South Carolina Court Upholds Contractor Liability for Faulty Workmanship

South Carolina’s high court has left intact a state law that requires a builder’s general liability policy to cover damages from faulty workmanship, but ruled it cannot be applied retroactively to claims filed before the law’s May 2011 effective date.

State lawmakers last year enacted a law expanding the scope of a commercial general liability policy so that in addition to covering any accidental damages it would cover faulty workmanship.

The law was in reaction to a previous Supreme Court case (Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company Op. No. 26909) where the court initially ruled that the insurance company was not on the hook for $16.8 million in damages based on their negligence when constructing the properties.

South Carolina builders feared the decision could leave them open to liability for past projects and force them to assume more risk when constructing others.

The Supreme Court later reversed its decision, but not before state lawmakers decided to act and reverse the first Crossman ruling, despite strong opposition from the insurance industry.

The new law expanded the definition of an “occurrence” as stated in a general liability policy. In addition to covering accidents that included repeated exposure to harmful conditions, an occurrence also would apply to property damage or bodily injury from faulty workmanship.

Harleysville Insurance, which was on the hook to pay the $16.8 million, challenged the new law on the grounds that the legislature under the separation of powers act didn’t have the power to pass a law overturning the court’s ruling. The insurer also said the law should be declared unconstitutional because it unfairly expands the coverage for builders performing “construction-related work, but not non-builders covered under the same policy.

Chief Justice Jean Hoefer Toal, writing for the majority, said that lawmakers had the right to enact a law since it was aimed at reversing the court’s first Crossman ruling, which was later reversed by the court.

“Given that in Crossman II we revised our initial decision in Crossman I, we do not find the General Assembly retroactively overruled this Court’s interpretation of the statute,” wrote Toal.

Secondly, the court ruled that the new law does not unfairly penalize insurers by expanding the coverage just for builders.

“Insurance coverage for construction liability lacks clarity, particularly with respect to whether construction defects constitute “occurrences” under construction general insurance policies,” wrote Toal. “The General Assembly properly exercised its authority in an attempt to definitively resolve or at least minimize this frequently-litigated issue,”

In deciding that the law could not be applied retroactively, the court ruled that the legislature has the power to expand the scope of a general contractor’s liability policy to include faulty workmanship. However, in so doing, they violated the contract clause since the expanded coverage includes a liability previously not considered before the law’s passage.

“While we hold that it is within the legislature’s power to statutorily define the meaning of “occurrence,” it violates the contract clause to apply the new definition retroactively as it substantially impairs pre-existing contracts,” wrote Toal.