07/24/2015

Client Alert

Written by: Gerard H. Hanson, Esq., and Todd J. Leon, Esq.

On July 9, the Superior Court of New Jersey – Appellate Division issued its opinion in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC.[1] Without fear of overstatement, Cypress Point marks a major departure from the existing body of case law in New Jersey, as it holds that unintended and unexpected consequential damages caused by a subcontractor’s defective work constitute both “property damage” and an “occurrence” under a standard CGL policy.

The facts of Cypress Point are fairly typical of a construction defect action. A condominium association (Cypress Point) sued its developer/general contractor (Adria Towers) and various of its subcontractors for damage to the common areas of the condominium complex – including to steel supports, sheathing, sheetrock and insulation, and to unit owners’ property, which was allegedly caused by defective work performed by the subcontractors. Cypress Point also sued Adria Towers’ CGL insurers, seeking a declaration that the carriers owed coverage for the claims.

The trial court, following the traditional case law of New Jersey, held that the allegations of faulty workmanship did not constitute “property damage” caused by an “occurrence”. The Appellate Division reversed. In so doing, the panel focused on the “plain language of the policy”, which is the current version of the standard ISO CGL policy and differs from the language that was considered in the seminal cases of Weedo v. Stone-E-Brick and Firemen’s Insurance Co. of Newark v. National Union Fire Ins. Co. The panel also rejected the rationale of the District Court and the Third Circuit in Pennsylvania National Mutual Casualty Ins. Co. v. Parkshore Development Corp.

The first substantive issue addressed by the Appellate Division was whether the claims fell within the policy’s definition of an “occurrence”, which is defined in relevant part as “an accident”. Because the term “accident” is not defined in the policy, the court looked to existing case law to inform its meaning, and specifically Voorhees v. Preferred Mutual Ins. Co., which holds that “the accidental nature of an occurrence is determined by analyzing whether the alleged wrongdoer intended or expected to cause an injury.” With this definition in mind, the panel held that the consequential damages at issue constituted an “occurrence”, since there was little question that the subcontractors did not intend that their work would cause damage.

Moving to whether the claims asserted against the developer also amounted to “property damage”, the panel concluded that “the consequential damages clearly constitute ‘physical injury to tangible property’”, since the “faulty workmanship damaged the common areas and unit owners’ property.” In short, the Appellate Division found that there was “property damage” because the faulty workmanship damaged elements of the project beyond the workmanship itself.

From that base, the panel moved to an analysis of whether the outcome should be guided by the key existing New Jersey case law on the subject – Weedo and Firemen’s. As to both cases, the panel observed that those earlier courts considered the 1973 ISO CGL policy, as opposed to the 1986 version at issue in Cypress Point. With respect to Weedo, the court distinguished the issues before it on the basis that Weedo focused upon the question of whether exclusions applied to preclude coverage, and found that defective-work damages were not covered. According to the Appellate Division, those issues were not in play in the Cypress Point matter, where the key question was whether the claims amounted to “property damage caused by an occurrence”, and the damage went beyond the cost of repairing the faulty workmanship itself. With respect to Firemen’s, the panel distinguished its holding on the basis that the damages at issue in the earlier case were confined to the costs of replacing the poorly-performed work, as opposed to consequential damage to work performed by other subcontractors.

In the end, the Appellate Division affirmed the rule established by Weedo and followed by Firemen’s, which holds that there is no coverage for the cost of repairing defectively performed work; rather, those are business costs, which must be borne by the insured. However, Cypress Point departed from previous New Jersey case law by holding that consequential damage to other parts of a project qualify as “property damage” caused by a subcontractor’s faulty work.

Notably, the panel’s analysis did not end there. Rather, the court further supported its conclusions by noting that there are “critical differences” between the language of the 1973 policies considered in Weedo and Firemen’s and the 1986 policy at issue in Cypress Point. One such difference is in the definition of “occurrence”, which in earlier versions of the policy expressly included the term “property damage”, while later iterations did not. The second difference identified by the Appellate Division was the so-called “subcontractor exception” of exclusion j(6), by which the policy “gives back” coverage for damage to the insured’s work where the work was performed by a subcontractor. Finally, the Appellate Division noted that its viewpoint was informed by the trend of cases nationwide finding that construction defects that cause consequential property damage should be covered as “occurrences”.

Finally, in reaching its decision the Appellate Division rejected the Parkshore trilogy of unreported decisions from New Jersey’s Federal courts. The court spent little time in so doing, as it simply found that the analysis in Parkshore was incorrect because it relied upon Firemen’s and its analysis of the outdated 1973 version of the CGL policy. The panel also rejected the long-argued notion that finding coverage for the claim converted the insurance policy into a performance bond.

Cypress Point thus marks a significant turning point with respect to the insurance coverage potentially owed for construction defect claims in New Jersey. Indeed, in the short time since Cypress Point was decided, the Appellate Division has issued two additional unreported decisions (Bob Meyer Communities, Inc. v. James R. Slim Plastering, Inc. and Belmont Condominium Association, Inc. v. Arrowpoint Capital Corporation)[2] following its rationale.

With Cypress Point on the books, gone are the days in which an insurer would prevail on such claims by simply arguing that faulty workmanship claims by a general contractor or developer were not covered as either “property damage” or an “occurrence”, regardless of whether the damage involved damage to work or property other than the work performed by an individual subcontractor. As the opinion notes, however, insurers will still be able to argue that coverage for the claims is nevertheless precluded by operation one or more of the exclusions to the policy. However, the argument will certainly be more difficult, and fact-sensitive, than it has been to date. It will also bear watching to see whether the insurers file a Petition for Certification with the New Jersey Supreme Court on or before the July 31 deadline, seeking further review of the decision of the Appellate Division.  

We will continue to monitor the case, and will report as to any additional developments that may occur.

[1] While the opinion is "approved for publication", it does not yet have a permanent citation. For the time being, a copy of the opinion may be found on the website maintained by the New Jersey Judiciary or at 2015 WL 4111890 (N.J. App. Div.).

[2] Both decisions were handed down on July 21. Copies of the opinions may be found on the website maintained by the New Jersey Judiciary.

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