Constructive defect litigation has bedeviled the insurance industry for years, particularly in New Jersey, California, and Florida. These claims are complex and generate years of expensive litigation. While many insurers have abandoned the construction/contractor’s market or excluded these risks with “Tract Homes” or Condominium exclusions, others find themselves mired in disputes over the scope of coverage available to contractors involved in construction defect litigation.
In New Jersey, one unresolved question was whether the standard 1986 ISO form CGL policy covered a developer/general contractor against claims of consequential damage caused by the faulty workmanship of a sub-contractor. Do such claims satisfy the requirement that “property damage” must be caused by an “occurrence”? If so, are those claims barred by Exclusion l. as “property damage” to “your work”?
In Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., et al., the New Jersey Supreme Court used a three step process in resolving these coverage issues. First, it held that the consequential damages caused by a subcontractor’s shoddy work qualified as “property damage.” Further, the Supreme Court found the water damage to common elements and individual units caused by the subcontractor’s faulty workmanship was an occurrence, because “the consequential harm caused by negligent work is an ‘accident.’” Second, the Supreme Court observed the “Your Work” exclusion likely eliminated coverage for the ensuing water damage. However, on the final step of analysis, the “Your Work” exclusion was nullified by the exception for damage arising out of work performed “on your behalf by a subcontractor.”
There are two main takeaways from Cypress Point. First, a standard CGL policy provides coverage to a general contractor for claims of consequential damage caused by a subcontractor. The insurer for a general contractor can no longer disclaim coverage on the basis that the entire project is the GC’s work and therefore excluded from coverage. Second, the Supreme Court invited insurers to exclude this specific risk – participants in the Excess & Surplus Lines market take note – by eliminating the subcontractor exception from the “Your Work” exclusion or adding a breach of contract exclusion.