Cypress Point Condominium Association, inc v. Adria Towers, Llc(076348)

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., et al. (A-13/14-15) (076348)
Argued April 25, 2016 -- Decided August 4, 2016
SOLOMON, J., writing for a unanimous Court.
In this appeal, the Court determines whether rain water damage caused by a subcontractor’s faulty
workmanship constitutes “property damage” and an “occurrence” under a property developer’s commercial general
liability (CGL) insurance policy.
This dispute arose from the construction of Cypress Point, a luxury condominium complex in Hoboken.
Co-defendants Adria Towers, LLC, Metro Homes, LLC, and Commerce Construction Management, LLC
(collectively, the developer) served as the project’s developer and general contractor, and subcontractors carried out
most of the work. During construction, the developer obtained four CGL policies from Evanston Insurance
Company, covering a four-year period, and three from Crum & Forster Specialty Insurance Company, covering a
subsequent three-year period (collectively, the policies). The policies, which are modeled after the 1986 version of
the standard form CGL policy promulgated by the Insurance Services Office, Inc. (ISO), provide coverage for
“those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property
damage’ . . . caused by an ‘occurrence’ that takes place in the ‘coverage territory’ . . . [and] . . . occurs during the
policy period.”
Under the policies, “property damage” includes “[p]hysical injury to tangible property including all
resulting loss of use of that property,” while an “occurrence” is defined as “an accident, including continuous or
repeated exposure to substantially the same general harmful conditions.” The policies also contain an exclusion, for
“Damage to Your Work” (the “your work” exclusion), which eliminates coverage for “‘[p]roperty damage’ to ‘your
work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” Notably, this
exclusion “does not apply if the damaged work or the work out of which the damage arises was performed on [the
insured’s] behalf by a subcontractor.”
After completion of the complex, several residents began experiencing problems, such as roof leaks and
water infiltration around windows in units and common areas. Plaintiff the Cypress Point Condominium
Association (the Association) brought an action against the developer and several subcontractors, alleging faulty
workmanship during construction and claiming various consequential damages. Ultimately, a question arose as to
whether the Association’s claims were covered by the insurers’ CGL policies. Subsequently, the insurers moved for
summary judgment, arguing, in part, that they were not liable because the subcontractors’ faulty workmanship did
not constitute an “occurrence” that caused “property damage” as defined by the policies. The trial court agreed and
granted the motion.
In a published decision, Cypress Point Condominium Association, Inc. v. Adria Towers, L.L.C., 441 N.J.
Super. 369, 373 (App. Div. 2015), the Appellate Division reversed, holding that, under the plain language of the
CGL policies, the unintended and unexpected consequential damages caused by the subcontractors’ faulty
workmanship constituted “property damage” and an “occurrence.” The Court granted the insurers’ petitions for
certification. 223 N.J. 355 (2015).
HELD: The consequential damages caused by the subcontractors’ faulty workmanship constitute “property
damage,” and the event resulting in that damage – water from rain flowing into the interior of the property due to the
subcontractors’ faulty workmanship – is an “occurrence” under the plain language of the CGL policies at issue here.
1. Since there is no genuine issue of material fact before the Court, it reviews de novo the trial court’s conclusion
that the insurers were not obligated to defend and indemnify the developer against the Association’s claims. The
Court has long recognized that the general principles governing the interpretation of insurance policies must be
analyzed under the rules of contract law. When interpreting the meaning of a provision in an insurance contract,
courts look first to its plain language. If the terms of the provision are clear, it will be enforced as written. If the
provision is subject to more than one reasonable interpretation, a court will look to extrinsic evidence to aid in its
interpretation. With respect to insurance contracts specifically, if the policy’s controlling language supports two
meanings, the interpretation favoring coverage should be applied. (pp. 13-16)
2. A CGL policy protects business owners against liability to third-parties. The most commonly purchased CGL
policy is based on a standard form issued by the ISO. The ISO promulgated standard form CGL policies in 1973
and again in 1986. The 1986 policy, which was used here, defines an “occurrence” in a way that does not directly
include “property damage,” stating that an “occurrence” is “an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.” Unlike the 1973 ISO policy, the 1986 policy also includes a
significant exception to the “your work” exclusion clause, which eliminates coverage for “‘property damage’ to
‘your work’ arising out of it or any part of it.” The exception, which has never been directly addressed by this
Court, provides that the exclusion “does not apply if the damaged work or the work out of which the damage arises
was performed on your behalf by a subcontractor.” (pp. 16-19)
3. The seminal New Jersey cases addressing whether construction defects are covered under CGL policies
construed the 1973 ISO standard form CGL policy. The issue was first addressed in Weedo v. Stone-E-Brick, Inc.,
81 N.J. 233 (1979), under which the Court found that the replacement or repair of faulty goods and works is a
business expense, to be borne by the insured, and that CGL policies did not indemnify insureds where the claimed
damages are the cost of correcting the alleged defective work. Building on these principles, the Appellate Division
in Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App. Div. 2006),
held that claims against an insured general contractor for the cost of replacing materials installed by subcontractors
did not qualify as covered “property damage” caused by an “occurrence.” The panel distinguished the case from
Weedo, explaining that damage for breach of contractual warranty is limited and an expected cost of doing business,
whereas liability for damage to a person or property is unpredictable and almost limitless. The CGL policy is
designed to ensure against the latter risk. (pp. 19-23)
4. Since this Court has never addressed the question of coverage for consequential damages caused by faulty
workmanship under the 1986 ISO standard form CGL policy, review of other state and federal decisions is
instructive. The Supreme Court of Florida has held that a subcontractor’s defective work can constitute “property
damage” caused by an “occurrence” under the 1986 policy, noting that an interpretation precluding recovery for
damages caused by a subcontractor’s defective work would undermine the subcontractor exception to the “your
work” exclusion. The Fourth Circuit Court of Appeals held that the 1986 policy provides coverage for damages
caused by a subcontractor’s faulty workmanship, but not for the cost of replacing and/or repairing the faulty
workmanship itself. These cases, while not controlling, represent a strong recent trend of interpreting the term
“occurrence” to encompass unanticipated damage to nondefective property resulting from poor workmanship. (pp.
23-28)
5. Turning first to the question of whether the policies here provide an initial grant of coverage, the Court concludes
that the post-construction consequential damages, which resulted in loss of use of the affected areas by residents,
were covered “property damage” under the terms of the policies. In order to address the threshold question of
whether the subcontractors’ faulty workmanship and resultant damages constitute an “occurrence” triggering an
initial grant of coverage, the Court must give meaning to the term “accident,” which is not defined in the policies.
