South Carolina Construction Defect Law

Clay Olson is a lawyer at Olson & Good, PC, which is located in the greater Charleston, South Carolina area.  Olson & Good has offices in Mt. Pleasant, Charleston, and North Charleston for purposes of servicing clients in approximately 20 South Carolina counties.  From this point forward, I will be posting relevant, fresh news relative to construction defect law in South Carolina.  My topics will evolve with the law, although I intend to focus on the law as it affects contractors, subcontractors, artisans, material suppliers, product manufacturers, insurers, and surety companies that are involved with construction in South Carolina.

Insurance Coverage Repair Reimbursement not covered under Indiana law

A recent decision from the Sixth Circuit illustrates the fact that insurance policies and the interperatation of CGL language is certainly state specific. The Cincinnati Insurance Company v. Beazer Home Investments, LLC decision ruled that a homebuilder (Beazer) may not recoup proceeds spent for repairing its own work, even if the work repaired is performed by subcontractors. While the decision may not be binding and applicable to similar circumstances in other jurisdictions, it is clear that contractors need to implement risk transfer practices such as additional insured endorsements and indemnity clauses.

FACTS AND PROCEDURE
The Cincinnati Insurance Company (CIC) sued Beazer Homes Investments, LLC in a declaratory-judgment action to establish that CIC was not obligated to cover the costs that Beazer incurred in repairing water damage to several houses that Beazer had built as the general contractor.

Homeowners notified Beazer that their homes were experiencing moisture damage, and needed immediate repair. Beazer notified its insurer, CIC, and acted on the homeowner complaints. Beazer investigated the claims, established a remediation protocol, and began repairing the alleged construction defects. Beazer then submitted claims to CIC for houses with closing dates between December 1998 and July1, 2002, that have incurred damage as a result of water intrusion.

The damage was allegedly caused by faulty workmanship on the part of Beazer’s subcontractors. CIC argued that there was no coverage because, according to applicable Indiana state law, defects in construction do not constitute “accidents” and thus are not “occurrences” under the applicable policy provisions. Rather, claims for faulty workmanship arise from the homeowners’ contractual relationship with the builder. Next, CIC argued that there was no “property damage” as defined by the policies and as interpreted under Indiana law.

In 2007, a South Carolina state court issued a declaratory-judgment ruling against CIC and in favor of Beazer, interpreting South Carolina law to hold that water damage to properly constructed parts of a house, which was caused by faulty construction on other parts of the house, was property damage caused by
an occurrence under Beazer’s policies with CIC. See Crossmann Cmtys. of N.C., Inc. v.
Harleysville Mut. Ins. Co., No. 2004-CP-2600084 (S.C. Ct. Com. Pl., May 3, 2007). The Sixth Circuit declared that the South Carolina decision, while involving similar issues and identical parties to suit, had no bearing on the present case, and was not barred by res judicata.

The South Carolina State court found that the term “accident” was an ambiguous definition in the policy. Indiana courts are very clear that faulty workmanship can never be considered an “accident”, as that term is used in commercial general liability policies. See, e.g., Amerisure, Inc. v. Wurster Const. Co., Inc., 818 N.E.2d 998, 1004 (Ind. Ct. App. 2004). As far as Indiana law is concerned, there apparently is no ambiguity as to the meaning of the word “accident” in a CGL policy when the alleged “accident” is faulty workmanship.

Beazer sought relief from Indiana precedent cited above by referring to subcontractor exemption from the ‘your work’ exclusion. The “your work” provision excludes coverage for damage to “work performed by [the policyholder] or on [its] behalf.” But the exclusion does not apply “if the damaged work or
the work out of which the damage arises was performed on your behalf by a subcontractor.”
Beazer argues that the interpretation of “property damage” adopted by the Indiana courts
renders superfluous the Policies’ “your work” exclusion and that exclusion’s subcontractor
exception.

