Are you the parent of a teenager? Have you ever been the parent of a teenager? If the answer to either of those two questions is yes, have you ever felt like you’re banging your head against the wall? You think you’re speaking plain English, but they’re just not getting it.
That’s the way I sometimes feel about Court. As I’ve written on this blog before, I understand and empathize with the difficult job that judges have. I’ve spent 30 years practicing insurance law, and I still don’t understand it fully. Yet we routinely appoint judges to the bench, pay them what first-year associates are making at major law firms, and expect them to master every area of the law from Admiralty to Zoning, often with no seasoned law clerk to help them navigate the process. Not a great situation, especially given the tremendous workload we dump on them.
The nationwide struggle between insurance companies and policyholders over whether lawsuits for construction defects should be covered under commercial general liability policies reminds me of raising a teenager, if you’re on the policyholder side. You think you’re speaking English, but sometimes you feel like it’s just not getting through to overworked judges or carriers.
While commercial insurance policies are (in my view) often unnecessarily complicated, reading them should essentially involve a simple three-step process.
First, what does the insuring agreement say? (In other words, what does the policy cover, as a general matter?)
Second, what’s excluded from coverage?
Third and finally, what do the exceptions to the exclusions restore to coverage?
In the construction defect field, some insurance claims people and judges ignore the three necessary steps. For example, without specifically citing the language of the insuring agreement, they contend that “faulty workmanship” can never be a covered “occurrence’” because it’s a “business risk” (whatever that means).
But an “occurrence” is basically defined by insurance policies as an “accident.” “Faulty workmanship” is, by definition, negligence, and negligently-caused damage (which is an accident) is covered by liability policies.
As for construction defects constituting a “business risk,” that language doesn’t appear in the policies either, and almost everything involved with the conduct of a business (or everyday life) involves a quantifiable risk. Every time you getting your car to drive to the supermarket, there’s a risk that you’ll become involved in an accident – a risk that can be actuarially determined. (What if you got into an accident and your insurance company refused to cover it, because the accident was the result of a “personal risk”? The coverage would be worthless.)
I recently had the chance to apply the proper three-step analysis in a construction defect case that we argued before the New Jersey Appellate Division (thankfully they agreed!). And now, in great news for general contractors, builders and developers, the New Jersey Supreme Court has adopted the three-step analysis in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C. (You can obtain a complete copy of the Cypress Point decision by clicking here.)
Cypress Point involved a condominium project in which the subcontractors apparently botched some of the work, causing problems such as roof leaks and water infiltration at the interior window jambs and sills of residential units. The Condominium Association brought an action against the developer and several subcontractors. The question was whether the developer was covered for liability associated with damage caused by the subcontractors’ work.
With respect to the insuring agreement (step one), the Court stated: “Under our interpretation of the term ‘occurrence’ in the policies, consequential harm caused by negligent work is an ‘accident.’ Therefore, because the result of the subcontractor’s faulty workmanship here – consequential water damage to the completed and nondefective portions of Cypress Point – was an ‘accident,’ it is an ‘occurrence’ under the policies and is therefore covered so long as the other parameters set by the policies are met.”
The Court then turned to the topic of the “your work” exclusion (step two), which generally excludes coverage for damage to a contractor’s work. The Court noted that the version of that exclusion used in a particular policy was critical, because the 1986 version of the exclusion (in common use today) contains an exception to the exclusion for work done by subcontractors (step three). The Court noted that the typical subcontractor exception resulted from the demands of the policy-buying public, which wanted this sort of coverage, and the view of insurance companies that their products would be easier to sell with the subcontractor coverage included.
Accordingly, the Supreme Court wrote: “The insurers here chose not to negotiate away the subcontractor exception and instead issued the developer a series of 1986 ISO standard form CGL policies which explicitly provide coverage for property damage caused by a subcontractor’s defective performance.” Case closed.
I expect that the battle will now turn to the question of what constitutes covered “consequential damage.” Nevertheless, despite the comments of some of my colleagues in the defense bar that Cypress Point isn’t a watershed victory for policyholders in the construction and building field…it is.