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Legal Update - Supreme Court Opinion in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC. by Stefano Calogero
Windels Marx - Insurance Litigation Legal Update
AUGUST 25, 2016

In Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, et al, issued on August 4, 2016, the New Jersey Supreme Court unanimously upheld the New Jersey Appellate Division's decision, which found coverage under a property developer's commercial general liability policy for property damage to the interior structure, residential units and common areas of a condominium complex, which was allegedly the result of defective work performed by the developer's subcontractors. In finding coverage, the Supreme Court reviewed policy language from the 1986 ISO CGL form policy, which contains a subcontractor exception to the "your work" exclusion. The subcontractor exception previously had not been included in the 1973 ISO form, which had been the subject of earlier New Jersey decisions and held to exclude coverage for damages caused by defective work under the seminal case of Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979).

In Cypress Point, after completion of the condo complex and transfer of control to the Association, several condominium owners began experiencing roof leaks and water infiltration at the interior window jambs and sills of the residential units. Water intrusion also was found in the common areas and interior structures. The Association filed suit against the developer and several subcontractors, alleging faulty workmanship which included improperly installed roofs, gutters, and brick facades. The developer had a number of CGL policies with Evanston Insurance and Crum & Forster. The policies, using the 1986 ISO language, define "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." The policy also contained a "your work" exclusion. This exclusion eliminated coverage for property damage to "your work" "arising out of it or any part of it...." However, the policy's subcontractor exception to this exclusion had not been in the previous 1973 ISO form. The exception provided that the 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." The Court quoted from a law review article that stated that the subcontractor exclusion was motivated by an understanding between policyholders and insurers that 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. Cypress Point, slip opinion at p. 18.

In analyzing the policy language from the 1986 policy form, the Court found that the consequential damage caused by negligent work was the result of an occurrence. The Court quoted from a Supreme Court of Florida decision in U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007), which held that a subcontractor's defective work which is neither expected nor intended from the standpoint of the insured can constitute property damage caused by an occurrence.

The Court then reviewed the "your work" exclusion and held that but for the exception, the exclusion would have precluded coverage in this case. However, since the exception allowed for coverage if the faulty work was by a subcontractor, coverage was provided. The Court noted that it is not correct that a developer's failure to ensure that a subcontractor's work is sound can never result in an accident or occurrence. In Cypress Point, the insurers had argued that such a failure by the developer may be a breach of contract, but it is not covered in a CGL policy. The Court noted that under such a position, there would never be a need for a subcontractor exception. If that was the insurers' intent, then they should have eliminated the exception for a subcontractor's work.

The result in Cypress Point is that consequential damages arising out of a defective work product by a subcontractor is an occurrence and falls within the exception to the "your work" exclusion. If the insurance industry does not want to cover these types of claims, then the "your work" exclusion should eliminate the exception for the subcontractor work.


CONTACT

Please do not hesitate to contact Stefano V. Calogero at (973) 966-3205, or scalogero@windelsmarx.com, with any questions or comments.

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