Based on the plain meaning of the term and case law interpreting it in the context of homeowner’s policies, the
Court finds that “accident” encompasses unintended and unexpected harm caused by negligent conduct. In other
words, under the Court’s interpretation of the term “occurrence” in the policies, consequential harm caused by
negligent work is an “accident.” Therefore, because the result of the subcontractors’ faulty workmanship –
consequential water damage to the completed and nondefective portions of Cypress Point – was an “accident,” it is
an “occurrence” under the policies and is provided an initial grant of coverage. (pp. 28-34)
6. Since the Association’s claims are covered under the policies’ general insuring agreement, the Court next
examines the pertinent exclusions and, if applicable, any exceptions. Standing alone, the “your work” exclusion,
which precludes coverage for “property damage” to “your work,” eliminates coverage for water damage to the
completed sections of Cypress Point. However, the exception to this exclusion, which was added to the 1986 ISO
standard form CGL policy, narrows the exclusion by expressly declaring that it does not apply if the damaged work
or work out of which the damage arises was performed by a subcontractor. Thus, because the water damage here is
alleged to have arisen out of faulty workmanship performed by subcontractors, it is a covered loss. (pp. 34-39)
The judgment of the Appellate Division is AFFIRMED and the matter is REMANDED to the trial court
for proceedings consistent with this opinion.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, PATTERSON, and
FERNANDEZ-VINA join in JUSTICE SOLOMON’s opinion. JUDGE CUFF (temporarily assigned) did not
participate.
2
SUPREME COURT OF NEW JERSEY
A-13/14 September Term 2015
076348
CYPRESS POINT CONDOMINIUM
ASSOCIATION, INC.,
Plaintiff-Respondent,
v.
ADRIA TOWERS, L.L.C.; D.
LOUREIRO MASONRY CONTRACTOR;
DEAN MARCHETTO ASSOCIATES,
P.C.; PEREIRA CONSTRUCTION,
L.L.C.; AMERICAN
ARCHITECTURAL RESTORATION;
METRO HOMES, L.L.C.; COMMERCE
CONSTRUCTION MANAGEMENT,
L.L.C.; WATERFRONT MANAGEMENT
SYSTEMS, L.L.C.; NCF GLAZING
& ERECTING, INC.; and MDNA
FRAMING, INC.,
Defendants,
and
WEATHER-TITE,
Defendant/Third-Party
Plaintiff,
and
PEREIRA CONSTRUCTION, L.L.C.;
and AMERICAN ARCHITECTURAL
RESTORATION,
Third-Party Defendants,
and
EVANSTON INSURANCE COMPANY,
Defendant/Third-Party
1
Plaintiff-Appellant,
and
NATIONAL INDEMNITY COMPANY,
Third-Party Defendant,
and
CRUM & FORSTER SPECIALTY
INSURANCE COMPANY,
Third-Party Defendant-
Appellant.
Argued April 25, 2016 – Decided August 4, 2016
On certification to the Superior Court,
Appellate Division, whose opinion is
reported at 441 N.J. Super. 369 (App. Div.
2015).
Elliott Abrutyn argued the cause for
appellant Evanston Insurance Company (Morgan
Melhuish Abrutyn, attorneys; Mr. Abrutyn and
Thomas G. Rantas, on the briefs).
Gary S. Kull argued the cause for appellant
Crum & Forster Specialty Insurance Company
(Carroll McNulty Kull and Hardin, Kundla,
McKeon & Poletto, attorneys; Mr. Kull and
John S. Favate, of counsel; Mr. Kull, Mr.
Favate, Denise Marra DePekary, and Arthur A.
Povelones, Jr., on the briefs).
Mark M. Wiechnik argued the cause for
respondent (Ansell Grimm & Aaron, attorneys;
Breanne M. DeRaps, on the letter brief).
John Randy Sawyer argued the cause for
amicus curiae Community Association
Institute (Stark & Stark, attorneys; Mr.
Sawyer and Gene Markin, on the brief).
2
Timothy P. Law, Jay M. Levin, and Jill N.
Priscott submitted a brief on behalf of
amicus curiae United Policyholders (Reed
Smith, attorneys).
John P. DiBiasi submitted a brief on behalf
of amici curiae Associated General
Contractors of America and Associated
Construction Contractors of New Jersey
(Lewis & McKenna, attorneys; Patrick J.
Wielinski, a member of the Texas Bar, of
counsel).
Michael A. Barrese and Bethany L. Barrese
submitted a brief on behalf of amicus curiae
Turner Construction Company (Saxe
Doernberger & Vita, attorneys; Gregory D.
Podolak, a member of the Connecticut Bar, of
counsel).
Carlton T. Spiller, Ellen A. Silver, and
Steven B. Gladis, submitted a brief on
behalf of amici curiae National Association
of Home Builders, New Jersey Builders
Association, and Leading Builders of America
(Greenbaum, Rowe, Smith & Davis, attorneys).
JUSTICE SOLOMON delivered the opinion of the Court.
In this appeal, we are called upon to determine whether
rain water damage caused by a subcontractor’s faulty workmanship
constitutes “property damage” and an “occurrence” under a
property developer’s commercial general liability (“CGL”)
insurance policy.1 Here, a condominium association sued its
developer/general contractor for damage to the interior
1 CGL policies protect business owners against liability to third
parties, encompassing a wide variety of potential claims. 3
Jeffrey E. Thomas, New Appleman on Insurance, Law Library
Edition § 16.02[3][a][i], LexisNexis (2015).
3
structure, residential units, and common areas of the
condominium complex, which was allegedly the result of defective
work performed by subcontractors. The condominium association
also sued the developer’s CGL insurers, seeking a declaration
that claims against the developer were covered by the policies.
The trial court granted summary judgment to the insurers,
finding that there was no “property damage” or “occurrence,” as
defined and required by the policies, to trigger coverage. The
condominium association appealed, and the Appellate Division
reversed, concluding that “consequential damages caused by the
subcontractors’ defective work constitute[d] ‘property damage’
and an ‘occurrence’ under the polic[ies].”
We affirm the judgment of the Appellate Division and hold
that the consequential damages caused by the subcontractors’
faulty workmanship constitute “property damage,” and the event
resulting in that damage –- water from rain flowing into the
interior of the property due to the subcontractors’ faulty
workmanship –- is an “occurrence” under the plain language of
the CGL policies at issue here.
I.
We begin with a review of the pertinent facts that gave
rise to the instant dispute, which arose from the construction
of Cypress Point, a luxury condominium complex in Hoboken
consisting of fifty-three residential units.
4
Construction of Cypress Point began in 2002 and was
substantially completed in 2004. During construction, co-
defendants Adria Towers, LLC (“Adria Towers”), Metro Homes, LLC
(“Metro Homes”),2 and Commerce Construction Management, LLC
(“Commerce Construction”)3 (collectively, “the developer”) served
as the project’s developer and general contractor and hired
subcontractors to carry out a substantial majority of the work.
Adria Towers also controlled the Cypress Point Condominium
Association (“the Association” or “plaintiff”) until the fall of
2004, when control of the Association transferred to the unit
owners of Cypress Point’s condominiums.4
During construction of Cypress Point, the developer was
issued four CGL policies by Evanston Insurance Company
(“Evanston”) covering the time period from May 30, 2002 to July
15, 2006, and three by Crum & Forster Specialty Insurance
2 According to the complaints filed with the trial court, Metro
Homes “is a corporation which was the co-sponsor, co-developer
and/or general contractor that created, coordinated, designed
and constructed the Association’s building, units and common
elements.”
3 According to the complaints filed with the trial court,
Commerce Construction “is a construction/project management firm
that was responsible for overseeing the construction of the
Association’s building, units, and common elements.”
4 When a condominium is developed, the condominium association is
initially controlled by the developer; as units are sold,
control of the association must transfer from the developer to
the unit owners. N.J.S.A. 46:8B-12.1.
