Courts in the United States, both on the State and Federal level,  have long recognized the concept that a contractor controls the quality of its own work and thus should be expected to bear the cost of remedying its own faulty performance. In recent decisions, the Superior Court of New Jersey, Appellate Division and  the United States District Court, Eastern District of New York have put contractors on further notice that in terms of "faulty workmanship" the only covered risk is injury to people or damage of property of others.

New Jersey Alert: Appellate Division Finds No Coverage For Condominium Defects.

In Firemen's Insurance Company of Newark and The Continental Insurance Co. v.  National Union Fire Insurance Co., et. al., 387 N.J. Super. 434 (App. Div. 2006), the appellate panel affirmed the trial court's ruling finding no "property damage" or "occurrence" was associated with defective construction of condominiums under 1973 ISO commercial general liability policies which is required for coverage to attach.  An "occurrence" is a required event, and is specifically defined by the policy.   This insurance coverage action stemmed from construction defect litigation brought by the Society Hill Condominium Association Inc. over various alleged defects in the construction, including the substandard construction of the condominium firewalls.  The association recovered a substantial judgment ($600,000.00 with an additional $336,000 in prejudgment interest). The court, in the suit against the builder, determined that the general contractor was liable for certain specific defects.  In the coverage claim, Firemen's Insurance Company, The Home Indemnity Company, and Crum & Forster's Insurance sought an order declaring that they did not have a duty to indemnify the insured.   The trial court concluded that faulty workmanship did not constitute "property damage" or an "occurrence" under the policy language, and, therefore, there was no coverage.

In affirming the trial court's ruling, the Appellate Division relied on the decision of the  Supreme Court of  New Jersey, Weedo v. Stone-E-Brick, Inc., 81 N.J. 233 (1979).  In Weedo, the Supreme Court held that a commercial general liability policy does not provide coverage for the insured for damages in an action for breach of contract and faulty workmanship, where the damages claimed are the cost of correcting the work itself. Though Weedo addressed faulty work in terms of policy exclusions, it also addressed  the question of whether a risk falls within the scope of the coverage provided by the policy.  It has been determined by most courts that faulty workmanship does not constitute an "occurrence" which trigger's coverage.  Since an "occurrence" is a required event for coverage, the insured had no coverage.

The Appellate Court further reasoned that general liability policies, such as those in dispute in the Firemen's Insurance Company of Newark and The Continental Insurance Co. v.  National Union Fire Insurance Co. case, are not designed to provide contractors and developers with coverage against claims that their work is inferior or defective.  The risk of replacing and repairing defective materials or poor workmanship has generally been considered a "commercial risk" which is not passed on to the liability insurer. Rather, liability coverage comes into play when the insured's defective materials or work cause injury to property other than the insured's own work or products.  The New Jersey  courts have also stressed that actual physical damage to the property of another (consequential damage) is required.  Thus, economic loss or diminution in value, as a result of the faulty work, is insufficient to provide coverage.  Weedo at 243.

New York Alert: The United States District Court, Eastern District of New York Finds No Coverage For A Subcontractor's Failure To Mix Concrete Properly.    

In Amin Realty v. Travelers Casualty Co., 2006 WL 1720401 (E.D.N.Y. 2006), the United States District Court, Eastern District of New York found that a subcontractor's failure to properly mix and pour the concrete foundation for a four-story building was not an "occurrence" under a commercial general liability policy.

This insurance coverage lawsuit stemmed from a claim for breach of contract and negligence brought by Amin Realty LLC against K&R Construction Corp. over a defect in construction, specifically the installation of improperly mixed concrete. Amin Realty contracted with K&R for the construction of a four-story building in Brooklyn, NY. K&R, in turn, subcontracted with Commercial Builders to install the foundation. Commercial then subcontracted with Kings Ready Mix Inc. to prepare, mix and pour the concrete. After the concrete was poured, Commercial discovered Kings had improperly mixed the concrete resulting in a failure to harden.  As a result of this error in mixing the concrete and in its installation, the defective concrete, the steel decking, and the beams had to be removed and reinstalled.  Amin Realty filed suit against K&R Construction Corp.  At the time of the construction, K&R was insured under a Commercial General Liability policy with Travelers Property Casualty Co.  Amin Realty filed a  coverage lawsuit against Travelers, seeking a ruling that Travelers had a duty to defend and indemnify K&R.  Travelers filed a motion seeking a ruling that it did not owe K&R a defense or indemnification.  

The District Court relied on a long line of cases in granting Travelers' motion.  Specifically, the District Court relied upon the  New York State and Federal Court cases of: Fuller Co. v. U.S. Fid. & Guar. Co., 200 A.D. 2d 255 (1st Dept. 1994), (holding that under New York law, a contractor's defective installation of wood flooring, a curtain wall, and a water metering system, are not attributable to an "occurrence" to entitle it to coverage); Jakobson Shipyard, Inc. v. Aetna Casualty & Surety Company, 775 F.Supp. 606 (S.D.N.Y. 1991), aff'd, 961 F.2d. 387 (2d Cir. 1992), (holding that an insurer had no duty to defend or indemnify an insured, who manufactured and delivered defective steering mechanisms that rendered tugboats inoperable, because the "damages sought were for damage to the tugs themselves and not to "the property or persons of third parties"); and Baker Residential Limited Partnership v. Travelers Insurance Company, 10. A.D. 586 (1st Dept. 2004), (holding that an insurer did not have a duty to defend a developer in an underlying action by a residential condominium association based on the developer's defective installation of structural beams, because the damages sought "did not arise from an ‘occurrence' resulting in damage to property distinct from the developer's own work product, as contemplated by the policy").  In citing these cases, the District Court concluded that K&R was hired as a general contractor to provide a completed building, and, as a result, any alleged defects in the construction of the building, including the installation of improperly mixed concrete, involved K&R's own work product, and therefore, did not result from a covered "occurrence", and as a result there was no coverage.

The District Court further reasoned that general liability policies are designed to provide coverage 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. As a result, the District Court further established in its decision, that under New York law, the issuer of a general liability policy (the insurance company) does not provide a warranty for a construction contractor's defective work product.

The Impact Of These Decisions On Construction Contractors

The impact of these decisions is significant because they apply a narrow interpretation

to general liability polices. In determining whether coverage exists, courts must analyze the predictability of the harm. General liability policies are intended to insure against liability for injury or damage to a person or property because damages in this context are potentially "limitless" and are "entirely unpredictable." However, when the damage is for breach of a contractual warranty, that damage is inherently limited and is an expected cost of doing business, a risk not intended to be covered by the policy, as it is one which is within the control of the insured.

As a result of these decisions, we expect to see an increase in carrier initiated motions seeking to disclaim coverage for faulty workmanship claims resulting in the replacement and repair of defective materials or poor workmanship.

By: Audrey L. Shields