It has been several months since the New Jersey Supreme Court decided Cypress Point Condo Ass’n v. Adria Towers, LLC.
The issue in Cypress Point was whether rain water damage caused by a subcontractor’s faulty workmanship constituted “property damage” caused by an “occurrence” to trigger coverage under a condominium developer’s commercial general liability (CGL) insurance policy. Cypress Point, a condominium association, filed claims against Adria Towers, the developer, and its insurers, as well as various subcontractors. Adria Towers was also the general contractor on the condominium project and hired the subcontractors who performed the construction work. The Association alleged faulty workmanship during construction and claimed consequential damages.
After the condominium complex was completed, residents began experiencing roof leaks and water leakage around windows in units and common areas. The consequential damages to the common areas of the condominium complex and the unit owners’ property were caused by rain water leaking into the interior of the property due to the subcontractors’ faulty workmanship. Evaluating the 1986 ISP standard form CGL policy, the Court held that the consequential damages caused by the subcontractors’ faulty workmanship constituted “property damage” and the water leaking into the interior of the property due to the subcontractors’ faulty workmanship, was an “occurrence” triggering coverage under the CGL policies at issue.
Cypress Point marks the first time the New Jersey Supreme Court addressed the question of coverage for consequential damages caused by faulty workmanship under the 1986 ISO standard form CGL policy. The 1986 policy at issue defines an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The Court concluded that the consequential damages were covered “property damage” under the policies. As to whether the subcontractors’ faulty workmanship and resulting damages constituted an “occurrence” triggering coverage, the Court interpreted the term “accident,” which was not defined in the policies. Based on its plain meaning and case law related to homeowner’s policies, the Court found that “accident” encompasses “unintended and unexpected harm caused by negligent work.” Because the subcontractors’ faulty workmanship resulting in consequential water damage to the portions of Cypress Point was an “accident,” it was an “occurrence” under the policies.
A case recently decided by the United States Court of Appeals for the Third Circuit further clarifies, if not expands, the scope of the New Jersey Supreme Court’s analysis of “occurrence” and its holding in Cypress Point, requiring coverage under a CGL policy for subcontractors’ faulty workmanship.
In Travelers Prop. Cas. Co. of Am. v. USA Container Co., the Third Circuit, applying New Jersey law, considered the scope of coverage afforded under a general liability policy for property damage resulting from faulty subcontractor workmanship in a different context. Travelers’ insured, USA Container, was hired by Meelunie B.V./Amsterdam, a corn syrup distributor, to arrange for the transfer of corn syrup from rail cars to drums, prior to shipment. USA Container subcontracted out the heating of the syrup and the subcontractor accidentally damaged the product by overheating it. Travelers denied coverage for the claim, arguing in part that the damage to the corn syrup was not the result of an “occurrence.”
Travelers relied on the New Jersey Supreme Court’s 1979 decision Weedo v. Stone-E-Brick, Inc., holding that an insured’s defective work does not qualify as an occurrence under a general liability policy. The Third Circuit pointed to the New Jersey Supreme Court’s decision in Cypress Point to conclude that faulty workmanship causing damage to otherwise non-defective work can constitute an “occurrence” under a general liability policy. The Third Circuit rejected Travelers’ position that while Cypress Point may provide coverage for consequential damages resulting from a subcontractor’s negligent work, the decision does not mean the work itself is covered. Rejecting Travelers’ argument that the damage to the corn syrup caused by USA Container’s subcontractor was not an “occurrence,” the Third Circuit held that under Cypress Point’s definition of an “accident” triggering an “occurrence” under the policy – the damage was an “unintended and unexpected harm caused by negligent conduct.” The CGL policy thus covered the damages.
The Third Circuit’s affirmance of the Cypress Point holding should help to dispel any lingering uncertainty about the case’s application and scope, as occurred in the years following Weedo.
The issue arises as to if, how, and when a Condominium Association should react to Cypress Point and its holding as to developers’ and subcontractors’ insurance coverage – before or after damages are reported by unit owners and possible construction defects are suspected.