Because Indiana has determined that the home is a product in its entirety, and, therefore, the general contractor’s “work”, there is no coverage and the insurer is not obligated to reimburse for repairs performed by subcontractors that causes damage to component parts, which are not even within the definition of a subcontractors labor.

This case is significant for many reasons. First, it illustrates the complexities faced by both builders and insurers alike when evaluating risks. It seems clear that the court would have been much more favorable to Beazer if these repairs were made in another jurisdiction. Because Indiana law prevailed and its definitions of “your work” are very broad, there is no coverage under the insuring agreement.

RISK TRANSFER AND THE ADDITIONAL INSURED SUBCONTRACTOR
The implemenation of a risk transfer protocol should be implemented by all builders, no matter where they choose to build. Both AIA and AGC construction contracts provide optional clauses that require subcontractors to add the GC as an “additional insured” party under the subcontractor’s policy. In order to be compliant, contractors and subs need to implement the contractual provision, which asks that the subcontractor provide a certificate of insurance which names the General Contractor or Residential as an additional insured party under the Subcontractor’s insuring agreement with its insurance underwriter.

Had this occurred in the present set of circumstances, Beazer could have forced its subcontractors to put their carriers on notice, and Beazer would, thus, be insured by the policies possessed by the subcontractors responsible for the allegedly defective work.

While I have no direct knowledge as to the quality, or non-quality, of the subcontractors used in erecting the Beaumont homes that were the subject of this initial litigation, it is abundantly important for contractors to use quality subcontractors when beginning any project. Employing highly skilled subcontractors will not serve to bar homeowners from filing suits, although it will certainly reduce the likelihood.

Leed Certification and the Green Movement: Environmental Consciousness or a Gateway to Litigation?

An increase in US and global energy costs, coupled with awareness about the environmental problems facing our world have started what is known as “The Green Movement”.  Consumers, politicians, opportunists, and others in the mix have stated that Green building is not only a trend, but possibly the only mode of building project delivery worthy of consideration.  The media and a war in Iraq have aided in turning the Green movement into an indefinable “good” thing that has credibility without question, regardless of what is actually known.  Realtors, Developers, Lenders, Lawyers and the like use buzzwords like “Leed” to indicate a false sense of knowledge, and I would like the opportunity to address what I know and don’t know, coupled with what nobody knows.

LEED certified buildings have drawn criticism for not delivering what they promise:  energy efficiency, environmental harmony, reduced costs, and other eco-friendly benefits.  Because I do not know what these experts, on both sides of the debate know, I will focus on the portion of the equation that is often ignored.  What are the non-environmental costs and pitfalls involved with Green or Leed building?

LEED certification need not be confused with sustainable, smart development.  While I am not a tree-hugger, I am certainly in favor of a world which knows no diminishing resources.  I am also a realist, however, and practicing in the construction field for the duration of my legal career I do have the knowledge to recognize litigation festering.  Ever since I learned about EIFS, and the catch phrase “dissimilar materials”, I have learned that the concept of applying new technology to existing practices in the home building industry typically results in as many negatives as positives.

There are no universally accepted standards for this type of construction.  To qualify that statement, let me state that  there is  no universally accepted standard for
what qualifies as green or, sustainable building.  While some municipalities in states such as California have enacted standards recently, I will guarantee you that those standards fail to scratch the surface in comparison to what is actually intended by code regulations.  While there is not much doubt that many green projects will fail to deliver the promised environmental savings, there is an almost greater certainty that the mixing of technology with tradition will yield problems that we have yet to recognize.

At one time in the Southeast, EIFS was not a bad word.  It became a bad word due to several factors which, arguably, had nothing to do with the actual quality of the product.  Large corporations do not make a habit of manufacturing products that fail in a controled, laboratory setting.  The actual performance of a building product, philosophy, or practice can’t be measured inside the confines of a sterile environment, however, as external factors are not able to be explored or anticipated.  Green building incorporates products and practices which make tremendous laboratory sense, yet remain untested in the field.  Because construction defects are latent in nature, punch list inspections are unlikely to reveal issues with green building.

