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NJ Court: Insurance Pays for Subs’ Flubs
New Jersey’s highest court has ruled in case stemming from water infiltration and leaks that reportedly plagued a Hoboken condominium complex.
In its recent decision, the New Jersey Supreme Court affirmed that in that state, faulty work by a subcontractor can be covered by a general contractor’s commercial general liability (CGL) insurance.
The decision provides an updated precedent that will supersede previous case law on the topic in New Jersey; in recent years, numerous other states have seen similar rulings.
Leaks and Moisture
Cypress Point Condominium Association Inc. v. Adria Tower Inc., argued before the court in April and decided in August, stemmed from a dispute between residents of a Hoboken condo complex and the complex’s developer, which served as general contractor when it was built, between 2002-2004.
After construction at Cypress Point was complete, the CPCA took control of the site, only to have residents begin to complain about leaks and water infiltration. Condo owners alleged that builders did shoddy work installing roofing materials, gutters, brick facades, EIFS siding, fenestration, and did an inadequate job applying sealants.
CPCA sought damages from Adria, the general contractor, along with several subcontractors and Adria's insurers, Evanston Insurance Company and Crum & Forster Specialty Insurance Company, to cover the costs incurred. The insurance companies argued that faulty work by subcontractors was not covered under the CGL policies Adria had taken out.
The Fine Print
The case turned on whether the subs’ alleged shoddy work constituted an “occurrence” that caused “property damage,” which would be covered under the policies.
The insurance companies, according to court documents, argued that the risk inherent in constructing a building should be on the developer and general, who control the sub’s work, and not on the insurer. According to the insurers, only an accident should be deemed an “occurrence” in the context of the policy.
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The New Jersey Supreme Court, in a unanimous decision, sided with the previous Superior Court decision against the insurers in the case. |
A trial judge decided originally that there was no “occurrence” or “property damage,” and therefore the policy was not triggered. But the Supreme Court of New Jersey sided with last year’s Superior Court decision against the insurers, saying that there was indeed property damage in the case—moisture intrusion had allegedly caused damage to parts of several buildings—and that the water infiltration was an “accident” or “occurrence,” even if it was a result of poor workmanship.
The Supreme Court, in its unanimous decision, points out that the 1986 revision of the general CGL policy done by the Insurance Services Office Inc. included a clause providing that, while the insured contractor’s own flawed work would not be covered, a subcontractor’s could be—a clause the court says was inserted to make the policies more attractive to general contractors. If the insurers didn’t want to cover a subcontractor’s mistakes, the court notes, they could simply remove that clause from the policy.
Precedents
The case is seen as a reversal of a decades-old precedent, set by the New Jersey Supreme Court in the case of Weedo vs. Stone-E-Brick, which held that a subcontractor’s faulty work was essentially the same as the general’s faulty work—and therefore shouldn’t be covered. But the new decision notes that that case, decided in 1979, was based on the 1966 version of the CGL policy, and the newer version’s subcontractor exception leads to a different interpretation.
Weedo has been widely cited in decisions related to faulty subcontractor work, but had been under fire by some legal experts because of its application of an outdated version of the standard CGL policy.
The Florida Supreme Court came to a similar conclusion in a 2007 case, U.S. Fire vs. J.S.U.B. Inc., indicating that a 1986 version of the CGL policy opened insurers up to covering poor work performed by subcontractors.
In addition to U.S. Fire, the New Jersey Supreme Court cited French vs. Assurance Company of America, a 2006 case in which homeowners sued a general contractor over leaks in the EIFS system on their home. The U.S. Fourth Circuit Court of Appeals ruled in that case that the contractor’s insurer had to cover faulty work done by subcontractors based on the CGL policy.
“This ruling gives New Jersey condominium associations and homeowners the means to recover damages from the sponsor, developer and/or general contractor, who typically have no assets to satisfy a judgment,” noted law firm Ansell, Grimm and Aaron P.C., which argued the case on behalf of CPCA.
