Case Briefs

In its decision on reconsideration, the South Carolina Supreme Court first addressed whether there was an “occurrence” under the policy. The policy defined “occurrence” as an “accident,” which was expanded to include the “continuous or repeated exposure to substantially the same general harmful conditions.” The court found the definition of “occurrence” ambiguous in the context of progressive damage cases, so it construed the definition against the insurer. The court cited Auto Owners Insurance Co. v. Newman, 684 S.E.2d 541 (2009), and noted that a more complete understanding of whether there was an “occurrence” under the policy should involve the term “property damage.” The general liability policy, according to the court, defines the term “property damage” in two ways ' as “physical injury to tangible property” or as the “loss of use of tangible property that is not physically injured.” The court examined the first definition, noting that the “critical phrase” is “physical injury,” which “suggests the property was not defective at the outset, but rather was initially proper and injured thereafter.” The court clarified the decision in Newman, stating that “negligent or defective construction resulting in damage to otherwise non-defective components may constitute 'property damage,' but the defective construction would not.” Based on its interpretation of the term “property damage” and the ambiguity of the definition of “occurrence,” the court determined that there was an “occurrence” under the policy.

In disposing of this appeal, however, the South Carolina high court did “not address recent legislation that seeks in part to impose a construction on existing insurance policies in pending actions.” Slip Op. at n. 4. Earlier this year, South Carolina enacted Code ' 38-61-70, which provides that general liability policies shall contain or be deemed to contain a definition of “occurrence” that includes property damage or bodily injury resulting from faulty workmanship, although not covering the faulty workmanship itself. Harleysville Mutual, the insurer in the Crossmann suit, filed suit seeking to invoke the original jurisdiction of the South Carolina Supreme Court challenging the new statute, arguing it violates both the South Carolina and U.S. constitutions. The court has accepted jurisdiction and set a schedule for briefing of the issues presented. Accordingly, further court action on the interpretation and effect of the statute addressing the meaning of “occurrence” still is likely in South Carolina.

The South Carolina Supreme Court's decision on reconsideration in Crossmann also addressed the allocation question, adopting a pro rata “time on the risk” approach. In so holding, the court overturned the trial court and its own prior decision in Century Indemnity. The court noted that a pro rata “time on the risk” allocation “required a policyholder to bear a pro rata portion of the loss corresponding to any portion of the progressive damage period during which the policyholder was not insured or had purchased insufficient insurance,” which best conformed to the terms of a general liability policy and the parties' “objectively reasonable expectations.” In reaching its conclusion, the court addressed what must happen to trigger coverage under a particular policy. The policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies,” and the policy only applied if “the bodily injury or property damage was caused by an occurrence” during the policy period. The court determined that its earlier decision in Joe Harden Builders, Inc. v. Aetna Casualty & Surety Co., 486 S.E.2d 89 (1997), governed the analysis.

In Joe Harden, the South Carolina Supreme Court adopted a “'modified' continuous trigger” approach, holding that “coverage is triggered at the time of an injury-in-fact and continuously thereafter to allow coverage under all policies in effect from the injury-in-fact during the progressive damage.” However, Joe Harden also stated in dictum that the theory of coverage it adopted “will allow the allocation of risk among insurers when more than one insurance policy is in effect during the progressive damage.” The court clarified that Joe Harden did not intend to state that “risk can only be allocated among insurers,” nor that “where there is only one insurance policy in effect during the progressive damage that policy must bear the full risk.” The court expressly overturned Century Indemnity because it found that the decision both fundamentally misinterpreted Joe Harden and was “profoundly at odds with the insurance contract.”

The court then explained that the pro rata “time on the risk” approach is “most consistent with the language of a standard [general liability] policy.” In support of its decision, the court explained that the policy only provides coverage for damages incurred “because of 'bodily injury' or 'property damage' to which this insurance applies,” and the policy only applies if the “property damage” or “bodily injury” occurred “during the policy period.” Thus, the insurer's promise to pay is limited to only those damages caused by property damage that occurred “during the policy period.” In addition, the court noted that a pro rata allocation approach forwards important policy goals, including preserving the incentive for businesses to purchase sufficient insurance, which in turn promotes stability in the marketplace.