To be fair, I must state that the green concept will be valid for many years.  Further, green projects are positive in thought, if not practice due to their serving as evidence that our world is forward looking in terms of environmental policy.  Having said that, please realize that this is “new” technology and, just like an unproven antibiotic, it has yet to face true field trials and tests.  There doesn’t seem to be any adequate quality control, as there are thousands of LEED certified professionals and “Green” industry start-up companies within a three state radius.

I have no conclusory statement to make regarding the construction industry and green building because we are still in the “wait and see” period.  Due to the fact that construction defects are often latent, I do not know when or if we will begin to see the problems associated with the philosophy.  To be continued.

Economic Loss Rule Applicable to Residential Construction Only as Court overrules recent Colleton Prep decision

In Sapp & Smith v. Ford Motor Company, Opinion 26754 (S.C. December 21, 2009), South Carolina’s Supreme Court once again ruled that the economic loss rule only applies to residential construction.

“The economic loss rule is a creation of the modern law of products liability. Under the rule, there is no tort liability for a product defect if the damage suffered by the plaintiff is only to the product itself. Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730, 734 (1989). In other words, tort liability only lies where there is damage done to other property or personal injury. Id.”

In South Carolina, the “the economic loss rule does not preclude a homebuyer from recovering in tort against the developer or builder where the builder violates an applicable building code, deviates from industry standards, or constructs a house that he knows or should know will pose a serious risk of physical harm.” Kennedy v. Columbia Lumber & Mfg. Co., 299 S.C. 335, 341, 384 S.E.2d 730 (1989). This notion was extended to commercial construction in Colleton Preparatory Academy, Inc. v. Hoover Universal Inc., 379 S.C. 181, 666 S.E.2d 247 (2008).

“we overrule Colleton Prep to the extent it expands the narrow exception to the economic loss rule beyond the residential builder context”

Newman II Decision and SC Construction Defect Law

South Carolina Insurance Coverage in 2009

In the recent Supreme Court ruling on appeal of Auto Owners v. Virginia Newman, et al, (Newman II), the question was presented as to whether faulty construction that causes physical damage to tangible property (residential home) will trigger insurance coverage.  In the initial case (Newman I), assertions were made by a claimant that Trinity Construction built a defective home for Virginia Newman back in 1999.   The primary issue surrounded a subcontractor’s stucco application to the home’s exterior, and damages resulting from the application.  As an interesting side note, this was not an EIFS clad home, rather, traditional Portland cement/traditional stucco.

            The Plaintiff in the case, Ms. Newman, noticed water intrusion and subsequently retained an inspector to document the issues.  The expert (Engineer) observed that the stucco was improperly installed and the stucco, sheathing, and other components were damaged.  An arbitrator awarded Ms. Newman nearly $56,000 for her claims against Trinity.
            Auto Owners had issued a CGL policy to Trinity, and the claim was defended under a reservation of rights by the insurer.  Auto Owners filed a declaratory judgment action as South Carolina case precedent was murky, at best after the LJ-Bituminous decision in 2004.

            In its first published opinion on the matter, our court of appeals held that defective construction was an “Occurrence” as determined by rules of construction in the insuring agreement issued to Trinity.  Further, the court held that any exclusions (EIFS/Stucco etc) was construed in favor of the policyholder if the work excepted was performed by a subcontractor.  Of particular significance was that the interior damage to elements other than the cladding were covered as was the stucco removal due to the fact that the siding had to be removed in order to reach the damaged interior components.
            In September of 2009, the court withdrew and re-issued its opinion. In a bizarre twist, the opinion relies not on the subcontractor exclusion, or stucco exclusion, rather the rarely considered “Sistership” Exclusion.  In reaching this conclusion, Chief Justice Toal reversed her earlier holding that the cost to remove the stucco was covered.  The opinion seemed to further validate the concept that defective work performed by a subcontractor is an “occurrence” and, therefore, a damage which is covered.
             Newman clarified that coverage does not exist for the removal and demolition of exterior components excluded under the policy.  This is the most significant aspect of the opinion as logic would now presume that other defective construction claims will be interpreted and evaluated using the Newman case. 

