As this blog has reported, a line of cases deciding coverage disputes over faulty workmanship runs against (or, at least, around) a basic rule for interpreting insurance policies. Under that rule, the scope of coverage is determined by a policy’s insuring clause, which may be narrowed by one or more exclusions. Exceptions to the exclusions can add back coverage that the exclusions remove, but they cannot create coverage beyond the ambit of the insuring clause. E.g., West Bend Mut. Ins. Co. v. MacDougall Pierce Const., Inc., 11 N.E.3d 531, 538 (Ind. Ct. App. 2014). This summer, in Cypress Point Condominium Ass’n, Inc. v. Adria Towers, L.L.C., 226 N.J. 403 (N.J. Aug. 4, 2016), the Supreme Court of New Jersey joined the ranks of courts that honor this principle in the breach. The court did not hold that a subcontractor exception to a “Your Work” exclusion created coverage; but it did find that the presence of the exception required it to construe the insuring clause more broadly than substantially identical clauses found in policies from which the exception was absent.
Workmanship Is Hard
The long war over coverage for faulty workmanship is fought in a number of different theaters. There’s the insuring clause, which forces courts to ask whether mistakes on the job are “accidents,” or just a predictable cost of doing business. There’s the “Your Work” exclusion and the question of whether the insured is being asked to do anything more than deliver the work he was paid for. And there’s the underlying complaint—which might appear to sound in “negligence,” but really allege a breach of contract. See Columbia Ins. Grp., Inc. v. Cenark Project Mgmt. Servs., 2016 Ark. 185 (2016).
The battle in Cypress Point ranged over several of these terrains. After a luxury condominium complex in Hoboken, New Jersey was completed in 2004, residents complained of roof leaks and water infiltration at interior window jambs and sills. Water infiltration that occurred after the building had been completed and occupied also caused mold growth and other damage to the buildings’ common areas and interior structures. The leaks and infiltration were ultimately traced to the defective work of a subcontractor on the project. The condominium association sued the building’s developers, which sought coverage under two Commercial General Liability policies. After the insurers denied coverage, the association asserted a claim for a declaratory judgment that the developer was entitled to coverage.
The policies at issue were written on an ISO form created in 1986, providing coverage for “those sums that the insured becomes legally obligated to pay as damages because of … ‘property damage’…caused by an ‘occurrence.’” “Property damage” is defined to include “[p]hysical injury to tangible property including all resulting loss of use of that property.” An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
The ISO form also excludes coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” But the form differs from an earlier, 1973 version, in that the exclusion is subject to an exception, which applies “if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.”
The trial court awarded summary judgment to the insurers, relying on two earlier appellate cases, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A. 2d 788 (N.J. 1979), and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434, 904 A. 2d 754 (App. Div. 2006).
In Weedo, the New Jersey Supreme Court held that CGL policies do not provide coverage “where the damages claimed are the cost of correcting the [insured’s allegedly defective] work itself”—as opposed to consequential damages to other structures. In Firemen’s, an intermediate appellate court...