Having determined that loss should be apportioned on a pro rata basis, the court remanded the case to the trial court for the allocation determination. The South Carolina high court provided guidance to the trial court on applying a pro rata allocation model, noting that pro rata allocation “requires the finder of fact to determine precisely how much of the injury in fact occurred during each policy period and precisely what quantum of the damage award in the underlying suit was attributable to that injury.” Where it is impossible to determine the exact measure of damages attributable to the injury that triggered each policy, the court explained, courts must look at the total loss incurred and then develop a formula to “divide that loss in a manner that reasonably approximates the loss attributable to each policy period.” While the default rule assumes the damage occurred in equal portions during each year it progressed, if there is proof that the damage progressed in some different way, then the damage allocation must conform with that proof. The court noted further that a strict application of the pro rata allocation model may be inappropriate in this case, especially because there were numerous buildings involved in the underlying lawsuit and the buildings were occupied at different times.

Tenth Circuit: Colorado Construction Defect Law Cannot Be Applied Retroactively

The U.S. Court of Appeals for the Tenth Circuit, applying Colorado law, has held that property damage caused by faulty workmanship that is neither expected nor intended can constitute an “occurrence” that triggers coverage under CGL policies. Greystone Construction, Inc., et al. v. National Fire & Marine Insurance Co., No. 09-1412 (10th Cir. Nov. 1, 2011). The Greystone court did not apply a Colorado statute requiring courts to presume that property damage caused by construction professionals' work constitutes an accident because it was enacted while the dispute was on appeal and because the court held that the statute did not apply retroactively.

The policyholders in this case, general contractors, each hired subcontractors to construct homes that were purchased by the underlying claimants. Both houses were built on soils containing expansive clays, and soil expansion over time caused their foundations to shift, resulting in damage to their living areas. The underlying claimants sued the policyholders, alleging that the damage to their houses was caused by subcontractors' negligent design and construction of the houses' foundations. The policyholders tendered both suits to two insurers that each had issued them CGL policies covering multiple policy periods, the latest of which ended in 2006. The insurers' policies provided coverage for property damage caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies also contained a business risk exclusion barring coverage for property damage to the policyholders' “work,” except if “the damaged work or the work out of which the damage arises was performed on [the policyholder's] behalf by a subcontractor.”

One insurer agreed to defend the suits under a reservation of rights, and the other did not provide a defense. A coverage action was filed against the non-defending insurer, seeking to recover a portion of defense costs. The district court granted summary judgment in favor of the non-defending insurer, holding that, under General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co., 205 P.3d 529 (Colo. Ct. App. 2009), the underlying suits did not allege covered “occurrences.” On appeal, the Tenth Circuit sought to certify the question to the Colorado Supreme Court, which declined to address it.

In 2010, after the court heard oral argument, the Colorado legislature, in response to General Security, enacted C.R.S. ' 13-20-808. That statute requires courts, when interpreting liability policies issued to construction professionals, to “presume that the work of a construction professional that results in property damage ' is an accident unless the property damage is intended and expected by the insured.” The Tenth Circuit held that ' 13-20-808 did not apply. According to the court, if applicable, the statute would resolve the case because the policyholders did not intend or expect the damage to the houses and, therefore, the damage would be presumed to have arisen from an “accident.” The court, however, held that ' 13-20-808 did not apply retroactively. The court noted that, under Colorado law, a statute is presumed to operate prospectively if there is no legislative intent to the contrary. The court recognized, and agreed with, Colorado state courts refusing to apply ' 13-20-808 retroactively because, as the court found, there was no reason to believe the legislature intended such an effect. The court noted that the act expressly was made to apply “to all insurance policies currently in existence or issued on or after [its] effective date.” The court determined that “policies currently in existence” referred only to those whose policy periods had not yet expired because, if the legislature instead had intended it to apply to expired policies that nonetheless could be subject to claims for occurrences taking place during their policy periods, it would have more clearly stated that objective. The court further noted Colorado Supreme Court precedent construing the term “existing policy” as meaning one whose policy period has not yet expired, as well as Colorado insurance statutes and regulations that used a similar definition.

