Court rules that faulty workmanship is not an 'occurrence' under a CGL
In 1989, a South Carolina developer hired a contractor to perform site-development work and build roads for a new subdivision. The contractor, in turn, hired subcontractors to perform most of the work. The project was completed in 1990; by 1994 the roads had deteriorated. That led the developer to sue the contractor for breach of contract, breach of warranty and negligence.
In 1997, the lawsuit was settled for $750,000. Subsequently, the contractor sought indemnification from four insurers that had issued CGL policies to it between 1989 and 1996. Three of the carriers contributed $362,500 to the settlement; the fourth, however, refused to indemnify.
The contractor and the three carriers that participated in the settlement sued the holdout, seeking contribution and indemnification for all defense costs. A circuit court referred the action to a special master, who found that the damage to the roadway system was covered under the contractor's CGL policy. The special master said the damage constituted an "occurrence." It also said the "expected or intended" and "your work" exclusions did not apply, since the work was performed by subcontractors. Finally, the special master found that the CGLs' "policy years" ran from 1989 to 1996. Because the policy issued by the contractor's insurer covered the two-year period from 1990 to 1992, the special master said it owed the other carriers a two-year contribution, valued at $103,571.42.
A court of appeals affirmed the circuit court's ruling. That ruling was appealed to the state Supreme Court, which reversed the decision in August 2004. The high court subsequently granted a rehearing to determine, among other things, whether the court of appeals erred in finding that the road deterioration constituted an "occurrence," as defined by the CGL policy. It also agreed to consider whether the exception in the "your work" exclusion, which grants coverage for otherwise excluded damage to a contractor's work if the work is performed by a subcontractor, should restore coverage in this case.
The court noted that the issue of whether property damage to the work product alone, caused by faulty workmanship, constitutes an occurrence was a question of first impression in South Carolina. It noted that most other jurisdictions that had considered the issue held that faulty workmanship that by itself results in damage to the work product, with no damage to other property, does not constitute an occurrence under a CGL policy.
Although South Carolina courts had not specifically considered this issue before, the Supreme Court observed they had addressed the issue of whether CGL policies are intended to cover faulty workmanship. The South Carolina Court of Appeals had held that any liability that is incurred because of faulty workmanship is part of the insured's contractual liability, not an insurable event under a CGL 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, including continuous or repeated exposure to substantially the same general harmful conditions." Four years after completion, the roads in this case started to deteriorate, showing many signs of "alligator cracking," a form of cracking in asphalt that looks like alligator skin. Two expert witnesses testified in the case. One said that approximately 50% of the cracking was caused by insufficient road subgrade preparation, which was caused by the failure to properly remove tree stumps from the subgrade and compact the soft, wet clay in the subgrade. He also said that the cracking was caused by an insufficiently thick road course, improper drainage and excessive traffic. The second expert testified that the primary cause of the cracking was improper drainage and that other causes included an inadequate "edge of curb detail and the increased frequency of heavy wheel loads on the pavement."
The high court said the deposition testimony showed that the only "occurrences" were various negligent acts committed during road design, preparation and construction. The court found these negligent acts constituted faulty workmanship. Because faulty workmanship is not typically caused by "an accident or by exposure to the same general harmful conditions," the court held that the damage in this case did not constitute an occurrence.
The court continued that the complaint did not allege property damage beyond the improper performance of the task itself. It alleged 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 the damage itself did not constitute an "occurrence." If the court held otherwise, it said that the CGL policy would be more like a performance bond, which guarantees the work, rather than like an insurance policy, which is intended to insure against accidents. The court also said that since there was no "occurrence," it was unnecessary to consider whether the exception in the "your work" exclusion provided coverage.
The court continued, "Our holding today ensures that ultimate liability falls to the one who performed the negligent work--the subcontractor--instead of the insurance carrier. It will also encourage contractors to choose their subcontractors carefully instead of having to seek indemnification from the subcontractors after their work fails to meet the requirements of the contract."
