By Michael S. Karpoff

In a recent case, Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, a New Jersey appellate court has provided potential additional sources of recovery for community associations involved in construction defect litigation against developers, as well as potential greater financial protection for such developers. In an opinion approved for publication on July 9, 2015, the Appellate Division held that the Insurance Service Office (ISO) 1986 standard commercial general liability insurance policy does not bar coverage to developers in association construction defects cases alleging consequential damages based upon poor workmanship by subcontractors.

The Court concluded that consequential damages caused by a subcontractor’s defective work, presumably unintended and unexpected, constitute “property damage” and “occurrence” under the ISO 1986 policy. Therefore, in a condominium association’s lawsuit against a developer for defective construction resulting in consequential damages, the developer’s insurer may have a duty to defend the developer and indemnify the developer against such claims.

This holding is significant because it reverses a long-running argument, based upon a 1979 case, Weedo v. Stone-E-Brick, Inc., that defective workmanship by subcontractors is not covered by such insurance regardless of the effects. The Cypress Point Court distinguished Weedo and a 2006 case, Firemen’s Ins. Co. of Newark v. National Union Fire Ins. Co., by pointing out that those cases involved a differently worded insurance policy (ISO 1973) and involved only replacement costs, not consequential damages caused by defective work. The Court also found that coverage of consequential damages caused by subcontractors was logical because an exclusion in the policy for work performed by the developer expressly exempted from the exclusion work performed by a subcontractor. Nevertheless, the Cypress Point Court remanded the case to the Trial Court for consideration of whether other exclusions applied.

As a result of this decision, insurers who provided commercial general liability insurance using an ISO 1986 policy cannot deny coverage for defendant developers in construction defect cases asserting consequential damages merely because the damages resulted from subcontractors’ poor workmanship. Thus, unless the claim is subject to an exclusion other than for workmanship, a defendant developer will have another level of financial protection against such claims while the plaintiff association will have an additional funding source for recovery.

To read the Appellate Division’s decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, click here.

For more information on this case or any other issue concerning your community association, please contact one of our Community Associations attorneys. For breaking news or updates on new blog posts, follow us on Twitter at: @njcondolaw.