5
Company (“Crum & Forster”), covering the time period from July
15, 2006 to July 15, 2009 (collectively, “the policies”). The
policies, which are modeled after the standard form CGL policy
promulgated by the Insurance Services Office, Inc. (“ISO”),5
provide coverage for “those sums that the insured becomes
legally obligated to pay as damages because of ‘bodily injury’
or ‘property damage’ . . . caused by an ‘occurrence’ that takes
place in the ‘coverage territory’ . . . [and] . . . occurs
during the policy period.”
Pursuant to the terms of the policies, “property damage”
includes “[p]hysical injury to tangible property including all
resulting loss of use of that property.” An “occurrence” is
defined as “an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.”
The policies also contain “[v]arious provisions [that] . .
. restrict coverage[,]” including an exclusion for “Damage to
Your Work” (“the ‘your work’ exclusion”), which eliminates
coverage for “‘[p]roperty damage’ to ‘your work’ arising out of
5 “ISO is an influential organization within the insurance
industry that promulgates standard form insurance policies,
including CGL policies, that insurers across the country use to
conduct their business.” Christopher C. French, Construction
Defects: Are They ‘Occurrences’?, 47 Gonz. L. Rev. 1, 5 n.7
(2011-12) (citing U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.
2d 871, 879 n.6 (Fla. 2007)). Most CGL insurance policies in
the United States are written on standard forms developed by ISO
and made available with state insurance regulators. Ibid.6
it or any part of it and included in the ‘products-completed
operations hazard.’”6 Notably, this exclusion “does not apply if
the damaged work or the work out of which the damage arises was
performed on [the insured’s] behalf by a subcontractor.”7
(Emphasis added).
After completion of the condominium complex and transfer of
control to the Association, several condominium owners began
experiencing problems, such as roof leaks and water infiltration
at the interior window jambs and sills of the residential units.
The Association also became aware of damage caused by water
intrusion into the common areas and interior structures of
Cypress Point. As a result, the Association brought an action
against the developer and several subcontractors. It alleged
faulty workmanship during construction, including but not
limited to, defectively built or installed roofs, gutters, brick
facades, exterior insulation and finishing system siding,
6 Under the policies, “products-completed operation hazard”
“[i]ncludes all ‘bodily injury’ and ‘property damage’ occurring”
off-site and/or after the project is deemed “completed.”
7 The policies define “[y]our work” as “[w]ork or operations
performed by you or on your behalf . . . and . . . [m]aterials,
parts or equipment furnished in connection with such work or
operations.” “Your work” includes “[w]arranties or
representations made at any time with respect to the fitness,
quality, durability, performance or use of ‘your work’ . . . and
. . . [t]he providing of or failure to provide warnings or
instructions.”
7
windows, doors, and sealants. The Association claimed
consequential damages, consisting of, among other things, damage
to steel supports, exterior and interior sheathing and
sheetrock, and insulation, to Cypress Point’s common areas,
interior structures, and residential units (“the consequential
damages”).8
After the Association filed suit, Adria Towers requested
that Evanston defend and indemnify it against the Association’s
claims. When Evanston refused, and Adria Towers failed to file
a declaratory judgment action against Evanston, the Association
filed an amended complaint, seeking a determination whether its
claims against the developer were covered by Evanston’s CGL
policies. Evanston subsequently filed an amended answer to the
Association’s complaint, denying any obligation to defend and
indemnify the developer, as well as a third-party complaint
against Crum & Forster, alleging that if Evanston did owe such
an obligation, the rights and responsibilities under the Crum &
Forster CGL policies should also be adjudicated.
8 In the complaint, which was amended several times between 2010
and 2012 to add claims and parties, the Association asserted
claims of negligence, breach of express warranties, breach of
implied warranties, negligent misrepresentation, violations of
the Planned Real Estate Development Full Disclosure Act, and
breach of contract.
8
Evanston and Crum & Forster (collectively, “the insurers”)
filed motions for summary judgment, arguing, among other things,
that they were not liable because the subcontractors’ faulty
workmanship did not constitute an “occurrence” that caused
“property damage” as defined by the policies. The trial court
agreed, concluding that faulty workmanship does not constitute
an “occurrence” and that the consequential damages caused
therefrom were not “property damage” under the terms of the
policies because the damage arose entirely from faulty work
performed by or on behalf of the developer. Accordingly, the
trial court granted Evanston’s motion for summary judgment and
dismissed Crum & Forster’s motion for summary judgment as moot.
The Association filed a motion for reconsideration, which was
denied.
In a published opinion, the Appellate Division reversed the
trial court’s grant of summary judgment in favor of the
insurers, holding that “unintended and unexpected consequential
damages [to the common areas and residential units] caused by
the subcontractors’ defective work constitute ‘property damage’
and an ‘occurrence’ under the [CGL] polic[ies].” Cypress Point
Condo. Ass’n, Inc. v. Adria Towers, L.L.C., 441 N.J. Super. 369,
373 (App. Div. 2015). The panel found that, under the plain
language of the CGL policies, the damages alleged in the
Association’s claim satisfied the policies’ definitions of
9
“property damage” and “occurrence.” Id. at 375-77. The panel
also distinguished two prior New Jersey cases relied upon by the
trial court in finding for the insurers, Weedo v. Stone-E-Brick,
Inc., 81 N.J. 233 (1979), and Firemen’s Insurance Co. of Newark
v. National Union Fire Insurance Co., 387 N.J. Super. 434 (App.
Div. 2006), “because they (1) involved only replacement costs
flowing from a business risk, rather than consequential damages
caused by defective work; and (2) interpreted different language
than the policy language in this appeal,” which was based on the
1986 standard CGL form rather than the 1973 version at issue in
Weedo and Firemen’s. Cypress Point, supra, 441 N.J. Super. at
377.
Thereafter, we granted the insurers’ petitions for
certification. 223 N.J. 355 (2015).
II.
The pertinent contentions of the parties are as follows.
The insurers urge this Court to overturn the Appellate
Division’s finding that the policies provided coverage for the
Association’s claims against the developer. Citing Weedo and
Firemen’s, the insurers argue that the panel’s holding conflicts
with established law that CGL policies are only intended to
provide coverage for damage caused by faulty workmanship to
other property and not to the project itself, as was the case
here. In doing so, the insurers assert, the panel improperly
10
shifted the risks inherent in constructing a building from the
developer and general contractor, who are in the best position
to control a subcontractor’s work, to their insurers.
The insurers further contend that the Appellate Division
failed to apply the correct definition of “accident” as it
relates to a covered “occurrence” under the policies. According
to the insurers, a subcontractor’s faulty workmanship does not
have the fortuity element required for the faulty workmanship to
constitute an “accident,” and is therefore not an “occurrence”
under the terms of the policies. In other words, damage to any
portion of the project caused by defective construction is not
accidental because it is one of the normal, frequent, and
predictable consequences of the construction business.
Relatedly, the insurers assert that the panel
inappropriately invoked the “subcontractor exception” to the
“your work” exclusion to trigger coverage for the Association’s
claims against the developer. According to the insurers, there
was no coverage because faulty workmanship is not “property
damage” or an “occurrence” under the terms of the policies and,
therefore, the panel should not have considered whether the
policies’ exclusions, let alone exceptions to those exclusions,
apply here.
