State of The Occurrence

New Jersey – Insurance Coverage

Key Points:

• The occurrence issue is not resolved in New Jersey.
• A recent appellate division case may have opened the door on the issue that many practitioners believe is already resolved in New Jersey.

New Jersey Supreme Has Not Ruled on Whether Faulty Workmanship Can Satisfy the Occurrence Requirement

This article discusses the current state of the law in New Jersey regarding the question of whether a contractor's faulty or defective workmanship can give rise to an occurrence as the term is defined in a standard commercial general liability policy (CGL). The New Jersey Supreme Court's decision in Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (N.J. 1979) is often cited as the seminal case on this point. While Weedo is frequently cited for the proposition that faulty workmanship cannot give rise to an occurrence when the damage sought is the cost to repair the work itself, the fact is that the Weedo Court did not rule on this issue. This was indicated by the court in the following footnote of its opinion:

2. [The insurer] conceded at oral argument before us, as apparently it did before the Appellate Division, [citation omitted] that but for the exclusion in the policy, coverage would obtain. Hence, we need not address the validity of one of the carrier's initially offered grounds of non-coverage, namely, that the policy did not extend coverage for claims made even absent the exclusions.

What the Weedo Court specifically held was that exclusions (n) and (o) in a standard commercial general liability policy barred coverage for the contractor seeking coverage in the case. Significantly, the court did not specifically rule on whether faulty workmanship can give rise to an occurrence. The significance of this point cannot be overstated with regard to coverage litigation. It is the insured's initial burden to bring the claim within the terms and conditions of the policy. If there is no occurrence, then the insured has not satisfied the burden, coverage is not triggered and the question of whether there is an applicable exclusion becomes irrelevant. On the other hand, if there is an occurrence—with concurrent bodily injury or property damage—and coverage is triggered, the burden shifts to the insurer to prove the application of a clear and unambiguous exclusion.

While Weedo did not specifically rule on the occurrence issue, it did lay the ground work by framing what would essentially become the "occurrence" question when it discussed the concept of "business risk." The Weedo decision contains an extensive discussion regarding the purpose of liability insurance and how it was not designed to cover "business risks." The court determined that liability policies were not designed to cover the risk that a contractor would fail to provide the product it promised, free from defects. Ensuring that the customer received the benefit of the bargain was achieved through warranties and not liability insurance. The risks and costs associated with the inability to meet its contractual promise was something that every business must assume and was not the objective of liability insurance.

Major Precedent Setting Case Involves the 1973 CGL Form

 The next significant case addressing the issue of coverage for faulty workmanship was the appellate division's decision in Fireman's Fund Insurance Company of Newark v. National Union Fire Insurance Company, 387 N.J. Super. 434 (App. Div. 2006). In National Union, a builder and developer of condominiums was sued by a condominium association for defectively constructing the development. The insurer for the builder voluntarily provided a defense and then filed a declaratory judgment action against a number of insurers, those who had issued policies to the developer during the long construction period. After a liability trial in the underlying construction defect litigation, the developer was held liable for seven specific construction defects.

The insurers filed motions for summary judgment at the trial level, arguing that the policies in question did not provide coverage for faulty workmanship. The specific arguments asserted by the insurers were that faulty workmanship was not "property damage" as the term is defined in a standard CGL policy and that faulty workmanship is not an "occurrence" that triggers coverage under a CGL policy. The trial court granted the insurers' motion, and the condominium association appealed the decision because, as is often the case, the developer could not satisfy the judgment without insurance. The appellate division determined that defective materials and workmanship are not considered "property damage" as the term is defined in CGL policy.

The National Union Court also held that defective materials and workmanship did not constitute an "occurrence." The appellate division reiterated the "business risk" concept of Weedo and the belief that a contractor retains control over the quality of its own work and so should be expected to bear the cost of curing its own deficient performance.

