New Jersey Supreme Court Holds CGL Policy Covers Claims of Consequential Water Damage Resulting from Alleged Defective Subcontractor Work

On August 4, 2016, the New Jersey Supreme Court held that a developer/prime contractor’s commercial general liability (“CGL”) policy covered claims of consequential water damage resulting from alleged defective work by subcontractors. See Cypress Point Condominium Assoc., Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. 2016).

The case arose from the construction of Cypress Point, a fifty-three unit, luxury condominium complex in Hoboken, New Jersey.  Id.  Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC (collectively “Developer”) jointly served as both the project’s developer and prime contractor.  Id.  At issue were four CGL policies covering the time period from May 30, 2002, to July 15, 2006, that Evanston Insurance Company (“Evanston”) issued to the Developer and which were modeled after the standard form CGL policy promulgated by the Insurance Services Office, Inc. (“ISO”).  Id.

Those policies provided that “’[p]roperty damage’ includes ‘physical injury to tangible property including all resulting loss of use of that property’”.  Id. at *2.  The policies defined an “occurrence” as “’an accident, including continuous or repeated exposure to substantially the same general harmful conditions.’”  Id.  The policies also contained the typical “your work” exclusion, but stated that the 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’”.  Id.

Roof leaks and water infiltration at the interior window jambs and sills of the residential units and water intrusion into common areas and other interior areas were the damage at issue.  Id.  The plaintiff Cypress Point Condominium Association (“Association”) sought a declaration that Evanston’s CGL policies covered its claims against the Developer for the damages.  Id.

The insurers contended that “a subcontractor’s faulty workmanship does not have the fortuity element required for the faulty workmanship to constitute an ‘accident’”, and therefore, is “not an ‘occurrence’ under the terms of the policies”.  Id. at *3.  The insurers further argued that because there is no coverage the outset, the exceptions to the “your work” exclusions for subcontractor work were of no moment.  Id.

The Association argued that a ruling in favor of coverage for consequential damages caused by subcontractors’ work is consistent with judicial precedent and the plain policy language.  Id. at *4. 

The trial court concluded that faulty workmanship does not constitute an “occurrence” and that the resulting consequential damages were not “property damage” under the policy terms.  Id.  The Appellate Division reversed, holding that “’unintended and unexpected consequential damages [to the common areas and residential units] caused by the subcontractors’ defective work constitute ‘property damage’ and an ‘occurrence’ under the [CGL] polic[ies]’”.  Id. at *3.

Noting “’ a strong recent trend in case law [of most federal circuit and state courts] interpret[ing] the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship’”, the New Jersey Supreme Court ruled in favor of coverage.  Id. at *9 - *14.  While the policies did not define “accident”, the court found that the term, as used in the policies at issue, encompassed unintended and unexpected harm caused by negligent conduct, and therefore, the alleged negligence of the subcontractors at issue was an “occurrence”.  Id. at *11.  The Court next found that the policies’ “your work” exclusion did not apply because the alleged damage arose from work by a subcontractor.  Id. at *13.

Linked here is a copy of the New Jersey Supreme Court’s decision.