THE COURT THAT KICKED THE HORNET'S NEST
The New Year's Eve fireworks were nothing compared to what South Carolina experienced in the first two weeks of 2011. Granted the six inches of snow and ice were unusual and inconvenient. But it was the South Carolina Supreme Court's opinion in the Crossmann case on January 7th that has set the insurance and construction industries on fire and the legal community abuzz. Crossmann Communities of North Carolina, Inc. v. Harleysville Mut. Ins. Co., Op. No. 26909 (S.C.Sup.Ct. filed Jan. 7, 2011) (Shearouse Adv.Sh. No. 1 at 32).
Frankly, no one saw it coming. The Court agonized over the insurance coverage afforded in construction defect claims in the Newman decisions through much of 2008 and 2009. In 2009, it issued a revised opinion in Newman which, distilled down to its essence, held that while an insured's faulty workmanship is not covered, damage to property other than the faulty work is an occurrence and is covered. Auto Owners Ins. Co. v. Newman, 285 S.C. 187, 684 S.E.2d 541 (2009). As a result, the volume of construction defect lawsuits increased, especially on the coast, because all the property-owner had to do to trigger insurance coverage was show that the contractor's faulty workmanship (failing to properly flash, failing to properly install vapor barriers, failing to properly install windows, failing to properly install siding - take your pick) allowed water intrusion into the building which damaged framing, sheetrock, floor coverings (again, take your pick).
Just sixteen short months from the issuance of the revised Newman decision, no one was expecting the court's retreat. The Crossmann Court began by characterizing the efforts of courts to determine the extent of coverage for construction defect claims an "intellectual mess." Crossmann at 37. And we couldn't agree more. It then turned to a discussion of the majority and minority views of what constitutes an "occurrence" for purposes of determining whether commercial general liability insurance coverage is triggered. In a near-unanimous decision (Justice Pleicones wrote a separate concurring opinion), it held that Newman was incorrect to the extent that it did not first address whether there was an occurrence. Id. at 49. It went on to hold that an "occurrence" (not surprisingly) must have some element of fortuity. Id. at 46-47.
In layman's terms, the Crossmann Court held that if the property damage alleged to result from faulty workmanship is the "natural and probable consequence" of that faulty workmanship, it is not an "occurrence" and, therefore, not covered by a commercial general liability policy. With regard to the specific property damage in Crossmann, which consisted of water intrusion and damage to the interior of condominium units, the court held that it was the natural and probable consequence of the contractor's improper installation of siding and, therefore, was not covered. Id. at 47.
The Crossmann decision is worth reading for yourself if you are in any way involved in construction defect claims in South Carolina and we've provided a link to the opinion below. And we take the opportunity to remind everyone that "it ain't over until it's over." The petition for rehearing has yet to be filed and there are rumors (from reliable sources) that the construction industry will be filing amicus briefs and backing legislation drafted to kill Crossmann's effect. Even if the petition for rehearing is denied and the legislation goes nowhere, there are enough questions that remain as to how Crossmann will be interpreted to warrant further discussion on the issue. So, stay tuned as Coverage Briefs keeps you apprised of this developing story.
The North Carolina Court of Appeals held that an insurer's act of mailing a UM/UIM selection/rejection form was sufficient to provide the insured the opportunity to select additional UM/UIM coverage limits. In Nationwide Property and Casualty Insurance Company v. Martinson
, No. 08 CVS 18950 (N.C. Ct. App. November 16, 2010), upon receiving a requested quote for $100,000/$300,000 of UIM coverage, an insured paid his premium for six months of coverage (presumably including the $100,000/$300,000 limits of UIM coverage) before signing any of the necessary documentation. Subsequently, the insurance agency placed the application and the selection/rejection form required by the North Carolina Rate Bureau into the mail to be signed and completed by the insured. The package was never returned, and the agency never received any indication from the insured that he had received the documents. Approximately three weeks later, the insured was involved in a serious motor vehicle accident and died the following week. The insurer filed a declaratory judgment action requesting that the Court declare that the total available underinsured motor coverage was in the amount of $100,000/$300,000. The administratrix of the insured's estate requested that the policy provide $1 million in UIM coverage as a result of the insurer's failure to notify the insured that $1 million of UIM coverage was available. The trial court granted the insurer's motion for summary judgment and the administratrix appealed.
