CGL Policies: When Consequential Damages Are a Covered Loss in Construction Defect Matters

Consequential damages to common areas and unit owners’ property in a condominium complex that result from a subcontractor’s defective work constitute both “property damage” and an “occurrence” pursuant to the plain meaning interpretation of the terms as defined in the Insurance Services Office, Inc.’s (ISO) 1986 standard CGL form. Cypress Point Condo. Ass’n, Inc. v. Adria Towers, L.L.C., 143 A.3d 273 (N.J. 2016).

Adria Towers, L.L.C. served as general contractor during the construction performed at the Cypress Point Condominiums. Defective work performed by Adria Tower’s subcontractors resulted in both defective work and consequential damages claims. The Appellate Division held that the trial judge erred when he summarily dismissed the plaintiff’s claims on the grounds that there was neither “property damage” nor an “occurrence” per the policy.

The Appellate Division distinguished Cypress Point from earlier cases that relied upon an earlier interation of the 1986 ISO form (Weedo v. Ston-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) and Firemen’s Ins. Co. of Newark v. Nat’l Union Fire Ins. Co., 904 A.2d 754 (N.J. Super. Ct. App. Div. 2006)) when it determined that a subcontractor’s defective work constituted both “property damage” and an “occurrence.” The court noted that, while as a threshold matter, consequential damages that result from a subcontractor’s defective work constitute “property damage” and an “occurrence,” an insurer is not precluded from arguing against coverage based upon other exclusions within a policy.

The third-party defendant insurers, Evanston Insurance Company and Crum & Forster Specialty Insurance Company, appealed, and the Supreme Court of New Jersey affirmed the decision of the Appellate Division. The court utilized a three-step process to determine whether the policies issued by the insurers to the developers provided coverage for claims of consequential water damage caused by the subcontractors’ faulty workmanship.

First, the court examined whether the underlying facts of the plaintiff’s claims were afforded initial coverage under the relevant insurance policies. Next, the court considered whether any policy exclusions precluded coverage. Finally, the court considered whether an exception to the exclusion applied to restore coverage. Cypress Point Condo. Ass’n, Inc., 143 A.3d at 286.

By defining the insurance policy’s term “accident” as “unintended and unexpected harm caused by negligent conduct,” the court found that initial coverage applied. Next, the court considered the applicability of the “your work” exclusion to the policies. The “your work” exclusion generally precludes coverage for “property damage to ‘your work’ arising out of it or any part of it.” The court acknowledged that this exclusion seemed to eliminate coverage for the water damage to Cypress Point.

However, the policy also contained an exception to the “your work” exclusion. The exception expressly stated that the “your work” exclusion does not apply if “the damaged work or the work out of which the damage arises was performed on your behalf by the subcontractor.” Thus, because the damage alleged at Cypress Point was caused by the faulty work on the part of subcontractors, the court found it was a covered loss. The court affirmed the Appellate Division’s decision—that rain water damage caused by a subcontractor’s faulty workmanship constituted both property damage and an occurrence under the applicable CGL policies—and remanded the matter to trial court.

The Appellate Division interpreted the scope and breadth of Cypress Point two years after its decision. In following with the Supreme Court of New Jersey, the Appellate Division noted that whether the “your work” exclusion or its exceptions apply has proven to be a policy and fact-specific inquiry.

First, “[w]hen ‘the language of a contract is plain and capable of legal construction, the language alone must determine the agreement’s force and effect.’” Cypress Point, 143 A.3d at 280, quoting, Manahawkin Convalescent v. O’Neill, 85 A.3d 947 (N.J. 2014). Consistently, the Appellate Division recently remanded to the trial court the construction defect matter of 313 Jefferson Trust, LLC v. Mercer Ins. Cos., 2018 N.J. Super. Unpub. LEXIS 35, at *24 (N.J. Super. Ct. App. Div. Jan. 8, 2018) for policy analysis according to the specific CGL policy language.

In 313 Jefferson Trust, the plaintiff/owner, 313 Jefferson Trust, alleged that its contractor, Tricomitis, which was engaged to perform demolition and construction at 313-315 First Street, Hoboken, New Jersey, failed to install essential rebar within the concrete slab. Prior to commencing performance, and pursuant to its contract obligations, Tricomitis procured a CGL policy. The defendant, Mercer Insurance Company, provided the policy, which outlined its coverage obligations in the context of “property damage” and “occurrence.” These terms were defined by the policy.

The Appellate Division in 313 Jefferson Trust noted that, similar to the policy in Cypress Point, the Mercer policy did not limit its definition of property damage to property owned by a third party, nor did the Mercer policy specifically exclude property where Tricomitis performed its work. Additionally, as stated by the court in Cypress Point, the Appellate Division noted that an occurrence may be an accident which “encompasses unintended and unexpected harm caused by negligent conduct.” 313 Jefferson Trust, 2018 N.J. Super. Unpub. at *16, quoting Cypress Point, 143 A.3d at 287-288.

Although the Appellate Division stated that “there may have been unintended or unexpected expenses because of [Tricomitis’] poor workmanship, there was no finding by the trial court that there was harm to any completed, non-defective portions of a building as was the case in Cypress Point.” The Appellate Division did not interpret Cypress Point “so broadly as to define occurrence without some damage to non-defective property. By focusing on consequential damage the trial court did not determine whether there was an occurrence under the policy.” (Italics added)

Next, the Appellate Division considered the “your work” exclusion within the Mercer policy. The Mercer policy stated that it would not “insure any property damage to your products or your work caused, to any extent, but your products or your work or any part of such,” with two exceptions. Pursuant to the Mercer policy, the “your work” exclusion would not apply where:

1. The work ha[d] not, at the time of the damage, been abandoned or completed; or
2. The damaged work, or work out of which the damage ar[ose], was performed on your behalf by a subcontractor.

The trial court failed to analyze the liability coverage, exclusions or exceptions thereto. Still, the trial court awarded consequential damages, consisting of professional fees, consulting fees, delay damages, cost to complete and interest to 313 Jefferson, without any findings related to harm to the completed non-defective portions of the building. The Appellate Division, therefore, remanded the matter to the trial court to determine whether there was property damage “attributable to the ‘unintended and unexpected harm caused by the negligent conduct’,” as well as to determine whether the work on the project was performed by Tricomitis or one of its subcontractors.

Cypress Point and 313 Jefferson highlight the importance of the plain language analysis of CGL policies and the exceptions to coverage provided therein. Additionally, for purposes of coverage and consequential damages considerations, an occurrence requires damage to otherwise non-defective property.

*Daniel is an associate in our Roseland, New Jersey office. He can be reached at 973.618.4102 or djalgieri@mdwcg.com.

_{Defense Digest, Vol. 25, No. 4, December 2019 is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2019 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}