A condominium complex sustained consequential damages resulting from rainwater infiltration from roof leaks and leaking windows, due to alleged defective work of a construction subcontractor. The condo association filed suit against the prime contractor, among others, to recover its losses. The contractor tendered the claim to its commercial general liability (CGL) carrier to defend. The carrier refused to do so – arguing that there was no “property damage” or “occurrence” as required by the policies to trigger policy. The Supreme Court of New Jersey held that consequential damages caused by the subcontract’s work was an “occurrence” caused by an “accident” and was within the subcontractor exception to the “your work exclusion” of the GCL policy, and therefore covered by the policy. Cypress Point Condominium Association v. Adria Towers, LLC, 226 N.J. 403 (2016).
In this case the condo association alleged that water infiltration occurred after the project was completed and caused mold growth and other damage to the competed common areas and individual units. The case does not discuss whether a pollution exclusion might have been applied to deny damages allegedly resulting from the mold. But the court stated that the post-construction consequential damages resulted in loss of use of the affected areas and this qualifies as “physical injury to tangible property…” and were covered by “property damage” under the terms of the policy.
The next issue for the court to determine was whether the property damage resulted from an “occurrence” which is defined in the policy as an “accident.” Since there is not a definition of the word “accident” in the policy, the court looked to the Merriam-Webster dictionary definition of “accident” as “an unforeseen and unplanned event or circumstance.” The court also looked to a leading treatise on New Jersey insurance law that tracks substantially the same language as the dictionary definition. Based on those guidance principles, the court found that the term “accident” in the policies “encompasses unintended and unexpected harm caused by negligent conduct.”
The insurers here asserted that damage to an insured’s work caused by a subcontractor’s faulty workmanship is foreseeable to the insured developer because damage to any portion of the completed project is normal, predictable risk of doing business. “Thus, in the insurers’ view, a developer’s failure to ensure that a subcontractor’s work is sound results in a breach of contract, not a covered ‘accident’ (or ‘occurrence’) under the terms of the policies. We disagree.”
For its final point, the court having determined that the claims were covered under the policies’ general insuring agreement, the court analyzed whether the “your work” exclusion might nevertheless bar coverage. This exclusion precludes coverage for “property damage to your work arising out of it or any part of it.” But an important exception to that exclusion states that the exclusion does not apply “if the damaged work, or the work out of which the damage arises, was performed on your behalf by a subcontractor.” Because the work in this case was performed by a subcontractor, the exclusion became inapplicable. In conclusion, the court held that there was coverage under the policy for the damages alleged by the condo.
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 19, No. 4 (April 2017).
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