Finally, the insurers ask us to follow authority from other
jurisdictions, which they claim supports the proposition that
11
CGL policies do not provide coverage for faulty workmanship that
causes damage to any portion of the work that the insured was
obligated to deliver. See, e.g., Columbia Ins. Grp., Inc. v.
Cenark Project Mgmt. Servs., 2016 Ark. 185 (Ark. 2016).
The Association, conversely, asserts that the Appellate
Division’s ruling in favor of coverage for the consequential
damages caused by a subcontractor’s faulty workmanship is in
line with both judicial precedent and the plain language of the
policies. Citing to Weedo, Firemen’s, and S.N. Golden Estates,
Inc. v. Continental Casualty Co., 293 N.J. Super. 395 (App. Div.
1996), the Association contends that our courts have
consistently found that, while a construction defect itself is
not covered under a CGL policy, the damage caused as a
consequence of the defect is covered. Thus, plaintiff argues
that consequential damages stemming from faulty workmanship
constitute a covered “occurrence” under the terms of the
policies, and that the Appellate Division’s holding supporting
such an interpretation should not be disturbed.
The Association also notes that the Weedo and Firemen’s
decisions were based on the 1973 ISO form CGL policy, whereas
the instant case involves the 1986 ISO form CGL policy, which
contains a subcontractor exception to the “your work” exclusion
that was not included in the 1973 ISO form. The Association
argues that the existence of the subcontractor exception implies
12
that the policies’ definition of an “occurrence” includes
construction defect claims, because interpreting the contract
otherwise would render the subcontractor exception meaningless.
Finally, this Court granted leave to appear as amicus
curiae to five entities or groups of entities: Associated
General Contractors of America and Associated Construction
Contractors of New Jersey; the Community Association Institute;
the National Association of Home Builders, New Jersey Builders
Association, and Leading Builders of America; Turner
Construction Company; and United Policyholders. All five amici
support the Association’s positions.
III.
A.
We begin our discussion of the law applicable to this
appeal by noting that we review the trial court’s grant of
summary judgment de novo under the same standard as the trial
court. Mem’l Props., LLC v. Zurich Am. Ins. Co., 210 N.J. 512,
524 (2012). That standard commands that summary judgment be
entered “if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to
any material fact challenged and that the moving party is
entitled to a judgment or order as a matter of law.” R. 4:46-
2(c). When no issue of fact exists, and only a question of law
13
remains, this Court affords no special deference to the legal
determinations of the trial court. Manalapan Realty, L.P. v.
Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). Because
there is no genuine issue of material fact before us, we review
de novo the trial court’s conclusion that the insurers were not
obligated to defend and indemnify the developer against the
Association’s claims.
B.
With that standard in mind, we turn to the general
principles governing the interpretation of insurance policies,
which we have long recognized must be analyzed under the rules
“of simple contract law,” Kampf v. Franklin Life Ins. Co., 33
N.J. 36, 43 (1960), requiring us “to read the document as a
whole in a fair and common sense manner,” Hardy ex rel. Dowdell
v. Abdul-Matin, 198 N.J. 95, 103 (2009).
Well-settled contract law provides that “[c]ourts enforce
contracts based on the intent of the parties, the express terms
of the contract, surrounding circumstances and the underlying
purpose of the contract.” Manahawkin Convalescent v. O’Neill,
217 N.J. 99, 118 (2014) (citations and internal quotation marks
omitted). Thus, “[w]hen the terms of an insurance contract are
clear, it is the function of a court to enforce it as written
and not to make a better contract for either of the parties.”
Kampf, supra, 33 N.J. at 43 (citation omitted). It follows that
14
“[i]n attempting to discern the meaning of a provision in an
insurance contract, the plain language is ordinarily the most
direct route,” Chubb Custom Ins. Co. v. Prudential Ins. Co. of
Am., 195 N.J. 231, 238 (2008), and that when “the language of a
contract is plain and capable of legal construction, the
language alone must determine the agreement’s force and effect,”
Manahawkin, supra, 217 N.J. at 118 (citations and internal
quotation marks omitted). However, “[w]hen the provision at
issue is subject to more than one reasonable interpretation, it
is ambiguous, and the ‘court may look to extrinsic evidence as
an aid to interpretation.’” Templo Fuente de Vida Corp. v.
Nat’l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189, 200
(2016) (quoting Chubb Custom, supra, 195 N.J. at 238).
As to insurance contracts specifically, “the general rule
of construction [is] that if the controlling language of a
policy will support two meanings, one favorable to the insurer
and the other to the insured, the interpretation favoring
coverage should be applied.” Butler v. Bonner & Barnwell, Inc.,
56 N.J. 567, 575 (1970) (citing Mazzilli v. Accident & Cas. Ins.
Co., 35 N.J. 1, 7 (1961)); see also Doto v. Russo, 140 N.J. 544,
556 (1995) (noting that “New Jersey courts often have construed
ambiguous language in insurance policies in favor of the insured
and against the insurer”). Moreover, “[w]hile specific words may
not be ambiguous, the context in which they are used may create
15
an ambiguity. The court’s responsibility is to give effect to
the whole policy, not just one part of it.” Arrow Indus.
Carriers, Inc. v. Cont’l Ins. Co. of N.J., 232 N.J. Super. 324,
334 (Law Div. 1989) (citing Boswell v. Travelers Indem. Co., 38
N.J. Super. 599, 604 (App. Div. 1956)).
C.
Having reviewed our jurisprudence on the interpretation of
insurance policies, we turn to CGL policies, generally, with a
special emphasis on the CGL policy at issue here. A CGL policy
“protects business owners against liability to third-parties.”
3 Jeffrey E. Thomas, New Appleman on Insurance, Law Library
Edition § 16.02[3][a][i], LexisNexis (2015) (Appleman). The
policy was first developed in the 1940s as “the result of a
voluntary effort in the insurance industry to address the
misunderstanding, coverage disputes, and litigation that
resulted from the unique language used by each liability
insurer.” U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871,
877-78 (Fla. 2007) (citations omitted). In 1966, the ISO CGL
policy was “broadened to cover ‘occurrences,’ which included
coverage for both ‘accidents’ and ‘continuous exposure to
conditions.’ This change permitted coverage for accidental
events that were not abrupt and short-lived, such as seepage and
long-term exposure to hazardous substances.” Appleman, supra, §
16.02[3][a][iv].
16
The most commonly purchased CGL policy is the standard form
CGL policy, which “is revised every few years by the [ISO].”
Id. at § 16.02[3][a][iii]. Although not required to do so, most
insurers prepare their CGL policies based on the ISO’s standard
forms. Id. at § 16.02[3][a][iv].
Since 1966, the ISO has promulgated two standard form CGL
policies, one in 1973 and another in 1986. As the Appellate
Division aptly noted, there are important differences between
the 1973 and 1986 standard form CGL policies which are of
particular importance in the instant dispute. “First . . .[t]he
1973 ISO [policy] defines ‘occurrence’ as ‘an accident . . .
which results in . . . property damage neither expected nor
intended from the standpoint of the insured’” while the 1986 ISO
“policy defines ‘occurrence’ as ‘an accident, including
continuous or repeated exposure to substantially the same
general harmful conditions.’” Cypress Point, supra, 441 N.J.
