Proposed Bill Would Require All Commercial Liability Insurance Policies Issued In New Jersey to Specify Coverage For “Faulty Workmanship”
Assemblyman Gary S. Schaer of New Jersey’s 36th District introduced a proposed bill, A.B. 1075, that would require all commercial liability insurance policies issued in New Jersey to include “faulty workmanship” within the definition of “occurrence.”
The proposed bill “provides that a commercial liability insurance policy shall not be delivered, issued, executed, or renewed in this State, on or after the bill’s effective date, unless the policy contains a definition of occurrence that includes:
an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
property damage or bodily injury resulting from faulty workmanship.”
The proposed bill was introduced on January 11, 2022, and must move through the committee review process as an initial step. A substantially similar proposed bill, NJ A3401, was introduced by Assemblyman Schaer on February 25, 2020. The earlier bill was referred to the Assembly Financial Institutions and Insurance Committee but failed to make it through for passage.
The proposed bill is the next logical step following the New Jersey Supreme Court’s landmark decision in Cypress Point Condo. Assn. v. Adria Towers, LLC, 226 N.J. 403 (2016), which the Court issued on August 4, 2016. The issue in Cypress Point was whether rainwater damage caused by a subcontractor’s faulty workmanship constituted “property damage” caused by an “occurrence” to trigger coverage under the condominium developer’s commercial general liability (“CGL”) insurance policy. Cypress Point, a condominium association, filed suit against Adria Towers, the developer and general contractor for the project, its insurers, and various subcontractors hired by Adria Towers, alleging faulty workmanship during construction, which resulted in consequential damages to common elements and unit owner property.
After construction was complete, unit owners began experiencing roof leaks and water infiltration in their units and the common areas. The association alleged that consequential damages to the common elements and unit owner property were caused by rainwater leaking into the interior of the property due to faulty workmanship during construction. At issue was language contained in the 1986 ISP standard form CGL policy issued to the developer, which defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In reviewing the association’s claims in conjunction with the 1986 ISP standard form CGL policy definition of “occurrence,” the Court held that the consequential damages caused by the subcontractors’ faulty workmanship constituted “property damage,” and the water leaking into the interior of the property due to the subcontractors’ faulty workmanship was an “occurrence” triggering coverage under the CGL policies at issue.
In arriving at its holding, the Court found that the term “accident” contained in the policy was not defined. Upon review of the policy and relevant case law, the Court concluded that “the term ‘accident’ in the policies at issue encompass[ed] unintended and unexpected harm caused by negligent conduct.” Having defined “accident,” the Court turned to the critical question of whether “the consequential water damage to the completed, nondefective portions of Cypress Point flowing from the subcontractors’ poor workmanship was foreseeable.” To this point, the Court noted that “no one claim[ed] that the subcontractors intentionally performed substandard work that led to the water damage.”
As a result, the Court held that
“under our interpretation of the term ‘occurrence’ in the policies, consequential harm caused by negligent work is an ‘accident.’ Therefore, because the result of the subcontractors’ faulty workmanship here—consequential water damage to the completed and nondefective portions of Cypress Point—was an ‘accident,’ it is an ‘occurrence’ under the policies and is therefore covered so long as the other parameters set by the policies are met.”
In so ruling, the Court’s decision in Cypress Point resolved decades of conflicting and contradictory rulings from New Jersey’s lower courts. The proposed bill introduced by Assemblyman Gary S. Schaer would codify the Court’s holding as part of the statutory requirements insurers must meet in order to issue policies in New Jersey. Whether or not the bill will gain traction in the legislature this time around and move through the committee process is unknown. If you’re interested in following the bill’s progress, you can track it here.