Bill, Court Case Puts Builders, Insurers at Odds

April 8, 2011

Investigative Reports

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The NerveBattle lines have been drawn in the S.C. General Assembly pitting property insurance companies against property owners and builders in a high-stakes standoff over who gets hit in the pocketbook as a result of damage from faulty workmanship.

The clash of interests features all the elements of a classic political showdown: influential opposing voices, legal ramifications, lobbyists galore – and lots of money on the line.

And, in addition to the Legislature, the imbroglio involves the state Supreme Court, too.

On Jan. 7, the five-member court issued a unanimous ruling in a construction liability insurance case, Crossman v. Harleysville. The ruling was controversial; and, according to sources for this story, contradicted court findings in similar cases in at least two other states.

Less than three weeks after the S.C. Supreme Court handed down its ruling, state Senate President Pro Tempore Glenn McConnell, R-Charleston, filed a bill that would essentially reverse the decision.

McConnell’s bill, which passed the Senate last week with overwhelming support, adds intrigue to the plot on yet another level – a perpetual push and pull between the legislative and judicial branches of government.

In a rare move, amid the legislation pending and the courts in other states ruling, the S.C. Supreme Court has decided to reconsider its decision. The court has scheduled that to happen on May 23.

The plaintiffs in the case – Crossman Communities of North Carolina, Beazer Homes Investment Corp. and one individual party – are attempting to get a multimillion-dollar insurance claim approved. The claim stems from water damage resulting from defects in the construction of some condominiums in Myrtle Beach.

The plaintiffs are seeking approval of the claim under a commercial general liability, or CGL, policy issued for the condos project by Harleysville Mutual Insurance Co. of Pennsylvania.

Such CGLs are common in the business world, although many observers say the policies have become increasingly complex and difficult to understand.

Harleysville is the lead defendant in the case. Two other insurance companies, including one in Myrtle Beach, are co-defendants.

The case follows a lawsuit over the faulty building work. The suit was settled for about $16.8 million, according to the Supreme Court ruling. Justice John Kittredge wrote the opinion.

“The condominium project was fraught with negligent construction, which resulted in claims filed by the homeowners,” the ruling says. “Respondents [the plaintiffs] settled the construction lawsuit and then sought coverage from Harleysville under the CGL policy.”

Harleysville subsequently denied the coverage claim. So the plaintiffs sued.

A trial court found that the property damage resulted from, and in addition to, negligent work by subcontractors and determined that it should be covered under the commercial general liability policy.

Both sides, however, were unhappy with aspects of the trial court’s ruling. So they appealed it to the Supreme Court, which overturned the lower court’s judgment.

The case hinges on whether the property damage was caused by an “occurrence,” a legalistic insurance term usually defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Typically, an occurrence triggers coverage under CGL policies. But what exactly constitutes an occurrence is a subject of much confusion and debate.

In their ruling, the five state supremes said “courts across the country have struggled with CGL” insurance, particularly a “subcontractor exception” often written into the policies. “In analyzing difficult and complex issues which arise in these cases, courts have taken differing approaches,” the ruling says. “The result is an intellectual mess.”

Addressing the definition of occurrence, the judgment says, “Courts across the country, including this Court, have struggled with understanding the ‘continuous or repeated exposure to substantially the same general harmful conditions’ language.”

The Supreme Court ruling said the origin of the case also has been a difficult subject in jurisprudence.

“Courts across the country have wrestled with whether a CGL policy covers damage to property caused by faulty workmanship,” the ruling says. “A review of these cases reflects two divergent approaches courts have taken in deciding whether coverage exists.”

In this case, the S.C. Supreme Court decided that it does not, explaining its rationale with details about how the water damage happened.

“The natural and expected consequence of negligently installing siding to these condominiums is water intrusion and damage to the interior of the units,” the court said. “There is no fortuity [accident] element present under this factual scenario.

“We hold that where the damage to the insured’s property is no more than the natural and probable consequences of faulty workmanship such that the two cannot be distinguished, this does not constitute an occurrence. Accordingly, Respondents have failed to show an ‘occurrence.’”

Basically, the court declared that the damage that resulted from the shoddy work was to be expected, so therefore the harm to the property could not be considered accidental.

