What Will Your Liability Policy Cover?

May 24, 2011
Legal Alert

Courts have been revisiting a hot issue in the construction industry—whether or not a commercial general liability (CGL) policy provides coverage for damage to property caused by faulty workmanship.

In a recent case, a majority in the South Carolina Supreme Court ruled that claims for repair of poor workmanship alone are not covered by insurance. The primary reason is that CGL policies are meant to protect against accidental risks, and faulty workmanship (think “defective product”) is not considered an accident, but the result of intended acts. In the past, claims for damages beyond that of correcting the faulty work have been covered. With the ruling, that is no longer the case.

The insurance industry has been steadfastly making the argument that in the absence of unforeseeable damage, there is no coverage for the faulty work or damage to other property. In other words, “damage to other property” is a logical, foreseeable result of the poor workmanship. If you leave a “hole” in a roof, for example, water can go through it and cause damage to other property.

The stakes are huge. Thousands of construction defect cases—including many claims of defective fenestration products—are regularly settled with insurance funds because of coverage for damage to “other property.” When courts take that coverage away, the is a swift reaction.
The South Carolina situation is illustrative. In Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company—S.E.2d—(S.C. January 7, 2011), the court held that no occurrence (no coverage) exists unless the damages arise from a fortuitous (e.g. accidental, unexpected) event. The court required an “unintended, unforeseen, fortuitous or injurious event.”

In Crossman, the homeowners alleged that developers negligently designed, developed and constructed condominiums and breached express and implied warranties. In the court’s words, the “natural and expected consequence of negligently installing siding to these condominiums is water intrusion and damage to the interior of the units. There is no fortuity element present under that 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.”

With those words, construction defect insurance coverage in South Carolina was nearly obliterated. South Carolina contractors quickly organized and convinced the legislature to enact a new law in order to clarify under what circumstances construction professionals are afforded coverage under CGL policies.

An astounding four months later, on May 17, 2011, the governor of South Carolina signed a bill that defines several terms—commercial general liability insurance policy, construction professional, construction related work—and requires that a CGL policy define “occurrence” so as to cover “property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.” A legislative over reaction? I leave it to you, but the states of Arkansas and Colorado have followed suit and others are considering the same response. Ask about this coverage when you buy insurance.

This Legal Alert is presented by Paul Gary, an attorney at the Gary Law Group based in Portland, Ore. The firm specializes in legal services for the window and door industry. More information is available at www.prgarylaw.com.  Contact Gary at paul@prgarylaw.com for further information or to receive the firm's "Risk in the Fenestration Industry” quarterly newsletter.