Is Weedo v. Stone-E-Brick Going Down?

In Cypress Point Condo. Ass'n, Inc. v. Adria Towers, LLC, 223 N.J. 355, 124 A.3d 240 (2015), the New Jersey Supreme Court holds the ongoing viability of Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979), in the balance. For the uninitiated, Weedo is one of the most notorious and misunderstood cases in the history of construction defect insurance coverage. For almost 40 years, insurers have been relying, and many would say misapplying, that case and its outmoded business risk rationale to the detriment of the construction industry.

Shortly, the New Jersey Supreme Court can exercise the opportunity to put Weedo and its misbegotten business risk doctrine to rest as to construction defect coverage under modern commercial general liability (CGL) policies.

The Coverage Dispute

In Cypress Point Condo. Ass'n, Inc. v. Adria Towers, LLC, 118 A.3d 1080 (N.J. Super. Ct. App. Div. 2015), Cypress Point Condominium Association (Cypress Point) brought construction defect claims against the developer and general contractor, Adria Towers, LLC; its insurers, Evanston Insurance Company and Crum & Forster Specialty Insurance Company; and various subcontractors who performed the faulty construction work on the condominium project. The subcontractors did not properly install the roof; flashing; gutters and leaders; brick; and exterior insulation and finish systems (EIFS) façade, windows, doors, and sealants. This caused damage to the common areas of the condominium building and to individual unit owners' property, including water damage in the units.

Cypress Point sought coverage for this damage under Adria Towers' CGL policies. The trial court applied the holdings of Weedo and Firemen's Ins. Co. of Newark v. National Union Fire Ins. Co., 387 N.J. Super. 434, 904 A.2d 754 (N.J. Super. Ct. App. Div. 2006), one of Weedo's progeny, and accordingly determined that there was no "property damage" caused by an "occurrence" under the policies. Therefore, the trial court granted summary judgment in favor of Evanston and dismissed the claims against Crum & Forster.

Effect of Weedo v. Stone-E-Brick and the Business Risk Doctrine

In Weedo v. Stone-E-Brick, a claim was made against the insured contractor (Stone-E-Brick) for faulty masonry work on a home. The insured had also performed defective roofing and gutter work on another home for which another claim was made against him. In the course of ultimately denying coverage based on the damage to products and the work performed exclusions, the court engaged in an extended analysis of insurable versus uninsurable risks.

However, that analysis applied to the limited coverage under the 1966 CGL policy form before the court. That policy form was not endorsed with a Broad Form Property Damage Endorsement (BFPDE), so it was not intended to provide for an exception for a subcontractor's work. That type of endorsement was readily available to general contractors. As such, the court's analysis was relatively uncomplicated, though inapplicable to other cases involving other policy forms expressly broadening coverage to include property damage arising out of subcontractor work.

Even more problematic is the fact that the Weedo court addressed only the business risk exclusions in the policy and did not opine on the existence of an occurrence, and even the insurer conceded that "but for the exclusions in the policy, coverage would obtain."

In support of its denial of coverage, the Weedo court quoted the following from a 1971 law review article by Professor Roger Henderson.

"The risk intended to be insured is the possibility that the goods, products or work of the insured, once relinquished or completed, will cause bodily injury or damage to property other than to the product or completed work itself, and for which the insured may be found liable. The insured, as a source of goods or services, may be liable as a matter of contract law to make good on products or work which is defective or otherwise unsuitable because it is lacking in some capacity. This may even extend to an obligation to completely replace or rebuild the deficient product or work. This liability, however, is not what the coverages in question are designed to protect against. The coverage is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained."¹

This law review article, for better or for worse, is another of the most frequently cited authorities in support of the denial of coverage for defective workmanship to an insured contractor. For example, the Henderson law review article has been cited in nearly 200 court opinions, and the Weedo case has been cited in nearly 500 opinions. And many of those opinions rely on both authorities.