National Union is often cited as a case that squarely addresses the occurrence debate in the context of faulty workmanship claims, and there is no question that the court made a pronouncement on the issue. Nonetheless, there are two aspects to the National Union decision that should give pause to any belief that the occurrence issue is settled in New Jersey. The first is that the National Union Court did not have to rule on the occurrence issue. The court had already found that there was no "property damage," and the occurrence discussion begins with a declaration that it is not necessary to rule on the occurrence issue because of the property damage finding. Thus, there is an argument to be made that National Union's occurrence ruling is dicta and not binding authority. Also, while National Union is a 2006 decision, all the policies at issue in the case contained the 1973 version of the standard CGL coverage form. The standard CGL policy examined in Weedo and National Union has been modified a number of times since 1973. Most notably, the following language was added to the standard CGL policy definition of "Damage to Your Work":

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

This language has been interpreted to support an argument that the current standard CGL policy covers builders and developers and any contractor for construction defect claims, so long as subcontractors are employed to perform the work. There are likely few builders who don't use subcontractors to carry out their work. The National Union case did not address the new language, but the Court did address the issue that arises from the language in the recent edition of the form. The insured builder in National Union argued that work performed by subcontractors did constitute property damage and an occurrence from its perspective. The National Union Court held that general contractors', developers' and builders' product consists of the combined work of its subcontractors. The National Union Court did not find the argument persuasive in theory, but the Court did not address the language of the later CGL forms.

Recent Cases Have Come From the Federal District Court and Not the State Court

In an unpublished 2008 decision from the District Court of New Jersey, the court held that faulty workmanship was not an occurrence. Pennsylvania National Mutual Casualty Company v. Parkshore Development Corporation, 2008 U.S. Dist. LEXIS 71318 (D.N.J., September 10, 2008). The court held that when the damages sought consist of the cost to repair and replace defective work and materials, there has been no occurrence. The Parkshore Court cited National Union in support of its decision. Interestingly, in the memorandum of decision, the Parkshore Court recognized the fact that the New Jersey Supreme Court in Weedo, supra, did not address the issue of whether faulty workmanship constitutes an occurrence under a general liability policy. The Parkshore Court was not bound by the ruling in the National Union case but, nevertheless, held that there was no occurrence. The Parkshore decision was later upheld by the Third Circuit in Pennsylvania National Mutual Casualty Company v. Parkshore Development Corporation, 403 Fed. Appx. 770 (3d Cir. N.J. 2010). Other federal cases ruling that faulty workmanship is not an occurrence include Pennsylvania General Insurance Company v. Menk Corporation, 2011 U.S. Dist. LEXIS 134086 (D.N.J., November 21, 2011); Zurich American Insurance Company v. R.M. Shoemaker, 2012 U.S. Dist 35760 (E.D. Pa. March 16 2012).

The Question Has Not Been Resolved

In January of this year, the New Jersey appellate division in East Coast Associates v. Builders Firstsource, 2012 N.J. Super. Unpub. 2012, included language in its decision indicating that the occurrence issue is not resolved. Builders Firstsource was a coverage dispute involving property damage caused by alleged faulty workmanship, but it was not necessary for the court to reach the occurrence issue. However, the Builders Firstsource Court included a small discussion at the end of its decision on the issue. The court recognized National Union's holding that faulty workmanship was not an occurrence, but the court also indicated that the holding was arguably not necessary to the court's decision and was dicta. In the last paragraph of the opinion, the court also mentions Weedo and the business risk exclusions that are at the heart of the occurrence issue. While not going so far as to say that Weedo was no longer authoritative, the Builders Firstsource Court stated that the CGL form had changed. The court made specific reference to the exception for damage caused by subcontractors and acknowledged that the scope of the exception remains a question to be answered.

*David is an associate in our Cherry Hill, New Jersey, office who can be reached at 609.414.6317 or ddblake@mdwcg.com.

Defense Digest, Vol. 18, No. 2, June 2012