By: J. Kent Holland, Jr.
In an insurance coverage case arising out of a lawsuit by a condominium association against a number of contractors for faulty work, a New Jersey appellate court held that the contractors’ commercial general liability (CGL) policies did not require the insurers to indemnify the defendant contractors for the claims against them because faulty workmanship does not constitute “property damage” or an “occurrence” within the meaning of the applicable insurance policies.
The case of Fireman’s Insurance Co., et al. v. National Union Fire Insurance Co, et. al., 387 N.J. Super. 434 (2006), arose out of litigation by the condominium association of the Society Hill Condominiums in Cherry Hill, New Jersey against the contractors that built the condominium complex. The claims against the contractors in the underlying litigation included breach of express and implied warranty, negligent design and construction, negligent supervision of subcontractors, and failure to investigate and correct defects. All of the alleged defective work was performed by subcontractors. The trial court in the construction defect case found several of the contractors liable on seven specific construction defects.
Fireman’s Insurance Company, The Home Insurance Company and Crum and Foster Insurance defended the contractors in the construction defect litigation. Rather than going through the details of how the numerous carriers submitted declaratory judgment actions against each other, this article will just explain the essential holding of the insurance coverage litigation which held that none of the carriers involved had any duty to indemnify the construction defendants in the underlying action.
It is interesting to note that as a result of summary judgment being granted to the insurance carriers on the grounds that none of their policies provided coverage for the defective work, there was no insurance coverage available for any party to satisfy the judgment against the contractors.
The policies at issue in this case included standard provisions of the 1973 ISO form for CGL coverage. That language provided that the carrier would pay sums caused by damages due to “property damage” that were “caused by an occurrence.” In granting summary judgment, the trial court found there was no property damage and there was no occurrence as defined by the policies. It is important to note that in addition to finding no coverage under the insuring agreement sections of the policies the trail court went further and ruled that even if the claims were for damages and occurrences, coverage would nevertheless be denied pursuant to exclusions in the policy.
In holding that there was no coverage, the appellate court relied largely upon the seminal New Jersey case, Weedo v. Stone-E-Brick, regarding insurance coverage for a contractor’s defective work. The court in Weedo stated that the risk of the contractor’s work may being faulty and breaching express or implied warranties is a “business risk” that is not covered under the CGL policy. This is because the contractor retains control over the quality of its own work and is expected to bear the cost of curing its own deficient performance.
The kind of risk that is intended to be covered under the CGL policy is the risk of injury to people and damage to property. This includes injury and damage caused by faulty workmanship. The Fireman’s Insurance court, quoting from Weedo, explained the thinking this way: “In other words, the key distinction is the predictability of the harm: damage for breach of contractual warranty is limited and is an expected cost of doing business; liability for injury or damage to a person or property is potentially ‘almost limitless’ and is ‘entirely unpredictable.’ The policy is intended to insure against the latter risk. As concisely stated, ‘the policy in question does not cover an accident of faulty workmanship, but rather faulty workmanship which causes an accident.’”
The court explained that it applied the Weedo principle which stands for the following proposition: “There is a critical distinction between insurance coverage for tort liability for physical damages to other persons or property, and protection from contractual liability of the insured for economic loss caused by improper workmanship. Ordinarily, the coverage is for tort liability for physical damage to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargains.”
The trail court in the Fireman’s Insurance case correctly applied this principle because there was no property damage since property damage, by definition, “is generally not inclusive of inferior material or poor workmanship.” In affirming the trial court’s decision the appellate court considered whether it made a difference that the defective work was performed by subcontractors rather than the prime contractor. In holding that it made no difference, the court stated that “cases that have considered the issue equate subcontractors with general contractors for the purposes of determining whether there was ‘property damage’ ….”
Several reported decisions were cited by the court for the proposition that subcontractor performance of the work did not get the prime contractor out from under the “work performed” exclusion or what in current versions of the ISO form would be called the “your work” exclusion” of the policy.
One final point made by the court was that faulty workmanship does not constitute an “occurrence” under the policy definition. The majority view of courts around the country, is that “faulty workmanship standing alone, resulting in damage only to the work product itself, does not constitute an occurrence under a CGL policy.” For these, reasons, the court affirmed the decision finding no insurance coverage under any of the CGL policies at issue.
Comment: For an interesting contrast in judicial decisions concerning faulty workmanship coverage, see my article on the decision of Limbaugh Company v. Zurich North American. (Published in Construction Risk.com Report, Vol. 7, No. 4 (2005). There the court found coverage and relied heavily on the fact that the defective work in question was performed by subcontractors rather than the prime contractor.
About the author: J. Kent Holland, Jr. is a construction lawyer in Tysons Corner , Virginia , and is a risk management consultant for environmental and design professional liability insurance and contracts. He is also publisher of ConstructionRisk.com Report. He may be reached at Kent@ConstructionRisk.com. This article is published in ConstructionRisk.com Report, Vol. 9, No. 1 (January, 2007).