            1.         Roofing Material Removal:      Not covered in situations where leaking causes a roof to be removed in order to access and correct water damaged areas beneath the roof membrane.

            2.         Windows and Doors:   Removal and replacement would, arguably, not be covered to make corrections to components such as pan flashing.  windows pulled to install flashing omitted during original construction. The biggest losers, though, may be homebuilders and commercial contractors who purchased CGL policies over the years, believing they were covered for all damages.

            3.         HVAC and Electrical: Removal and replacement of equipment would not be covered when such removal is necessary to correct issues involving floor deflection, indoor air quality, and caulking/fireproofing issues.

HISTORY AND BACKGROUND

            The September 2009 decision was actually the second opinion on the issue as well as a rehearing of Auto Owners Ins. Co. v. Newman, 2008 WL 64856 (S.C. Mar. 10, 2008) (Newman I). Newman I overturned the LJ case which is mentioned above.  The LJ opinion was doomed from its inception as it was based on a non-traditional factual pattern whereby damage to a road (Cracking) was determined to have been caused by a subcontractor’s work.  In sum, the court found no coverage due to the court’s opinion that the “Your Work” exception was applicable to the entirety of damages as the cracking was the only “damage” and that damage was the subcontractor’s work product.

            Because of the facts surrounding LJ, lawyers immediately looked for a case to overturn the opinion.  Since most construction defect cases involved houses and other commercial, horizontal structures, insurance policies were typically covering these risks, not highway construction.

            Newman I was the case that made the cut, as the SC Court of Appeals ruled in 2008 that defective stucco work performed by an insured subcontractor was covered under the general contractor’s policy.  The court found an “Occurrence” (Prong A) had caused physical damage to tangible property (Prong B) due to water intrusion causing damage to the component products and labor of other trades.  The court attempted to further clear up any confusion by listing the actual areas of the home that were damaged outside and apart from the actual stucco siding.

POLICY INTERPETATION UNDER NEWMAN I

            The court relied on the plain meaning examination of the insurance policy in question which both fail to define “accident” or “physical damage to tangible property” in the context of a trade contractor’s work damaging the work of another trade.  For example, it is not clearly defined whether a window installer’s defective placement of windows triggers coverage for damages to the interior wall and floor.   

            Significantly, the court in Newman I determined that costs associated with remedying the other property damage that resulted from an “occurrence”, the removal of such otherwise excluded work was also covered.  This issue prompted the rehearing.

AUTO OWNERS INSURANCE AND CLARIFICATIONS SOUGHT BY REHEARING

            AO argued that, based on L-J v. Bituminous, there was no “occurrence” within the terms of the CGL policy considered by the court in Newman. Once again, the court disagreed and upheld its prior holding that the negligent application of stucco by the subcontractor resulted in an “occurrence” of water intrusion, resulting in “property damage” that was tangible and adversely impacted the home owned by Ms. Newman.  Hence, the court ruled that this was covered.

            The court reiterated that the subcontractor’s negligent application of the stucco did not, in and of itself, constitute an “occurrence” absent tangible damage to the work or products integrated within the house by others. The Supreme Court appears to be in line with the definition of an occurrence as opined by the SC Ct. of Appeals as recently as Spring, 2009 in Auto Owners v. Rhodes.

            The South Carolina Supreme Court in Newman II also addressed the applicability of two exclusions in the CGL policy. Auto Owners argued that, even if an occurrence was present, indemnity was not appropriate if that damage was within the expected or intended damages exclusion that was discussed in a very important Texas opinion, Lamar Homes v. Mid-Continent Casualty.

