On August 4, 2016, the New Jersey Supreme Court issued its decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al., which held that faulty workmanship by a subcontractor that causes property damage is a covered loss under the developer’s/general contractor’s commercial general liability (CGL) insurance policy. The ruling holds that this consequential damage constitutes an “occurrence” under the CGL policy and, as such, may allow community associations to recover for water infiltration and other defective construction.
In this case, Cypress Point Condominium Association instituted transition litigation against the project’s developer/general contractor for water leaks and other construction defects, which caused damage to the units and common property. The developer’s insurance company argued that the Association’s claims were not covered under the various CGL policies obtained by the developer because the alleged faulty workmanship by the developer’s subcontractors did not amount to an “occurrence” and that the resulting damages did not constitute “property damage” under the policies.
The CGL policies at issue here were standard insurance policies based on a form that is widely used in the insurance industry dating back to 1986. Generally, these policies cover claims for “property damage” that is caused by an “occurrence” that happens during the policy period; however, these policies specifically state that they will not cover claims for damage to “your work,” which means that a developer/general contractor making a claim under the policy is not covered when it is its work that is damaged by the “occurrence.” This is known as the “your work” exclusion.
While the “your work” exclusion prohibits insurance coverage for the developer’s own work, the standard insurance policy was altered in 1986 to add an exception to the “your work” exclusion. This is a clause that says, in essence: “[t]he [your work] exclusion does not apply where the damaged work was performed on your behalf by a subcontractor.” This clause is known as the “subcontractor exception” to the “your work” exclusion.”
For many years, the interpretation of this policy language, and the exclusion and exception, has been unsettled in New Jersey. Two previous New Jersey decisions – Weedo v. Stone E Brick, Inc., decided in 1979, and Firemens Insurance Co. of Newark v. National Union Fire Insurance Co., decided in 2006 – had raised doubts about whether defective construction work that caused property damage was covered under typical developer/general contractor CGL policies. However, in Cypress Point, the New Jersey Supreme Court has now made clear that there is coverage under a general contractor’s CGL policy for faulty workmanship by subcontractors that causes property damage to a community association’s building or structures.
The Cypress Point decision is a victory for both homeowners and community associations who have long tried to hold developers and general contractors liable for substandard work in the construction of an association. The law in New Jersey had been in a state of uncertainty as to whether damage to structures and their contents resulting from deficient construction was covered at all, leading associations to frequently undervalue their claims in the face of strong opposition from a well-funded insurance industry. New Jersey now joins a large number of states in which insurance carriers may be forced to pay damages for faulty, substandard workmanship that leads to damage to the structure itself, or to other property.
You can read the Supreme Court’s decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al. by clicking here.
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