United States: Defective Construction Can Be A Covered Occurrence In New Jersey – The End Of Weedo?

Perhaps no case has generated as many citations and commentary (more than 1,880 citations, including 440 cases) on the subject of liability coverage for "construction defects" as Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979). For more than 35 years, courts in many jurisdictions have relied on Weedo in ruling that improper, non-conforming, defective construction (faulty workmanship by contractors) is a normal, construction-related "business risk" that is not covered by a contractor's general liability policy. However, courts slowly began to recognize that Weedo and its progeny construed policy language that was replaced in 1986 by a new policy form providing products completed operations hazard ("PCOH") coverage for damage caused by a negligent subcontractor. Now, two new decisions in New Jersey have limited Weedo to its facts (and the form of policy at issue then) by recognizing that defective construction is an insured "occurrence" that can be covered by a general liability policy. These cases signal the "death knell" for Weedo.

In two, straight-forward, clear decisions, the Appellate Division of the Superior Court of New Jersey issued rulings that appropriately limited the outcome in Weedo. The New Jersey cases are Cypress Point Condo. Ass'n, Inc. v. Adira Towers, L.L.C., Docket No. A-2767-13T1, 2015 WL 4111890, (N.J. App. Div. July 9, 2015) and Belmont Condo. Ass'n, Inc. v. Arrowpoint Capital Corp., Docket No. A-4187-12T4, 2015 WL 4416582 (N.J. App. Div. July 21, 2015). Both appellate courts recognized that the standard form of CGL policy in effect when Weedo was decided (ISO's 1973 policy form) contains a broad exclusion for the defective construction "work" of both general contractors and subcontractors, which the New Jersey Supreme Court characterized as an uninsured "business risk." Unlike the 1973 ISO form, the 1986 policy form contains a "subcontractor" exception to the "your work" exclusion that extends coverage when the insured is sued for property damage caused by a negligent subcontractor.

While these are the first two New Jersey appellate decisions holding that defective construction can be a covered "occurrence," these certainly are not the first cases to recognize that Weedo, when properly considered in light of the 1973 policy form at issue in that case, does not stand for the proposition that faulty workmanship, a/k/a "defective work," can never be a covered "occurrence." Nevertheless, as noted by a Texas court in construing the PCOH coverage of the 1986 policy form, many courts have "continually misapplied Weedo to hold that defective construction cannot constitute an occurrence resulting in some 'regrettably overbroad' generalizations about CGL policies." Lennar Corp. v. Great Am. Ins. Co., 200 S.W. 3d 651, 671 (Tex. App. 2006) (citing and quoting in part Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 268 Wis.2d 16, 673 N.W.2d 65, 74 (2004)). For instance, in a leading PCOH decision, the Florida Supreme Court concluded that the outcome in Weedo was "not due to the insuring provisions [of the policy], but because faulty workmanship by a contractor was specifically excluded based on the clear and unambiguous 'business risk' exclusionary clauses" contained in the 1973 policy form. United States Fire Ins. Co., v. J.S.U.B., Inc., 979 So.2d 871, 881-82 (2007). Indeed, the Weedo court itself specifically noted that the coverage limitations it applied "are set forth in the exclusion clauses of the policy, whose function it is to restrict and shape the coverage otherwise afforded." 405 A.2d at 790 (emphasis added). As recognized in J.S.U.B. and by Cypress Point and Belmont, if those coverage exclusions do not apply, Weedo does not answer the question of whether or not defective construction, i.e., faulty, negligent workmanship, can be a covered "occurrence."

As noted simply in Cypress Point, "[i]n Weedo, the Court did not resolve whether consequential damages resulting from subcontractors' faulty workmanship constituted 'property damage' or an 'occurrence.'" 2015 WL 4111890, at *4. Most importantly, unlike the 1973 policy form construed in Weedo, the "plain language" of the 1986 policy form at issue in Cypress Point contained a critical difference in the exclusionary language for damage to "your work." Unlike the policy form at issue in Weedo, the policy construed in Cypress Point contains an "exception" that eliminates the "your work" exclusion "'if the damaged work or the work out of which the damage arises was performed on your [the insured's] behalf by a subcontractor.'" Id. at 6 (quoting policy form) (emphasis in original). The court ruled that the "addition of the subcontractor's exception is of critical importance when determining whether the subcontractors' faulty workmanship causing consequential damages amounts to 'property damage' and an 'occurrence' under the policy." Id. at 6. Citing J.S.U.B., among other authorities, the Cypress Point court noted that the proposition that "construction defects" can be insured "occurrences" was now the "majority rule" in cases construing the 1986 policy form when post-completion property damage is caused by a negligent subcontractor. Id. at 7. Citing the commonly-used definition of an "accidental occurrence" as an event neither expected nor intended by the wrongdoer, the court noted that the "insurers do not contend, and we cannot reasonably believe, that the subcontractors either expected or intended for their faulty workmanship to cause 'physical injury to tangible property.'" Id. at 4.

Both Cypress Point and Belmont, which followed Cypress Point, involved claims of consequential property damage caused by water intrusion. In Cypress Point, the water intrusion had been caused by negligent workmanship ("defective work") of subcontractors in installing the roof, gutters, a brick and EFIS facade, and windows. This faulty workmanship had caused consequential damages to the "common areas" of the project, the unit owners' property, and other interior areas of the building, including sheetrock, wall finishes, flooring and trim. The court concluded that the plaintiff's claim for "consequential damages flowing from defective work [is] vastly different than the costs associated with replacing the defective work," which the court decided was the nature of the uninsured, "business risk" property damage at issue in Weedo. In Belmont, while the plaintiff association argued that water intrusion had caused "consequential" damages, the plaintiff also argued that "it can recover the cost of repairing the defective work." Belmont, 2015 WL 4416582, at *2. The Belmont court did not address this issue. Neither Cypress Point nor Belmont resolved the scope of coverage available for the claimed damages, as both courts noted that the carriers had raised other exclusions and defenses to the claims being pursued that had to be considered by the trial courts on remand.

The Cypress Point and Belmont decisions now align New Jersey (one of the last holdouts) with a majority of recent decisions ruling that when the liability policy at issue contains PCOH coverage that includes the "subcontractor exception," property damage arising out of or "to" the work of the negligent subcontractor can be insured. However, neither case addresses the issue of when and under what circumstances coverage may be available for the cost of repairing the "defective work" of the subcontractor, an issue that has sharply divided other courts. As noted above, the Cypress Point court suggested that such cost remains an uninsured "business risk." But see Edmund M. Kneisel & Betsty Cooke, The Products-Completed Operations Hazard: When Coverage Exists, Just What is Covered?, 2009 Construction Law Update, Chap. 6 (N. Sweeney, ed. 2009) (discussing Pozzi Window v. Auto-Owners Ins. Co., 984 So.2d 1241 (Fla. 2008), in which the Florida Supreme Court sanctioned coverage for the cost of repairing negligently installed windows that caused water intrusion). In a decision issued nine years after the Lennar Corp. ruling cited above, the Texas Supreme Court also allowed recovery of the cost of remediating "defective use of EFIS in home construction" that had caused water intrusion damage to completed homes. Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750, 753 (Tex. 2013). This issue remains an open question in New Jersey and many other states.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.