            In this argument, Auto Owners contended that damages awarded to Ms. Newman which were relative to the framing and exterior sheathing of the home were not covered due to the assumption that a builder should expect moisture intrusion from defective stucco placement to result in water related damages.  The court ruled that it was not reasonable to assume a contractor intended or expected an inferior product, citing the Lamar Homes decision.  Therefore, the court rejected the argument based on the expected or intended injury exclusion, that argument being essentially a restatement of arguments rejected by the courts listed above as to the ability to foresee  property damage arising from defective workmanship.

            The “Sistership Exclusion” was effectively argued by Auto Owners in Newman II.  (Author’s Note:  Many of us that practice in the construction realm anxiously awaited the Newman II decision and had varying theories as to how the court would come to either one or two conclusions regarding the defective work of a subcontractor.  In my discussions, I never heard the sistership exclusion mentioned once.  I bashfully admit that I had not ever heard of it, much less considered it). 

            The Sistership argument is based on the following logic: 

            Even if the damage to the home constituted an occurrence of property damage to tangible property within the insuring agreement, the exclusion nullified coverage for replacement and repairing defective stucco itself as an incidental cost to repairing the damage to other property.

            The “sistership exclusion,” is an often ignored element of the standard CGL policy as it argues that there is no coverage for damages claimed for any loss, cost, or expense incurred as a result of the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal, or disposal of the insured’s product, work, or impaired property in the event such is withdrawn or recalled from the market or from use because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.

            Everyone ignored this ancillary, “Plan C” argument.  Everyone but the court, that is, as it agreed with this argument.  In contractual matters, the insurance policy is to be read and applied independently of any other exclusion. Since the subcontractor exception preserved coverage for property damage that would otherwise be excluded as the named insured’s work, the court pointed to another exclusion that barred coverage for damage to the defective workmanship itself.

            There is wide speculation that the court’s reliance on this exclusion will serve to further muddy the waters.  This reasoning states that a “Product Recall” exclusion (“Sistership) should not be applicable in the analysis of property damage and coverage in residential or commercial construction.  The court’s reasoning is troublesome to both defense attorneys and those that represent owners of property in construction defect claims.   The court appears to have ignored the  primary issue on appeal, which was whether construction deficiencies causing physical damage to tangible property constitute “occurrences” and “property damage”. 

            The reliance on obscure exclusions or endorsements affecting coverage is damaging to both contractors and their insurers as both sides want some clarity.  If you build houses, you have the right to know whether or not your policy will cover your subcontractor’s work.  As an insurance company, billions of dollars rest on the same question.  Therefore, the construction industry and insurance industry should certainly agree that consistency is needed if they are going to engage in business practices which are based on some element of risk.  Had the court answered the primary issues left open by LJ and Auto Owners I, the construction industry would have a better idea as to what their policies covered and, just as importantly, the insurance industry would have a much better gauge on pricing these policies of insurance.  To be continued.

South Carolina Construction Defect Law

Clay Olson is an attorney in Charleston South Carolina at Olson & Good, PC. With multiple locations in Charleston County, Mr. Olson serves Olson & Good clients in construction matters including insurance defense, construction defect litigation, mechanics lien, commercial loan modification and foreclosure. Mr. Olson services several industries in collection issues, risk transfer and management of business risks, insurance coverage and policy language.

