Back in the days of the environmental insurance coverage wars, we on the policyholder side argued (eventually successfully in New Jersey) that the word “sudden”, as used in the 1973 version of the pollution exclusion, meant “unexpected” and did not have a temporal connotation. My friends in the defense bar often criticized us for trying to twist the clear meaning of words. The current battle over construction defect coverage has perhaps made me better understand their professed annoyance, because, for example, carriers have been arguing that the “subcontractor exception” to the “your work” exclusion isn’t actually an exception for damage caused by the work of subcontractors, and that damage to property isn’t really “property damage.”
Last week, in Cypress Point Condominium Ass’n v. Adria Towers, LLC, the New Jersey Appellate Division torched the carriers’ arguments as to the essential nonexistence of liability insurance coverage for construction defects, at least for now. Cypress is a garden-variety construction defect case, involving a general contractor whose subcontractors performed defective work on parts of a condominium complex, such as the roof. The defective work resulted in consequential damage to other areas of the building. The carriers naturally denied coverage for subsequent third-party liabilities under the general contractor’s policies, on the ground that the damage was simply a “business risk” (a term not used in the policies themselves), and did not constitute the required “property damage caused by an occurrence.”
The Court quickly disposed of the carriers’ arguments as to the lack of “property damage” and an “occurrence,” writing: “As to whether there exists ‘property damage,’ the consequential damages clearly constitute ‘physical injury to tangible property.’ The faulty workmanship damaged ‘the common areas and unit owners’ property.’ The interior structures, including the drywall, insulation, wall finishes, and wood flooring, were damaged by water infiltration from the faulty workmanship. As a result, the consequential damages constitute ‘property damage’ as defined under the policy.… The insurers do not contend, and we cannot reasonably believe, that the contractors either expected or intended for their faulty workmanship to cause ‘physical injury to tangible property.’ Thus, the consequential damages constitute an ‘occurrence’ as defined in the policy.”
The Court also discussed the “your work” exclusion, which, as the name indicates, precludes coverage for damage to “your work.” The 1986 ISO form of that exclusion contains an exception reading: “This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” Some Courts simply read that exclusion out of the policy. But the Appellate Division ruled that the exception must be given effect, writing: “As a practical matter, it is very difficult for a general contractor to control the quality of a subcontractor’s work. If the parties to the insurance contract did not intend a subcontractor’s faulty workmanship causing consequential damages to constitute ‘property damage’ and an ‘occurrence’…then it begs the question as to why there is a subcontractor’s exception.” The Court noted: “The exception treats consequential damages caused from faulty workmanship by subcontractors differently than damage caused by the work of general contractors.”
Obviously, this is a great ruling for policyholders. It remains to be seen whether the New Jersey Supreme Court will take it up.
You can read the full Appellate Division decision here.