Super. at 379 (internal citations omitted). Thus, “‘[p]roperty
damage,’ . . . is not directly included in the policy’s
definition of ‘occurrence.’” Id. at 379-80. “Second and most
importantly, the 1986 ISO [policy] includes a significant
exception to an exclusion not contained in the 1973 ISO
[policy].” Id. at 380.
The exception in the 1986 ISO CGL policy, which has never
been directly addressed by this Court, is found under the “your
17
work” exclusion clause of the policy. As outlined above, the
1986 standard form CGL policy eliminates coverage for “‘property
damage’ to ‘your work’ arising out of it or any part of it . .
.”9 However, the policy’s exception to this exclusion, included
in the form by the ISO for the first time in 1986, provides that
the “your work” exclusion “does not apply if the damaged work or
the work out of which the damage arises was performed on your
behalf by a subcontractor.” Appleman, supra, §§ 18.03[12][a],
[d].
In creating the subcontractor exception to the “your work”
exclusion, it has been noted that the ISO was motivated by an
agreement between policy holders and insurers
that the CGL policy should provide coverage
for defective construction claims so long as
the allegedly defective work had been
performed by a subcontractor rather than the
policyholder itself. This resulted both
because of the demands of the policyholder
community (which wanted this sort of coverage)
and the view of insurers that the CGL was a
more attractive product that could be better
sold if it contained this coverage.
[Christopher C. French, Construction Defects:
Are They ‘Occurrences’?, 47 Gonz. L. Rev. 1,
8-9 (2011-12) (citation omitted).]
9In the 1973 ISO Form, the “your work” exclusion was worded
slightly differently: “[t]his insurance does not apply . . . to
property damage to work performed by or on behalf of the named
insured arising out of the work or any portion thereof, or out
of materials, parts or equipment furnished in connection
therewith.” Weedo, supra, 81 N.J. at 241.
18
Moreover, the ISO itself addressed the addition of the
subcontractor exception in a July 1986 circular, which
“confirm[ed] that the 1986 revisions to the standard CGL policy
. . . specifically ‘cover[ed] damage caused by faulty
workmanship to other parts of work in progress; and damage to,
or caused by, a subcontractor’s work after the insured’s
operations are completed.’” U.S. Fire, supra, 979 So. 2d at 879
(citing ISO Circular, Commercial Gen. Liab. Program Instructions
Pamphlet, No. GL-86-204 (July 15, 1986)).
D.
We now turn to New Jersey’s case law pertinent to
interpreting CGL policies. In doing so, we note that the
seminal cases considering whether construction defects are
covered under such policies construed versions of the standard
form ISO policy that predated the 1986 version used here.
This Court first addressed the issue of whether a standard
CGL policy covers construction defects in Weedo, supra, which is
regularly cited by both state and federal courts as the leading
case on the issue. French, supra, 47 Gonz. L. Rev. at 22-24;
see also Fireman’s, supra, 387 N.J. Super. at 442 (noting that
“[t]he seminal case regarding insurance coverage for a
contractor’s defective work is Weedo”). In Weedo, two sets of
homeowners sued a masonry contractor, Stone-E-Brick, for claims
arising out of faulty workmanship and defective construction
19
work. Weedo, supra, 81 N.J. at 235-36. In their complaints,
the homeowners sought damages to cover the cost of correcting
the construction defects. Ibid. Stone-E-Brick, in turn,
requested that its CGL insurer defend and indemnify it against
both complaints, but the insurer refused, asserting that CGL
policies exclude coverage for claims of faulty construction that
require repair or replacement of a contractor’s work. Id. at
236.
The policy at issue in Weedo was the 1973 version of the
standard form CGL, which contained exclusions for “business
risks” to the “‘insured products’ (exclusion ‘(n)’) and ‘work
performed’ (exclusion ‘(o)’),” and read as follows:
* * * This insurance does not apply
(n) to property damage to the named insured’s
products arising out of such products or any
part of such products;
(o) to property damage to work performed by or
on behalf of the named insured arising out of
the work or any portion thereof, or out of
materials, parts or equipment furnished in
connection therewith.
[Id. at 240-41.]
After engaging in an extensive discussion of the nature and
purpose of “business risk” exclusions within CGL policies, and
determining that “[t]he consequence of not performing well is
part of every business venture[, and that] the replacement or
repair of faulty goods and works is a business expense, to be
20
borne by the insured-contractor in order to satisfy customers,”
the Weedo Court rejected Stone-E-Brick’s claim for coverage.
Id. at 238-41. In doing so, the Court held that CGL policies
did not indemnify insureds “where the damages claimed are the
cost of correcting the [alleged defective] work itself[,]” id.
at 235, but did not address whether the alleged faulty
workmanship constituted a covered “occurrence” under the 1973
standard form CGL policy. See id. at 237 n.2 (noting that
because insurer “conceded . . . that but for the exclusions in
the policy, coverage would obtain,” Court would “not address the
validity of one of the carrier’s initially-offered grounds of
non-coverage, namely, that the policy did not extend coverage
for the claims made even absent the exclusions”). Rather, the
homeowners’ claims seeking compensation for the repair and
replacement of the insured’s faulty work was specifically
excluded and, therefore, the CGL insurer was not obligated to
provide coverage. Id. at 241 (stating that “given the precise
and limited form of damages which form the basis of the claims
against the insured, either exclusion is, or both are,
applicable to exclude coverage”).
Building on the principles enunciated in Weedo, the
Appellate Division in Fireman’s, supra, held that claims against
an insured general contractor for the cost of replacing sub-
standard condominium firewalls installed by subcontractors did
21
not qualify as covered “property damage” caused by an
“occurrence” under the 1973 ISO standard form CGL policy. 387
N.J. Super. at 446, 449. In reaching that conclusion, the panel
noted that Weedo had distinguished between “two kinds of risks,
one of which is excluded by the standard CGL policy and one of
which is not”: (1) “‘business risk,’ . . . the risk that the
contractor’s work may be faulty and may breach express or
implied warranties”; and (2) “the risk of injury to people and
damage to property caused by faulty workmanship.” Id. at 442-43
(citing Weedo, supra, 81 N.J. at 239) (internal quotation marks
omitted). “[T]he key distinction,” according to the Firemen’s
panel, “is the predictability of the harm: damage for breach of
contractual warranty is limited and is an expected cost of doing
business; liability for injury or damage to a person or property
is potentially ‘almost limitless’ and is ‘entirely
unpredictable.’ The policy is designed to ensure against the
latter risk.” Id. at 443 (citing Weedo, supra, 81 N.J. at 239-
40). Thus, because “the alleged damage was the cost of
replacing sub-standard firewalls [and not] that the firewalls
caused damage to the rest of the building or to any other person
or property,” the panel found that, under Weedo, the CGL insurer
was not obligated to indemnify the insureds. Id. at 443, 445,
449 (“While Weedo addressed ‘business risk’ in the context of
whether certain exclusions applied, the Weedo principle has been
22
extended to the threshold issue of whether the risk was within
the scope of the standard insuring clause.”).
E.