L-J, Inc. vs. Bituminous Fire and Marine Insurance Co., No. 25854 (S.C. 09/26/2005) 2005.SC.0000785 (www.versuslaw.com).
In 1989, a South Carolina developer hired a contractor to perform site-development work and build roads for a new subdivision. The contractor, in turn, hired subcontractors to perform most of the work. The project was completed in 1990; by 1994 the roads had deteriorated. That led the developer to sue the contractor for breach of contract, breach of warranty and negligence.
In 1997, the lawsuit was settled for $750,000. Subsequently, the contractor sought indemnification from four insurers that had issued CGL policies to it between 1989 and 1996. Three of the carriers contributed $362,500 to the settlement; the fourth, however, refused to indemnify.
The contractor and the three carriers that participated in the settlement sued the holdout, seeking contribution and indemnification for all defense costs. A circuit court referred the action to a special master, who found that the damage to the roadway system was covered under the contractor's CGL policy. The special master said the damage constituted an "occurrence." It also said the "expected or intended" and "your work" exclusions did not apply, since the work was performed by subcontractors. Finally, the special master found that the CGLs' "policy years" ran from 1989 to 1996. Because the policy issued by the contractor's insurer covered the two-year period from 1990 to 1992, the special master said it owed the other carriers a two-year contribution, valued at $103,571.42.
A court of appeals affirmed the circuit court's ruling. That ruling was appealed to the state Supreme Court, which reversed the decision in August 2004. The high court subsequently granted a rehearing to determine, among other things, whether the court of appeals erred in finding that the road deterioration constituted an "occurrence," as defined by the CGL policy. It also agreed to consider whether the exception in the "your work" exclusion, which grants coverage for otherwise excluded damage to a contractor's work if the work is performed by a subcontractor, should restore coverage in this case.
The court noted that the issue of whether property damage to the work product alone, caused by faulty workmanship, constitutes an occurrence was a question of first impression in South Carolina. It noted that most other jurisdictions that had considered the issue held that faulty workmanship that by itself results in damage to the work product, with no damage to other property, does not constitute an occurrence under a CGL policy.
Although South Carolina courts had not specifically considered this issue before, the Supreme Court observed they had addressed the issue of whether CGL policies are intended to cover faulty workmanship. The South Carolina Court of Appeals had held that any liability that is incurred because of faulty workmanship is part of the insured's contractual liability, not an insurable event under a CGL 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, including continuous or repeated exposure to substantially the same general harmful conditions." Four years after completion, the roads in this case started to deteriorate, showing many signs of "alligator cracking," a form of cracking in asphalt that looks like alligator skin. Two expert witnesses testified in the case. One said that approximately 50% of the cracking was caused by insufficient road subgrade preparation, which was caused by the failure to properly remove tree stumps from the subgrade and compact the soft, wet clay in the subgrade. He also said that the cracking was caused by an insufficiently thick road course, improper drainage and excessive traffic. The second expert testified that the primary cause of the cracking was improper drainage and that other causes included an inadequate "edge of curb detail and the increased frequency of heavy wheel loads on the pavement."
The high court said the deposition testimony showed that the only "occurrences" were various negligent acts committed during road design, preparation and construction. The court found these negligent acts constituted faulty workmanship. Because faulty workmanship is not typically caused by "an accident or by exposure to the same general harmful conditions," the court held that the damage in this case did not constitute an occurrence.
The court continued that the complaint did not allege property damage beyond the improper performance of the task itself. It alleged 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 the damage itself did not constitute an "occurrence." If the court held otherwise, it said that the CGL policy would be more like a performance bond, which guarantees the work, rather than like an insurance policy, which is intended to insure against accidents. The court also said that since there was no "occurrence," it was unnecessary to consider whether the exception in the "your work" exclusion provided coverage.
The court continued, "Our holding today ensures that ultimate liability falls to the one who performed the negligent work--the subcontractor--instead of the insurance carrier. It will also encourage contractors to choose their subcontractors carefully instead of having to seek indemnification from the subcontractors after their work fails to meet the requirements of the contract."
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 drenau@ thepoint.com.
