On August 4, 2016, New Jersey's highest court affirmed a ruling that consequential damages resulting from a subcontractor’s faulty work constituted “property damage” caused by an “occurrence” under the property developer/general contractor’s commercial general liability policies pursuant to ISO's 1986 standard commercial general liability ("CGL") form. Cypress Point Condo. Ass'n, Inc. v. Adria Towers, L.L.C., No. 076348, 2016 WL 4131662 (N.J. Aug. 4, 2016).
The New Jersey Supreme Court decision is significant for insurance carriers who write CGL policies for real estate developers and general contractors, as the case settled a previously open-ended question regarding the 1986 ISO standard CGL form, the most widely used CGL form today. Further, the decision nullifies the Third Circuit’s contrary opinion in Pennsylvania Nat. Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 403 F. App'x 770, 771 (3d Cir. 2010), which has been relied upon heavily by carriers to support coverage denials and reservations of rights. The Pennsylvania decision is no longer applicable, as it relied upon ISO’s 1973 standard CGL form (the “1973 ISO form”), whereas the policy form at issue in Cypress was the 1986 ISO CGL policy. In making its holding, the New Jersey Supreme Court in Cypress Point also distinguished two leading state cases on the issue of whether a standard CGL policy covers construction defects, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979) and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006). The Weedo and Firemen's cases were distinguished, as they also relied upon the older 1973 ISO form. The decision was motivated by the belief that the 1986 ISO sought to provide coverage for defective construction claims so long as the allegedly defective work had been performed by a subcontractor rather than the policyholder itself.
The precise issue before the Supreme Court was if rain water damage caused by a subcontractor's faulty workmanship constituted property damage and an occurrence under the developer's commercial general liability (CGL) insurance policy. This dispute arose from the construction of Cypress Point, a luxury condominium complex in Hoboken. Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC served as the project's developer and general contractor, and subcontractors carried out most of the work. Plaintiff, Cypress Point Condominium Association, brought suit for alleged faulty workmanship during construction, including roof leaks and water infiltration at the interior window jams and sills of the residential units. The Association claimed consequential damages, consisting of, among other things, damage to steel supports, exterior and interior sheathing and sheetrock, and other damage to insulation, common areas, and the residential units. During construction, the developer, Adria Towers, LLC, obtained four CGL policies from Evanston Insurance Company and Crum & Forster Specialty Insurance Company, (collectively, the "insurers").
The trial court entered summary judgment in favor of the insurers, dismissing the Association's claims against the insurers. In a published decision, the Appellate Division reversed the trial court and held that, under the plain language of the CGL policies, the unintended and unexpected consequential damages caused by the subcontractors' faulty workmanship constituted property damage and an occurrence. The Supreme Court agreed and affirmed, finding that the consequential damages caused by the subcontractors faulty workmanship constituted property damage. The matter was remanded to the trial court for proceedings consistent with the opinion.
The Supreme Court's decision in Cypress is significant to carriers and policyholders alike, as New Jersey has joined the current majority of states holding that construction defects causing consequential damages give rise to an “occurrence” and “property damage” under the 1986 ISO CGL policy. Insurance carriers who write policies for subcontractors should be alerted to the potential for this exposure. Conversely, carriers writing policies for developers can take comfort in the clarity given by the ruling, which will enable them to more easily recoup damages from subcontractors whose faulty work results in consequential damages.