New Jersey Appellate Court Holds That Coverage Exists for Consequential Damages Caused By Subcontractors’ Defective Work

Denise N. Yasinow, Loly G. Tor and Christopher A. Barbarisi | K & L Gates | November 23, 2015

This past summer, the Superior Court of New Jersey, Appellate Division issued a favorable decision for owners, real estate developers, and general contractors regarding insurance coverage for damages caused by the faulty work of their subcontractors.  In Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, the Court held that unexpected and unintended consequential damages caused by a subcontractor’s defective work constitutes “property damage” caused by an “occurrence” under a commercial general liability (“CGL”) insurance policy.  Thus, these types of consequential damages are recoverable.

The Cypress Point decision roundly rejected the Third Circuit’s opinion in Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., which concluded that faulty workmanship performed by a contractor or a subcontractor that causes damage to the general contractor’s work is not an “occurrence.”

In Cypress Point, the plaintiff, a condominium association, brought an action against the association’s developer, the developer’s two insurers, and various subcontractors.  The developer served as the general contractor on the condominium project and hired the subcontractors to perform all construction work.  The plaintiff sought coverage from the insurers under the developer’s CGL policies for consequential damages caused by the subcontractors’ defective work.  According to the plaintiff, the subcontractors improperly installed the roof, flashing, gutters and leaders, brick and EIFS facade, windows, doors, and sealants.  The faulty workmanship caused consequential damages to the common areas of the condominium complex and to the unit owners’ property.

The trial court granted summary judgment to one insurer and dismissed the complaint against the other insurer as moot, determining that there was no “property damage” or “occurrence” as required by the policy to trigger coverage.

On appeal, the plaintiff raised two main arguments.  First, the plaintiff argued that under a plain reading of the policy language, consequential damages constitute “property damage” and an “occurrence.”  Second, the plaintiff argued that the trial judge erroneously placed substantial reliance on the holdings in Weedo v. Stone–E–Brick, Inc., 81 N.J. 233 (1979) and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006) to determine whether there existed “property damage” and an “occurrence.”

On the first argument, the Cypress Point Court found that consequential damages constitute “property damage” and an “occurrence” as defined in the policy.  On the second argument, the Court concluded that the trial judge erroneously applied the holdings in Weedo and Firemen’s and readily distinguished the cases on two grounds.  First, the Court concluded that Weedo and Firemen’sinvolved only replacement costs of correcting the defective work itself (cost of replacing stucco inWeedo and replacing firewalls in Firemen’s) rather than the costs of curing consequential damages caused by defective work.  Second,…

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