Because this Court has never addressed questions of
coverage for consequential damages caused by faulty workmanship
under the 1986 ISO standard form CGL policy, a brief review of
other state and federal decisions that have considered this
issue is instructive. See Weedo, supra, 81 N.J. at 241(“Because of the factual similarity and the uniform wording of
the exclusionary clauses [contained in standard form CGL
policies], the reasoning in these decisions [from other
jurisdictions] is thoroughly persuasive.”).
In U.S. Fire, supra, the Supreme Court of Florida held that
a subcontractor’s defective work, which “is neither expected nor
intended from the standpoint of the [insured] contractor[,] can
constitute ‘property damage’ caused by an ‘occurrence’ as those
terms are defined in a standard form [CGL] policy.” 979 So. 2d
at 875. There, after a contractor completed construction of
several homes, the homeowners discovered that improper soil
compacting and testing by subcontractors caused damage to the
homes and the homeowners’ personal property. Ibid. The
contractor sought coverage for the damage under its CGL
policies, but the insurer denied coverage for the costs of
repairing the structural damage to the homes and only agreed to
23
indemnify the contractor for the damage caused to the
homeowners’ personal property. Id. at 876. The contractor sued
the insurer, and the dispute reached the Supreme Court of
Florida, which considered the issue of whether a 1986 standard
form CGL policy “issued to a general contractor, provides
coverage when a claim is made against the contractor for damage
to the completed project caused by a subcontractor’s defective
work.” Id. at 877.
In finding that a subcontractor’s faulty workmanship can
constitute an “occurrence” under the 1986 ISO form, the court in
U.S. Fire rejected the insurer’s argument that faulty
workmanship “can never be an ‘accident’ because it results in
reasonably foreseeable damages,” and noted that “a construction
of the insuring agreement that precludes recovery for damage
caused to the completed project by the subcontractor’s defective
work renders the . . . subcontractor exception to [the ‘your
work’] exclusion . . . meaningless.” Id. at 883, 887. The
court also rejected the insurer’s argument that “faulty
workmanship that injures only the work product itself does not
result in ‘property damage;’” observing that, “just like the
definition of the term ‘occurrence,’ the definition of ‘property
damage’ in the CGL policies does not differentiate between
damage to the contractor’s work and damage to other property.”
Id. at 888-89. Thus, the Court found that “faulty workmanship
24
or defective work that has damaged the otherwise nondefective
completed project has caused ‘physical injury to tangible
property’ within the plain meaning of the definition in the
[1986 CGL] policy.” Id. at 889.10
In French v. Assurance Co. of America, the Fourth Circuit
Court of Appeals, applying Maryland Law, held that the 1986
standard form CGL policy provides coverage for damages caused by
a subcontractor’s faulty workmanship, but not for the cost of
replacing and/or repairing the faulty workmanship itself. 448
F.3d 693, 704 (2006). French involved homeowners who sought
coverage from a general contractor’s CGL insurer after a
subcontractor’s negligently installed stucco caused moisture
damage to their otherwise properly-built house. Id. at 696.
When the CGL insurer refused to indemnify the insureds for
either the cost of replacing the stucco or the damages resulting
from the faulty workmanship, the homeowners sued. Ibid. After
acknowledging that the subcontractor exception “restored
otherwise excluded coverage for damage caused to construction
10Interestingly, and of particular relevance to this Court, the
U.S. Fire Court also explicitly distinguished its finding from
the holding in Weedo, supra, 81 N.J. 233, holding that Weedo’s
determination that there was no coverage for faulty workmanship
by a subcontractor was based on specific exclusions in the pre-
1986 ISO form, and not on the definitions of “property damage”
or “occurrence” within the policy itself. U.S. Fire, supra, 979
So. 2d at 881-82.
25
projects by subcontractor negligence,” the Court determined that
the standard form 1986 CGL policy precludes coverage to a
general contractor to replace or repair defective workmanship
performed by a subcontractor but does provide coverage for the
damages resulting from the subcontractor’s faulty workmanship.
Id. at 704, 706. Accordingly, the Fourth Circuit found that the
subcontractor exception to the “your work” exclusion required
the CGL insurer to “provide[] liability coverage for the cost to
remedy unexpected and unintended property damage to the
contractor’s otherwise nondefective work-product caused by the
subcontractor’s defective workmanship.” Id. at 706.
Although the holdings in U.S. Fire and French are not
controlling here, they are informative because they represent “a
strong recent trend in the case law [of most federal circuit and
state courts] interpet[ing] the term ‘occurrence’ to encompass
unanticipated damage to nondefective property resulting from
poor workmanship.” Greystone Constr. v. Nat’l Fire & Marine
Ins. Co., 661 F.3d 1272, 1282-83, 1286 (10th Cir. 2011)
(recognizing body of case law “generally hold[ing] that damage
caused by faulty workmanship is neither expected nor intended
from the standpoint of the policyholders and, therefore,
receives coverage so long as it does not fall under a policy
exclusion” and finding that “when a subcontractor’s faulty
workmanship causes unexpected property damage to otherwise
26
nondefective portions of the builder’s work, [CGL] policies
provide coverage”); see also Sheehan Constr. Co. v. Cont’l Cas.
Co., 935 N.E.2d 160, 169-71 (Ind.) (adopting view that 1986 CGL
policy covers property damage caused by subcontractor’s
unexpected and unintended faulty workmanship), modified on other
grounds, 938 N.E.2d 685 (Ind. 2010); Architex Ass’n v.
Scottsdale Ins. Co., 27 So. 3d 1148, 1162 (Miss. 2010) (finding
1986 CGL “policy unambiguously extends coverage to [insured
general contractors] for unexpected or unintended ‘property
damage’ resulting from negligent acts or conduct of a
subcontractor, if not excluded by other applicable terms and
conditions of the policy”); Travelers Indem. Co. of Am. v. Moore
& Assocs., Inc., 216 S.W.3d 302, 309 (Tenn. 2007) (concluding
that water damage resulting from subcontractor’s faulty window
installation constitutes “both an ‘accident’ and an ‘occurrence’
for which there is coverage under” the 1986 standard form CGL
policy); Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d
1, 16 (Tex. 2007) (explaining that “claims for damage caused by
an insured’s defective performance or faulty workmanship may
constitute an ‘occurrence’ when ‘property damage’ results from
the ‘unexpected, unforeseen or undesigned happening or
consequence’ of the insured’s negligent behavior”) (citation and
quotation marks omitted); Am. Family Mut. Ins. Co. v. Am. Girl,
Inc., 673 N.W.2d 65, 70 (Wis. 2004) (holding subcontractor’s
27
faulty workmanship, which caused building’s foundation to sink,
was “property damage” caused by “occurrence”).
IV.
A.
We now turn to the merits of the instant dispute, which
requires that we determine whether the policies issued by the
insurers to the developer provide coverage for the Association’s
claims of consequential water damage caused by the
subcontractors’ faulty workmanship. In answering this question
we follow a three-step process. First, we examine the facts of
the Association’s claims to ascertain whether the policies
provide an initial grant of coverage. If so, the second step
considers whether any of the policies’ exclusions preclude
coverage. Finally, in step three, we determine whether an
exception to a pertinent exclusion applies to restore coverage.11
As previously stated, the policies at issue insure against
liability for “property damage” that “is caused by an
‘occurrence.’” “Property damage” is defined as:
a. Physical injury to tangible property
including all resulting loss of use of that
property. All such loss of use shall be
deemed to occur at the time of the physical
injury that caused it; or
11The three-step analytical framework we use here is informed by
the process employed by the Wisconsin courts. See Design Basics
LLC v. J&V Roberts Inv., Inc., 130 F. Supp. 3d 1266, 1285 (Wis.