The court went on to predict that the Colorado Supreme Court would construe the term “occurrence” to encompass unforeseeable damage to “nondefective” property caused by faulty workmanship and, therefore, that the underlying suits triggered coverage under the insurers' policies. The court noted that jurisdictions differed over whether damage caused by faulty workmanship can constitute an “occurrence.” According to the court, however, damage resulting from improper or faulty workmanship constitutes an “occurrence” if the damage is to nondefective property and caused without expectation or foresight.

According to the court, the damage to the houses' living areas was unforeseen and unanticipated, having resulted from exposure to expansive soils caused by the homes' poorly designed and built soil-drainage and structural elements. Because the damage caused by the subcontractors' faulty design and construction was not foreseen, the court explained, the underlying suits alleged an “occurrence” triggering a defense duty. The court noted, however, that CGL policies cover only damage to nondefective work product (here, the living areas of the homes) and not defective work product (the faulty soil-drainage and structural elements). This is because an obligation to repair defective work is neither unexpected nor unforeseen, but damage to otherwise nondefective work is, the court explained. According to the court, “faulty workmanship, standing alone, is not caused by an accident ' but damage to other property caused by the faulty workmanship ' is the result of an accident.”

The court rejected the non-defending insurer's argument that the costs of repairing damage caused by faulty workmanship are a business risk not covered by CGL policies, while noting that the business risk policy exclusions do operate to eliminate certain coverage, including the costs of repairing damage to a policyholder's own work.

Laura A. Foggan, a member of this newsletter's Board of Editors and a partner at Wiley Rein LLP, contributed this month's Case Briefs.

South Carolina Supreme Court Issues New Opinion in Defective Construction Case

The South Carolina Supreme Court has withdrawn its prior decision in Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909, 2011 WL 93716 (S.C. Jan. 7, 2011), issuing a new opinion concluding that negligent or defective construction resulting in damage to otherwise non-defective components may constitute “property damage,” and thus, an “occurrence” under a commercial general liability policy. Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909 (S.C. Aug. 22, 2011). The court also held that a pro rata allocation was appropriate under South Carolina law, and in so doing, overruled its previous decision in Century Indemnity Co. v. Golden Hills Builders, Inc. , 348 S.C. 559, 561 S.E.2d 355 (2002).

The policyholder, a condominium developer, negligently constructed certain condominiums, resulting in water penetration and progressive damage to otherwise non-defective components of the condominiums. The policyholder sought coverage for damages arising out of the lawsuit, and the insurer denied coverage. The policyholder then filed a declaratory judgment action against the insurer to determine coverage. The trial court determined that the homeowners' lawsuit was covered under the policy, finding that the progressive damage “that resulted from, and was in addition to, the subcontractors' negligent work itself” was caused by an “occurrence.” In addition, the trial court held that the insurer was jointly and severally liable and was not entitled to a set-off based on the settlements of other insurers. The insurer appealed the court's decision, and the Supreme Court of South Carolina initially held that there was no coverage. The policyholder filed a petition for rehearing, which the Supreme Court granted.

In its decision on reconsideration, the South Carolina Supreme Court first addressed whether there was an “occurrence” under the policy. The policy defined “occurrence” as an “accident,” which was expanded to include the “continuous or repeated exposure to substantially the same general harmful conditions.” The court found the definition of “occurrence” ambiguous in the context of progressive damage cases, so it construed the definition against the insurer. The court cited Auto Owners Insurance Co. v. Newman , 684 S.E.2d 541 (2009), and noted that a more complete understanding of whether there was an “occurrence” under the policy should involve the term “property damage.” The general liability policy, according to the court, defines the term “property damage” in two ways ' as “physical injury to tangible property” or as the “loss of use of tangible property that is not physically injured.” The court examined the first definition, noting that the “critical phrase” is “physical injury,” which “suggests the property was not defective at the outset, but rather was initially proper and injured thereafter.” The court clarified the decision in Newman , stating that “negligent or defective construction resulting in damage to otherwise non-defective components may constitute 'property damage,' but the defective construction would not.” Based on its interpretation of the term “property damage” and the ambiguity of the definition of “occurrence,” the court determined that there was an “occurrence” under the policy.

