Stephen S. Asay | Pillsbury Winthrop Shaw Pittman LLP | September 6, 2016<\/p>\n
Since 1979, commercial general liability (CGL) insurers have relied on the New Jersey Supreme Court case of Weedo v. Stone-E-Brick, Inc.<\/em> and its progeny to argue that a subcontractor\u2019s defective work can never qualify as an \u201coccurrence\u201d under a standard form ISO CGL policy. This argument is contrary to both the language of standard CGL policies and the trend in recent case law, but courts in New Jersey and elsewhere have continued to cite Weedo<\/em> for this proposition. With its new decision in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC<\/em>, the New Jersey Supreme Court has now finally relegated Weedo<\/em> to its proper status as an historical footnote based on outdated policy language.<\/p>\n Cypress Point <\/em>involved claims for rain water damage to a condo building. When the condo association began noticing the damage, it brought claims against the developer\/general contractor and several subcontractors. The association alleged that the subcontractors\u2019 defective work on the exterior of the building allowed water leaks that damaged steel supports, sheathing and sheetrock, and insulation. When the developer\u2019s CGL insurers refused to cover the claims, the association sued the insurers, seeking a declaration that the association\u2019s claims against the developer were covered.<\/p>\n Relying on Weedo<\/em>, the insurers argued that they were not liable because the defective work was not an \u201coccurrence\u201d that caused \u201cproperty damage\u201d as defined by the policies. The New Jersey Supreme Court was thus tasked with determining whether rain water damage caused by a subcontractor\u2019s defective work constitutes \u201cproperty damage\u201d and an \u201coccurrence\u201d under a standard form ISO CGL policy. Properly applying the policy language, the court held that a subcontractor\u2019s defective work that causes damage is an \u201coccurrence\u201d under the plain language of the policy.<\/p>\n Discussing the evolution of the standard form ISO CGL policy, the court recognized important distinctions between the 1973 and 1986 versions. (Variants of the 1986 version are still in widespread use today.) First, the 1973 definition of \u201coccurrence\u201d incorporated a requirement of resulting property damage; that requirement was removed from the 1986 definition. Second, and more importantly, the 1973 policy did not include the \u201csubcontractor exception\u201d to the \u201cyour work\u201d exclusion. This exception, which was included in the 1986 policy, represented an agreement between policyholders and insurers \u201cthat the CGL policy should provide coverage for defective construction claims so long as the allegedly defective work had been performed by a subcontractor rather than the policyholder itself.\u201d Because Weedo<\/em> involved the 1973 CGL policy, the New Jersey Supreme Court rejected the insurers\u2019 contention that Weedo<\/em> has any bearing on coverage under the 1986 CGL policy.<\/p>\n Turning to the language of the 1986 insuring agreement, the court first determined that the damage caused by the rain water leaks clearly met the definition of covered \u201cproperty damage.\u201d The court then addressed the definition of an \u201coccurrence\u201d\u2014i.e., \u201caccident\u201d\u2014under the policy. Applying common definitions, the court found that an \u201caccident\u201d includes \u201cunintended and unexpected harm caused by negligent conduct.\u201d Because the result of the subcontractors\u2019 defective work\u2014water damage to non-defective portions of the building\u2014was an \u201caccident,\u201d it was a covered \u201coccurrence\u201d under the policy.<\/p>\n After determining that the insuring agreement provided coverage, the court turned to policy exclusions raised by the carriers. (This is an important analytical step skipped by many courts, which sometimes overlook the incredibly broad coverage provided by the insuring agreement.) While the \u201cyour work\u201d exclusion applied, the damage claimed by the association arose out of subcontractors\u2019 defective work. Therefore, the \u201csubcontractor exception\u201d to the \u201cyour work\u201d exclusion restored coverage for the association\u2019s claims.<\/p>\n