Expert Commentary

The Demise of Weedo: Glad Tidings but Coverage Left on the Table

The New Jersey Supreme Court in Cypress Point Condo. Ass'n, Inc. v. Adria Towers, LLC, No. 076348, 2016 WL 4131662, 2016 N.J. LEXIS 847 (Aug. 4, 2016), issued its opinion on August 4, 2016, rejecting the application of the business risk doctrine as set out in Weedo v. Stone-E-Brick, 405 A.2d 788 (N.J. 1979) to the 1986 edition commercial general liability (CGL) insurance form. However, it narrowly interpreted the scope of coverage preserved under the subcontractor exception to the "your work" exclusion, effectively denying coverage to construction insureds for the damaged defective work of subcontractors.


Construction Defect Coverage
August 2016

If insurance coverage disputes are likened to rough and tumble elections (and there are definitely some similarities), New Jersey has to be regarded as one of those "battleground states." This is the third in an inadvertent "trilogy" of recent columns exploring the future of the business risk doctrine under New Jersey law in light of the Cypress Point Condo. Ass'n, Inc. v. Adria Towers, LLC, series of opinions in New Jersey.1 In those prior articles on this website, "Is Weedo v. Stone-E-Brick Going Down?" (April 2016) and "Defective Work as Occurrence: 'The Song Remains the Same'" (July 2016), the author discussed the impact of the pending appeal of the Appellate Division's opinion in Cypress Point Condo. Ass'n, Inc. v. Adria Towers, LLC, 441 N.J. Super. 369, 118 A.3d 1080 (App. Div. 2015), to the New Jersey Supreme Court.

Before the ink could barely dry on that article (to engage in a colloquialism in the digital age), the New Jersey Supreme Court issued its opinion affirming the Appellate Division's judgment in Cypress Point Condo. Ass'n, Inc. v. Adria Towers LLC, No. 076348, 2016 WL 4131662, 2016 N.J. LEXIS 847 (Aug. 4, 2016). While Cypress Point has attracted considerable attention, upon closer scrutiny, coverage that was intended to be provided to a general contractor for the defective work of its subcontractors was left on the table.

Setting the Table: The Troubled Reign of Weedo

New Jersey's notoriety as to insurance coverage for defective work has been the product of an infamous case decided nearly 40 years ago—Weedo v. Stone-E-Brick, 405 A.2d 788 (N.J. 1979). As an attorney who has litigated defective work coverage claims for 35 years, the author is extremely familiar with the Weedo opinion, which has been cited by insurers in nearly every coverage case to which construction insureds have been parties for the proposition that the construction insured is not entitled to liability insurance coverage for property damage arising out of defective workmanship.

The New Jersey Supreme Court in Weedo applied the "work performed" exclusion of the 1973 comprehensive general liability form, holding that it excluded coverage for the "business risk" of defective workmanship performed by the named insured contractor. That business risk rationale, though appropriate for that particular policy form, has been overextended by the insurance industry so that Weedo came to be cited for the proposition that the damage arising out of defective workmanship of the named insured does not constitute an "occurrence" (i.e., an "accident") under the standard commercial general liability (CGL) policy forms in use since 1986.2

Of course, that position flies in the face of the express inclusion of the "subcontractor exception" included in the 1986 policy form, and that provision, as an exception to the "your work" exclusion, preserves coverage for property damage arising out of the work of subcontractors of the named insured.

In fact, the Weedo business risk rationale maintained much of its vitality due to insurers who doggedly adhered to that position. Their effort was undertaken to avoid the preservation of coverage provided by the subcontractor exception that, in practice, preserved more coverage than the insurance industry bargained for.

Fast forward through 40 years of negative case law in New Jersey and, to a lesser extent, throughout the United States to the New Jersey Supreme Court's opinion in Cypress Point in which it affirmed the Appellate Division. The court recognized the national trend of case law interpreting the term "occurrence" and concluding that the meaning of "accident" includes "unintended and unexpected harm caused by negligent conduct," including unexpected damage to nondefective property resulting from faulty workmanship. The court found support in the subcontractor exception to the "your work" exclusion, holding that based on it, consequential damages caused by subcontractors' defective work are "property damage" and are the result of an "occurrence." Of course, that case involved the obligatory condominium project on which subcontractors had performed defective work that damaged common areas of the building and unit owners' property.

