As a general rule, there is no coverage under a commercial general liability (“CGL”) policy for damage caused by an insured-contractor’s faulty workmanship. The reasoning behind this was explained by the New Jersey Supreme Court in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979), the seminal New Jersey case addressing liability insurance coverage for faulty workmanship performed by a contractor:
Where the work performed by the insured-contractor is faulty, either express or implied warranties, or both, are breached. As a matter of contract law the customer did not obtain that for which he bargained. The dissatisfied customer can, upon repair or replacement of the faulty work, recover the cost thereof from the insured-contractor as the standard measure of damages for breach of warranties.
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[T]he insured-contractor can take pains to control the quality of the goods and services supplied. At the same time he undertakes the risk that he may fail in this endeavor and thereby incur contractual liability whether express or implied. The consequences of not performing well is part of every business venture; the replacement or repair of faulty goods and works is a business expense, to be borne by the insured-contractor in order to satisfy customers.
Id. at 239. Consequently, the insured-contractor and not the insurer is liable for any costs incurred to correct the faulty workmanship. In Firemen’s Insurance Co. v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006), the Appellate Division extended the holding in Weedo to faulty workmanship performed by a subcontractor.
Consistent with this reasoning, most CGL policies contain an exclusion providing that there is no coverage for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” This exclusion, which is referred to as the “your work” exclusion, applies to work performed “by or on behalf of” the insured-contractor and, therefore, would encompass work performed by a subcontractor.
CGL policies typically provide coverage for the insured’s legal liability for property damage arising out of an occurrence covered under the policy. Occurrence is commonly defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” or “an accident … which results in … property damage neither expected nor intended from the standpoint of the insured.” Although not addressed by the Weedo court, some courts have held that even in the absence of an express exclusion, there is no coverage for damage resulting from faulty workmanship because such damage did not result from an “accident.” The reason for this is that faulty workmanship is the natural consequence of “not performing well” and is an inherent part of the construction business.
While there is no coverage for damage to the insured’s work, there may be coverage if the insured’s faulty workmanship causes damage to other property. Thus, if an insured-contractor is sued for faulty workmanship, and there are no allegations that the faulty workmanship caused damage to anything other than the project itself, an insurer likely will have no duty to defend or indemnify its insured. On the other hand, if the faulty workmanship results in damage to other property, an insurer may have a duty to defend or indemnify its insured. Because a general contractor’s work consists of completing the entire project, there generally will be no coverage for damage to any portion of the project even if that damage was caused by faulty workmanship on a different portion of the project.
An issue that often arises is whether coverage exists under the general contractor’s CGL policy for damage caused by a subcontractor’s faulty workmanship. Because a subcontractor typically works on discrete portions of a project, it is possible that the subcontractor’s faulty workmanship can cause damage to other portions of the project. For instance, the improper installation of a window can result in water leaking around the window, causing damage to the interior finishes of the project. Whether coverage exists for such damage was addressed by the New Jersey Supreme Court in Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 2016 WL 4131662 (N.J. Aug. 4, 2016). In a well-reasoned and well-supported decision, the Court concluded that there was coverage under the contractor’s CGL policy for such damage.
Cypress Point involved a claim by a condominium association against its developer/general contractor, seeking recovery for damage to the interior structures, common areas, and individual residential units, including damage to steel supports, exterior and interior sheathing and sheetrock, and insulation. Id. at *2. The condominium association also sued the contractor’s CGL insurers, seeking a declaration that the damage was covered under the policies they issued. The damage at issue resulted from roof leaks and water infiltration around the windows. It was alleged that the damage was caused by “faulty workmanship during construction, including but not limited to, defectively built or installed roofs, gutters, brick facades, exterior insulation and finishing system siding, windows, doors, and sealants.” Id.
The policies at issue were based on standard form policies developed by the Insurance Services Office, Inc. (“ISO”), an insurance industry trade organization. The policies provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of … property damage … caused by an occurrence.” Occurrence was defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Id. The policies also contained a “your work” exclusion, which provided that there was no coverage for “‘[p]roperty damage’ to ‘your work’ arising out of it or any part of it ….” The exclusion contained an exception, however, providing that the exclusion did “not apply if the damaged work or the work out of which the damage arises was performed on [the insured’s] behalf by a subcontractor.” Id. The ISO first added this exception to the exclusion to the 1986 version of the standard form policy. The 1973 version of the exclusion, which was the prior version, did not contain the exception.
The trial court ruled in favor of the insurers, finding that neither faulty workmanship nor the consequential damages resulting therefrom was covered. The Appellate Division reversed, concluding that damage to other property caused by a subcontractor’s faulty workmanship was covered. On further appeal, the New Jersey Supreme Court framed the issue before it as “whether rain water damage caused by a subcontractor’s faulty workmanship constitutes ‘property damage’ and an ‘occurrence’ under a property developer’s commercial general liability (“CGL”) insurance policy.” Id. at *1. The Court held that it did.
According to the Court, damage to other property caused by a subcontractor’s faulty workmanship met the definition of “occurrence” and “property damage” under the policies. The Court rejected the argument that faulty workmanship can never result in a covered loss under a CGL policy. The Court also held that while the “your work” exclusion “would seem to eliminate coverage,” the exception to the exclusion reinstated coverage. Id. at *13.
In Cypress Point, unlike in Weedo, the faulty workmanship was performed by a subcontractor and there was no question that the faulty workmanship resulted in damage to other portions of the project. In addition, the policy at issue was based on the 1986 ISO form, whereas the Weedo policy was based on the 1973 version. Given these differences, and the decisions by courts in other jurisdictions that have considered the issue, the Court’s decision is not surprising. Indeed, to hold otherwise would have rendered meaningless the subcontractor’s exception to the “your work” exclusion.
It is important to emphasize that the Court did not back away from Weedo, which remains good law. Thus, there still is no coverage for the costs to correct the faulty workmanship itself regardless of whether that work is performed by the general contractor of a subcontractor. The Cypress Point decision is limited to damage to other property resulting from a subcontractor’s faulty workmanship. Under the Court’s decision, that damage is covered absent some other exclusion.
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