The New York Supreme Court, Appellate Division, determined there was no coverage for construction defects under New York or New Jersey law. Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Turner Constr. Co., 2014 N.Y. App. Div. LEXIS 3546 (N.Y. App. Div. May 15, 2014).

   The property owner retained Turner Construction to serve as the general contractor. Turner subcontracted with Permasteelisa North America Corporation to design and build the exterior wall, a "curtain wall," which consisted of granite and glass. 

   A segment of the pipe rail system fell to the street from the eighth floor of the building. An investigation  determined that more than 20% of the pipe rail connections surveyed did not conform to the building plans. Additional problems included inconsistencies in the method of rail attachment, bent brackets on the pipe rail system, cracked glass louvers, cracked glass panels, and water infiltration.

   The owner sued Turner and Permasteelisa in New Jersey Superior Court for breach of contract, breach of warranty, and negligence. Turner and Permasteelisa tendered to National Union, who agreed to defend under a reservation of rights. National Union filed suit in New York for a declaratory judgment that it had no coverage obligations and for reimbursement of defense costs. The lower court held there was no coverage under the policy and that National Union was entitled to reimbursement.

   On appeal, the court noted that New Jersey law applied. Under well-established New Jersey law, a CGL policy did not cover an accident of faulty workmanship but rather faulty workmanship which caused an accident. Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 796 (N.J. 1979). There was no "occurrence" under a commercial general liability policy where faulty construction only damaged the insured's own work. Further, faulty workmanship by subcontractors hired by the insured did not constitute property damage under a CGL policy issued to the general contractor since the entire project was the general contractor's work.

   The court refused to follow the growing trend in other states that have recognized that faulty work may be treated as an "occurrence." Therefore, New York and New Jersey are aligned with the Hawaii Intermediate Court of Appeals' decision in Group Builders v. Admiral Ins., 123 Haw. 142 (Haw Ct. App. 2010), which held that construction defects arise from a breach of contract, not an "occurrence."

   The New York court further noted that New Jersey law permitted reimbursement of defense costs of claims later determined not to be covered. However, National Union's policy included an endorsement which read, "This policy is primary coverage and the insurance carrier agrees not to take action or recourse against any insured for loss paid or expenses incurred because of any claims made against this policy." National Union argued the provision only precluded it from seeking to recoup from its insured the cost of defending against covered claims. There was nothing in the provision, however, that differentiated between covered and uncovered claims. Therefore, reimbursement of defense costs sought by the insurer was unambiguously precluded by the policy.