Last month, the South Carolina Supreme Court ruled that a state law changing the definition of “occurrence” to include faulty workmanship was constitutional, but could not be applied by insured’s retroactively.  The decision was Harleysville Mutual Insurance Company v. State, et al., No. 27189 (Nov. 21, 2012).  A copy is available here.

The South Carolina Legislature’s Act No. 26 requires that CGL policies contain, or otherwise will be deemed to contain, a definition of “occurrence” that includes “property damage or bodily injury resulting from faulty workmanship.”  While property damage or bodily injury resulting from faulty workmanship will be covered, the faulty workmanship itself remains an excluded business risk.  The Act became law on May 17, 2011, and was codified as Section 38-61-70 of the South Carolina Code.

Following enactment, Harleysville Mutual Insurance Company filed an original petition with the South Carolina Supreme Court challenging the constitutionality of the Act.  The Court held that the Act did not violate the separation of powers doctrine, was not unconstitutional special legislation, and did not deprive Harleysville of its right to equal protection under the law.  The Court did, however, hold that the Act amounted to a retroactive change in the terms of existing contracts, in derogation of the Contract Clauses of both the South Carolina and the United States constitutions.  Thus, the Court ruled that the Act applies only prospectively to contracts executed on or after its effective date of May 17, 2011.

Although the Act changed the definition of the term “occurrence” to include property damage or bodily injury resulting from faulty workmanship, thereby foreclosing arguments that such resulting damage falls within the scope of a usual business risk exclusion, insurers should find solace in that the Court refused to re-write existing policies in effect prior to May 17, 2011.