The first decision issued this year addressing product completed-operations hazard (PCOH) coverage for faulty construction work confirms that the ongoing debate regarding the “occurrence issue” remains remarkably unsettled. Reversing a decision it had issued less than two years earlier that had found coverage for water intrusion damage to a completed home caused by installation of defective, synthetic stucco, the South Carolina Supreme Court has reinvigorated the “occurrence” issue debate by denying coverage for progressive water intrusion damage caused by faulty workmanship of a subcontractor. Crossmann Communities of North Carolina, Inc. v. Harleysville Mut. Ins. Co., __ S.E. 2d. ___, 2011 WL 93716 (S.C. Jan. 7, 2011)(overruling Auto Owners Ins. Co. v. Newman, 684 S.E.2d 541 (S.C. 2009)).
In Crossmann, the South Carolina court reaffirmed its previous ruling in L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 621 S.E.2d 33 (S.C. 2005) holding that faulty workmanship by a highway subcontractor that only damaged the completed highway was not an “accidental occurrence” covered by the PCOH provisions of a CGL policy. The Crossmann court rejected decisions from other jurisdictions finding PCOH coverage for negligent subcontractor work that damages a completed project. The court decided that such decisions adopt a “minority” view that faulty workmanship by a subcontractor that is unintentional and unexpected can constitute an accidental occurrence that triggers PCOH coverage. See, e.g., U.S. Fire Ins. Co. v. J.S.U.B., 979 So. 2d 871 (Fla. 2007). Instead, the Crossmann court followed Bituminous, which it concluded had applied the majority view that faulty or “defective” construction that only damages the completed project cannot be an “occurrence” of covered property damage. See also Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 908 A.2d 888 (Pa. 2006)(applying Bituminous). The issue regarding which outcome represents the “majority” view is subject to dispute, as commentators have suggested that the ruling in J.S.U.B. represents the majority view.
The Crossmann court decided that its 2009 ruling in Newman was erroneous because that decision had failed to consider whether or not the claims at issue were the result of an accidental occurrence. According to Crossmann, to qualify as a covered accident, there must be 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." Id. at *8. Focusing apparently on the "by chance and usually suddenly" component of this definition of "accident," the court decided that progressive water intrusion damage to condominium units caused by the negligent work of subcontractors "was a direct result and the natural and expected consequence of faulty workmanship" and hence was not an accidental occurrence. The court decided that Newman should be overruled because it had erroneously "permitted coverage for faulty workmanship in the absence of an 'occurrence' with its fortuity underpinnings." Id. at *9.
Crossmann reiterated the “no occurrence” ruling from Bituminous, but the court refused to adopt the insurer’s proposed bright-line test that would bar any PCOH coverage for damage to a completed project caused by faulty construction work. Clarifying Bituminous on this point, Crossmann held that in appropriate circumstances, there might be an insured "occurrence," even if the post-completion damage were confined to the project itself. However, the court suggested that the only type of "occurrence" that might trigger such coverage would be an unintentional, identifiable act of negligence that caused a distinct, "sudden" event, such as a fire or partial collapse of the foundation of the completed structure. Id. at *7.
In South Carolina, there is at least a possibility of obtaining PCOH coverage for construction-related property damage if the claims at issue are based on catastrophic events that can be characterized as sudden and accidental. After Crossmann, however, it is doubtful that any PCOH coverage is available in South Carolina for ongoing, progressive damage to a completed project, such as cracking of walls caused by faulty foundation work or water intrusion caused by roofing, siding or window installation errors. A further limitation adopted by Crossmann is that where a subcontractor’s faulty workmanship causes accidental damage to other parts of the project, only the costs of repairing the consequential damage is covered, not the costs of replacing the “faulty” work. Id. at *9.
Recent rulings of the highest courts in Florida, Indiana, Kansas, Texas, and Tennessee, all decided after Bituminous, reject carriers’ “no occurrence” arguments. These courts adopt a more liberal view of what is an “accidental” occurrence and allow PCOH coverage for water intrusion and similar types of progressive property damage caused by negligent subcontractors. Indeed, in a case handled by this firm, Pozzi Window Co. v. Auto-Owners Ins. Co., 984 So. 2d 1241, 1248 (Fla. 2008), the Florida Supreme Court extended its J.S.U.B. decision by ruling that post-completion water intrusion damage caused by a subcontractor’s negligent installation of windows can trigger PCOH coverage, even if the damages are limited to the cost of repairing or replacing the negligently installed windows.
The Crossman court did not cite Pozzi and rejected decisions, such as J.S.U.B., finding PCOH coverage for progressive property damage caused by negligent subcontractors. The key to the outcome of such cases is to review carefully the “accidental occurrence” law of the particular jurisdiction and to develop evidence to refute the carrier’s common argument that there has been no “occurrence.” It is critically important in such cases to establish that the post-completion property damage at issue was caused by the actual negligence of a subcontractor that was neither intended nor expected by the insured.