New Jersey Supreme Court: Damages from Subcontractor’s Faulty Work Triggers Insurer’s Duty to Defend a General Contractor under Commercial General Liability Policy

August 24, 2016

On August 4, 2016, in Cypress Point Condominium Association Inc. v. Adria Towers LLC, [2016 WL 4218263], the New Jersey Supreme Court, joining a growing trend of state high courts, held that consequential damages resulting from a subcontractor’s faulty work triggered an insurer’s duty to defend the general contractor. This holding is a significant win for real estate developers, general contractors and commercial policyholders who seek insurance coverage for the defective work of their subcontractors.

The plaintiff in Cypress, a condominium association, brought a lawsuit against the condo’s developer (who also served as the general contractor) and various subcontractors. The subcontractors, which handled all of the construction work, allegedly improperly installed roofs, gutters, windows, doors, siding, and other components, such that water damage was caused to the interior structures, common areas and unit owners’ property.

The developer requested that his insurer, Evanston Insurance Company, defend and indemnify it against the association’s claims. Evanston impleaded another insurer, alleging that if it owed any obligation under its commercial general liability (“CGL”) insurance policy, Crum & Foster Specialty Insurance Company, which insured the developer during a different time period, should also be similarly obligated.

After the insurers filed motions for summary judgment, the trial court agreed with the insurers and held that there was no “property damage” or an “occurrence” as required by the policies. In doing so it relied in part on older precedents, including Weedo v. Stone-E-Brock, Inc., 81 N.J. 233 (1979) and Firemen’s Ins. Co. of Newark v. Nat’l Union Fire Ins. Co., 387 N.J. Super 434 (App. Div. 2006).

The New Jersey Appellate Division subsequently reversed, and the state’s Supreme Court upheld the appellate court’s decision. The Supreme Court found that in this case, the consequential water damage resulting from the subcontractor’s faulty workmanship constituted “property damage,” and that the unintended and unexpected harm caused by the negligent conduct of the subcontractors constituted an “occurrence” under the policies. 

1986 ISO Standard Form Policy
Having determined that the association’s claims were covered, the Court went on to consider the policies’ exclusions. The Court cited the seminal cases of Weedo and Firemen’s Fund, which involved insurance policies that were modeled after an older standard form policy, but instead, relied on more recent precedent interpreting the 1986 ISO standard form policy. The 1986 form includes a “subcontractor exception” to the “your work” exclusion, which excludes, in part, coverage for repairing a contractor’s own work. Applying the subcontractor exception, the Court concluded that the defective workmanship claims were covered losses.

The Cypress decision constitutes a significant advancement in New Jersey insurance law for real estate developers, general contractors and policyholders.  In light of Cypress, insurers can no longer deny New Jersey policyholders’ claims of faulty workmanship of subcontractors under policies using the 1986 ISO form. Insureds that are denied coverage are encouraged to closely inspect their policies and confirm that insurers are not basing their denial on language contained in an old form that is no longer adopted.

For more information on this and other insurance matters, please contact:

Alan R. Lyons at [email protected] or 212.592.1539 or
Gabrielle C. Wilson at [email protected] or 212.592.1615.

Copyright © 2016 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for informational purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.