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SOUTH CAROLINA - CGL - Construction Defect Coverage/Occurrence The South Carolina Supreme Court issued a 4-1 revised opinion in Auto-Owners v. Newman, Op. No. 26450, (S.C.Sup.Ct. re-filed September 8, 2009) (Shearouse Adv.Sh. No. 39 at 12), which retreats from some of the Court's earlier broad holdings of coverage for general contractors. Newman involved alleged defective stucco application by a subcontractor which resulted in moisture damage to the residence's framing and exterior sheathing. An arbitration of the homeowner's claims against the general contractor resulted in an award for the homeowner. The general contractor's insurer brought a declaratory judgment action to determine whether the arbitration award was covered.
The trial court held not only that the subcontractor's negligence constituted an "occurrence" under the policy, but also that the insurer would have to pay for the costs of removing and replacing the defective stucco because it was "incidental" to the cost of making the other repairs. In its first opinion, the Supreme Court affirmed the trial court in its entirety, holding that "the subcontractor's negligence led to an 'occurrence' invoking coverage under the CGL policy for the resulting 'property damage' to other property not the work product." Auto-Owners v. Newman, Op. No. 26450,(S.C.Sup.Ct. filed March 10, 2008) (Shearouse Adv.Sh. No. 9 at 68). Moreover, the Court affirmed the trial court's conclusion that the costs of removing and replacing the defective stucco were covered, despite the work exclusion. "Because this underlying moisture damage could neither be assessed nor repaired without first removing the entire stucco exterior, the trial court correctly concluded that the arbitrator's allowance for replacement of the defective stucco was covered by the CGL policy as a cost associated with remedying the other property damage that resulted from an 'occurrence.'" Id. at 72.
In its revised opinion, the Court re-affirmed that a subcontractor's negligence can result in an "occurrence" which triggers coverage for resulting "property damage." It regarded the negligence of a subcontractor and the resulting property damages as "accidental" from the perspective of the general contractor. However, in the revised opinion, the Court scaled back its holding, stating that a subcontractor's negligence which results in an "occurrence" falls within a CGL policy's "initial grant of coverage" only for damage to property other than the subcontractor's work. Auto-Owners v. Newman, Op. No. 26450, (S.C.Sup.Ct. re-filed September 8, 2009) (Shearouse Adv.Sh. No. 39 at 18). This subtle shift in the holding appears to signal the Court's intent to maintain that subcontractor negligence constitutes an "occurrence," thus triggering coverage, but is subject to exclusionary language.
The Court also justified this result by stating that it gave effect to the subcontractor exception to the "your work" exclusion. It again rejected the insurer's argument that a general contractor's "work" is the entire project and that the "your work" exclusion therefore applies to the entire project. However, it deleted its earlier criticism of Judge Norton's order in Bituminous Cas. Corp. v. Altman Builders, Inc., No. 2:01-4267-DCN, slip op. (D.S.C. July 28, 2006), which reasoned that a general contractor's "work" is the entire project.
The primary difference in the revised opinion is that the Court held that the "your work" exclusion excluded coverage for the costs of removal and replacement of the subcontractor's defective stucco. Nevertheless, because the arbitrator had not specifically identified these costs, the Court held that the insurer had to pay the full arbitration award.
In his dissenting opinion, Justice Pleicones stated that earlier precedent, which was not sufficiently distinguished, required the Court to view the general contractor's "work"as the entire project. Therefore, because the general contractor's work product was the entire residence, there was no "occurrence," only faulty workmanship which did not trigger the CGL policy.
The learning points:
- South Carolina law appears to have solidified somewhat - a subcontractor's negligence can constitute an occurrence under a CGL policy issued to a general contractor;
- Where a subcontractor's negligence triggers coverage under that policy, property damage caused by that negligence to any portion of the project other than the subcontractor's faulty work, is generally covered;
- The cost to remove, repair or replace the subcontractor's faulty work is excluded under the "your work" exclusion; and
- Insurers will want to consider intervention in construction defect actions to itemize removal/repair/replacement costs which they believe will not be covered.
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