In disposing of this appeal, however, the South Carolina high court did “not address recent legislation that seeks in part to impose a construction on existing insurance policies in pending actions.” Slip Op. at n. 4. Earlier this year, South Carolina enacted Code ' 38-61-70, which provides that general liability policies shall contain or be deemed to contain a definition of “occurrence” that includes property damage or bodily injury resulting from faulty workmanship, although not covering the faulty workmanship itself. Harleysville Mutual, the insurer in the Crossmann suit, filed suit seeking to invoke the original jurisdiction of the South Carolina Supreme Court challenging the new statute, arguing it violates both the South Carolina and U.S. constitutions. The court has accepted jurisdiction and set a schedule for briefing of the issues presented. Accordingly, further court action on the interpretation and effect of the statute addressing the meaning of “occurrence” still is likely in South Carolina.

The South Carolina Supreme Court's decision on reconsideration in Crossmann also addressed the allocation question, adopting a pro rata “time on the risk” approach. In so holding, the court overturned the trial court and its own prior decision in Century Indemnity. The court noted that a pro rata “time on the risk” allocation “required a policyholder to bear a pro rata portion of the loss corresponding to any portion of the progressive damage period during which the policyholder was not insured or had purchased insufficient insurance,” which best conformed to the terms of a general liability policy and the parties' “objectively reasonable expectations.” In reaching its conclusion, the court addressed what must happen to trigger coverage under a particular policy. The policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies,” and the policy only applied if “the bodily injury or property damage was caused by an occurrence” during the policy period. The court determined that its earlier decision in Joe Harden Builders, Inc. v. Aetna Casualty & Surety Co. , 486 S.E.2d 89 (1997), governed the analysis.

In Joe Harden, the South Carolina Supreme Court adopted a “'modified' continuous trigger” approach, holding that “coverage is triggered at the time of an injury-in-fact and continuously thereafter to allow coverage under all policies in effect from the injury-in-fact during the progressive damage.” However, Joe Harden also stated in dictum that the theory of coverage it adopted “will allow the allocation of risk among insurers when more than one insurance policy is in effect during the progressive damage.” The court clarified that Joe Harden did not intend to state that “risk can only be allocated among insurers,” nor that “where there is only one insurance policy in effect during the progressive damage that policy must bear the full risk.” The court expressly overturned Century Indemnity because it found that the decision both fundamentally misinterpreted Joe Harden and was “profoundly at odds with the insurance contract.”

The court then explained that the pro rata “time on the risk” approach is “most consistent with the language of a standard [general liability] policy.” In support of its decision, the court explained that the policy only provides coverage for damages incurred “because of 'bodily injury' or 'property damage' to which this insurance applies,” and the policy only applies if the “property damage” or “bodily injury” occurred “during the policy period.” Thus, the insurer's promise to pay is limited to only those damages caused by property damage that occurred “during the policy period.” In addition, the court noted that a pro rata allocation approach forwards important policy goals, including preserving the incentive for businesses to purchase sufficient insurance, which in turn promotes stability in the marketplace.

Having determined that loss should be apportioned on a pro rata basis, the court remanded the case to the trial court for the allocation determination. The South Carolina high court provided guidance to the trial court on applying a pro rata allocation model, noting that pro rata allocation “requires the finder of fact to determine precisely how much of the injury in fact occurred during each policy period and precisely what quantum of the damage award in the underlying suit was attributable to that injury.” Where it is impossible to determine the exact measure of damages attributable to the injury that triggered each policy, the court explained, courts must look at the total loss incurred and then develop a formula to “divide that loss in a manner that reasonably approximates the loss attributable to each policy period.” While the default rule assumes the damage occurred in equal portions during each year it progressed, if there is proof that the damage progressed in some different way, then the damage allocation must conform with that proof. The court noted further that a strict application of the pro rata allocation model may be inappropriate in this case, especially because there were numerous buildings involved in the underlying lawsuit and the buildings were occupied at different times.

Tenth Circuit: Colorado Construction Defect Law Cannot Be Applied Retroactively

The U.S. Court of Appeals for the Tenth Circuit, applying Colorado law, has held that property damage caused by faulty workmanship that is neither expected nor intended can constitute an “occurrence” that triggers coverage under CGL policies. Greystone Construction, Inc., et al. v. National Fire & Marine Insurance Co., No. 09-1412 (10th Cir. Nov. 1, 2011). The Greystone court did not apply a Colorado statute requiring courts to presume that property damage caused by construction professionals' work constitutes an accident because it was enacted while the dispute was on appeal and because the court held that the statute did not apply retroactively.