2015) (citing Am. Girl, Inc., supra, 673 N.W.2d at 73).
28
b. Loss of use of tangible property that is not
physically injured. All such loss of use
shall be deemed to occur at the time of the
“occurrence” that caused it.
Here, the Association alleged that water infiltration,
occurring after the project was completed and control was turned
over to the Association, caused mold growth and other damage to
Cypress Point’s completed common areas and individual units.
Those post-construction consequential damages resulted in loss
of use of the affected areas by Cypress Point residents and, we
hold, qualify as “[p]hysical injury to tangible property
including all resulting loss of use of that property.”
Therefore, on the record before us, the consequential damages to
Cypress Point were covered “property damage” under the terms of
the policies.
Next, the policies define an “occurrence” as “an accident,
including continuous or repeated exposure to substantially the
same general harmful conditions.” The term “accident” is not
defined in the policies. Thus, we must first give meaning to
the term “accident” in order to address the threshold question
whether the subcontractors’ faulty workmanship, and the damages
that flowed therefrom, constitute an “occurrence” triggering an
initial grant of coverage for the Association’s claims.
When interpreting undefined terms within an insurance
policy, we “resort to the general rule that the terms in an
29
insurance policy should be interpreted in accordance with their
plain and commonly-understood meaning.” Morton Int’l v. Gen.
Accident Ins. Co., 134 N.J. 1, 56 (1993) (citation omitted);
Longobardi v. Chubb Ins. Co., 121 N.J. 530, 537 (1990) (“[T]he
words of an insurance policy should be given their ordinary
meaning[.]”). This common-sense approach often begins with an
examination of dictionary definitions.
Merriam-Webster’s dictionary defines “accident” as “an
unforeseen and unplanned event or circumstance.” Merriam-
Webster’s Collegiate Dictionary 1419 (11th ed. 2012); see also
Black’s Law Dictionary 18 (10th ed. 2014) (explaining that
“[t]he word ‘accident,’ in accident policies, means an event
which takes place without one’s foresight or expectation. A
result, though unexpected, is not an accident; the means or
cause must be accidental.”). A leading treatise on New Jersey
insurance law tracks substantially the same language as the
dictionary definition for “accident”:
An unintended or unexpected event. An
accident is an event or condition occurring by
chance or arising from unknown or remote
causes; an unforeseen, unplanned event or
condition; a usually sudden event or change
occurring without intent or volition, through
carelessness, unawareness, ignorance, or the
like; an unexpected happening causing loss or
injury not due to fault or misconduct of the
person injured which may form the basis for
legal relief.
30
[George J. Kenny & Frank A. Lattal, New Jersey
Insurance Law app’x A (2d ed. 2000) (citing
Prop. Cas. Co. of MCA v. Conway, 147 N.J. 322,
327 (1997) (defining “accident” for purposes
of determining whether homeowner’s insurance
policy covers parent’s vicarious liability for
child’s vandalism of school)) (additional
citations omitted).]
Although we have yet to define the term “accident” in a CGL
policy, this Court has considered the word in the context of a
homeowner’s insurance policy in two prior cases where, as here,
coverage was limited to damage caused by an “occurrence,” which
was defined as an “accident.” In Property Casualty Co., supra,
the Court found that the “ordinary meaning” of the term
“accident” is “an unintended or unexpected event.” 147 N.J. at
327, 330 (holding that homeowner’s insurance provides coverage
for parent’s vicarious liability for child’s vandalism of
school). In Voorhees v. Preferred Mutual Insurance Co., in
which the underlying action was a defamation suit brought by a
teacher against a parent, we determined “that the accidental
nature of an occurrence is determined by analyzing whether the
alleged wrongdoer intended or expected to cause an injury.” 128
N.J. 165, 183 (1992). Thus, we held that if the alleged
wrongdoer did not intend or expect to cause an injury, then “the
resulting injury is ‘accidental.’” Ibid.Based on those guiding principles, we find that the term
“accident” in the policies at issue encompasses unintended and
31
unexpected harm caused by negligent conduct. That construction
of the term “accident” as it relates to an “occurrence” in a CGL
policy aligns with both the commonly accepted definitions of
“accident” and the legal import given to the term by both this
and other jurisdictions. See, e.g., Greystone, supra, 661 F.3d
at 1284 (finding “the term ‘accident’ . . . incorporates [both]
a ‘fortuitous event,’ and ‘an unanticipated or unusual result
flowing from a commonplace cause’”) (internal citations
omitted); Sheehan Constr., supra, 935 N.E.2d at 170 (“Implicit
in the meaning of “accident” is the lack of intentionality.”);
Travelers, supra, 216 S.W.3d at 308 (“[C]onclud[ing] that the
term ‘accident’ as used in the [1986] CGL [policy] means ‘an
unforeseen or unexpected event’ . . . consider[ed] . . . from
the perspective of the insured.”); Am. Girl, Inc., supra, 673
N.W.2d at 76 (finding “accident” and therefore “occurrence”
where “[n]either the cause nor the harm was intended,
anticipated, or expected”).
Applying our definition, we must now determine whether the
consequential water damage to the completed, nondefective
portions of Cypress Point flowing from the subcontractors’ poor
workmanship was foreseeable. Here, no one claims that the
subcontractors intentionally performed substandard work that led
to the water damage. Rather, relying on Weedo, the insurers
assert that damage to an insured’s work caused by a
32
subcontractor’s faulty workmanship is foreseeable to the insured
developer because damage to any portion of the completed project
is the normal, predictable risk of doing business. Thus, in the
insurers’ view, a developer’s failure to ensure that a
subcontractor’s work is sound results in a breach of contract,
not a covered “accident” (or “occurrence”) under the terms of
the policies. We disagree.
To begin with, defendant’s argument that a breach of
contract cannot give rise to a covered “occurrence” ignores the
question of initial coverage. Indeed, as the Wisconsin Supreme
Court highlighted in Am. Girl, Inc., supra,
[while] CGL policies generally do not cover
contract claims arising out of the insured’s
defective work or product, . . . this is by
operation of the CGL’s business risk
exclusions, not because a loss actionable only
in contract can never be the result of an
“occurrence” within the meaning of the CGL’s
initial grant of coverage. This distinction
is sometimes overlooked, and has resulted in
some regrettably overbroad generalizations
about CGL policies in our case law.
[673 N.W.2d at 76 (emphasis added).]
See also U.S. Fire, supra, 979 So. 2d at 884 (rejecting CGL
insurer’s “argument that a breach of contract can never result
in an ‘accident,’” because such an assertion “is not supported
by the plain language of the policies”).
