Insurers Balk at South Carolina Construction Defects Bill

Insurers have come out against a move by South Carolina lawmakers to extend general liability policies to include construction defects.

The Property Casualty Insurers Association of America (PCI) says such a move would add to loss costs and potentially lead to higher rates on employers.

Lawmakers are seeking to reverse a South Carolina Supreme Court Ruling in the case of Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance, where the court ruled that insurers are not liable for damages caused by faulty workmanship under a contractor’s commercial general liability policy.

South Carolina builders fear the decision could have a negative impact on the industry if builders have to assume more risk.

The case originated in 2001 when a group of Myrtle Beach homeowners file suit against their builders on five condominium projects built between 1992 and 1995. The homeowners charged that the builder, Crossman Communities of North Carolina, Inc., had used poor construction methods that resulted in a “substantial decay and deterioration” in the units.

Crossman settled with the owners for the $16.8 million in damages, agreeing that a subcontractor’s poor work had resulted in water damage to the properties. Crossman then filed a claim with Harleysville seeking coverage for the costs under its general liability policy. Harleysville, however, rejected the claim saying it was not responsible since the damage was not the result of a covered peril such as windstorm damage or other accidental damage. The trial court found against the insurer saying that although the subcontractor was negligent there was additional damage due to the water thus making the insurer liable.

At issue for the high court was whether the builder’s actions constituted an “occurrence” as understood in the general liability policy. As stated in the policy, an occurrence is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court noted that although accident is not defined in the policy, the court had previous defined it as “an unexpected happening or event, which occurs by chance and usually suddenly, with harmful results, not intended or designed by the person suffering the harm or hurt.”

As applied to the case, the court found that the contractor’s actions did not constitute an occurrence under the policy since the damage to the property did not occur as the result of an “unintended, unforeseen, fortuitous, or injurious event.”

Micaela Isler, PCI’s state government representative, said lawmakers’ attempts to overturn the case could lead to higher rates and more litigation. “Such a law would negate the positive message the legislature is sending on tort reform efforts and discourage economic growth and job creation,” she said.