A ruling of the Appellate Division of the Superior Court in July 2015 with far-ranging implications to condominium associations, condominium owners, general contractors, trade subcontractors and their respective insurance companies will be reviewed and perhaps clarified by the state Supreme Court in its 2016 term. That decision, in a matter entitled Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., Docket No. A-2767-13T1, held that consequential damages to a condominium’s common areas, and to unit owner property which were caused by defective subcontractor work, could be attributed to the general contractor and, more importantly, covered under that party’s general liability insurance policy.
As a result of prior decisions (of the Supreme Court in 1979, and the Appellate Division in 2006), it has been the rule that both (a) the cost to repair the defective work performed by a subcontractor (for example, roof repair/replacement, improperly installed siding, or a failure to properly seal doors and windows) and (b) the resultant damage to other common elements, or to individual owner property proximately resulting from the defective work – such as damage to sheetrock, building sheathing, insulation, wall finishes, wood flooring and furnishings – was excluded under the general contractor’s liability policy because (1) economic loss was not equivalent to “physical injury to tangible property” and (2) this type of damage was not “an occurrence,” as it was not “accidental”. While Cypress Point did not change the fact that the cost to remedy the defective work itself was not actionable, it did change the rule with respect to the damage to the other property.
While the faulty subcontractor workmanship may or may not have been “accidental” with respect to the subcontractor, such work was clearly not expected or intended by either the subcontractor or general contractor to cause the resultant injury to the physical property, and it therefore met the definition of an “occurrence.” Moreover, held the Cypress Point court, the indirect damage to items other than as installed by the subcontractor constituted ‘property damage.” Thus, held the Court, the costs to repair or replace these items could be covered under the contractor’s typical ISO liability policy, and the insurer has the obligation to defend the general contractor against this type of claim. This was entirely consistent, the Court stated, with the insured general contractor’s expectations when it bought the liability policy, and was an economic burden that could be shifted back onto its subcontractors by requiring them to maintain comprehensive general liability coverage in an amount equal to the general contractor’s coverage.
The Appellate Division made clear, however, that while coverage for these types of claims existed under the cited policy provisions, that did not preclude the insurance carriers from arguing that coverage was excluded under different policy exclusionary provisions. Whether or not the Supreme Court chooses to tackle those undecided issues, or to leave open the door to recovery by condominium owners and associations against the property’s general contractors and insurers opened by the Appellate Division remains to be seen. Stay tuned!
