The Foundation to Deny Coverage May Have Cracks


By: Bart Gary and Brian Lake

In Cypress Point Condo. Ass’n, Inc. v. Adria Towers, L.L.C., 226 N.J. 403 (2016), decided August 4, 2016, the Supreme Court of New Jersey affirmed a Court of Appeals decision that a condominium developer general contractor’s Commercial General Liability (CGL) policies provide coverage for consequential damages stemming from its subcontractor’s allegedly defective work. The underlying dispute arose after several residents of a condominium complex began to experience roof leaks and water seepage in their units. The condominium association brought suit against the developer, who also served as the general contractor, alleging negligent construction by the developer’s subcontractors, and sought declarations that its claims were covered under the developer’s CGL policies. The trial court, relying on Weedo v. Stone-E-Brick, 81 N.J. 233 (1979), granted summary judgment to the insurers, finding that there was no “property damage” or “occurrence,” as defined by the policies to trigger coverage. The Supreme Court, however, held that the alleged consequential damage caused by the subcontractors’ defective work constitutes “property damage,” because it is “physical injury to tangible property,” as well as an “occurrence” because it is an unexpected or unintended “continuous or repeated exposure to substantially the same general harmful conditions.”

The Cypress Point decision signals a departure from long-standing New Jersey case law allowing insurers to disclaim coverage for consequential damages in negligent construction cases. In distinguishing the 1979 Weedo case, one of the leading decisions on the issue, the New Jersey Supreme Court noted that the policies at issue in Cypress Point were based on the 1986 ISO standard CGL form, while Weedo interpreted the earlier 1973 ISO standard form. The 1973 version defined “occurrence” as “an accident . . . which results in . . . property damage neither expected nor intended from the standpoint of the insured.” In contrast, the 1986 form defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Giving the undefined term “accident” its plain meaning, the New Jersey Supreme Court held that the an “occurrence” contemplates unintended and unexpected harms caused by negligent conduct, such as the consequential damages caused by the developer’s subcontractor’s allegedly defective work. Additionally, the 1986 form also includes a “subcontractor’s work” exception to the business risk exclusions. The New Jersey Supreme Court pointed out that the inclusion of the subcontractor exception signified the insurer’s intent to cover damages caused by the insured’s subcontractor’s negligent work. Otherwise, the exception would be meaningless.

With this decision, the New Jersey Supreme Court joins the recent trend of courts interpreting the terms of standard CGL policies, specifically those defining “occurrence” and “property damage” in accordance with the 1986 ISO standard form, to provide coverage for consequential damages resulting from a subcontractor’s negligent work. The Georgia Court of Appeals has fast adopted the majority view in Weedo to hold that a contractor’s general liability policy was not implicated where the damage was to the contractor’s work itself, as opposed to the consequential damages resulting from the poor workmanship. Gary L. Shaw Builders, Inc. v. State Automotive Mut. Ins. Company, 355 S.E.2d 220 (1987). For nearly thirty years the Georgia courts have slavishly followed this rule despite changes in the industry-wide policies during that time. With the court that decided Weedo modifying its ruling, Georgia Courts may be forced to look at the newer policy provisions as well and expand coverage for defective construction works.

As always, please contact the attorneys and Freeman, Mathis & Gary, LLP to address any further questions you may have regarding these issues.