S.C. Builders Buoyed by Liability Insurance Ruling
In a long awaited decision, on March 10 the South Carolina Supreme Court found that faulty workmanship by a subcontractor causing property damage to a home was covered by a builder's comprehensive general liability insurance policy.
Builders purchase comprehensive general liability insurance covering accidental on-the-job property damage to help manage the risk of construction defect claims by home owners.
The case — Auto Owners Insurance Company, Inc. v. Virginia T. Newman and Trinity Construction, Inc. — is significant because insurers across the country have been denying the claims of builders for construction defects arising from the work of their subcontractors. If the insurers prevail, this could create a coverage gap that would be difficult to fill.
NAHB joined the South Carolina Home Builders Association in filing a friend of the court brief in support of Newman in the South Carolina Supreme Court. To date, NAHB has filed similar amicus briefs in Arizona, Florida, Kansas, Michigan, Pennsylvania, Texas and several federal courts, arguing that that the insurers’ interpretation of coverage has been rigid, overly broad and not supported by the language in their policies.
Less than one year after moving into her new home in Mount Pleasant, S.C., Virginia Newman sued her builder, Trinity Construction, for breach of contract, negligence and breach of warranty. The suit said that construction deficiencies in the home, primarily related to the installation of stucco siding, had caused severe damage to the structure and substructure of the house. The parties agreed to arbitrate the dispute and the arbitrator issued an award in Newman’s favor.
After the decision, Trinity’s insurer, Auto-Owners, Inc., sought a declaratory judgment that the arbitrator’s award was not a covered loss under its insurance contract with Trinity. At trial, the parties stipulated that subcontractors performed all of the work on Newman’s home. The trial court, sitting without a jury, found that the damages to the home constituted an “occurrence” and were covered under the policy.
In affirming the trial court’s decision last week, the South Carolina Supreme Court noted that CGL policies in the home construction industry are designed to cover home builders against the risk of post-construction claims for damage to a home caused by alleged construction defects.
Significantly, the court said that the underlying moisture damage to Newman’s home could neither be assessed nor repaired without first removing the entire stucco exterior; as a result, 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.”
Law in a State of Flux
The decision is particularly heartening for builders because the law in South Carolina on this issue has been in a state of flux following the state supreme court’s decision in L-J, Inc. v. Bituminous Fire and Marine Insurance Co. (S.C. 2005).
In that case, the court concluded that premature deterioration of a subdivision's roads was caused by various negligent acts of the contractor during the design, preparation and construction of the road system and that this faulty workmanship did not fall under the insurance policy’s contractual definition of “occurrence.” The opinion, however, did appear to leave open the possibility that in a different scenario, faulty work by a subcontractor resulting in other damage to a home might constitute an “occurrence.”
In the Newman case, NAHB and the South Carolina HBA urged the court to affirm the trial court’s order on the “occurrence” issue on the grounds that the trial court had correctly interpreted the L-J, Inc. decision as holding that property damage to another part of the structure caused by a subcontractor’s defective work can be caused by an “occurrence” within the meaning of the general contractor’s general liability insurance policy.
Last week’s decision is consistent with recent rulings by the highest courts in other states, most recently Florida, Tennessee and Texas. Those courts held that damage to a structure caused by the work of a subcontractor can constitute “property damage” caused by an “occurrence” within the meaning of the builder’s CGL policy.
For more information, e-mail David Jaffe at NAHB, or call him at 800-368-5242 x8317.