Act’s Definition of “Occurence” Only Applies Prospectively

The South Carolina Supreme Court held unconstitutional the retroactivity clause in S.C. Code Ann. Section 38-61-70, which was made effective on May 17, 2011. The Act defines “occurrence” in a commercial general liability policy as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions and property damage or¬† bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.”

The Act’s retroactivity clause¬†provides: “This section applies to any pending or future dispute over coverage that would otherwise be affected by this section as to all commercial general liability policies issued in the past, currently in existence, or issued in the future.”

The S.C. Supreme Court held that this clause unconstitutionally violates the Contract Clause of both the U.S. and S.C. Constitutions because retroactive application of this definition would substantially impair existing contractual relationships. The Court addressed whether the Act was reasonable and necessary to effectuate a legitimate legislative purpose and held that it was not.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.



Negligent Bid Recommendation

Sunland Constr. Co. v. Wilbur Smith, Inc.,  387 F. App’x 361 (4th Cir. 2010).

In this recent Fourth Circuit case, a construction company sued the city of Myrtle Beach for breach of contract after the City terminated its contract to install rainwater pipes. The construction company also sued the project’s design engineer. The City filed a counterclaim against the construction company and the engineer. The district court held that the design engineer was liable to the City, but dismissed the other claims. The design engineer appealed this judgment to the circuit court of appeals.

The facts of this case are simple: the engineer was to recommend a contractor for the job following a competitive bidding. The engineer recommended a contractor that bid drastically less than the other bidders. The court held that the City had a right to rely on the engineer’s recommendation, which the engineer should have foreseen. Likewise, the engineer should have foreseen that the contractor bidding substantially less than its competitors would not reasonably be able to perform under the contract.

The court determined that the engineer was liable to the City for its negligent recommendation because the engineer had a duty to make a reasonable recommendation, breached that duty by negligently recommending the dramatically low bidder, and this recommendation was a foreseeable contributing cause of the City’s injuries. Based on this finding, the court affirmed the district court’s holding.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.

Legislature Responds to Crossman Case

In a previous blog I discussed the court’s holdings in L-J, Inc. v. Bituminous Fire & Marine Ins. Co. and Auto Owners Ins. Co., Inc. v. Newman.  In L-J, the court held that damage to a roadway caused by faulty workmanship did not constitute an occurrence and was not covered under the CGL policy.  In Newman, the court ruled that damage to walls and exterior sheathing did constitute an occurrence because the damage went beyond the defective work product itself (stucco).  Specifically, the continued repeated exposure to moisture caused by the defective stucco was both unexpected and unintended, therefore coverage could be found for those damages, but not for the defective stucco itself.

The court took another look at it’s insurance jurisprudence in Crossman Communities of North Carolina, Inc., v. Harleysville Mutual Ins. Co..  In this case, defective construction on a condominium project resulted in homeowners filing claims against the developer.  The developer settled with the homeowners for $16.8 million, and in turn sought coverage from Harleysville, the issuer of the developer’s CGL policy.  Harleysville refused to provide coverage and this declaratory judgment followed.  The issue before the court was: when faulty workmanship directly causes further damage to non-defective components of an insured’s project, does this necessarily constitute an occurrence?

Occurrence is defined in the policy as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.”  “Accident” is defined by the court as “an unexpected happening or event, which occurs by chance and usually suddenly, with harmful results, not intended or designed by the person suffering the harm or hurt.”

The court then took the opportunity to review both the majority and minority rules in other jurisdictions as to what constitutes an occurrence in faulty workmanship cases.  Under the majority rule, faulty workmanship alone does not trigger coverage under a CGL policy. Under the minority rule, however, damages caused by faulty workmanship do constitute an occurrence as long as they are unintended or unexpected from the standpoint of the insured. Critics of the minority rule argue that it is more of a performance bond than an insurance policy.

In analyzing whether a claim for faulty workmanship is covered, the court first must determine whether there has been an occurrence. This means the damages must arise from a fortuitous event and must not be the natural and probable consequences of the faulty workmanship.  Second, the court must address whether there has been property damage according to the specific CGL policy.

The court overruled its decision in Newman “to the extent it permitted coverage for faulty workmanship that directly causes further damage to property in the absence of an ‘occurrence’ with its fortuity underpinnings.”  The error in Newman lies in the fact that the court found coverage for property damage without the necessary finding of an occurrence.

Under the above analysis, the court held that there was no occurrence in the present case  because the damage caused “was a direct result and the natural and expected consequence of faulty workmanship….”

In response to this case, the South Carolina Senate proposed S. 431, a bill to amend the South Carolina Code of Laws to define an occurrence as an “accident” or “continuous or repeated exposure to substantially the same general harmful condition or substance.”  The bill specifically adds that “No additional requirement of a fortuitous event is needed to constitute an occurrence.”  On March 31, S. 431 was referred to the House Committee on Labor, Commerce and Industry.

This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice.  Seek a competent attorney for advice on any legal matter.