McCarter & English LLP on New Jersey Appellate Division Opens Door to Coverage for Subcontractors' Defective Work

Craig Davis and Nicholas Insua   By Craig W. Davis and Nicholas M. Insua, Attorneys, McCarter & English, LLP

A recent decision by New Jersey's Appellate Division questions the continued viability of prior New Jersey decisional law regarding whether property damage caused by faulty construction constitutes an "occurrence" for purposes of commercial general liability ("CGL") coverage.  The court in East Coast Residential Associates, LLC v. Builders Firstsource - Northeast Group, LLC, No. A-4808-09T1, 2012 N.J. Super. Unpub. LEXIS 64 (App. Div. Jan 11, 2012) (per curiam), held against a general contractor insured who sought additional insured coverage under a subcontractor's policy, based on an explicit provision excluding coverage for property damage occurring after completion of a subcontractor's work.

In what amounts to a postscript to the decision, however, the appellate court opined that a prior finding of the court that faulty work was not an occurrence was dicta, and also suggested that the insurance industry's revision to the "business risk" exclusions in CGL policies raised questions about the continued viability of the New Jersey Supreme Court's decision in Weedo v. Stone-E-Brick, 405 A.2d 788 (N.J. 1978); i.e., that such exclusions preclude the type of coverage for property damage arising from a subcontractor's work.

The East Coast court signals a possible retreat from the conclusions drawn from prior New Jersey decisions that business risk exclusions bar coverage for defective construction liabilities and property damage resulting from defective construction is not an "occurrence" covered by a CGL policy.  The decision also casts doubt on the Third Circuit's holding in Pennsylvania National Mutual Casualty Insurance Co. v. Parkshore Development Corp., 403 Fed. Appx. 770 (3d Cir. 2010), where the court relied on New Jersey precedent to hold that water damage caused by a subcontractor's faulty work did not constitute an occurrence under the general contractor's CGL policy.  Hopefully, "East Coast provides a potential corrective to the Parkshore decision, and offers some clarification concerning what has been a murky and ill-defined principle" under New Jersey law; i.e., "whether damage caused by faulty workmanship can ever bee deemed an occurrence under a CGL policy."

Craig W. Davis is an associate and Nicholas Insua is a partner at McCarter & English, LLP in Newark, New Jersey, where they regularly represent policyholders in disputes with their insurance companies.  The opinions expressed in this commentary are those of the authors and not necessarily of McCarter & English or its clients.

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