Homebuilder's CGL Policy Covers Subcontractor's Negligence

 

In Auto Owners Ins Co. v. Newman, 2008 WL 648546 (S.C., 2008), the homeowner filed a claim against Trinity Construction for breach of contract, negligence, and breach of warranty, alleging defective construction related to the installation of stucco siding. The homeowner alleged that the application of the stucco did not conform to industry standards and that these nonconforming aspects of the stucco installation allowed water to seep into the home, causing severe damage to the home's framing and exterior sheathing.

 

After an arbitrator issued the homeowner an award of itemized damage due to the defective construction, Auto-Owners sought a declaratory judgment to determine its rights and obligation under the CGL policy it had issued to Trinity. Auto-Owners contended that the damages awarded by the arbitrator were not covered by the policy. The trial court determined that the policy covered the damages because they resulted from an “occurrence” and because Auto-Owners failed to show that any exclusion applied. Auto-Owners appealed, and The Supreme Court of South Carolina affirmed the decision.

 

First, the court determined that the negligent application of stucco to the house by the subcontractor resulted in an “occurrence” of water intrusion, causing property damage covered under the Trinity's CGL policy. The court explained that although the stucco subcontractor's negligent application was not on its own sufficient to constitute an “occurrence,” pursuant to its reasoning in L-J v Bituminous Fire & Marine Insurance Co., 366 S.C. 117, (2005), the continuous water intrusion into the home resulting from the subcontractor's negligence qualified as an accident involving “continuous or repeated exposure to substantially the same harmful conditions.”

 

The court next held that the subcontractor's exception to the “your work” exclusion applied to property damage resulting from water intrusion. Although Auto-Owners claimed that the “work” under the “your work” exception extended to the builder's entire project, the court explained that including the entire project in the definition of “work” would render the “your work” exclusion and subcontractor exception meaningless.

 

The court also held that the exclusion for damage expected or intended by the insured did not apply to damage resulting from negligent work of the subcontractor because even if the homebuilder would have expected such damage from water intrusion, the homebuilder would not have expected or intended the subcontractor to perform negligently.

 

Finally, the court held that the replacement of defective stucco was a cost associated with repair of property damage covered under the policy. The court stated that although the policy excluded property damage to the subcontractor's work product, water damage resulting from the faulty stucco application by the subcontractor to the rough carpentry, windows and doors, thermal and moisture protection, and interior and exterior finishes, could not be assessed nor repaired without removing the entire stucco exterior. Thus, replacement of the stucco was a cost associated with remedying other property damage covered under the policy.