Moreover, the insurers’ argument fails to recognize that
Weedo and its progeny were decided based upon exclusions
33
contained within the pre-1986 CGL policy, rather than an
interpretation of the policy’s terms granting coverage in the
first instance. See Travelers, supra, 216 S.W.3d at 307 (noting
that “Weedo . . . is [not] relevant to the determination of
whether there has been an ‘occurrence’ under the terms of the
‘insuring agreement’” because “[i]n Weedo, the insurer conceded
that the ‘insuring agreement’ granted coverage and asserted that
the sole issue . . . was whether the ‘exclusions’ precluded
coverage” (citing Weedo, supra, 81 N.J. at 237 n.2)) (emphasis
added); Am. Girl, Inc., supra, 673 N.W.2d at 77 (same).
In any event, under our interpretation of the term
“occurrence” in the policies, consequential harm caused by
negligent work is an “accident.” Therefore, because the result
of the subcontractors’ faulty workmanship here –- consequential
water damage to the completed and nondefective portions of
Cypress Point -- was an “accident,” it is an “occurrence” under
the policies and is therefore covered so long as the other
parameters set by the policies are met. See Weedo, supra, 81
N.J. at 249 (noting that CGL policies do “not cover an accident
of faulty workmanship but rather faulty workmanship that causes
an accident”).
B.
Having determined that the Association’s claims are covered
under the policies’ general insuring agreement, we next turn to
34
the final two steps in our analysis in which we examine the
policies’ pertinent exclusions and then, if applicable, any
exceptions to those exclusions. In doing so, our
“responsibility is to give effect to the whole policy, not just
one part of it.” Arrow Indus., supra, 232 N.J. Super. at 334
(citing Boswell, supra, 38 N.J. Super. at 604); see also Herbert
L. Farkas Co. v. N.Y. Fire Ins. Co., 5 N.J. 604, 610 (1950)
(reinforcing principal that insurance policies “must be
considered as a whole and effect given to every part thereof”).
“In addition, we must also be mindful of the corollary rule of
construction that if the clause in question is one of exclusion
or exception designed to limit the protection afforded by the
general coverage provisions of the policy, a strict
interpretation is in order.” Bello v. Hurley Limousines, 249
N.J. Super. 31, 40-41 (1991) (citing Butler, supra, 56 N.J. at
574; Mazzilli, supra, 35 N.J. at 7-8).
The policies at issue here, like those in Weedo and
Firemen’s, contain numerous exclusions eliminating coverage for
a variety of business risks including the cost of repairing
damage to the contractor’s own work –- the “your work”
exclusion. See Weedo, supra, 81 N.J. at 241; Firemen’s, supra,
387 N.J. Super. at 441. As outlined above, the “your work”
exclusion precludes coverage under the policies for “‘property
damage’ to ‘your work’ arising out of it or any part of it.”
35
Thus, under the second step of our three-part analysis, and
viewing that exclusion in isolation, the policies would seem to
eliminate coverage for the water damage to the completed
sections of Cypress Point.
However, the “your work” exclusion contains an important
exception that “narrow[s] the exclusion by expressly declaring
that it does not apply ‘if the damaged work or the work out of
which the damage arises was performed on your behalf by a
subcontractor.’” Sheehan Constr., supra, 935 N.E.2d at 171
(quoting 1986 ISO standard form CGL policy). This exception to
the “your work” exclusion was not contained in the 1976 ISO CGL
form, but unquestionably applies in this case. Accordingly, the
third and final step of our inquiry compels the conclusion that,
because the water damage to the completed portions of Cypress
Point is alleged to have arisen out of faulty workmanship
performed by subcontractors, it is a covered loss.
Indeed, as courts and commentators have acknowledged, the
1986 ISO standard form CGL policy’s inclusion of the
“subcontractor exception” “resulted both because of the demands
of the policyholder community (which wanted this sort of
coverage) and the view of insurers that the CGL [policy] was a
more attractive product that could be better sold if it
contained this coverage.” French, supra, 47 Gonz. L. Rev. at 8-
9 (citation omitted); see also Greystone, supra, 661 F.3d at
36
1287 (noting that “the evolution of CGL-policy language shows
that the current standard-form policy, which was used in the
present case, was specifically designed to provide general
contractors with at least some insurance coverage for damage
caused by the faulty workmanship of their subcontractors”);
Lamar Homes, supra, 242 S.W.3d at 12 (“By incorporating the
subcontractor exception into the ‘your-work’ exclusion, the
insurance industry specifically contemplated coverage for
property damage caused by a subcontractor’s defective
performance.”). Moreover, the ISO itself addressed the addition
of the subcontractor exception in a July 1986 circular, which
“confirm[ed] that the 1986 revisions to the standard CGL policy
. . . specifically ‘cover[ed] damage caused by faulty
workmanship to other parts of work in progress; and damage to,
or caused by, a subcontractor’s work after the insured’s
operations are completed.’” U.S. Fire, supra, 979 So. 2d at 879
(citing ISO Circular, Commercial Gen. Liab. Program Instructions
Pamphlet, No. GL-86-204 (July 15, 1986)).
Furthermore, we agree with other courts that “if the
insurer decides that this is a risk it does not want to insure,
it can clearly amend the policy to exclude coverage, as can be
done simply by either eliminating the subcontractor exception or
adding a breach of contract exclusion.” Id. at 891; Greystone,
supra, 661 F.3d at 1288 (“Insurers are of course free to amend
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CGL agreements or offer riders so as to reallocate the risk of
subcontractor negligence.”). The insurers here chose not to
negotiate away the subcontractor exception and instead issued
the developer a series of 1986 ISO standard form CGL policies
which explicitly provide coverage for property damage caused by
a subcontractor’s defective performance. Thus, the
Association’s claims of consequential damages caused by the
subcontractors’ faulty workmanship are covered not only by the
insuring agreements’ initial grant of coverage but also by the
subcontractor exception to the “your work” exclusion.
As a final note, we decline to address the issue raised by
the Appellate Division of whether the subcontractor exception in
the policies created a “reasonable expectation” that
“consequential damages caused by the subcontractors’ faulty
workmanship constituted ‘property damage’ and an
‘occurrence[,]’” in light of our finding that the policy
unambiguously provides coverage in such instances. See Di Orio
v. New Jersey Mfrs. Ins. Co., 79 N.J. 257, 269-70 (observing
that where insurance policy’s provision is not ambiguous or
otherwise misleading, courts need not consider “objectively
reasonable expectation” of average policyholder in interpreting
the policy). In any event, to the extent that the parties
interpret the term “accident” in the policy differently, thereby
raising the specter of ambiguity within the policy itself, we
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note that such ambiguities are to be read in favor of the
insured, not the insurer. See Doto, supra, 140 N.J. at 556
(noting “the importance of construing contracts of insurance to
reflect the reasonable expectations of the insured in the face
of ambiguous language and phrasing” in case addressing coverage
under commercial-umbrella liability policy (citing State v.
Signo Trading Int’l, 130 N.J. 51, 62 (1992))).
In sum, we hold that the trial court erred in entering
summary judgement in favor of the insurers because the
Association’s claims of consequential water damage resulting
from defective workmanship performed by subcontractors
constitutes both an “occurrence” and “property damage” under the
terms of the policies.
V.
The judgment of the Appellate Division is affirmed and the
matter is remanded to the trial court for proceedings consistent
with this opinion.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN,
PATTERSON, and FERNANDEZ-VINA join in JUSTICE SOLOMON’s opinion.
JUDGE CUFF (temporarily assigned) did not participate.
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