Decision Detrimental to Builders And Homeowners In South Carolina
In the recent SC Supreme Court case of Crossmann v. Harleysville filed on January 7, 2011, the SC Supreme Court ruled that faulty workmanship which results in property damage to a builder’s work is no accident. Instead, such property damage is intended, foreseen, expected, and a natural and probable consequence of the builder’s faulty workmanship. Therefore, faulty workmanship does not rise to the level of an “occurrence” and as a result is not covered by a builder’s General Liability policy.
The end result of Crossmann is that builders won’t be able to get construction defect coverage and homeowners will be left uncompensated when builders don’t have the assets to make repairs “out of pocket”. However, there is some hope that the insurance industry will develop a new endorsement to counter the Crossmann line of “no occurrence claim denials”. In addition, a bill is being drafted in the South Carolina legislature to do the same.
Summary Of “Occurrence” Requirement In Crossmann
In order for construction defect coverage to exist for a builder under a General Liability policy, the first hurdle to be cleared is that the claim must be the result of an “occurrence”. The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. In other words, the term “occurrence” is generally synonymous with “accident”.
In a prior blog, it was explained how the SC Supreme Court finally got it right in its Auto Owners v. Newman decision where it held that the resulting property damage from faulty construction was an “occurrence” under the General Liability policy. In the Auto Owners case, the court held that the defective application of stucco in itself was not an “occurrence”; however, the resulting continuous moisture intrusion to the walls and exterior sheathing resulting from the subcontractor’s negligence was an “occurrence” since it was unexpected and not intended.
Unfortunately, in Crossmann, the SC Supreme Court flip flopped and decided that it erred in the Auto Owners v. Newman case to the extent that the prior finding of an “occurrence” did not take into account the fortuity (chance) component of an “accident” but instead relied upon the “continuous or repeated exposure to substantially the same general harmful conditions” part of the definition in isolation. Crossmann clarifies that an “occurrence” must be unintended, unforeseen, and fortuitous.
In addition, the court in Crossmann made the following statements:
* “… in analyzing whether a claim is covered under a CGL policy, we first focus on whether there has been an ‘occurrence’… we then look to whether there has been ‘property damage’ as defined by the policy.”
* “In finding no ‘occurrence’, we need not determine whether there is “property damage” and we believe to address this issue creates unnecessary confusion.”
* “To provide coverage under these circumstances would transform the CGL policy into a performance bond.”
* In footnote (5), distinctions are drawn between tort actions (damages to property of a third party or injury to a person) and contractual actions (faulty workmanship that damages only the insured’s project). It is implied that contractual liability does not result in an occurrence, but tort liability does. The standard CGL policy “does not cover an accident of faulty workmanship, but rather faulty workmanship which causes an accident”.
Is Property Damage Resulting From Faulty Workmanship Always Intended And Expected?
The ruling in this case is an insult to the many professional builders that I’ve advised and insured over the past 25 years. For those builder clients that have had construction defect claims filed against them, to say that they intended and expected the construction problem to arise is not true in the majority of cases. Many of the claims were frivolous lawsuits where the true cause of the problem was lack of routine maintenance on the part of the homeowner such as lack of caulking. Other claims resulted from the use of synthetic stucco (EIFS) and similar products where the builder had no reason to believe that such products would ultimately be found to be inherently defective. However, the majority of the claims were caused by unknowing mistakes in the construction process where the builder certainly didn’t expect a problem to arise.
Can Faulty Workmanship Be An Accident?
Can property damage to a contractor’s work caused by faulty workmanship occur accidentally? Or is such property damage always the natural and probable (intended) consequence of faulty workmanship and thus not an accident? In Crossmann, the court ruled the latter. But, is this correct? I don’t think that it is.
The Independent Insurance Agents And Brokers Association (IIABA) prepared a well thought out response to this issue in a 2006 publication entitled the “No Occurrence Claim Denial”. To follow is an overview of the findings of the IIABA faculty as regards the issue of the validity of the “no occurrence claim denial”.
When The “No Occurrence Claim Denial” Is Valid (Deliberate, Shoddy Work)
* Contractor’s deliberate use of substandard materials, violation of local building codes, breach of the construction contract, disregard for design specifications, or use of substandard construction practices so that faulty workmanship is or should have been foreseeable and expected.
