Relationships between insurers and insureds are always touch and go. Claims become especially tricky when made for defective work. Depending on the type of policy and the exceptions and exclusions in the contract, these claims can be paid or fall by the wayside. In Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., the New Jersey Supreme Court held that damage to a project stemming from a subcontractor’s defective work can give rise to coverage, keeping in line with the national trend.
Insurance Terms Decoded
Let’s quickly define some insurance terms to make interpreting this decision easier. If you’re already familiar with these terms, feel free to move on down to the next section.
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When a contractor purchases a CGL (Comprehensive General Liability) policy, they become an insured of the insurance company who assigned the policy. As an insured, the contractor now has a safety net should the project go awry. Coverage is triggered by “occurrences,” which are synonymous with accidents for the purposes of this case. Within the CGL policy are exclusions, or holes in coverage. Certain situations are built into the contract for which no coverage will be provided. One of the most prevalent exclusions in construction contracts is the “Your Work” exclusion. Essentially, insurance companies won’t provide coverage when the work you have contracted to do causes damage. But within the Your Work exclusion often lies an exception for subcontractors’ work. Think of an exception as a patch to the hole in coverage created by an exclusion. When an exception applies, coverage is no longer excluded. So when an insurance contract has a subcontractor exception to a Your Work exclusion, coverage may apply.
So in order for coverage to apply, an occurrence must have taken place. Damage resulting from an occurrence is not covered when there is an exclusion to the particular incident, unless an exception to the exclusion applies.
New Jersey Supreme Court Finds Subcontractor Defects Are Covered
The main issues faced by the court is whether damage resulting from defective subcontractor work is “property damage” under the CGL policy, and whether the defective work constitutes an “occurrence.” Until this case, the New Jersey Supreme Court had never faced these issues. The Court looked to decisions from other states, including Florida, to inform their reasoning. The nationwide trend in this sort of insurance litigation is that subcontractor defects are covered under standard CGL policies, and the Court ultimately followed suit.
After a condominium complex was completed, condo owners began noticing water leaks from the roof and windows. As a result, the condominium association filed suit against the contractor and several subs alleging “defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.” The association also claimed consequential damages including damage to steel supports, sheetrock, and insulation and damage to the condo’s common areas and units. The contractor’s insurer was brought into the legal battle after attempting to deny coverage. The insurer argued that the defective work did not constitute an occurrence, and as a result there was no coverage for the damage. After the trial court found in favor of the insurer, the appellate court reversed. The case then made its way to the New Jersey Supreme Court.
The New Jersey Supreme Court
The Court found that faulty work performed by the subcontractor was an occurrence. They reasoned that because an “accident” constitutes an “occurrence,” and an “accident” is defined as an event causing “unintended and unexpected harm caused by negligent conduct,” defective work created an occurrence under the policy. With damage to the condominium resulting from defective work, this qualified as “property damage” arising from an occurrence, triggering coverage.
Importantly, the Court also found that while the Your Work exclusion would otherwise eliminate coverage, the subcontractor exception to the Your Work exclusion brings the claim back under the policy. The CGL policy here was the standard form issued by the Insurance Services Office (“ISO”). The standard ISO form provides for the subcontractor exception, and there was no offsetting language that would call its effect into question. This marks the first time the New Jersey Supreme Court has weighed in on coverage resulting from faulty craftsmanship, and the state joins many others in holding that subcontractor defects are covered under standard form CGL policies.
Courts across the country have found insurers liable where subcontractors are responsible for defective work and a standard form CGL policy is present. Should the subcontractor exception to the Your Work exclusion not be present, however, a contractor would foot the bill. Understanding your insurance policy could not be more important. Without knowing the extent of your coverage, it is impossible to account for potential liability. Financial managers in the construction industry already face unique and challenging issues, and surprises such as costly damage and litigation costs could really impact a business. Reducing risks should be a top priority, and making sure an insurance policy properly shields you from liability is a great way to do that.
For more updates on the state, here are our other New Jersey posts.