While most of South Carolina was digging in for the great blizzard of 2011, the South Carolina Supreme Court decided to give lawyers all across the state something to keep them warm while the snow was falling. On January 7, the Supreme Court issued its opinion in
Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Ins. Co. In that opinion, the Court held that construction defects, generally speaking, are no longer covered by the contractor's commercial general liability (CGL) policy. Whether that opinion will prove as frightful as the recent weather will certainly depend on your perspective, but contractors, building owners, and the lenders who support them should be aware of this significant shift in the law.
A quick legal background is in order. Just a few years ago, the South Carolina Supreme Court decided
Auto Owners Ins. Co. v. Newman. In
Newman, the court tried to clarify what had become an increasingly confusing legal quagmire: what construction defects were covered by CGL insurance policies, and under what circumstances?
Newman expanded on prior decisions - and contradicted others - leaving the insurance coverage and construction defect legal landscape only slightly more certain than it was before. Practitioners like us, however, recognized that
Newman had problems, to put it bluntly. In seeking to cla
rify what was covered, the Court had actually set forth two irreconcilable models. With
Crossmann, the Supreme Court recognized this minor oversight, and rocked the boat once again.
Crossmann was a suit initially brought by homeowners in a Myrtle Beach condo development. The underlying suit alleged all manner of construction defects in the project, including faulty siding installation which resulted in water intrusion. Crossmann and the rest of the developers settled with the homeowners, and the various insurance companies which insured the developers, and then asked Harleysville to pay its share of the settlement. When Harleysville refused, on the grounds its policy didn't cover the homeowners' allegations, Crossmann instituted a declaratory judgment action, asking the Court to determine wheth
er the Harleysville CGL policy covered the homeowners' allegations.
Contradicting the result reached in
Newman, the Court found Harleysville's policy did not cover the homeowners' claims. The Court began its analysis by noting that "CGL policies are not intended to insure risks that the business can and should control or manage." After an exhaustive discussion of the history of CGL policies, the majority and minority viewpoints of courts across the country on the issue, and an exposition of past South Carolina Supreme Court opinions, the Court pronounced that all future construction defect cases should be analyzed by first determining if there was an "occurrence" that would trigger coverage under a CGL policy. The Court then massaged the definition of "occurrence," noting that occurrences were traditionally "accidents," and "accidents" had an element of fortuity to them. The Court then dropped the proverbial hammer (pardon the pun) on construction defect coverage:
The natural and probable consequence of negligently installing siding to these condominiums is water intrusion and damage to the interior of the units. There is no fortuity element present under this factual scenario. We hold that where the damage to the insured's property is no more than the natural and probable consequences of the faulty workmanship such that the two cannot be distinguished, this does not constitute an occurrence.
Since no "occurrence" means no coverage, the Court ruled that the construction defects were not covered by Harleysville's CGL policy. While the Court set forth some examples of what construction defect-related damage
could possibly constitute an occurrence, it is fair to say that, under
Crossmann, the vast majority of construction defects - which most previously assumed would be covered by a CGL policy - are no longer covered by insurance. As the Court wryly noted, "to provide coverage under these circumstances would transform the CGL policy into a performance bond."
Crossmann is truly groundbreaking. Indeed, it is quite rare that a legal opinion has such a vast and profound impact on such a wide range of industries. While the South Carolina Supreme Court - the state's highest court - has spoken, the battle is not yet over. Crossmann and the other developers will certainly ask the Court to reconsider its decision. Regardless of the outcome of that request, the number of parties interested in and impacted by this decision guarantees this fight will continue for the foreseeable future. And, if the decision stands, the affected industries will fight on. Contractors' groups have vowed to take the fight to the legislature.
We recognize that the gravity of this decision, and whether it causes you joy or pain, will vary widely across our client base. While the legal battle rages-and our state thaws out-give one of our lawyers a call to learn how
Crossmann may very well change how you do business.
