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Insurance Law

Sweet Carolina For Policyholders: Good Times Will Never Seem So Good For Construction Defect Claims

South Carolina Supreme Court Withdraws Crossmann Communities and Allows Coverage for Consequential Damages of Construction Defects - Court Adopts Time on the Risk Allocation

Randy Maniloff   Randy J. Maniloff, White and Williams, LLP

The Supreme Court of South Carolina has issued its opinion in the very closely watched case of Crossmann Communities v. Harleysville Mutual Ins. Co. There were twelve Amicus briefs filed with court. Twelve. That's almost 2 ½ briefs for each Justice. That's four briefs for every person I've ever met from South Carolina.

The South Carolina high court issued its first decision in Crossmann Communities in January. The Supreme Court overruled its 2009 decision in Auto Owners Ins. Co. v. Newman and held that "where the damage to the insured's property [project] is no more than the natural and probable consequences of faulty workmanship such that the two cannot be distinguished, this does not constitute an occurrence."

In other words, Crossmann essentially eliminated coverage for the consequential damages of faulty workmanship. This brought an immediate firestorm from the construction community. So much so that in May, Governor Haley signed into law § 38-61‐70 of the South Carolina Code. Under this statute, "property damage" resulting from faulty workmanship is deemed to be an "occurrence." Under Crossmann, the law is just the opposite (in many situations). Thus, the construction defect statute restored the coverage - that was eliminated by Crossmann ‐‐ for "property damage" that is the consequence of/resulting from faulty workmanship.

While all this hubbub was going on, the Supreme Court granted re‐hearing in Crossmann Communities. The court has issued its decision. The court withdrew its January opinion in Crossmann and held as follows:

Returning to Newman and viewing those facts through the lens of both "property damage" and "occurrence," we clarify that the costs to replace the negligently constructed stucco did not constitute "property damage" under the terms of the policy. The stucco was not "injured." However, the damage to the remainder of the project caused by water penetration due to the negligently installed stucco did constitute "property damage." Based on those allegations of property damage and construing the ambiguous occurrence definition in favor of the insured, the insuring language of the policy in Newman was triggered by the property damage caused by repeated water intrusion.

In sum, we clarify that negligent or defective construction resulting in damage to otherwise non-defective components may constitute "property damage," but the defective construction would not. We find the expanded definition of "occurrence" is ambiguous and must be construed in favor of the insured, and the facts of the instant case trigger the insuring language of Harleysville's policies. We note, however, that various exclusions may preclude coverage in some instances. Because the parties in the present case stipulated not to raise the issue, we do not address any policy exclusions and exceptions.

Crossmann at 6‐7.

Water Intrusion and Water Damage

Putting aside the combined "occurrence" and "property damage" rationales that the court adopted and what that can mean - which I'm still thinking about - the court essentially held that, while no coverage is owed to an insured for defective construction, coverage is owed for the consequential damages of defective construction.

The court's decision made no mention of the recently adopted South Carolina statute, except to say that it would make no mention of it.

Having now found that some coverage was owed, the South Carolina Supreme Court was required to address the method of allocation for multiple triggered policies. The court rejected "all sums" and adopted time on the risk. This is a lengthy part of the opinion and I leave it for another day.

The construction defect coverage situation in South Carolina has received a lot of attention. In my view - that has less to do with South Carolina's individual importance as a coverage jurisdiction (sorry 3 people that I've ever met from South Carolina) and more to do with it generally demonstrating and bringing attention to the complexity and lack of agreement that exists over coverage for construction defect claims. Consider that the Supreme Court of South Carolina issued Newman in 2009. The court overruled it in January 2011. The South Carolina legislature then un‐overruled Newman (not sure that's a word) in May 2011. The South Carolina Supreme Court then un‐overruled its overruling of Newman in August 2011. Got it?

A free copy of the Supreme Court of South Carolina's decision can be accessed here: Crossmann Cmtys. of N.C. v. Harleysville Mut. Ins. Co., 2011 S.C. LEXIS 277 (S.C. Aug. 22, 2011). subscribers can access the Lexis enhanced version of the Crossmann Cmtys. of N.C. v. Harleysville Mut. Ins. Co., 2011 S.C. LEXIS 277 (S.C. Aug. 22, 2011) decision with summary, headnotes, and Shepard's.

Please let me know if you have any questions.

Randy J. Maniloff
White and Williams LLP
1800 One Liberty Place | Philadelphia, PA 19103-7395
Direct Dial: 215.864.6311 | Direct Fax: 215.789.7608

The views expressed herein are solely those of the author and not necessarily those of the firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. The term "Binding Authority" is used herein for literary purposes only and is not an admission that any case discussed herein is in fact binding authority on any court.

Randy J. Maniloff is a Partner in the Business Insurance Practice Group at White and Williams, LLP in Philadelphia.  He concentrates his practice in the representation of insurers in coverage disputes over various types of claims.  He writes frequently on insurance coverage topics for a variety of industry publications.  Maniloff's views on coverage issues have been quoted by numerous media including The Wall Street Journal, The New York Times, USA Today, Associated Press and Dow Jones Newswires.  In January Maniloff published "General Liability Insurance Coverage: Key Issues In Every State," a book addressing the law in all 50 states on twenty key liability insurance coverage issues (Oxford University Press) (Co-authored with Professor Jeffrey Stempel of the University of Nevada Las Vegas Boyd School of Law).

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