A pending case before the New Jersey Supreme Court has the potential to put
a nail in the coffin of Weedo v. Stone-E-Brick, Inc., a case
that insurers have relied on for nearly 40 years to deny coverage to insured
contractors for construction defects.
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 case law, 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.