By Real Estate NJ
There is no shortage of pitfalls that developers and general contractors can face in New Jersey, but it looks as though one longtime source of angst may be gone for good.
Late this summer, the state Supreme Court ruled that damage from faulty work by subcontractors can be covered under a general contractor’s insurance policy. The case — which involved damage to a Hoboken luxury condo property — effectively settled a question that had weighed on the construction industry in New Jersey and other states for decades, fueling countless disputes between builders and their insurance carriers.
Experts say that, as much as anything else, the lack of certainty was to blame.
“Carriers often previously contested whether such negligent work resulted in covered ‘property damage’ caused by a covered ‘occurrence’ — and suggested they should not have to cover any damages from the subcontractor’s faulty work,” said Greg Horowitz, an attorney with McCarter & English. “In essence, the carriers argued this was a non-fortuitous business risk that developers and general contractors could not or did not transfer to the insurance industry.”
Horowitz, a partner with the Newark-based firm’s insurance coverage and complex commercial litigation group, said that such litigation often forced developers and contractors with “to settle for smaller net recoveries from their insurers than perhaps they should have received.”
But he said that resolving the issue in favor of policyholders “should have a positive benefit on the entire construction industry” on many levels.
In a Q&A prepared for Real Estate NJ, Horowitz broke down the ruling and its impact on how developers and general contractors do business in New Jersey.
Real Estate NJ: In which market sectors or project types has this been issue been most prevalent?
Greg Horowitz: The issue is highly relevant across the construction industry. Nearly all developers and general contractors utilize at least some subcontractors in connection with their construction projects, whether it involves homes or commercial complex buildings. Of course, larger developers and general contractors likely will benefit the most as the stakes are often higher and they usually use subcontractors more often than smaller firms. So now, if a subcontractor and its carrier are not able or willing to meet their indemnification obligations directly to a developer or general contractor, that developer and GC will still have the comfort of knowing they be protected under their own coverage for the unexpected consequences arising from the subcontractor’s faulty work.
RENJ: What do you think it was about this particular case that made it all the way to the Supreme Court?
GH: In addition to recognizing the trend toward finding such coverage in other jurisdictions, the facts of the case actually are fairly typical of a matter involving negligent work by subcontractors — a condo association that alleged roof leaks and water infiltration at interior window sills and jambs were caused by the subcontractor’s work for the developer/general contractor, and it resulted in unexpected damage to other areas. It appears from the opinion our Supreme Court recognized it was time to ultimately resolve this issue here, clarify and distinguish a handful of narrow carrier-friendly holdings in the past, make it clear that there was a transfer of this type of subcontractor-driven risk to the insurance industry and to provide guidance to contractors and carriers alike — which will hopefully reduce the dockets filled with these types of coverage claims.
RENJ: We know the development and construction community has believed in its position for years, but what does it mean to have the court weigh in on this?
GH: Developers and general contractors finally have what they need most: certainty that coverage exists for consequential damage resulting from subcontractors’ defective work. Rather than focusing and spending money on disputes with insurers, developers and general contractors in the construction industry can proceed in New Jersey with the comfort that consequential damage caused by subcontractors should be insured under the (commercial general liability) forms at issue to the extent New Jersey law applies, and that our high court also has now clearly said there can be a transfer of risk by the general contractors and developers to their carriers for their subcontractors’ flawed work if it causes unexpected consequential damages.
RENJ: Does this do anything to change the approach or mindset of a contractor going into a project?
GH: Absolutely, especially for those developers and general contractors that were previously relying on protecting themselves exclusively through indemnification rights and/or pursuing additional insurance protections received through their subcontractors’ insurance. In the past, general contractors and developers working in New Jersey sometimes lacked certainty that their own carriers would honor coverage obligations for subcontractors’ negligent construction where there were consequential damages. The New Jersey high court’s opinion provides those companies with assurance that they will now get the benefit of their intended bargain if such unexpected damages result, which provides more comfort both in the negotiation process as well as if a claim arises.
While their liability carriers may now try to find other ways to avoid these claims — and there likely will still be related additional insured and indemnification considerations — general contractors and developers now have at least one less worry about the scope of their exposure for liabilities and damages caused by negligent subcontractor work. And hopefully, the carriers’ mindset and focus will change so the insurers’ interests are now more aligned with the general contractors and developers in pursuing any indemnification or additional insurance protections from the subcontractors and their respective carriers, if needed.
RENJ: How were these disputes resolved in the past before you had this clear-cut guidance on the issue?
GH: The bottom line is that carriers often pushed back harder on these claims than they will be able to in the future. In many instances, policyholders had to spend money on coverage disputes or litigation to press their claim with their own carriers — while at the same time pursuing additional insured claims against their subcontractors’ carriers, and/or bringing direct indemnification claims from subcontractors that are often not as well capitalized or otherwise able to handle these claims.
Now, hopefully, the carriers will focus on working with general contractors and developers on these claims to vigorously defend the underlying negligence allegations arising from the subcontractor’s work, and jointly pursue any third-party recoveries — rather than waste resources on avoiding their direct coverage obligations to the general contractor or developers. Hopefully, this focus on resolving the underlying claim will lead to less net legal expense for the industry on claims than in the past.
RENJ: Are there any other issues to speak of related to construction law or insurance that this opinion does not address?
GH: While this decision will have a wide-ranging impact in the construction industry working in New Jersey, the coverage issue that was resolved is relatively narrow — and there unfortunately continue to be other legal and fact-intensive disputes raised by carriers that often seek to avoid or delay their obligations to policyholders, which will continue to have an adverse impact for subcontractors, developers and general contractors alike.