Citing Williams v. Nationwide Mutual Insurance Company,
621 S.E.2d 644 (N.C. Ct. App. 2005), the Court indicated that only the total failure by the insurer to notify the insured that he may purchase up to $1 million in UM/UIM coverage will result in the insured being entitled to the full amount of coverage. The Court noted that the critical determination in analyzing these issues is whether or not the insured was given "some opportunity" to select different coverage limits. While the insured was not verbally informed of the UIM coverage limits, the evidence suggested that the selection/rejection form was mailed to him in a timely manner. The Court held that the act of mailing the form satisfied the standard of notice required by N.C. Gen. Stat. Section 20-279.21(b)(3) and would not constitute a total failure on the part of the insurer to provide an opportunity to select or reject additional limits.
* Without establishing a clear standard of what "notice" is required to be given to an insured regarding UM/UIM limits, this opinion favors insurers because the Court clearly did not require any showing of actual notice.
The North Carolina Court of Appeals affirmed the grant of summary judgment in favor of an insurer when an insured failed to comply with the reporting provisions in a builder's risk insurance policy. In Gore v. Assurance Company of America
, et al., No. 08 CVS 11203 (N.C. Ct. App. December 7, 2010), an insured developer obtained a builder's risk policy which included provisions for the monthly reporting of its inventory. The insured reported a property as a "new start" in 2006, then failed to make any reports over the next eight months. When the insured made its next report, it reported the same property as a "new start," nearly one year after its completion. It then paid its premiums for the next four months in conjunction with its required reporting. Subsequently, the property was destroyed by fire. The insurer denied coverage for the loss, and the insured commenced a civil action for amounts due under the policy. The trial court granted the insurer's motion for summary judgment, and the insured appealed.
In support of its appeal, the insured argued that the insurer's receipt of past-due payments constituted a waiver of conditions of coverage. The issue of whether an insurer's acceptance of reports or premium payments following the insured's failure to comply with the reporting provisions of a reporting policy constitutes a waiver of the condition was novel to North Carolina law. Relying on the decisions of other jurisdictions, the Court indicated that the language of the policy determines coverage and the insurer's liability in the event of a loss occurring subsequent to late or irregular reporting. The additional conditions of coverage under the policy at issue indicated that the insurer will not provide coverage for a loss if all the reports and premium payments have not been received for a loss location. Accordingly, the Court held that the insurer's acceptance of reports or premium payments following an insured's failure to comply with reporting provisions, specified as conditions of coverage, did not constitute a waiver of coverage.
* This opinion reflects a case of first impression under North Carolina law. Insureds are required to fully comply with reporting provisions which constitute a condition of coverage, and an insurer's acceptance of "corrective" reports and premiums does not constitute waiver. Interestingly, the court did not determine or even discuss whether the insurer had to prove prejudice resulting from the insured's failure to comply with a condition of coverage.
The South Carolina Supreme Court finally answered the question of whether uninsured motorist coverage benefits in an employer's policy can be offset by workers' compensation benefits paid to the employee. In Sweetser v. South Carolina Department of Insurance Reserve Fund, Op. No. 26905 (S.C.Sup.Ct. filed Dec. 20, 2010) (Shearouse Adv.Sh. No. 50 at 24), an employee was injured by an uninsured motorist while riding as a passenger in his employer's vehicle. The employer's vehicle was insured for minimum limits, $15,000, uninsured motorist benefits. However, the employee received $13,520.21 in workers' compensation benefits that the employer sought to offset against the uninsured motorist coverage. In a declaratory judgment action, the South Carolina Supreme Court held that the setoff was permissible under Section 38-77-220 of the state's financial responsibility act which specifically allows insurers to exclude coverage for any liability under the state's worker's compensation law.
While the setoff had been held applicable to underinsured motorist coverage since 1994, the state's highest court had not addressed the applicability of the setoff for UM benefits until now. Of interest, the court stated that the employer is entitled to apply the workers' compensation offset "so long as that offset does not operate so as to make the employee less than whole." In the Sweetser case, the court reasoned that the offset of $13,520.21 to the $15,000 did not make the plaintiff less than whole if he obtained a judgment greater than his workers' compensation benefits because he would still be entitled to the remaining limits on the policy or the amount of the judgment, whichever was less. However, we have to wonder what the court meant by its "less than whole" remark and what the outcome would have been if the employer had paid $16,000 in workers' compensation benefits. The notion that the employer would not be entitled to an unconditional setoff if the amount of workers' compensation benefits paid exceeded the uninsured or underinsured motorist coverage is troubling.