New Jersey’s highest court issues important insurance coverage decision in Cypress Point Condominium Association Inc. v. Adria Towers LLC, Case Number 076348, affirming that a CGL policy provides coverage for consequential damages resulting from a subcontractor’s defective construction work.
On August 4, 2016, the New Jersey Supreme Court affirmed that a Commercial General Liability (CGL) policy covers damages resulting from defective construction work performed by a subcontractor. The New Jersey Supreme Court held that the lower court misapplied the leading New Jersey decision on this issue, Weedo v. Stone-E-Brick, 81 N.J. 233 (1979), where the lower court held that a CGL policy does not cover consequential damages resulting from defective construction work performed by a subcontractor.
The Cypress Point lawsuit arises out of the construction of the Cypress Point condominium complex in Hoboken, New Jersey. Adria Towers, LLC, the construction project developer and general contractor, hired various subcontractors to perform the construction work. Adria Towers, LLC procured four CGL policies with standard CGL language, providing 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.”
The term “property damage” was defined by the policies as including “physical 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 for “Damage to Your Work,” which excludes coverage for “property damage” to “your work” arising out of it or any part of it and included in the ‘products-completed operations hazard.'” An exception to the Damage to Your Work exclusion provided that it 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 construction of the condominium complex, residents complained of roof leaks and water infiltration in their apartments and in common areas due to rain. Cypress Point filed a lawsuit against Adria Towers, LLC and its subcontractors, alleging defective work and claiming consequential damages. The trial court held that pursuant to the Supreme Court’s holding in Weedo, no coverage was afforded to Cypress Point under its CGL policies for consequential damages. The Appellate Division reversed, holding that consequential damages caused by the subcontractors’ defective work constitutes “property damage,” because it is “physical injury to tangible property.” In addition, rain seeping into the complex as a result of the defective construction work constitutes an “accidental occurrence” as defined by the policies since it is an unexpected or unintended “continuous or repeated exposure to substantially the same general harmful conditions.” Furthermore, the Damage to Your Work exception to the exclusion for work performed by subcontractors applied. The Appellate Division noted that the lower court misapplied Weedo because: 1) Weedo involved replacement costs, not consequential damages; and 2) the policy at issue in Weedo did not include the subcontractor exception to the Damage to Your Work exclusion.
The New Jersey Supreme Court affirmed the Appellate Division’s decision, holding that consequential damages resulting from the rain infiltration constitutes property damage as defined by Adria Towers’ CGL policies. Additionally, the court held that an “accidental” occurrence includes unintended and unexpected harm caused by negligent conduct. Furthermore, the court held that the subcontractor exception to the Damage to Your Work exclusion applied. It should be noted that the Cypress Point decision did not reverse the holding in Weedo that replacement costs are not covered under a CGL policy.
The Cypress Point decision follows a recent trend in other jurisdictions which have recognized the misapplication of Weedo, affirming that consequential damages from a subcontractor’s defective work is covered by a CGL policy. As a result of this decision, insurers should be made aware of the potential exposure presented to them for liability for damages due to a subcontractor’s faulty or defective work.