Faulty Workmanship, Occurrence, and Damage to Non-Defective Components of Insured's Work Discussed in South Carolina

A condominium project was fraught with negligent construction which resulted in claims filed by the homeowners. The insured builders sought coverage from the insurer and the trial court determined that the claims fell within the definition of “occurrence” and found coverage under the CGL form. The case ended up before the South Carolina Supreme Court. This case is Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company, 2011 WL 93716 (S.C.).

The insured constructed five condominium projects from 1992 through 1999 and in 2001, the homeowners filed a lawsuit against the insured after they discovered numerous construction defects and problems. The homeowners alleged defective construction that resulted in substantial decay and deterioration. The insureds settled with the homeowners of the projects for approximately $16.8 million and the insureds then sought coverage for the damages arising out of the lawsuit from the insurer, Harleysville Mutual. The insurer refused to provide coverage and a declaratory judgment action was filed.

When the case came before the Supreme Court of South Carolina, the court noted that general liability policies are not intended to insure business risks that are the normal, frequent, or predictable consequences of doing business. CGL forms are not intended to insure risks that the business can and should control or manage. To this end, the CGL form does not insure the work of the insured itself, but rather, it insures consequential risks.

The court then focused on the policy term “occurrence” and an understanding of the concept of faulty workmanship. The court said that there are two divergent approaches in the country about whether a CGL policy covers damage to property caused by faulty workmanship: the majority view is that claims of poor workmanship, standing alone, are not occurrences that trigger coverage under a CGL form; the minority rule is that damage flowing from faulty workmanship constitutes an occurrence, regardless of whether only the contractor's product is injured or a third party's property is injured, so long as the insured did not intend or expect the resulting damage. The Supreme Court of South Carolina sided with the majority approach.

The court stated that damage that does not arise from a fortuitous event is not an occurrence and damages to the insured's project that are the natural and probably consequences of faulty workmanship do not constitute an occurrence. For faulty workmanship to give rise to potential coverage, the faulty workmanship must result in an occurrence, that is, an unintended, unforeseen, fortuitous, or injurious event. In this case, the court said the facts showed that the insured negligently designed, developed, and constructed the condominiums, and the natural and expected consequences of this negligence was water intrusion and damage to the units. There was no fortuity element present under the factual scenario, no occurrence, and thus, no coverage under the CGL form. The ruling of the trial court was reversed.

In an aside, the court also ruled that to give effect to the standard CGL form as a whole, a narrow construction of the phrase “work product” is required. That is, the work product encompasses only the alleged negligently constructed component and not the non-defective components of the insured's work. In other words, if the insured's defective work caused damage to property beyond that work itself, the CGL form would provide coverage for that property damage.

Editor's Note: The Supreme Court of South Carolina presents a very good study of the faulty workmanship issue with a discussion of both the current majority rule and the minority rule.

The court notes that under the majority holding, courts state that there is no coverage because either they see no property damage or they see no occurrence as required by the terms of the CGL form. This court decided there was no occurrence since damage to the insured's own work is no more than the natural and probable consequence of faulty workmanship; that is, there is no accident or fortuity element which is required if there is to be an occurrence.