* When “fly by night” contractors enter a disaster area such as after a hurricane and perform shoddy repairs by cutting corners to maximize profit and then make a quick exit. This is a deliberate act of faulty workmanship and such contractors know that their work will fail
* When work is subbed to a contractor who is known to be incompetent or who has a poor track record of past problems. In such cases, it is a reasonable certainty that defective construction will be an “ordinary or natural consequence”.
When The “No Occurrence Claim Denial” Is Not Valid (Ordinary Negligence)
* Most contractors want to make a profit and understand that their reputation is important to this goal. With this in mind, no contractor would intentionally engage in faulty workmanship or expect that its work product would deteriorate. Unless there is evidence to the contrary, it should be assumed that faulty workmanship was negligently and accidentally caused.
* In “Hot Topics Involving Liability Insurance Coverage”, Clifford J. Shapiro explains “Acts that cause construction defects normally are undertaken with the intent to perform the work properly, but unknowingly are performed improperly by mistake. The property damage that results from these mistakes is therefore neither intended nor expected by the contractor performing the work. Accordingly, property damage that arises out of construction defects should be considered ‘accidental’ and held to qualify as an ‘occurrence’ under the CGL insurance policy.”
Crossmann Disregards Intent Of Drafters Of General Liability Policy Form
The drafters of the General Liability policy form, Insurance Services Office (ISO), designed the policy form to provide a broad grant of coverage for “bodily injury” and “property damage” caused by an “occurrence” in the initial insuring agreement. Then, the design called for a list of policy exclusions to whittle away coverage for various uninsurable risks such as business risks. Furthermore, it was intended that various policy endorsements could be tacked onto the policy form to further alter coverage.
In order for coverage to be triggered for a construction defect claim, the incident must first be considered to be “property damage” caused by an “occurrence” before the impact of various property damage exclusions can be considered. The Crossmann case, in ruling that construction defect cases are not an “occurrence”, cuts off all subsequent discussion of the property damage exclusions and special property damage endorsements. This is a distortion because it was the intent of the drafters of the General Liability policy, Insurance Services Office (ISO), to control which types of property damage claims are or are not covered through the exclusions section of the policy. In addition, various insurance carriers draft special policy endorsements to clarify their intent on paying these claims.
Insurance Industry Already Provides Solution For Carriers To Avoid Construction Defect Claims
In a free market, insurance carriers should be able to decide whether or not to write General Liability policies for builders as well as their approach to coverage for construction defect claims. Some may want to exclude all property damage arising from construction defect and others may want to provide total or partial coverage. The design of the General Liability policy allows this flexibility through the use of special policy endorsements to alter or clarify the coverages of the basic policy form.
Carriers that wish to insure contractors, but avoid paying construction defect claims, merely need to add the ISO policy endorsement entitled “Exclusion – Damage To Your Work Performed By Subcontractors On Your Behalf” (CG2294). This endorsement has been in widespread use since 2004 and has proven to be very effective in denying construction defect claims.
In my opinion, the reason why the carriers are not satisfied with CG2294 is because they can’t use it to address construction defect claims that arose before the widespread use of the endorsement in 2004. Instead, their only option to escape responsibility for these claims is to pursue the “no occurrence claim denial” strategy.
At the present time, several carriers in South Carolina are using special property damage endorsements that they drafted to provide partial coverage to builders for construction defect claims. Most of these endorsements take the form of excluding coverage for property damage to the faulty work itself, but providing coverage for resulting property damage to non faulty work. Many within the building community think that this is an acceptable compromise.
The Crossmann decision creates a fiction that builders always intend or expect the property damage that results from even unknowing faulty construction. It also subverts the General Liability policy form drafter’s intent of basic policy construction, as well as the ability of insurance carriers to alter or clarify the coverage of the basic policy form through the use of special property damage endorsements.
The line of “no occurrence claim denial” cases should be remedied by the drafting of a new “occurrence” clarification endorsement by Insurance Services Office (ISO) or by individual carriers. Such an endorsement should clarify that continuous or repeated exposure to substantially the same general harmful condition(s) shall constitute an “occurrence”, and that there is no additional or accompanying requirement of an accident or fortuitous event to constitute an “occurrence”. If ISO or individual carriers don’t voluntarily address this problem, state legislatures will attempt to pass contractor friendly legislation that will go way beyond remedying the “no occurrence claim denial” strategy.
Originally posted at Contractor Insurance And Risk Management Blog.