Court rules that faulty workmanship is not an'occurrence' under a CGL
In 1989, a South Carolina developer hired a contractor to performsite-development work and build roads for a new subdivision. Thecontractor, in turn, hired subcontractors to perform most of thework. The project was completed in 1990; by 1994 the roads haddeteriorated. That led the developer to sue the contractor forbreach of contract, breach of warranty and negligence.

In 1997, the lawsuit was settled for $750,000. Subsequently, thecontractor sought indemnification from four insurers that hadissued CGL policies to it between 1989 and 1996. Three of thecarriers contributed $362,500 to the settlement; the fourth,however, refused to indemnify.

The contractor and the three carriers that participated in thesettlement sued the holdout, seeking contribution andindemnification for all defense costs. A circuit court referred theaction to a special master, who found that the damage to theroadway system was covered under the contractor's CGL policy. Thespecial master said the damage constituted an “occurrence.” It alsosaid the “expected or intended” and “your work” exclusions did notapply, since the work was performed by subcontractors. Finally, thespecial master found that the CGLs' “policy years” ran from 1989 to1996. Because the policy issued by the contractor's insurer coveredthe two-year period from 1990 to 1992, the special master said itowed the other carriers a two-year contribution, valued at$103,571.42.

A court of appeals affirmed the circuit court's ruling. Thatruling was appealed to the state Supreme Court, which reversed thedecision in August 2004. The high court subsequently granted arehearing to determine, among other things, whether the court ofappeals erred in finding that the road deterioration constituted an“occurrence,” as defined by the CGL policy. It also agreed toconsider whether the exception in the “your work” exclusion, whichgrants coverage for otherwise excluded damage to a contractor'swork if the work is performed by a subcontractor, should restorecoverage in this case.

The court noted that the issue of whether property damage to thework product alone, caused by faulty workmanship, constitutes anoccurrence was a question of first impression in South Carolina. Itnoted that most other jurisdictions that had considered the issueheld that faulty workmanship that by itself results in damage tothe work product, with no damage to other property, does notconstitute an occurrence under a CGL policy.

Although South Carolina courts had not specifically consideredthis issue before, the Supreme Court observed they had addressedthe issue of whether CGL policies are intended to cover faultyworkmanship. The South Carolina Court of Appeals had held that anyliability that is incurred because of faulty workmanship is part ofthe insured's contractual liability, not an insurable event under aCGL policy [Isle of Palms Pest Control Co. vs. Monticello Ins. Co.,319 S.C. 12, 16, 459 S.E.2d 318, 320 (Ct. App. 1995)].

The CGL policy defined “occurrence” as “an accident, includingcontinuous or repeated exposure to substantially the same generalharmful conditions.” Four years after completion, the roads in thiscase started to deteriorate, showing many signs of “alligatorcracking,” a form of cracking in asphalt that looks like alligatorskin. Two expert witnesses testified in the case. One said thatapproximately 50% of the cracking was caused by insufficient roadsubgrade preparation, which was caused by the failure to properlyremove tree stumps from the subgrade and compact the soft, wet clayin the subgrade. He also said that the cracking was caused by aninsufficiently thick road course, improper drainage and excessivetraffic. The second expert testified that the primary cause of thecracking was improper drainage and that other causes included aninadequate “edge of curb detail and the increased frequency ofheavy wheel loads on the pavement.”

The high court said the deposition testimony showed that theonly “occurrences” were various negligent acts committed duringroad design, preparation and construction. The court found thesenegligent acts constituted faulty workmanship. Because faultyworkmanship is not typically caused by “an accident or by exposureto the same general harmful conditions,” the court held that thedamage in this case did not constitute an occurrence.

The court continued that the complaint did not allege propertydamage beyond the improper performance of the task itself. Italleged breach of contract, breach of warranty, and negligence.However, each of the claims repeated verbatim the same allegation:faulty workmanship in completing the project. That, the court said,was not covered by the CGL policy. The court concluded that thedamage itself did not constitute an “occurrence.” If the court heldotherwise, it said that the CGL policy would be more like aperformance bond, which guarantees the work, rather than like aninsurance policy, which is intended to insure against accidents.The court also said that since there was no “occurrence,” it wasunnecessary to consider whether the exception in the “your work”exclusion provided coverage.

The court continued, “Our holding today ensures that ultimateliability falls to the one who performed the negligent work–thesubcontractor–instead of the insurance carrier. It will alsoencourage contractors to choose their subcontractors carefullyinstead of having to seek indemnification from the subcontractorsafter their work fails to meet the requirements of thecontract.”

L-J, Inc. vs. Bituminous Fire and Marine Insurance Co., No.25854 (S.C. 09/26/2005) 2005.SC.0000785(www.versuslaw.com).

Readers can get in touch with Don Renau via e-mail at [email protected].