CGL Policies Issued to Developers May Cover Damages Caused by Subcontractors

Insurers using or modeling their policies after the 1986 version of the ISO standard form Commercial General Liability (CGL) policy, beware. The coverage provided may be broader than you think. According to the N.J. Supreme Court, such insurance policies issued to general contractors and developers afford coverage for consequential damages arising out of faulty workmanship by a subcontractor.

In Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al., (A-13/14-15)(076348), the Court affirmed the judgment of the Appellate Division and held that water from rain flowing into the interior of the property at Cypress Point due to subcontractors’ faulty workmanship constituted an “occurrence,” and the resulting consequential damages were “property damage” under the plain language of the developer’s insurance policies.

Following completion of the condominium complex, control was transferred from the developer to the Association pursuant to N.J.S.A 46:8B-12.1. Thereafter, unit owners experienced leaking problems, and water infiltration damaged common areas and the interior structure of Cypress Point. The Association filed suit against the developer and several subcontractors claiming faulty workmanship, and consequential damages to steel supports, sheathing, sheetrock, and insulation.

During construction, the entities acting as developer and general contractor procured four CGL policies from Evanston Insurance Co., and three from Crum & Forster Specialty Insurance, all of which mirrored the 1986 standard form policy issued by the Insurance Services Office, Inc. (ISO).

The policies covered “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 within the policy to include, “[p]hysical 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.” However, the term “accident” was not defined.

Evanston and Crum & Forster filed motions for summary judgment, arguing that the subcontractors’ faulty workmanship was not an “occurrence” that caused “property damage” under the terms of the policies. The trial court granted the motions, and the Association’s motion for reconsideration was denied. The Appellate Division reversed the trial court’s determination, holding that the Association’s alleged damages met the policies’ definitions of “property damage” and “occurrence.” Further, the Appellate Court distinguished two prior cases relied on by the trial court because: a) they involved replacement costs stemming from a business risk, and not consequential damages caused by defective work, and b) interpreted policy language in the 1973 version of the standard CGL form, which differed from the 1986 version at issue.

The Supreme Court highlighted an important difference between the 1973 and 1986 standard form policies. Unlike the earlier version, the 1986 policy did not directly include the words “property damage” in its definition of “occurrence.” The later version also included a pertinent exception to an exclusion not part of the 1973 ISO policy. The “your work” exclusion, which eliminated coverage for “’property damage’ to ‘your work’ arising out of it or any part of it…,” was tempered by an exception stating that the “your work” exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” This exclusion was not included in the ISO form policy prior to 1986.

In analyzing the matter, the Court determined that 1) the Association’s claims of consequential water damage were covered “property damage” under the terms of the policies; 2) the harm caused by the subcontractors’ faulty workmanship was an “accident” as defined by the policy and therefore, an “occurrence”; 3) reading the “your work” exclusion in isolation would seem to eliminate coverage; and 4) the subcontractor exception to the exclusion provides coverage for the damages alleged in the Association’s complaint.

While the Court acknowledged that an insured can amend a policy to exclude a risk it does not want to insure, the Court’s opinion states, “[t]he insurers here chose not to negotiate away the subcontractor exception and instead issued the developer a series of 1986 ISO standard form CGL policies which explicitly provide coverage for property damage caused by a subcontractor’s defective performance.”

As a result, the Court found that the trial court erred in granting summary judgment to the insurers because the consequential water damage to the condominiums and common areas at Cypress Point that resulted from defective work by subcontractors was both an “occurrence” and “property damage” under the terms of the developer’s policies.

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