New Jersey Rules in Favor of CGL Coverage for Faulty Subcontractor Work

New Jersey has joined several other U.S. states in deciding that if a subcontractor’s defective work damages parts of a general contractor’s project, the damages are covered under the general contractor’s standard commercial general liability (CGL) policy.

The New Jersey Supreme Court in August affirmed an intermediate court’s ruling last year in Cypress Point Condominium Association Inc. v. Adria Towers LLC. The suit arose following the construction of Cypress Point, a luxury condominium complex in Hoboken, N.J.

Adria Towers LLC, Metro Homes LLC and Commerce Construction Management LLC served collectively as the project’s developer and general contractor, while subcontractors carried out most of the work on the project. After construction was complete, the developer was sued by the Cypress Point Condominium Association because several residents reported issues such as water leaks in units and common areas.

According to the association, defective work by subcontractors caused damage to steel supports; exterior and interior sheathing and sheetrock; insulation and other interior areas of the building. As a result, some unit owners reported damage to the interior of their units, including wall sheathing, wall cavity insulation, insulation sheetrock, wall finishes, wood flooring and trim.

The developer sought coverage for the damages under four CGL policies from Evanston Insurance Co. and three from Crum & Forster Specialty Insurance Co. obtained during construction. The insurers denied this claim, stating that the defects could not be covered under the CGL policies because damages stemming from a general contractor’s own work are excluded from the policies.

The developer argued that because damages were caused by the work of subcontractors who did not properly install the roof, gutters, windows, doors and other parts of the complex, the coverage exclusion shouldn’t apply.

This issue previously came to light in a 1979 lawsuit, Weedo v. Stone-E-Brick Inc., under which the court found that the replacement or repair of faulty workmanship is a business expense that should be taken on by the insured, and CGL policies do not cover the cost.

In its latest decision, however, the court found that the developer’s CGL policies were modeled after the 1986 version of the standard form CGL policy put in place by the Insurance Services Office Inc. (ISO). The policies differ from the 1973 standard form ISO CGL policies referenced in the Weedo case. This is because the policies state that the exclusion of coverage for defective work performed by the insured does not apply if the work is carried out by a subcontractor on the insured’s behalf.

The court also highlighted that if an insurer decides not to cover the work of subcontractors because it is too great a risk, it can amend its policy to exclude coverage by eliminating the subcontractor exception or adding a breach of contract exclusion.

“The consequential damages caused by the subcontractors’ faulty workmanship constitute ‘property damage,’ and the event resulting in that damage – water from rain flowing into the interior of the property due to the subcontractors’ faulty workmanship – is an ‘occurrence’ under the plain language of the CGL policies at issue here,” the court stated in a published opinion.