By Scott C. Turner, Attorney, Anderson Kill
Wednesday, the Supreme Court of South Carolina issued its decision in Bennett & Bennett Const., Inc. v. Auto Owners Ins. Co., 2013 S.C. LEXIS 170 (S.C. 2013), holding that Commercial General Liability (CGL) policy’s coverage for defective construction work was excluded by operation of the Performing Operations Exclusion and the Recall of Products or Work Exclusion. It also restated its general view that the CGL policy does not cover property damage to the policyholder’s own work; it only covers property damage to other property that is not the policyholder’s work.
Bennett & Bennett Const., Inc. v. Auto Owners Ins. Co., 2013 S.C. LEXIS 170 (S.C. 2013) [enhanced version available to lexis.com subscribers]
Bennett & Bennett Construction contracted with a homeowner to remove synthetic stucco cladding from her home and replace it with a decorative brick face. Bennett & Bennett hired a subcontractor, M & M Construction (M & M), to install the brick. The brick featured a decorative sandy finish. M & M completed installation of the brick face, left the site, informed Bennett & Bennett that the work was completed, and sent a final invoice. Bennett & Bennett inspected the work and discovered mortar and slurry dried onto the face of the brick. Bennett & Bennett informed M & M of the problem and directed it to make necessary corrections.
M & M hired a subcontractor to clean the brick which used a pressure washer and acid solution that discolored some of the bricks and removed their decorative sandy finish. After attempts to repair the appearance of the brick face proved unsuccessful, Bennett & Bennett instructed M & M to remove and replace all of the brick. At that point, M & M ceased all communication with Bennett & Bennett, which then replaced the brick face at its own expense, sued, and obtained a default judgment against M & M. Bennett & Bennett then brought suit against M & M’s insurance company, Auto Owners, seeking a declaratory judgment that its CGL policy provided coverage for the damage.
First, the South Carolina Supreme Court addressed the effect of exclusion j.(5) which excludes coverage for coverage “property damage” to “[t]hat particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations....” It held that that the exclusion applied to bar coverage, because operations were being performed on Bennett & Bennett’s behalf at the time of the property damage.
Second, the court addressed the effect of exclusion n. which excludes coverage for “[d]amages claimed for any loss, cost or expense ... incurred ... for the ... repair, replacement, adjustment, removal or disposal of ... “Your work” ... If such ... work ... is withdrawn ... from use ... because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.” It held that this exclusion also applied to bar coverage, because the brick face was replaced because of a known defect or inadequacy in it.
COMMENTS FROM A POLICYHOLDER PERSPECTIVE:
The court was arguably wrong on one point and clearly wrong on another:
Exclusions j.(5), j.(6), and l. separately treat property damage to the policyholder’s work at each of the three stages of that the property goes through in construction: (1) property that is actively being performed upon, (2) that part of the property on which the policyholder’s work has been completed but before the policyholder’s work on other parts of the project has been completed, and (3) property on which all of the policyholder’s work has been completed. The last was intended to afford particularly generous coverage for general contractors, like Bennett & Bennett, who use subcontractors. Therefore, the demarcation line between completed and uncompleted work is obviously very important. It is provided in the policy definition of “products-completed operations hazard”. That definition provides, in pertinent part, that “[w]ork that may need . . . correction, repair or replacement, but which is otherwise complete, will be treated as completed.” What happens then when the policyholder send agents back to perform that “correction, repair or replacement” to its earlier work but the latter causes damage to the earlier work during the attempt? If the work had experience property damage spontaneously on its own, such as through premature deterioration, exclusion l. would clearly apply, and that exclusion’s large exception for subcontractor work would leave coverage standing on many claims. Does the clock get reset such that the “correction, repair or replacement” work become a new instance of the policyholder “performing operations” such that exclusion j.(5) should apply? Or, does the generous coverage of exclusion l. apply, because the work attained completed work status under the definition? The South Carolina Supreme Court concluded here that it is the former, but the policy is at least ambiguous on this point, so the Doctrine of Contra Proferentem should have applied to push the property damage into being treated under exclusion l.
Next, the policy drafters intended exclusion n. to apply to the costs of a classic products recall, in which one item of a policyholder’s product or work fails under circumstances that strongly suggest that identical products or work will likewise fail in the future, causing a recall of those identical products or work. This remains how the exclusion is explained in the insurance industry’s own publications. Accordingly, many courts have limited the application of this exclusion to the costs of such a withdrawal, leaving coverage for the property damage that actually occurs. Not so this court, who failed see any ambiguity in the wording of the exclusion.
Scott C. Turner (email@example.com), is of counsel at Anderson Kill, a national firm known for exclusively representing policyholders. He is a construction insurance attorney with over 20 years of experience securing insurance recoveries for property losses and in securing defense and indemnification for liability resulting from construction disputes and defects.
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