Chinese Drywall and Insurance

Chinese Drywall is getting national press, government scrutiny and a great deal of attention from insurers that might have underwritten policies for general contractors and subcontractors who may have, unknowingly, used drywall product imported from China during 2003-2007. Hurricane Katrina has been blamed on the shortage of United States produced drywall during that time period thus, forcing distributors to reach out to at least one Chinese subsidiary of Knauf Plasterboard, a German company. (Editorial Comment: I am curious as to why they don’t call the product German Dryall, Knauf Plasterboard, or something else besides “Chinese Drywall”, as the notion that local mom and pop building suppliers had then, or had now, direct access to Chinese markets has never made sense to me.)
I first read about the allegedly deficient product at some point during the past two years, although I can’t pinpoint an exact date. At first, there were statements made that the drywall contained a putrid, sulfur-like odor. Later, I heard that it could strip paint, chrome, and all sorts of other coatings from fixtures in a home. The latest word on the street is that it makes people sick.
With permission of Jeff Casale, I would like to copy, paste, and link his latest article from Business Insurance.
Several small private insurance companies have filed pre-emptive declaratory judgment motions in Florida state courts, saying they are not obligated to cover damages caused by the tainted drywall based on exclusions in their policies. While no large commercial insurers have taken similar action so far, it’s likely more lawsuits will roll in during the next year.
“Some insurers are denying claims left and right,” said Barry I. Buchman, a partner at Washington-based law firm Gilbert L.L.P. “They are citing pollution exclusions, business risk exclusions, and construction defects and occurrence as reasons for denying coverage.”
Mr. Buchman said the insurers involved primarily are companies with a larger exposure to the situation, but added that “it shows the insurers are taking this seriously and that they are willing to dig their heels in.”
Towers Perrin, a Stamford, Conn.-based consulting firm, estimates the total economic losses from the tainted drywall could fall between $15 billion and $25 billion, costs that rival the 10 most-expensive hurricanes in recorded history, excluding Hurricane Katrina.
Towers Perrin added that, based on past construction defect experience, legal fees could represent 40% to 50% of the total claims cost, which would make a court fight rather costly for insurers. Meanwhile, the National Assn. of Home Builders estimates the cost of repairing homes with the defective drywall will be approximately $8 billion.
The problem stems from about 500 million pounds of drywall that was imported to the United States between 2004 and 2007 when the housing market peaked and the Southeast was rebuilding after Katrina. The drywall was traced back to Chinese subsidiaries of German manufacturer Knauf Plasterboard Tianjin Co. Ltd. (BI, May 11.)
Early environmental studies conducted by health officials in Florida found the gypsum wallboard used in the homes was tainted with strontium sulfide and elemental sulfur that, when exposed to high levels of humidity and heat, produce a gas strong enough to corrode copper wiring, pipes and appliances.
Additionally, homeowners have contacted state health departments complaining of dizziness, nosebleeds, difficulty breathing, and itchy or irritated skin, among other symptoms.
Federal investigators released initial results of its ongoing investigation of Chinese drywall and found no direct link between the chemicals in the drywall and the health problems homeowners reported. While they said they did find higher concentration levels of sulfur and strontium in Chinese drywall than from non-Chinese drywall, they could not determine any direct correlation.
The report, released Oct. 29, is the first of an ongoing series. The U.S. Consumer Product Safety Commission along with Environmental Protection Agency will conduct more tests during the coming months. Next month, the results of a 50-home indoor air quality study will be released as well as engineering analysis of electrical and fire safety associated with corrosion.
The CPSC has received 1,897 reports from residents with homes built with the contaminated drywall in 30 states, the District of Columbia and Puerto Rico. Nearly 70% of those reports are from Florida homeowners. The office received its first consumer complaint on Dec. 22, 2008.
Mr. Buchanan and Ron Kozlowski, Hong Kong-based Towers Perrin principal and leader of the company’s property/casualty insurance consulting practice in Southeast Asia, said how courts define pollution will be a major determining factor as to how insurers react.
In the past, Mr. Buchman said Florida courts have taken a broader view on the exclusion, which could lead to more litigation bouts.
Recently, Citizens Property Insurance Corp., a state-backed insurer of last resort in Florida, denied homeowner claims, saying it considered the drywall a pre-existing condition and that such defective materials fall under the pollution exclusion. After media coverage about the denial, Jacksonville, Fla.¬based Citizens reversed its decision and said it will renew policies for homes built with the defective drywall.
Torus Specialty Insurance Co. sees the Chinese drywall event and Chinese product importation as an emerging liability.
R. Lincoln Trimble Jr., Jersey City, N.J.-based senior vp of Torus’ U.S. excess casualty unit, said it is likely that general liability underwriters will ask a lot more questions when constructing a policy that will leave general contractors little wiggle room in the future, but will provide good coverage.

