Construction Defects, Insurance Claim Occurrence
Uncommon Occurrence: New Jersey Assembly Takes Up Bill Covering Contractors for Construction Defects
Mark Shifton
December 4, 2013
On November 25, 2013, a bill was introduced before the New Jersey State Assembly which, if enacted into law, would redefine the term “occurrence” in an insurance policy to include damages resulting from a contractor’s faulty workmanship, thereby providing the possibility that such damages would be covered by the contractor’s insurer.
As we have mentioned several times (as recently as last Monday, and also back in September), the definition of the term “occurrence” in the construction defect context is a thorny issue. A common view is that an occurrence under the meaning of an insurance policy is an unexpected fortuity, and damages caused by an insured’s deficient work is not fortuity. Accordingly, courts in many jurisdictions have held that property damage caused by a contractor’s faulty workmanship is not an “occurrence” under the contractor’s insurance policy, and thus the contractor’s insurer has no obligation to indemnify the contractor for a judgment or settlement in a construction defect action. A4510 seeks to change this (in policies written in New Jersey) by redefining the term occurrence to explicitly include claims of property damage resulting from faulty workmanship.
A4510 provides, in pertinent part:
2. A commercial liability insurance policy shall not be delivered, issued, executed, or renewed in this State … unless the policy contains a definition of occurrence that includes:
a. an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
b. property damage or bodily injury resulting from faulty workmanship.
Notably, A4510's effect is limited to the definition of the policy term “occurrence;” the bill does not obligate insurers to provide coverage for construction defects. If ultimately enacted into law, A4510 would have no effect on the various “business risk” exclusions commonly found in commercial general liability policies, such as the “your work” or “insured product” exclusions. Thus, even in the case where a contractor’s deficient workmanship is held to be an “occurrence” under the meaning of the policy, the contractor’s policy will often exclude coverage on other grounds.
Most courts have held that a contractor’s deficient work does not constitute an “occurrence,” and New Jersey courts have followed this view.A4510 would change that, and would force courts deciding coverage disputes past the threshold of whether alleged property damage constitutes an “occurrence,” and into the analysis of whether the alleged damages constitute insured property damages under the policy. While not focused on the issue of the meaning of the term “occurrence” itself, in the seminal case of Weedo v. Stone-E-Brick, 81 N.J. 233 (1979), the New Jersey Supreme Court discussed the two unique risks faced by contractors – the first (business) risk is the risk that the contractor’s work may be deficient and will thus breach a warranty. In this situation, the contractor controls the quality of its work, and it should be expected to bear the cost of repairing or replacing it; obligating an insurer to cover this risk would be to make the insurer a guarantor of its insured’s work. The second risk is the risk of damage to property caused by the contractor’s deficient workmanship – not the risk that the contractor’s work is deficient and needs to be replaced, but the risk that the contractor’s deficient work causes property damage to other work on the project. In such a situation, the contractor’s potential liability is greatly expanded, and is intended to be covered by insurance. In Weedo, the New Jersey Supreme Court put it as “the policy in question does not cover an accident of faulty workmanship but rather faulty workmanship which causes an accident.”
Thus, things are a lot more complicated than they seem. A4510, if enacted into law, would settle the question as to whether damages alleged in a construction defect action constitute an “occurrence” – they will. Contractors seeking coverage under the policies (and their insurers seeking to disclaim coverage), however, will still need to litigate the issue of whether the alleged property damage is covered by the insuring clause, and if it is, whether the various exclusions apply.
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SOURCE: greenbuildingconstructionlaw.com