property.” An “occurrence” was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies contained an exclusion to coverage, for “Damage to Your Work” which excluded coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” However, this exclusion “does not apply if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.”
Following the completion of the complex, residents began experiencing roof leaks and water infiltration around windows in units and common areas. The Condominium Association filed suit against the developer and subcontractors, alleging faulty workmanship and seeking consequential damages, and claims were asserted against the insurers for a determination as to whether the developer was entitled to coverage
The insurers filed motions for summary judgment arguing that the subcontractors’ faulty workmanship did not constitute an “occurrence” resulting in “property damage” as defined by the policies. The trial court agreed finding that “faulty workmanship” did not constitute an “occurrence” and the consequential damages that flowed were not considered “property damages” as they arose entirely from work performed by or on behalf of the developer.
On appeal to the Appellate Division, the Court held in a published decision that, under the plain language of the CGL policies, the unintended and unexpected consequential damages caused by the subcontractors’ faulty workmanship constituted “property damage” and an “occurrence,” thus obligating the carriers to provide coverage. See, Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 441 N.J. Super. 369 (App. Div. 2015).
After granting Cert., the Supreme Court, in a published decision, upheld the Appellate Division’s holding, similarly finding that consequential damages caused by the subcontractors’ faulty workmanship constituted “property damage,” and the resulting damages were an “occurrence” under the plain language of the CGL policies. In doing so, The Court distinguished the present matter from the prior cases relied upon the insurers, Weedo, 81 N.J. 233 (1979), and Firemen’s Insurance Co. of Newark, 387 N.J. Super. 434 (App. Div. 2006) as the cited cases were based upon the 1973 ISO form CGL policy and not the 1986 ISO form CGL policy. The distinction is significant as the 1986 ISO form contains a subcontractor exception to the “your work” exclusion that was not included in the 1973 ISO form. Additionally, the 1973 ISO form defined an “occurrence” as “an accident which results in. . .property damage neither expected nor intended form the standpoint of the insured” while an “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful condition” under the 1986 ISO form.
Since the issue of coverage for consequential damages caused by faulty workmanship under the 1986 ISO standard form CGL policy was never addressed by the New Jersey Supreme Court, The Court was persuaded by the holdings of the Florida Supreme Court decision in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871, 874 (Fla. 2007) and the Fourth Circuit Court of Appeals’ decision in French v. Assurance Co. of America, 448 F.3d 693 (2006) as they represented the a strong recent trend of interpreting an “occurrence” as including unanticipated damage to nondefective property resulting from poor workmanship.
Against that backdrop, The Court had to interpret the term “accident” according to its plain and commonly-understood meaning as it was not defined in the policies. In doing so, The Court defined the term “accident” as encompassing unintended and unexpected harm caused by negligent conduct. As such, The Court concluded that under their interpretation of the term “occurrence,” consequential harm caused by negligent work is considered an “accident” for coverage purposes. Therefore, since the results (i.e. consequential water damages) of the subcontractors’ faulty workmanship were an “accident,” it is therefore considered an “occurrence” under the policies, and thus, a covered loss provided all other policy parameters are met.
Concluding that the claims are covered under the policies’ general insuring agreement, the final inquiry was whether any of the policies’ exclusions or exceptions applied. The Court initially noted that the “your work” exclusion would eliminate coverage as it precludes coverage for “property damage” resulting from the insured’s work. However, the “your work” exclusion in the 1986 ISO standard form CGL policy, contains an important exception by expressly declaring that it does not apply if the damaged work was performed on the insured’s behalf by a subcontractor. Essentially, the “your work” exclusion would not apply if the loss resulted from the work of the insured’s subcontractor. Therefore, since the water damage was alleged to have been caused by the subcontractors’ faulty workmanship, it is a covered loss.
The impact of the Supreme Court’s decision in Cypress Point is significant for both insurance carriers and contractors. At the outset, the ruling significantly broadens insurance carriers’ ultimate exposure on claims to include consequential damages caused by a subcontractor’s “work.” As The Court noted, the insurance carriers could potentially offset increased exposure by either eliminating the subcontractor exception or adding a breach of contract exclusion to their policies. As for contractors, this decision expands the coverage under their CGL policies to include coverage for consequential damages, thus limiting potential uncovered exposure. The decision is also consistent with twenty-four other state Supreme Courts, which have similarly ruled in favor of coverage.
 Eric S. Schlesinger, Esq. is a Shareholder in GRSLB&G’s Litigation Department. He defends a wide variety of clients in various civil actions brought forth in New York and New Jersey State and Federal Courts. Eric can be reached at email@example.com.
 Hristo Zevilkaris, Esq. is an Associate in GRSLB&G’s Litigation Department. He defends a wide variety of clients in various civil actions brought forth in New Jersey State and Federal Courts. Chris can be reached at firstname.lastname@example.org.