But as the same time, the justices acknowledged that their findings contrast with some judges’: “We recognize that other courts have taken a different view. However, we believe the facts of this case show that a CGL policy was not intended to provide coverage under these circumstances.”

To its detractors, the ruling upends CGL precedent and exposes property owners and builders to significantly greater liability.

Mark Nix, director of the Home Builders Association of South Carolina, says it is tantamount to narrowing CGL coverage to a freak accident or an act of God. “This could have a ripple effect on the insurance industry across the country,” Nix says.

He says courts in Colorado and Georgia have ruled differently.

A March 12 news release posted on the insurance industry news site insurancenewsnet.com says, “Georgia’s Supreme Court has determined that a general contractor may recover from its subcontractors’ insurers the cost of repairs for property damages stemming from the subcontractor’s shoddy workmanship.”

Apparently, even some insurance industry executives find the Palmetto State ruling puzzling.

Nix provided an advance copy of an article he says the Home Builders Association plans to print soon in its periodic South Carolina Builder Journal publication. In the article, representatives of three insurance companies are said to question or criticize the Crossman v. Harleysville outcome.

“It’s a disastrous decision,” Howard Cox of the Upstate-based Palmetto Insurance is quoted as saying, “In the past, when someone did something wrong, the wrong wasn’t paid for, but the resulting damage was.”

More in the write-up from Frank Norris of Columbia-headquartered Frank B. Norris & Co.: “Something is wrong when insurance companies cannot issue a liability policy that the builder can understand, much less the insurance agent. Something is wrong when multiple state supreme courts spend thousands of hours of legal time trying to interpret the CGL policy … ”

Enter McConnell’s bill, S. 431.

It would amend state law to require that commercial general liability policies “be broadly construed in favor of coverage.” The legislation also says that construction work resulting in property damage “in certain circumstances constitutes an occurrence … and is not the intended or expected consequence of the work.”

The bill would apply “to any pending or future dispute over coverage,” whether from a policy issued in the past or future.

Efforts to reach McConnell earlier this week by email and phone were unsuccessful.

After clearing the Senate last week on a 39-2 final vote, his bill was sent to the House, where it was referred to that chamber’s Labor, Commerce and Industry Committee.

Rep. Bill Herbkersman, R-Beaufort, introduced a similar version of the bill in the House on Jan. 26, the same day McConnell filed his proposal. The House bill, H. 3449, has attracted several co-sponsors and likewise was sent to the LCI Committee. But it hasn’t gone anywhere since then.

Among other provisions, the House legislation mentions the gobbledygook nature of CGLs. The measure says in part, “Insurance policies issued to construction professionals have become increasingly complex, often containing multiple, lengthy endorsements and exclusions conflicting with the reasonable expectations of the insured.”

But be that as it may, the Property Casualty Insurers Association of America, for one, opposes the legislative effort and wants the House to wait for the Supreme Court rehearing on the case before acting on McConnell’s bill.

“Passage of a bill to extend insurance coverage to construction defects under a general commercial liability policy passed the Senate today and would set a dangerous precedent in South Carolina that could add to loss costs, negate the meaning of any contract and potentially increase rates for insurance consumers,” the association said in a March 31 news release.

The practical effect of McConnell’s bill would be to reverse the Crossman v. Harleysville decision.

Indeed, that’s how both the insurance and construction industries are couching it. However, they occupy opposing terrain in the debate, and have loaded up with lobbyists who are doing battle in the Legislature in an effort to win lawmakers to their respective sides.

At a minimum, Harleysville Mutual Insurance Company has hired four lobbyists; the South Carolina Property and Casualty Insurance Guaranty Association has retained three of those same ones; the Property Casualty Insurers Association of America is employing five lobbyists; and the Home Builders Association has five, according to State Ethics Commission records.

It is not uncommon for lawmakers at the state and federal levels to sponsor legislation to counteract a court ruling. That’s how our separation-of-powers system works. But, with so much money at stake in this issue – and that many competing lobbyists buzzing around the State House on this one – it’s anybody’s guess what will happen with it.

Reach Ward at (803) 254-4411 or eric@thenerve.org