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(Article from Insurance Law Alert, July/August 2016)

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The New Jersey Supreme Court ruled that consequential damage caused by subcontractors’ negligent workmanship is property damage and an occurrence for purposes of general liability coverage.  Cypress Point Condo. Assoc., Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. Aug. 4, 2016).

The coverage dispute arose after condominium residents sued a developer and several subcontractors.  The underlying complaints alleged that interior portions of the building were damaged due to leaks and water infiltration.  The developer’s general liability insurers refused to defend or indemnify on the basis that the subcontractors’ faulty workmanship was not an “occurrence” or “property damage” under the policies.  A New Jersey trial court agreed, and granted the insurers’ summary judgment motion.  An appellate court reversed, ruling that unintended and unexpected consequential damages caused by defective work is property damage caused by an occurrence.  The New Jersey Supreme Court affirmed.

The New Jersey Supreme Court reasoned that allegations of mold growth and other damage to parts of the building alleged “physical injury to tangible property.”  The court further held that the underlying claims alleged an “occurrence” (defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”) because the subcontractors’ negligent conduct resulted in unintended and unexpected harm.  In so ruling, the court rejected the insurers’ argument that a developer’s failure to ensure the soundness of subcontractors’ work arises from a breach of contract rather than a covered accident.  The court distinguished New Jersey precedent that holds that faulty workmanship claims are not covered under general liability policies, noting that those cases involved different policy language from an earlier version of the standard general liability policy or allegations relating only to replacement costs rather than consequential damages.

Finally, the court ruled that the “Your Work” exclusion eliminated coverage for the alleged water damage, but that coverage was restored by an exception to the exclusion that provides that it does not apply where damage arises out of work performed by a subcontractor.