NEW JERSEY INTERMEDIATE APPEALS COURT HOLD DEFECTIVE CONSTRUCTION IS AN “OCCURRENCE” AND “PROPERTY DAMAGE”
In Cypress Point Condominium Ass’n v. Adria Towers, L.L.C., et al. ---A. 3d ---, 2015 WL 4111890 (N.J. App. Div. July 9, 2005), the court held that defective construction which resulted in unintended and unexpected consequential damages caused by the work of subcontractors constituted both property and an occurrence under a post 1986 CGL Form. In so holding, the court recognized that the New Jersey court system had historically held such risks were “business risks” and not covered. More specifically, the Cypress Point Court distinguished two decisions: Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) and Firemen's Ins. Co. of Newark v. Natl. Union Fire Ins. Co., 904 A.2d 754 (N.J. Super. App. Div. 2006). In distinguishing Weedo and Firemen’s Ins. Co., the Cypress Point court noted that both of those opinions, and many others in New Jersey involved interpretation of the 1973 ISO Form.
In evaluating the prior decision of the New Jersey Supreme Court Weedo, the court made two specific notations. First, the court noted that under the 1973 Form, the work of subcontractors was equated to the work of the general contractor for the purpose of determining whether there was property damage and coverage. However, the court noted the changes to the subject policy in 1986, by including the subcontractor exception, “treated consequential damages from faulty workmanship of subcontractors differently than damages cause by the work of general contractors.” The court also specifically noted that the Weedo court had not resolved whether consequential damages resulting from subcontractors’ faulty work constituted either “property damage” or “occurrence.” Rather, the Weedo court focused only on issues related to the exclusions in the policy. The court specifically noted, that the insurer had conceded that “but for the exclusions in the policy, coverage would obtain.” Second, the Cypress Point Court rejected insurers’ argument that the insured’s requested at holding in the case would transform the policy into a performance bond, noting, “A performance bond guarantees the completion of a construction contractor if a contractor defaults and unlike an insurance policy, it benefits the project owner rather than the contractor. Assuredly, unlike a liability insurer, it is also entitled to indemnification from the contractor.”
The court went on to note the intentional changes made by the Insurance Services Organization culminating in the 1986 ISO Form and the addition of the so-called subcontractor exception. The court noted that in recent years the majority rule had become that consequential damages caused by construction defects were covered citing Christopher C. French, Construction Defects: Are They “Occurrences”?, 47 Gonz. L. Rev. 1, 8–9 (2011). Further the Court cited to the Florida Supreme Court decision in U.S. Fire Ins. Co. v. J.S.U.B., Inc., which decision explicitly referenced circulars issued by the ISO setting forth the intended scope of coverage. See J.S.U.B., 9379 So. 2d 871, 879 (Fla. 2007) (quoting ISO Circular, Commercial General Liability Program Instructions Pamphlet, No. GL–86–204 (July 15, 1986). Finally, the court distinguished prior decisions purporting to interrupt New Jersey law as holding that defect construction was not an occurrence cited Pennsylvania Nat’l Mut.Cas. Ins. Co. v. Parkshore Dev.Corp., 403 Fed. Appx. 770 (3d Cir. 2010).
The decision in Cypress Point is particularly important because of where it was decided. The New Jersey Supreme Court’s decision in Weedo, was the seminal cases deciding that defective construction claims were not covered. While these decisions were eminently correct under the 1973 ISO CGL Form, the broad business risk concepts recognized in Weedo were dependent on the then existing policy language. The Weedo court also cited influential articles by G.H. Tinker, Comprehensive General Liability Insurance Prospective and Overview, 23 Fed’n Ins. Coun. Q. 217, 218-21 (1975), and Dean Henderson, Insurance Protection for Products Liability and Completed Operations What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 418 (1971). The Combination of the Weedo decision and these articles “informed” and impacted the interpretation of CGL policies for many years beyond their intended scope. The Weedo decision and these articles all correctly informed how the 1973 ISO CGL Policy Form was intended to be interpreted. However, when the policy changed, first by broad form property damage endorsements in the late 1970s, and later by incorporation of the broad form property damage concepts into the main line 1986 ISO CGL Form, the court systems across the country were somewhat slow to recognize the intended changes to the CGL. That New Jersey has finally done so, shows that the “occurrence” revolution is almost complete. As of the dictation of this posting, virtually all jurisdictions have considered the questions recognize, either by court decision, or statutory change, the defective construction can constitute an occurrence.