The New Jersey appellate court found that the unintended and unexpected consequential damages caused by the subcontractor's defective work constituted "property damage" and an "occurrence." Cypress Point Condo. Ass'n v. Adria Towers, L.L.C., 2015 WL 4111890 (N.J. Super. Ct. App. Div. July 9, 2015). The insured developer hired subcontractors to perform all of the construction work at a condominium project. The subcontractors failed to properly install the roof, flashing, gutters and leaders, brick and EIFS facade, windows, doors and sealants. The AOAO sued the developer, who served as the general contractor, its insurers, and various subcontractors.The AOAO conceded that replacement costs did not constitute "property damage" and an "occurrence" under the policy. The faulty workmanship, however, also caused consequential damages to the common areas and unit owners' property, including damage to steel supports, exterior sheathing and interior sheathing and sheetrock, insulation and other interior areas of the building. Nevertheless, the trial judge determined there was no property damage or "occurrence", and granted summary judgment to the insurers. The appellate court began its analysis by noting that the insuring agreement and definitions in the policy were followed by a section listing exclusions. Thus, before reaching the policy's exclusions, the insuring agreement required that there be an initial determination of whether there was "property damage" and an "occurrence." Construing the first section of the policy with the insuring agreement, the court first noted that the consequential damages clearly constituted "physical injury to tangible property," thus meeting the policy's definition for "property damage." The faulty workmanship damaged the common areas and unit owners' property. Second, the consequential damages amounted to an unexpected and unintended "continuous or repeated exposure to substantially the same general harmful conditions." There was no claim that the subcontractors either expected or intended for their faulty workmanship to cause "physical injury to tangible property." Therefore, the consequential damages constituted an "occurrence" as defined in the policy. The insurer next argued that the trial court properly relied upon Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979) and Firemen's Ins. Co. of Newark v. Nat'l Union Fire Ins. Co., 904 A.2d 754 (App. Div. 2006) to determine there was no coverage. In both decisions, the court found that damage from faulty workmanship was not caused by an occurrence and not covered. In Weedo, the court held there was no coverage for "faulty workmanship . . . where the damages claimed were solely the cost of correcting the work itself." Here, however, the consequential damages were distinct from the cost of correcting the work itself. Thus, the holding in Weedo was not dispositive here. In Fireman's, the court concluded there was no "property damage" or "occurrence," and thus no coverage for damages that were solely related to replacing sub-standard firewalls because the damages were a business risk and not consequential damages. In Fireman's, there were no allegations of damages to the rest of the building. Therefore, the court followed Weedo in holding that the replacement of the defective work - a business risk - was uninsurable. The consequential damages here were additional damages to the common areas of the building and the unit owners' property. The consequential damages were therefore not the cost of correcting the defective work, such as the cost of replacing the stucco in Weedo or replacing the firewalls as in Firemen's, but rather the cost of curing the "property damage" arising form the subcontractors' faulty workmanship. The appellate court also noted that the two prior opinions construed the 1973 ISO form, which differed from the 1986 ISO form at issue here. First, the 1973 ISO form defined "occurrence" as "an accident . . . which results in . . . property damage neither expected nor intended from the standpoint of the insured." The 1986 ISO form defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." "Property damage," therefore, was not directly included in the policy's definition of "occurrence." Second, the 1986 ISO form included a significant exception to an exclusion not contained in the 1973 ISO form. Although exclusion 2 (l) barred coverage for "property damage" to "your work," the exclusion did "not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." This exception in the 1986 ISO form meant that consequential damages caused by a subcontractor's faulty workmanship were considered differently than property damage caused by a general contractor's work. Finally, the court found persuasive the fact that the current majority rule was that construction defects causing consequential damages constituted an occurrence. The case was remanded for consideration of the policy's exclusions. The Hawaii Intermediate Court of Appeals found in 2010 that construction defect claims did not constitute an occurrence. Group Builders, Inc. v. Admiral Ins. Co., 123 Haw. 142, 148-49, 231 P.3d 67, 73-74 (Haw. Ct. App. 2010). The Hawaii court was partially persuaded by what it deemed to be the majority rule at the time, i.e., a defective workmanship cliam is not an "occurrence" under a CGL policy. The Hawaii Supreme Court has yet to address the issue.
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