The policyholders in this case, general contractors, each hired subcontractors to construct homes that were purchased by the underlying claimants. Both houses were built on soils containing expansive clays, and soil expansion over time caused their foundations to shift, resulting in damage to their living areas. The underlying claimants sued the policyholders, alleging that the damage to their houses was caused by subcontractors' negligent design and construction of the houses' foundations. The policyholders tendered both suits to two insurers that each had issued them CGL policies covering multiple policy periods, the latest of which ended in 2006. The insurers' policies provided coverage for property damage caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies also contained a business risk exclusion barring coverage for property damage to the policyholders' “work,” except if “the damaged work or the work out of which the damage arises was performed on [the policyholder's] behalf by a subcontractor.”

One insurer agreed to defend the suits under a reservation of rights, and the other did not provide a defense. A coverage action was filed against the non-defending insurer, seeking to recover a portion of defense costs. The district court granted summary judgment in favor of the non-defending insurer, holding that, under General Security Indemnity Co. of Arizona v. Mountain States Mutual Casualty Co. , 205 P.3d 529 (Colo. Ct. App. 2009), the underlying suits did not allege covered “occurrences.” On appeal, the Tenth Circuit sought to certify the question to the Colorado Supreme Court, which declined to address it.

In 2010, after the court heard oral argument, the Colorado legislature, in response to General Security, enacted C.R.S. ' 13-20-808. That statute requires courts, when interpreting liability policies issued to construction professionals, to “presume that the work of a construction professional that results in property damage ' is an accident unless the property damage is intended and expected by the insured.” The Tenth Circuit held that ' 13-20-808 did not apply. According to the court, if applicable, the statute would resolve the case because the policyholders did not intend or expect the damage to the houses and, therefore, the damage would be presumed to have arisen from an “accident.” The court, however, held that ' 13-20-808 did not apply retroactively. The court noted that, under Colorado law, a statute is presumed to operate prospectively if there is no legislative intent to the contrary. The court recognized, and agreed with, Colorado state courts refusing to apply ' 13-20-808 retroactively because, as the court found, there was no reason to believe the legislature intended such an effect. The court noted that the act expressly was made to apply “to all insurance policies currently in existence or issued on or after [its] effective date.” The court determined that “policies currently in existence” referred only to those whose policy periods had not yet expired because, if the legislature instead had intended it to apply to expired policies that nonetheless could be subject to claims for occurrences taking place during their policy periods, it would have more clearly stated that objective. The court further noted Colorado Supreme Court precedent construing the term “existing policy” as meaning one whose policy period has not yet expired, as well as Colorado insurance statutes and regulations that used a similar definition.

The court went on to predict that the Colorado Supreme Court would construe the term “occurrence” to encompass unforeseeable damage to “nondefective” property caused by faulty workmanship and, therefore, that the underlying suits triggered coverage under the insurers' policies. The court noted that jurisdictions differed over whether damage caused by faulty workmanship can constitute an “occurrence.” According to the court, however, damage resulting from improper or faulty workmanship constitutes an “occurrence” if the damage is to nondefective property and caused without expectation or foresight.

According to the court, the damage to the houses' living areas was unforeseen and unanticipated, having resulted from exposure to expansive soils caused by the homes' poorly designed and built soil-drainage and structural elements. Because the damage caused by the subcontractors' faulty design and construction was not foreseen, the court explained, the underlying suits alleged an “occurrence” triggering a defense duty. The court noted, however, that CGL policies cover only damage to nondefective work product (here, the living areas of the homes) and not defective work product (the faulty soil-drainage and structural elements). This is because an obligation to repair defective work is neither unexpected nor unforeseen, but damage to otherwise nondefective work is, the court explained. According to the court, “faulty workmanship, standing alone, is not caused by an accident ' but damage to other property caused by the faulty workmanship ' is the result of an accident.”

The court rejected the non-defending insurer's argument that the costs of repairing damage caused by faulty workmanship are a business risk not covered by CGL policies, while noting that the business risk policy exclusions do operate to eliminate certain coverage, including the costs of repairing damage to a policyholder's own work.

Laura A. Foggan, a member of this newsletter's Board of Editors and a partner at Wiley Rein LLP, contributed this month's Case Briefs.