Construction Defects & Insurance Claim Coverage
State Courts Limit CGL Coverage for Property Damage Arising from Defective Construction
Brian M. Rowlson
February 6, 2013
Courts have generally recognized that property damage arising from faulty or defective work performed on a construction project constitutes an "occurrence" under commercial general liability (CGL) policies. In turn, contractors have frequently relied on these policies to provide insurance coverage for property damage claims arising from negligent work performed by their subcontractors. However, recent court decisions in a number of states have eroded the definition of an "occurrence," limited coverage under CGL policies, and altered the construction industry’s widespread reliance on these policies as a risk-management mechanism.
The South Carolina Supreme Court issued one of the most publicized opinions on this issue in Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company ("Crossman I"). In Crossman I, a developer was sued by several homeowners in a condominium development located in South Carolina for defective construction. Specifically, the exterior components of the projects were negligently constructed, leading to water intrusion issues and subsequent damage to non-defective components of the projects. The developer settled with the homeowners and later sought coverage under its CGL policies for the damages incurred. The trial court found that the homeowners’ property damage claims were an "occurrence" covered by the CGL policies. On appeal, the South Carolina Supreme Court overruled prior state precedent on the issue, and held that the water damage was a direct result of the faulty construction and therefore could not have been an unintended consequence of the negligent work. Coverage under the CGL policy was denied. The January 7, 2011 opinion received immediate and widespread criticism from the construction industry.
The South Carolina legislature quickly enacted Senate Bill 431 in the spring of 2011 in an attempt to counter the Crossman I decision. The new law provides that South Carolina CGL policies "shall contain or be deemed to contain a definition of ‘occurrence’ that includes: (1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and (2) property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship." Section 3 of § 38-61-70 also states that the Act applies to "any pending or future dispute" as to "commercial general liability policies issued in the past, currently in existence, or issued in the future." The statute’s aim was apparently to remove all CGL policies from the grasp of the Crossman I decision.
On May 23, 2011, the South Carolina Supreme Court reheard the arguments from Crossman I, reversed course on its prior decision, and issued a new opinion in August 2011 ("Crossman II") finding coverage under the CGL policies. Without making reference to the new law, but essentially restating the statutory language, the Crossman II court stated its intent to clarify that negligent construction resulting in damage to non-defective components "may" constitute property damage subject to coverage as an occurrence under the policy. As provided by the newly-enacted statute, damage arising from the faulty workmanship itself would not be covered by the policy.
Legislatures in states such as Colorado, Hawaii, and Arkansas have passed similar legislation in response to court decisions limiting CGL coverage for property damage arising from defective construction. However, despite the apparent widespread opposition to these limitations on CGL policies, some state courts continue to rule in favor of limiting coverage. Recently the Supreme Court of Ohio in Westfield Insurance Company v. Custom Agri Sys., Inc. ruled that claims for defective construction did not constitute "property damage" caused by an "occurrence" under a CGL policy. While it remains to be seen whether the Ohio legislature will step in and counter the Westfield decision, the ruling is a reminder that construction industry participants must remain cognizant of the governing law on this issue in their respective jurisdictions. The failure to do so may be costly to contractors, who may be liable for property damage claims that have been covered by CGL policies in many states.