Add New Jersey to the growing list of jurisdictions adopting a more expansive view of insurance coverage for construction defect claims.
The standard form commercial general liability (CGL) insurance policy provides coverage for those sums that the insured becomes legally obligated to pay as damages of “bodily injury” or “property damage” caused by an “occurrence.” An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The standard form CGL policy also contains an exclusion for damages to “your work” (the Your Work Exclusion), and, as of the 1986 standard form, an exception to the Your Work Exclusion if the damaged work was performed on the insured’s behalf by a subcontractor (the Subcontractor Exception).
Whether faulty construction workmanship resulting in property damage qualifies as an “occurrence” in a CGL policy is an issue that is litigated regularly. Courts have varied tremendously in their approach and findings. Some courts construe the language strictly, holding that defective construction can never be an occurrence because it is not an accident but rather a business risk of the insured contractor. Other courts take a modified approach, holding that defective construction standing alone is not an occurrence, but faulty workmanship that causes damage to property other than the defective work itself can be deemed as such. Still other courts make a more liberal application holding that any unintentional defective construction is an occurrence.
The trend has been in favor of coverage, and a decision last month by the New Jersey Supreme Court is the most recent example. In Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, a condominium association alleged that water infiltration occurring after the project was completed caused mold growth and other damage to the common areas and units. Distinguishing earlier precedent, the New Jersey Supreme Court held that the alleged damage qualified as an “occurrence” because it was a consequential harm caused by negligent work. Even if the alleged damages included damage to sections of the work being performed by the insured, the Your Work Exclusion was subsumed by the Subcontractor Exception because the defective work was performed by subcontractors.
The Cypress Point Court noted a “strong recent trend in the case law of most federal circuit and state courts interpreting the term ‘occurrence’ to encompass unanticipated damage to nondefective property resulting from poor workmanship.” The courts here in Massachusetts have historically taken a narrow interpretation that defective construction is not an accident and hence is not an insurable fortuitous event that qualifies as an occurrence. It will be interesting to see if Massachusetts follows New Jersey and other states that have trended towards a more expansive interpretation of the CGL policy language, which would greatly benefit contractors defending defect claims.