Rain Water Damage Caused by Subcontractor’s Faulty Workmanship Found to be Covered Claim under Developer’s CGL Policy

A year ago, I reported on a published Appellate Division case, Cypress Point Condominium Assoc., Inc. v. Adria Towers, L.L.C., 441 N.J. Super. 369 (App. Div. 2015), in which the court decided that the consequential damages caused by a subcontractor’s work in the construction of a condominium complex was potentially covered by the developer’s insurance policy. Cypress Point was appealed to the New Jersey Supreme Court, Cypress Point Condominium Assoc., Inc. v. Adria Towers, L.L.C., 2016 N.J. LEXIS 847 (Aug. 4, 2016), which affirmed the Appellate Division’s decision, finding that there was coverage for the damages caused by the subcontractor’s faulty workmanship.

After the construction of the condominium complex, several condominium owners began experiencing roof leaks and water infiltration into their units. The common areas also suffered damage caused by water intrusion into the common areas and interior structures. The condominium association brought suit against the developer and several subcontractors, alleging faulty workmanship during construction. The issue in this case was whether the developer’s insurers owed coverage for such damages.

Initially, the trial court had ruled in favor of the insurers, finding no coverage. But, as I reported a year ago, the Appellate Division reversed, finding that the CGL policies did potentially cover these damages. The insurers filed a petition for certification to the New Jersey Supreme Court to try to overturn this ruling, which petition was granted. However, ultimately, the Supreme Court agreed with the Appellate Division and affirmed its decision, finding that coverage did exist.

The condominium association claimed that after the project was completed, the water infiltration caused mold growth and other damage to the common areas and the individual units. As a result, there was a loss of use of those areas. The Supreme Court held that these damages qualified as “property damage” under the policy.

Next, the Court looked at whether an “occurrence,” as defined by the policy took place. An occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The Court found that an “accident” encompassed unintended and unexpected harm caused by negligent conduct. No one claimed that the subcontractors intentionally performed substandard work that led to the water damage. Thus, the Court held that the consequential harm caused by their negligent work was an “accident.”

After finding that these claims were covered by the policies, the Court turned to whether any exclusions applied and, if applicable, any exceptions to the exclusions. The policies contained numerous exclusions for the cost to repair the contractor’s own work, the “your work” exclusion. However, the policies also contained an exception to the exclusion (the subcontractor exception) in that this exclusion did not apply “if the damaged work or the work out of which the damage arises was performed by a subcontractor.” Because the water damage was alleged to have arisen from the faulty workmanship of subcontractors, the exception to this exclusion applied. Hence, the Supreme Court found that the water damage was a covered loss.

Accordingly, the Court held that the trial court incorrectly granted summary judgment in favor of the insurers because the association’s claims of consequential water damage resulting from the defective subcontractor workmanship constituted both an “occurrence” and “property damage” under the terms of the policies.

Tags: CGL Policy, coverage, Occurence, Property damage