Risk & Business Magazine JGS Insurance Magazine Winter 2018 | Page 6

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