Synthetic Stucco (EIFS) and the legacy left in South Carolina Construction Litigation

Construction defect lawsuits are typically initiated by a property owner, or entity assigned to act on behalf of a group of individual owners, such as a Home Owners’ Assocaition.  These lawsuits have risen dramatically over recent years due to a littany of factors including, but not limited to, the following: 

  The proliferation of EIFS-related litigation which reached its apex upon the 1999 class action certification against certain synthetic stucco (EIFS) manufacturers in New Hanover County, NC (Ruff v. Parex, Sto Corp, WR Bonsal, Continental Stucco Products, Senergy, Inc., Thomas Waterproof Coatings Co., Dryvit Systems, Inc., United States Gypsum Co., and Shields Industries).  The class action certification only applied to residential homeowners in North Carolina, as commercial structures were not included. 

Because of its close proximity, the Wilmington class action bore a direct impact on South Carolina due to Wilmington’s proximity to Myrtle Beach, Litchfield, Pawleys, Island, and the entire Grand Strand.  Some luxury neighborhoods conducted meetings and allowed attorneys within the confines of their Association meetings.  The result of all the hype was an explosion of construction suits, the emergence of service industries that had never before thrived, as well as tremendous costs to builders as insurance premiums skyrocketed in order to keep pace with the projected losses that were  in areas such as Georgetown, Hilton Head, Kiawah Island, news coverage, the proximity of , and other forms of publicity. 

South Carolina, through both its courts and legislature, had historically been a favorable venue for the home buying consumer.  See Terlinde v. J.F. Neely, Sr., 275 S.C. 395, 271 S.E.2d 768 (1980) (subsequent purchasers of home may sue builder in tort and contract), JKT Co. v. Hardwick, 274 S.C. 413, 265 S.E.2d. 510 (1980) (statutory implied warranty of merchantability extends to corporate plaintiff not in privity with defendant), Lane v. Trenholm Building Co., 267 S.C. 497, 504, 229 S.E.2d 728, 731 (1976) (“Our legislature continues to place South Carolina in the vanguard of consumer protection.”). Our court’s allowance of suits to be brought by homeowners lacking a direct, contractual relationship with the large, corporate manufacturers made these cases easier to file and, most importantly, profitable for the owners and attorneys.

The party appeared as if it would come to an end due to several factors including, but not limited to, the following:  a)  considerations by our legislature to ban the product entirely;  b) exclusions within standard, broad form CGL policies procured by builders which contained the “EIFS” exclusion c) the stucco and exterior cladding insustry reacted with deliberate speed and introduced ”drainable” or “traditional” stucco systems as an alternative and, finally, d) it didn’t appear that there were any EIFS structures that had not been litigated by 2005.

Analysts were wrong, however, as South Carolina courts, as well as our legislature (General Assembly) reacted to the blight of construction suits in ways which, inexplicably, served to disrupt and upset every each of the following parties: the consumer homebuying public; manufacturers and distributors of products integrated within the construction of both residential and commercial structures, contractors of all sizes and shapes, as well as insurance companies writing construction risk.

