Construction Law Updates
If we can provide any additional information or answer any questions you may have about the following case law updates, please contact the Richardson Plowden Construction Team today.
September 2011
Court announces decision in the re-hearing of Crossmann Case
On August 22, 2011, the South Carolina Supreme Court announced its much awaited decision in the re-hearing of Crossmann Communites of North Carolina, Inc. et. al. v. Harleysville Mutual Insurance Company et. al. (Crossman II). The Court reversed its previous holding in Crossmann I (issued January 7, 2011) where it found no insurance coverage existed under typical CGL policy language for progressive water intrusion damage. In Crossmann II the Court reasoned that coverage existed because the definition of “occurrence” which includes “continuous or repeated exposure to substantially the same general harmful conditions” is ambiguous and must be construed against the insurance company.
In the Crossmann II decision the Court was consistent with its previous decisions in L-J, Inc. v. Bituminous Fire and Marine and Auto Owners, Inc. v. Newman where coverage is provided for continuous moisture damage resulting from negligent construction, but is not provided to cover the cost of repairing the defective construction itself. The Court reasoned that a claim for the costs of repairing or removing defective work is not a claim for property damage, but a claim for the costs of repairing damage caused by the defective work is a claim for property damage.
In Crossmann II the Court also overruled a previous decision, Century Indemnity Co. v. Golden Hills Builders, Inc., when it adopted a default “time on the risk” analysis for South Carolina courts to allocate the liability of multiple insurers to a construction defect suits. The Court held that once a court determines that bodily injury or property damage caused by an occurrence has occurred, “each triggered insurer must indemnify only for the portion of the loss attributable to property damage that occurred during its policy period.” This holding overturned the previous joint and several liability determination from the Century Indemnity decision.
While it is still an unsettled question whether the Court will find constitutional the legislative response of the Crossmann I decision, which explicitly defined an “occurrence” in a typical CGL policy, with Crossmann II it insured that the analysis of coverage for construction defect suits will be consistent with previous court precedent. To read the full opinion, click here.
February 2011
Court decision may affect coverage under CGL policies
New ruling has contractors concerned about faulty workmanship
The South Carolina Supreme Court has issued its long awaited decision in Crossman Communities of N.C., Inc., et al v. Harleysville Mutual Insurance Company, et al. The decision overruled its previous holding in Auto Owners v. Newman and significantly limits the coverage that might be available to contractors under a Commercial General Liability (CGL) policy.
Prior to this ruling, contractors often believed if a subcontractor did defective work, the contractor would be covered by his CGL policy. In this case, the court focused on whether there has been an “occurrence” as defined in the CGL policy and held that:
Damage that does not arise from a fortuitous event is not an occurrence. Damage to the insured’s project that are the natural and probably consequences of faulty workmanship do not constitute an “occurrence.”
The Crossman case presented a fairly typical construction defects fact pattern. Crossman was the general contractor for five condominium projects. It subcontracted essestially all of the work. Several years after the projects were completed, the homeowners filed suit after they discovered numerous construction defects and problems with the units. The homeowners alleged Crossman defectively constructed the units and as a result, the units experienced substantial decay and deterioration.
Crossman settled the homeowners’ suits for approximately $16.8 million. It then sought coverage under various CGL policies in an effort to be reimbursed for the settlement amounts.
The trial court analyzed Crossman’s claims within the framework of prior S.C. Supreme Court decisions. These included the seminal cases of L-J, Inc. v. Bituminous Fire and Marine Ins. Co. and Auto Owners Ins. Co., Inc. v. Newman. The trial court held that there was an occurrence causing property damage and that the “your work” exclusion was not applicable due to the subcontractor exception to the “your work” exclusion.
The Supreme Court never went beyond the definition of “occurrence” in its analysis. It held that faulty workmanship is not an occurrence unless caused by a fortuitous event. It also held that foreseeable damage (cost to repair) to non-defective components of the project, whether installed by the insured or a subcontractor, is not an occurrence.
The Court gave an example of where a standard CGL policy would provide coverage:
Assume the insured is a general contractor that built an apartment building using various subcontractors to complete the work. Also assume a subcontractor installed all wiring in the apartment building. After the building is complete and put to its intended use, a defect in the building’s wiring causes the building to sustain substantial fire damage...In such an instance, an occurrence would exist, the insurer could point to the “your work” exclusion, but then the “subcontractor exception” would provide an exception to the exclusion.
Prior to Crossman, the cost to repair defective workmanship was not covered, but the cost to access the damaged element or to replace non-defective components as a part of repairs would be covered. Under Crossman, this is no longer the case. For example, a subcontractor fails to properly install flashing around windows. There is water entry into the walls, which results in deterioration of the wall structure. Under Auto Owners, the cost to replace the flashing was not covered, but repairs to the wall structure itself would have been covered. Under Crossman, none of the costs to repair would be covered since the deterioration of the wall would be the natural and ordinary consequence of faulty workmanship.
The Crossman opinion substantially reduces the scope of covered damages in a construction defects claim because of the narrow definition of “occurrence.” The Court left the door open a small crack by referring to the element of “fortuity.” It may be possible to use this to find coverage under specific factual scenarios.
The Crossman decision is not yet final, but ultimately may impact pending and future cases in construction and coverage issues. Crossman has filed a petition for rehearing and it is possible the Court may alter or amend its holding, just as it did in the L-J and Auto Owners cases.
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