TARGETED TENDERS

Construction defect cases are occurrence based matters which, in South Carolina, are pre-determined to involve the occurrence of property damage each and every year following a construction project. The “continuous trigger” theory puts the onus on a defense attorney to send notice in the form of a “tender letter” to all insurers affording CGL coverage to an insured for the time on risk.
Today we will look at this a little more closely.
South Carolina does not follow the “targeted tender doctrine”, which allows the insured to submit an entire claim to only one of multiple insurers whose policies may be triggered. However, South Carolina courts have held that when an insurer owes a duty to defend, the insurer must defend the entire claim.  Sloan Constr. Co., Inc. v. Central Nat’l Ins. Co. of Omaha, 269 S.C. 183, 236 S.E.2d 818 (1977).
Where two companies insure the identical risk and both policies provide for furnishing the insured with a defense, neither company, absent a contractual relationship, can require contribution from the other for the expenses of the defense where one denies liability and refuses to defend. The duty to defend is personal to both insurers; neither is entitled to divide the duty. Indemnity contemplates merely the payment of money. The agreement to defend contemplates the rendering of services.Citing Sloan Constr. Co., Inc. v. Central Nat’l Ins. Co. of Omaha, 269 S.C. 183, 236 S.E.2d 818 (1977).
For purposes of indemnification, the claim must be submitted to each carrier on the risk while the damage continued, and each carrier is responsible for only the “property damage” that occurred during its policy period.  Crossmann Cmties. of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 66-67, 717 S.E.2d 589, 603 (2011).
This distinction is often confusing at mediations, I have found. In certain situations we may have three policies of insurance defending a claim under three reservations of rights. Depending on the issues, any of the carriers might evaluate their indemnity duties as being slight and, in many cases, less than another carrier’s. As defense counsel it is important to make sure these issues are addressed by a third party, such as a good mediator. Fortunately we have several outstanding mediators in Charleston. William G. “Bill” Lyles, Jay Jones, and John Massalon come to mind.

South Carolina District Court Clarifies Statute of Repose

A SC District Court has reached a decision regarding a potential exception to the eight year statute of repose. Claims brought against an architecture firm and a contractor were barred as untimely despite alleged building code violations. Hampton Hall LLC v. Chapman Coyle Chapman & Associates Architects AIA Inc., et al., No. 17-1575, D. S.C., 2018 U.S. Dist. LEXIS 17795).

SC Statute of Repose

South Carolina Code § 15-3-640 provides that “[n]o actions to recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property may be brought more than eight years after substantial completion of the improvement.” The statute has an exception for gross negligence and fraud which, when a prima facie showing is made, the statute is tolled.

Building Code Violation Does Not Trigger Gross Negligence Per Se

The Court held that “no authority suggests defects that violate a building code are exempted from the statute of repose governing claims for defective construction. To the contrary, South Carolina Code § 15-3-670(B) provides, “the violation of a building code of a jurisdiction or political subdivision does not constitute per se fraud, gross negligence, or recklessness” for purposes of the gross negligence, recklessness, fraud, or concealment exception to the statute of repose.”

Thus, a building code violation does not make a prima facie showing of gross negligence.

DELAY CLAUSES IN CONSTRUCTION CONTRACTS

Delays on construction projects cost money. Because delays are typically the result of several factors and actors, contractors need to address delays and the apportionment of damages in their contracts.

No Damage for Delay Clauses

These clauses are exactly as they sound.  The enforceability of these varies from jurisdiction to jurisdiction.   South Carolina has ruled “In many respects, SC policy does not favor punishing a party for a delay arising from negligence and unlucky circumstances.  Generally, no-damage-for-delay provisions are valid and enforceable so long as they meet ordinary rules governing the validity of contracts.” U.S. for Use and Benefit of Williams Elec. Co., Inc. v. Metric Constructors, Inc., 325 S.C. 129, 132, 480 S.E.2d 447, 448 (1997). South Carolina recognizes several exceptions to this general rule, including “delay caused by fraud, misrepresentation, or other bad faith; active interference; delay which amounts to an abandonment of the contract; and gross negligence.” Id. at 137, 480 S.E.2d at 451.