South Carolina has always drawn special attention and concern to insurance carriers and their insured contractors.  Until 2005, the statute of repose was 13 years from substantial completion of a project.  13 years!  Consider the following example involving a case that I litigated and settled in late 2004.  The case involved a residential project that resembled a compound, or a group of buildings on a salt water creek in Beaufort County.  A certificate of occupancy was issued in 1988, and suit was filed in 2001, allowing this case to be litigated in the nick of time.  To put this in perspective, the Plaintiffs obtained a building permit during George Herbert Walker Bush only tenure as our president.  These same Plaintiffs filed suit during his son’s first term of office, and settled the suit during the height of W’s campaign for a second term in office. 

The statute of repose and its duration (13 years) was certainly a catalyst which allowed many EIFS suits to be actionable.  In 2003, the legislature voted to reduce the statute of repose to eight years for all construction completed after 2005.  Therefore, a construction project completed in 1991 could be litigated in 2004.  The problems mounted for the defense as Plaintiffs appeared with little, if any records, other than a building permit (in your client’s name) and his certificate of insurance.  If the contractor was still in business, risk transfer and indemnity was tough due to the general lack of records.  Contractual indemnity provisions were unbelivably rare as, even if they existed, these documents were long gone. 

So long as EIFS was on the Plaintiff’s house, however, the show went on, and lawyers and insurers working on behalf of a builder were forced to bring third-party warranty, negligence, equitable indemnity, and other claims on little more than memory.  Because SC recognizes negligence as a complete bar to an equitable indemnity claim, the lack of documentation was always a real problem for contractors and carriers insuring them.

As for EIFS, there were means of identifying products (mesh color) and, when brought into a suit, the manufacturers were quick to roll on the applicator subcontractor, window installer, roofer, and anyone else that might have contributed to the alleged water intrusion. 

EIFS litigation continues as of this writing, although cases have become sparse.  For all practical purposes, houses built during the 13 year repose period have all been litigated.  Some multi-family projects have been suspect to more than one suit, as actions are brought for deficient repair or replacement of EIFS with a comparable product such as drainable synthetic products, as well as traditional portland cement stucco applications.

Although the final pages have yet to be turned, the EIFS era is over for all intents and purposes.  The EIFS saga hurt many builders, insurers, and consumers.  Thankfully, insurance carriers indemnified contractors, manufacturers possessed enough money to pay most claims, and all parties to litigation, while bruised, were rarely broken. 

The proliferation of EIFS litigation served to grow and create several industries.  Forensic experts, attorneys, junk scientists, inspectors, and manufacturers of alternative siding products profited.  As EIFS began to fade, construction defect cases did end.  The industries that profited from EIFS litigation had to find another outlet, or target issue in order to survive.

Enter toxic mold, chinese drywall, engineered wood trusses, IAQ (HVAC), PVC, all things composite and not traditional.  Lawyers, contractors, insurers, as well as court administrators learned very quickly that the end of EIFS did not mean the end of construction defect litigation. 

Construction defect cases are not all created equally.  Owners and their attorneys have learned that any instance of “defective” construction can lead to the retention of an expert witness who will identify problems.  The extens or magnitude of these problems is rarely challenged, as defect cases rarely go to trial.  As a lawyer rerpresenting contractors and, on occasion, owners, I have learned that most construction professionals do not leave projects knowing that problems exist.  Most owners never take title to a property contemplating a suit.  Somewhere after closing, and prior to suit being filed, there are factors which lead to these suits. 

As attorneys defending contractors, we can’t control outside influences which lead to litigation.  We can, however, act as advocates of the construction industry by impressing upon our clients the need to use strong contract language, additional insured clauses, and other means of risk transfer. 

Construction defect litigation is not going away.  I expect it to proliferate due to new building practices (green building, modular construction) which, combined with a poor economy, declining home values, and the inability of owners to refinance their homes or secure cash from home equity create a perfect storm. 

In two or three years, I will be writing about a new construction defect theory which is likely unknown to us now.  While there will never be a second waive of EIFS suits, the second, third, fourth, and future waives of construction defect litigation will bear the remnants of the EIFS age, and its creation of a profit center and industry that did not exist before.