The New Jersey Supreme Court’s August 4, 2016 decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC opened the door for general contractors to obtain insurance coverage under their commercial general liability (CGL) policies for property damage caused by their subcontractor’s defective work.
In Cypress, a condominium association sued the general contractor and several of its subcontractors, alleging that water infiltration in roofs, windows, and common areas damaged the structural steel, sheathing, drywall, insulation and floors of the newly-constructed building . The association claimed that the damages were caused by the subcontractors’ faulty construction . When the general contractor’s CGL insurance companies denied coverage, the association joined the insurance companies into the lawsuit.
The insurance companies moved to dismiss the association’s claims, taking the position that the subcontractors’ faulty workmanship was not an “occurrence” that caused “property damage” under the terms of the CGL policy . Specifically, the insurance companies argued that CGL policies are only intended to provide coverage for damage to property other than the project itself . They further asserted that subcontractors’ defective workmanship was not an “accident” that gives rise to an “occurrence” under an insurance policy; rather, the subcontractors’ defective workmanship is a normal consequence of the construction business.
The association, on the other hand, argued that although New Jersey courts have long held that defective construction is not covered under an insurance policy, damages that are a consequence of the defective construction are covered. It also pointed to the “your work” exclusion contained in the 1986 version of the CGL coverage form . While property damage to a general contractor’s own work is excluded under its CGL policy, an exception to the “your work” exclusion provides coverage for property damage to the project caused by its subcontractor’s defective work.
The New Jersey Supreme Court agreed with the association . The Court found that the water infiltration and resulting property damage was an “occurrence” under the CGL policies and was caused by an “accident” because there was no evidence that the subcontractors intended to cause any of the damage . The most important consideration for the Court was the subcontractor exception to the “your work” exclusion contained in the CGL policies and the fact that the damage resulted from the subcontractors’ work .
The practical implications of the Cypress Point case are extremely significant for general contractors who have CGL policies issued in New Jersey. If your CGL policy contains an exception to the “your work” provision for your subcontractors, your insurance company may be required to defend you in a lawsuit and pay for the damages resulting from your subcontractors’ defective work . It is important to note that the insurance company will not be required to pay to repair your subcontractors’ defective work, but they may be required to pay for damages that are a consequence of that defective work.
To determine whether or not your CGL policy contains a subcontractor exception to the “your work” exclusion or provides coverage in any particular instance, you should always consult with your attorney and insurance broker.