The court ultimately held that its prior opinion in Weedo was based on exclusions in the 1973 policy form that did not include the subcontractor exception to the "your work" exclusion, preserving coverage for property damage arising out of the work of the named insured's subcontractors.3

Shorting the Insured: Coverage Left on the Table

While Cypress Point is undoubtedly an important opinion if for no other reason than it puts the last nail in the coffin of Weedo, the opinion unfortunately stops short, as is the case with many other similar opinions. Those opinions limit the coverage preserved by the subcontractor exception only to other nondefective portions of the work, sometimes loosely referred to as "consequential" damages. However, the intent behind the exception is not only to provide coverage for that exposure, but also to provide an insured general contractor or developer with coverage for the actual defective work performed by its subcontractors. That is because the subcontractor exception is very broad, stating, "This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf [the named insured's behalf] by a subcontractor." Thus, the subcontractor exception itself explicitly states that the exclusion does not apply to defective but damaged work performed by a subcontractor.

Nevertheless, courts such as the New Jersey Supreme Court in Cypress Point stop short and simply hold that the term "occurrence" does not include "property damage" to the defective work itself. This is an undue restriction on the scope of coverage. There is no distinction between direct damages and consequential damages, often referred to by other courts as "resulting damages." Moreover, the term "occurrence" also makes no such distinction. It is only through the application of the exclusions, particularly the "your work" exclusion and the preservation of coverage for the property damage to a subcontractor's defective work, that such restrictions apply.

Recognition of the increased scope of coverage could make a major difference in many claims, particularly where a subcontractor has performed a significant scope of work on a project in a defective manner so as to cause property damage not only to the work of others in its project but also to its own work.

In some jurisdictions, the courts have engrafted even further restrictions upon the definition of "occurrence," holding that only property damage to third-party property, and not the work itself, can constitute an "occurrence." Again, there is no such restriction in the definitions of "property damage" or "occurrence" in the policy form. Moreover, there is no such restriction as to the subcontractor exception to the "your work" exclusion. Such representative opinions include Mello Constr., Inc. v. Acadia Ins. Co., 874 N.E.2d 1142 (Mass. App. Ct. 2007); Auto-Owners Ins. Co. v. Home Pride Cos., 684 N.W.2d 571 (Neb. 2004); and Erie Ins. Exch. v. Builders Mut. Ins. Co., 742 S.E.2d 803 (N.C. Ct. App. 2013).

Of course, more expansive readings of the scope of coverage, including the defective work of a subcontractor itself, have been adopted by other courts, including Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007); Sheehan Constr. Co. v. Continental Cas. Co., 935 N.E.2d 160 (Ind. 2010); and K&L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. 2013).4

Turning the Tables

As in any good trilogy, even an inadvertent one such as these Cypress Point articles, good authors leave room for future trilogies. The "occurrence" debate between construction insureds and insurers has split the case law, and even with the demise of Weedo, there is plenty of controversy to go around to generate future trilogies. After all, "no one could make this stuff up." Perhaps someday, the "subcontractor exception fulfilled" will deserve its own trilogy.

Acknowledgment

Special thanks to Amy Rauch for her assistance with this article. She is an associate in the Dallas-Fort Worth office of Cokinos, Bosien & Young, and is a member of the policyholder practice group.


1 Perhaps this trilogy could become known as the "Occurrence Trilogy," since it was certainly unexpected and unintended.

2 As set out in the first article of this trilogy, much of the reasoning of the New Jersey Supreme Court in Weedo was taken from a law review article that analyzed the 1966 revisions to the CGL form that did not include any exceptions preserving coverage for property damage arising out of a subcontractor's work. Roger C. Henderson, Insurance Protection for Products Liability and Completed Operations—What Every Lawyer Should Know, 50 Neb. L. Rev. 415 (1971).

3 Due to the prevalence of the business risk doctrine and the possibility of the New Jersey Supreme Court overturning its prior opinion, Cypress Point attracted amicus curiae participation from construction industry groups. The author filed an amicus curiae brief on behalf of the Associated General Contractors of America and the Associated Construction Contractors of New Jersey in support of Cypress Point before the New Jersey Supreme Court.

4 For a more in-depth discussion by the author of "occurrence," consequential damages, and the effect of the subcontractor exception, see Insurance for Defective Construction, Fourth Edition (IRMI 2015), Chapters 3 and 11.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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