Caroline W. Spangenberg and Edmund M. Kneisel | Kilpatrick Townsend | July 23, 2015
Perhaps no case has generated as many citations and commentary (more than 1,880 citations, including 440 cases) on the subject of liability coverage for “construction defects” as Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979). For more than 35 years, courts in many jurisdictions have relied on Weedo in ruling that improper, non-conforming, defective construction (faulty workmanship by contractors) is a normal, construction-related “business risk” that is not covered by a contractor’s general liability policy. However, courts slowly began to recognize that Weedo and its progeny construed policy language that was replaced in 1986 by a new policy form providing products completed operations hazard (“PCOH”) coverage for damage caused by a negligent subcontractor. Now, two new decisions in New Jersey have limited Weedo to its facts (and the form of policy at issue then) by recognizing that defective construction is an insured “occurrence” that can be covered by a general liability policy. These cases signal the “death knell” for Weedo.
In two, straight-forward, clear decisions, the Appellate Division of the Superior Court of New Jersey issued rulings that appropriately limited the outcome in Weedo. The New Jersey cases are Cypress Point Condo. Ass’n, Inc. v. Adira Towers, L.L.C., Docket No. A-2767-13T1, 2015 WL 4111890, (N.J. App. Div. July 9, 2015) and Belmont Condo. Ass’n, Inc. v. Arrowpoint Capital Corp., Docket No. A-4187-12T4, 2015 WL 4416582 (N.J. App. Div. July 21, 2015). Both appellate courts recognized that the standard form of CGL policy in effect when Weedo was decided (ISO’s 1973 policy form) contains a broad exclusion for the defective construction “work” of both general contractors and subcontractors, which the New Jersey Supreme Court characterized as an uninsured “business risk.” Unlike the 1973 ISO form, the 1986 policy form contains a “subcontractor” exception to the “your work” exclusion that extends coverage when the insured is sued for property damage caused by a negligent subcontractor.
While these are the first two New Jersey appellate decisions holding that defective construction can be a covered “occurrence,” these certainly are not the first cases to recognize that Weedo, when properly considered in light of the 1973 policy form at issue in that case, does not stand for the proposition that faulty workmanship, a/k/a “defective work,” can never be a covered “occurrence.” Nevertheless, as noted by a Texas court in construing the PCOH coverage of the 1986 policy form, many courts have “continually misapplied Weedo to hold that defective construction cannot constitute an occurrence resulting in some ‘regrettably overbroad’ generalizations about CGL policies.” Lennar Corp. v. Great Am. Ins. Co., 200 S.W. 3d 651, 671 (Tex. App. 2006) (citing and quoting in part Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65, 74 (2004)). For instance, in a leading PCOH decision, the Florida Supreme Court concluded that the outcome in Weedo was “not due to the insuring provisions [of the policy], but because faulty workmanship by a contractor was specifically excluded based on the clear and unambiguous ‘business risk’ exclusionary clauses” contained in the 1973 policy form.United States Fire Ins. Co., v. J.S.U.B., Inc., 979 So.2d 871, 881-82 (2007). Indeed, the Weedocourt itself specifically noted that the coverage limitations it applied “are set forth in the exclusion clauses of the policy, whose function it is to restrict and shape the coverage otherwise afforded.” 405 A.2d at 790 (emphasis added). As recognized in J.S.U.B. and by Cypress Pointand Belmont, if those coverage exclusions do not apply, Weedo does not answer the question of whether or not defective construction, i.e., faulty, negligent workmanship, can be a covered “occurrence.”
As noted simply in Cypress Point, “[i]n Weedo, the Court did not resolve whether consequential damages resulting from subcontractors’ faulty workmanship constituted ‘property damage’ or an ‘occurrence.’” 2015 WL 4111890, at *4. Most importantly, unlike the 1973 policy form construed in Weedo, the “plain language” of the 1986 policy form at issue in Cypress Point contained a critical difference in the exclusionary language for damage to “your work.” Unlike the policy form at issue in Weedo, the policy construed in Cypress Point contains an “exception” that eliminates the “your work” exclusion “‘if the damaged work or the work out of which the damage arises was performed on your [the insured’s] behalf by a subcontractor.’” Id. at 6 (quoting policy form) (emphasis in original). The court ruled that the “addition of the subcontractor’s exception is of critical importance when determining whether the subcontractors’ faulty workmanship causing consequential damages amounts to ‘property damage’ and an ‘occurrence’ under the policy.”Id. at 6. Citing J.S.U.B., among other authorities, the Cypress Point court noted that the proposition that “construction defects” can be insured “occurrences” was now the “majority rule” in cases construing the 1986 policy form when post-completion property damage is caused by a negligent subcontractor. Id. at 7. Citing the commonly-used definition of an “accidental occurrence” as an event neither expected nor intended by the wrongdoer, the court noted that the “insurers do not contend, and we cannot reasonably believe, that the subcontractors either expected or intended for their faulty workmanship to cause ‘physical injury to tangible property.’” Id. at 4.