S.C. Supreme Court Re-defines Meaning of "Occurrence" Within the Construction Defect Arena
The South Carolina Supreme Court has issued an opinion changing the analysis of the meaning of an "occurrence" in the construction defect context. In Crossmann Communities of North Carolina v. Harleysville Mutual Insurance Co., Op. No. 26909 (S.C. Jan. 7, 2011), the Court reversed its 2009 decision, Auto-Owners Insurance Co. v. Newman 285 S.C. 187, 684 S.E. 2d 541, to the extent that Newman permitted coverage for faulty workmanship that directly causes further damage to property in the absence of an "occurrence" with the term's fortuity underpinning. The Court held that the added language "continuous or repeated exposure to substantially the same harmful conditions" in the definition of "occurrence" neither creates an ambiguity for insurance contract construction purposes, nor diminishes the fortuity element inherent in an "accident," and the Court concluded the CGL policy did not provide coverage for this defective construction suit.
In Crossmann, insured condominium developers sought coverage for damages arising out of a lawsuit filed by condominium homeowners. The homeowners alleged property damage resulting from water intrusion, progressive in nature, and alleged the property damage was caused by the negligent installation of siding by the subcontractors. The homeowners' lawsuit was settled, and the developers sought coverage from the insurer under a CGL policy. The insurer denied coverage. The developers filed a declaratory judgment action. The parties stipulated the property damage resulted from water intrusion, the damage was progressive in nature, and the damage was caused by the negligent construction of the subcontractors. The trial court determined the homeowners' claim fell within the definition of "occurrence" and found coverage existed for the developers' claims.
In reversing the holding of the trial court, the South Carolina Supreme Court provided a framework by which to analyze coverage for faulty workmanship under a CGL policy:
[W]e first focus on whether there has been an "occurrence." Damage that does not arise from a fortuitous event is not an occurrence. Damages to the insured's project that are the natural and probable consequences of faulty workmanship do not constitute an "occurrence." For faulty workmanship to give rise to potential coverage, the faulty workmanship must result in an occurrence, that is, an unintended, unforeseen, fortuitous, or injurious event. If there has been an occurrence, then we will look to whether there has been "property damage" as defined by the policy.
In its analysis, the Court emphasized the "fortuity element" in the term "occurrence" and held that "where the damage to the insured's property is not more than the natural and probable consequences of faulty workmanship such that the two cannot be distinguished, this does not constitute an occurrence." The Court found the natural and expected consequence of negligently installing siding is water intrusion and damage to the interior of condo units. Accordingly, the Court found the developers failed to show an "occurrence."
The opinion also set forth two National Underwriter Company illustrations as examples 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.
Assume that a subcontractor failed to properly construct the foundation of a new home. After the home is complete, the new homeowner moves into the home. The new homeowner then hires a landscaping company to plant shrubs near the house. During the landscaping project, while using a Bobcat machine to dig a hole for a shrub, the landscaper bumps the foundation of the home with the machine. Due to the poorly constructed foundation, after the landscaper hit the home with the machine, a collapse of all or some portion of the home occurs.
Citing National Underwriter Co., Fire, Casualty & Surety Bulletins, Public Liability, A 3-14 (2001), the Court opined that in both of these examples, although there was only damage to the contractor's project, there would be an initial grant of coverage because of an "occurrence." "Giving effect to other policy provisions, this coverage would be excluded under the 'your work' exclusion, but restored under the subcontractor exception. These examples further illustrate fortuitous events that were caused by faulty workmanship. Thus, under these scenarios, there was faulty workmanship, which caused an occurrence and resulted in property damage, which led to coverage."
We expect the homeowners to file petitions for re-hearing with the Court. It is expected that other parties, including trade groups, may file amicus curiae briefs. Therefore, it is possible the Court could revise this opinion. With that said, the manner in which the Court has evaluated the issues does not make it seem likely that the opinion will be substantially revised.
For more information, contact Collins & Lacy Insurance Coverage Practice Group Chair Pete Dworjanyn at pdworjanyn@collinsandlacy.com or (803) 255-0404.