COMMERCIAL GENERAL LIABILITY
H
A HUGE WIN ON
CONSTRUCTION DEFECTS
AS AN "OCCURANCE"
IN NEW JERSEY
ave you ever tried to speak
with someone who seemed to
simply not understand what
you were saying, even when
you are speaking simply and
clearly? It is a feeling that can make you feel
like banging your head on the wall even
during the best of times. That’s the way I
sometimes feel about insurance contracts
and coverage interpretation. Commercial
insurance policies are drafted in such
convoluted language that they force most
people like risk managers, insurance
professionals and business owners to
store away the policy in their file cabinet
and hope they never have to see it again!
However, losses do occur and that’s when
the policy is begrudgingly dusted off to be
reviewed. I was thrilled to learn about Gene
Killian of The Killian Law Firm and the
simple three-step coverage analysis process.
I too believe in these three simple steps and
use them when advising my clients:
Step 1: What does the insuring agreement
say? In other words, does the policy provide
coverage?
Step 2: What are the coverage exclusions?
Step 3: What are the exceptions to those
exclusions, or how does the policy give back
coverage?
When it comes to the construction industry,
it seems that insurance companies and
courts ignore this three-step coverage
analysis. The biggest example would be
the contention that “faulty workmanship”
is not covered as an “occurrence” because
it is a “business risk” (which in itself is
a vague term). In fact, the language of
what constitutes a “business risk” is not
in the Commercial General Liability
(CGL) policies at all, and the reality is
that anything a business does could be
considered a business risk.
6
Gene Killian applied the simple three-step
coverage analysis in a construction defect
case that he argued before the New Jersey
Appellate Division. Oh, sweet victory
for general contractors, builders, and
developers! The New Jersey Supreme Court
adopted the three-step coverage analysis
in Cypress Point Condominium Association,
Inc v. Adria Towers, LLC. The Cypress case
involved a high-end condo construction
project in Hoboken, New Jersey, which
sustained water infiltration as a result
of faulty work done by subcontractors of
the project developer. The developer was
sued by Cypress Point Condominium
Association (CPCA) for the water-related
damages. The question was whether the
developer’s commercial general liability
policy would provide coverage for liability
associated with the consequential damage
from the subcontractors’ work.
The court followed the three steps:
Step 1: The Court found that “[u]nder the
interpretation of the term ‘occurrence’ in
the policies, consequential harm caused by
negligent work is an ‘accident.’ Therefore,
because the result of the subcontractor’s
faulty workmanship here . . . was an
‘accident,’ it is an ‘occurrence’ under the
policies and is therefore covered as long as
the other parameters set by the policies are
met.”
Step 2: In the exclusion step, the Court
interpreted the “your work” exclusion. That
exclusion usually excludes coverage for
damage to the work of a contractor. The
version of the exclusion used was critical in
this case, because the 1986 version that is
commonly used today has an exception.
Step 3: In examining exceptions to the
exclusions, the Court found that the
1986 version had an exception for work
being done by subcontractors. That
exception resulted from the demands of
the policy-buying public who needed the
coverage, and insurance companies took
the stand that the product would be an
easier sell if that subcontractor coverage
was included. The Cypress case is a huge
victory to CGL policyholders, as it not only
adds New Jersey to the list of contractor-
friendly states that consider unintended
consequential damage to project work to
be an "occurrence" but also lessens the
significance that insurers have on a prior
New jersey case (Weedo v Stone E. Brick)
that reached the opposite conclusion.
The next question that is likely to be
asked is, what falls under the heading of
“consequential damage?” That, however, is a
topic for a different day. +
As an insurance expert who focuses on the non-profit
and food processing sectors, Gwenyth Luu has seen many
unusual exposures and claims. That’s why she knows
firsthand that it’s imperative for businesses to work with
an industry-specialized insurance partner. Gwenyth has
earned a certificate of completion in the HACCP System.
Gwenyth and her family reside in New Jersey. When
Gwenyth isn’t working, she enjoys CrossFit training, reading
and cooking.
BY: GWENYTH P. LUU, CLCS
DIRECTOR - COMMERCIAL LINES
JGS INSURANCE