Logic tells us that damages should be paid by the party causing the delay.  Very often, delays are caused by multiple parties relying on a condition which fails to occur or, sometimes, delays are simply the fruit borne from the confluence of confusion and justifiable misunderstanding.   

Drafting a No Damage for Delay clause can result in an instant debate settler and limit the likelihood of a lawsuit which might cause further delay and waste. Contractors and subcontractors faced with No Damage for Delay clauses can adjust their prices to account for increased risk or, in some cases, elect to pursue other opportunities.

Negotiation of Clauses 

Allocation of risk for delays should be considered and thoughtfully negotiated.   AIA and Consensus  Construction contracts frequently include some type of No Damage for Delay clause. For example:

No payment or compensation of any kind shall be made to the Contractor for damages because of hindrance or delay from any cause in the progress of the work, whether such hindrances or delays are avoidable or unavoidable;

or,

Contractor agrees that it may be subject to delay in the progress of the work and that the sole remedy for such delay shall be an extension of time;

or,

In the event the subcontractor’s performance of this subcontract is delayed by acts or omissions of the owner, contractor or other subcontractors, subcontractor may request an extension of time for the performance of this subcontract, but shall not be entitled to any increase in the subcontract price or to damages or additional compensation as a consequence of such delays.

Courts generally enforce No Damage for Delay clauses.  Courts generally enforce all contractual clauses between businesses.    One way for contractors and subcontractors to avoid such clauses is to use an unmodified industry form agreement such as ConsensusDocs 200 -Agreement and General Conditions between Owner and Constructor or ConsensusDocs 750 -Agreement between Constructor and Subcontractor which do not have No Damage for Delay clauses. But many owners and contractors will use their own form which will frequently include a No Damage for Delay clause.

Even if the contract includes a No Damage for Delay clause, the clause may prove to be unenforceable.

Next time we will examine exceptions to No Damage for Delay Clauses

As always, any questions in SC call or email Clay Olson.   843-224-6676 clay@harperwhitwell.com 

In Mississippi email James Harper james@harperwhitwell.com

Allocation of Liability Among Insurers in South Carolina: The Legacy of Crossman

The Court has spoken on Crossman, once again, this time deciding that………………………..Auto Owners II is still the prevailing measure of an “occurrence” and the January opinion which was discussed in detail is no longer relevant as to the “occurrence ” discussion.  There was some significant law to be made, however, as South Carolina’s Supreme Court relied on Keene Corporation v. Insurance Company of North America, 667 F.2d 1034 (D.C. Cir. 1981) to justify the revocation of joint and several treatment.

South Carolina has decided to deviate from precedent, once again, overruling the famous Century Indemnity opinion which placed a multiple progressive stream of insurers jointly and severally liable for damages alleged in a “continuous trigger” environment.  Construction defect cases thrive on legal fiction such as that which was advanced by the Joe Harden case immediately preceding Century Indemnity.  There are other theories of apportionment, of course, and the court has now decided that allocation among the insuring parties on a “pro-rata” basis is the proper method.

The approach taken by the court actually seeks to make each insurer liable for its portion of the damage occurring during the policy year.  Therefore, each insurer is liable for the actual damages that occurred during its policy period, and nothing more or less. Since the exact measure of damages is not provable in most progressive damages cases, each insurer will typically be required to cover a portion of the insured’s liability directly proportionate to the length of that insurer’s policy in relation to the total period over which damages occurred.

“We overrule Century Indemnity and impose a “time on risk” approach to defining the scope of each CGL insurer’s obligation to its insured in a progressive damage case.  This equitable approach best harmonizes with policy language limiting coverage to the “policy period.”  Moreover, the “time on risk” framework lends itself to a logical default formula that is easily applied when the actual quantum of damage incurred during each policy period is not known. “

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.