Nevertheless, the primary purpose of the Henderson article was to analyze the 1966 revisions to the CGL form and, more specifically, the dichotomy established in those revisions between the "products hazard," the hazard applicable to product manufacturers, and the "completed operations hazard," the hazard describing the risks associated with service providers such as construction contractors. That dichotomy between products coverage on the one hand and completed operations coverage on the other hand is maintained in the 1986 forms through the separate definitions of "your work" and "your product." The article contains no analysis as to the effect of the addition of the exception for a subcontractor's work through the BFPDE in 1973 or, of course, the effect of the addition of the subcontractor exception to the 1986 policy form.

Despite the fact that hundreds of cases have cited them, much of the analysis of Weedo and the Henderson law review article has been rendered obsolete as to the newer policy forms that expand coverage for insured contractors.

It goes without saying that the New Jersey Supreme Court's opinion in Weedo v. Stone-E-Brick caused considerable confusion among the appellate courts and federal district courts in New Jersey. Upon close analysis, many of these cases appear to have been decided on the basis that they involved claims that involved only damage or defects in the work itself. Nevertheless, they represent an extension of Weedo beyond its business risk exclusionary analysis to the coverage grant under the insuring agreement and the definition of occurrence.

For example, in Firemen's Ins. Co. of Newark v. National Union Fire Ins. Co., the court held that the property damage arising out of replacing defective firewalls installed by the insured on a condominium did not constitute an "occurrence" under the 1973 CGL policy form, applying Weedo even though the Weedo case based its business risk analysis on the 1973 policy exclusions. Similarly, in Pennsylvania Nat'l Mut. Cas. Ins. Co. v. Parkshore Dev. Corp., 403 Fed. Appx. 770 (3d Cir. N.J. 2010), the court held that faulty work performed by the insured's subcontractors that caused damage to other nondefective work was not an occurrence under the 1986 policy form because the entire project was the insured's work, and faulty construction causing damage only to the insured's work is not an occurrence.

The Court of Appeals Opinion in Cypress Point

However, in Cypress Point, the New Jersey Superior Court, Appellate Division, distinguished prior caselaw, including Weedo, because the policy before it was written on the 1986 policy form, which, in its view, created a reasonable expectation that a subcontractor's faulty workmanship is to be treated differently from the work of a general contractor, based on the exception for property damage arising out of a subcontractor's work. The court further determined that property damage to other work besides the subcontractor's own defective work constituted consequential damage and an occurrence. The court also emphasized the fact that coverage was not sought for the subcontractors' work itself, but only for consequential damage to other portions of the work.

Cypress Point is a significant opinion because it is the first New Jersey opinion to clearly distinguish Weedo v. Stone-E-Brick, which has been relied on by insurers across the country for nearly 40 years to justify denying coverage to contractors for damage caused by defective work on the basis that such damage does not constitute an occurrence of property damage under CGL policies. Unfortunately, too many courts in and out of New Jersey have followed the Weedo v. Stone-E-Brick rationale to deny coverage to insured contractors for damage that should otherwise have been covered under their policies. Moreover, in many of those cases, the Weedo opinion (and the Henderson article) is cited in support of the application of the business risk doctrine in derogation of the policy language before the respective courts, particularly as to unduly narrow interpretations of the definition of occurrence so as to deny coverage for construction defects.

N.J. Supreme Court Proceedings

The insurers appealed the Appellate Division's decision to the New Jersey Supreme Court. At the time of this writing, briefing is closed and oral arguments are set for the April 25–26, 2016, docket. Both sides to the dispute have received amici curiae support. The insurance industry argues for the continued relevance of Weedo, despite its reliance on policy forms that are no longer used. On the other hand, amici curiae for the construction industry, including the Associated General Contractors of America, Associated Construction Contractors of New Jersey, the National Association of Home Builders, the New Jersey Builders Association, and Leading Builders of America, together with the United Policyholders, support the position of Cypress Point Condominium Association, arguing that the Weedo decision has no place in determining whether defective workmanship constitutes an occurrence.² After arguments, the court will determine not only the outcome of Cypress Point, but likely the continued viability of the Weedo rationale.

¹R. Henderson, Insurance Protection for Products Liability and Completed Operations—What Every Lawyer Should Know, 50 Neb. L. Rev. 415, 441 (1971).

²The author filed an amici curiae brief on behalf of the Associated General Contractors of America and the Associated Construction Contractors of New Jersey in support of Cypress Point Condominium Association before the New Jersey Supreme Court.