OHIO DECISION PARTS WAYS WITH THE NORM AS TO CONSTRUCTION DEFECT COVERAGE FOR GENERAL CONTRACTORS

On October 9, 2018, the Ohio Supreme Court issued an important decision in Ohio N. Univ. v. Charles Constr. Servc., Inc., Slip Opinion 2018-Ohio-4057.  Departing from the national majority view, the Ohio Supreme Court held that a general contractor’s commercial general liability policy does not cover claims for property damage caused by a subcontractor’s faulty work. Specifically, the Court reasoned that faulty work is not accidental or “fortuitous,” as contemplated within the policy’s definition of an “occurrence” triggering coverage.”

This topic has been hotly debated in South Carolina after the Crossman decision. Following Crossman, a South Carolina statute was enacted. The statute stated that the definition of “occurrence” in general liability policies includes property damage “resulting from faulty workmanship, exclusive of the faulty workmanship itself.” See S.C. Code § 38-61-70 (2011). The South Carolina Supreme Court has ruled that this statute may only be applied to general liability insurance contracts executed on or after the effective date of the statute – May 17, 2011. Any retroactive application is unconstitutional. See Harleysville Mut. Ins. Co. v. State, 401 S.C. 15 (2012).

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. “

Harleysville v. Crossman Decision diminished by SC Legislature

  1. CROSSMANN SIGNED (Click for Signed PDF of Legislation)

We have not covered the Crossman decision with as much vigor as one might expect here at the South Carolina Construction Defect Blog.  This decision has been widely reported across state lines and, to many, it represented one of the most significant court decisions affecting the construction industry and Commercial General Liability policies of insurance.  http://www.judicial.state.sc.us/opinions/advSheets/no12011.pdf  The question presented in Crossman sought to address an issue we thought to be fully decided.  Specifically, when faulty workmanship directly causes further damage to non-defective materials or areas of an insured’s project (non “your work”)  (work of others), is this an occurrence.  Moreover, in a situation where the faulty work of a contractor causes damage to the work or materials of another trade, is the first prong (“occurrence”) of an insuring agreement satisfied such that the second prong (“Property Damage or Bodily Injury”) may be considered.  The Crossman decision was a deviation from “occurrence friendly” decisions in South Carolina (“Auto Owners v. Newman”) and other states (“ Lamar Homes v. Mid-Continent Cas. Co., 242 S.W.3d 1, 8 (Tex. 2007).  In Auto Owners v. Newman, the court followed the Lamar Homes logic which reasoned that faulty work is not “intentional”, and must be an accident which, therefore, constitutes an occurrence. 

Most construction lawyers thought defective work and the damage caused to the work product of others was a moot point.  Crossman surprised some, while shocking many into action as the decision appeared to come out of left field. 

At the beginning of this week, the South Carolina general assembly (legislature), in conjunction with Governor Haley, enacted a bill which effectively seeks to take the interpretation(s) of insurance coverage away from the courts. 

Officially, Section 38-61-70 defines “Commercial General Liability” policies of insurance as these relate to construction professionals.  Actually, the law does everything but define an “occurrence”, as it places the burden on the draftor of such policy to define an occurrence so that the purchaser and underwriter know the limits and scope of a policy.  While the legislation is a victory for contractors facing defect suits, one could argue that it is a victory for all in that it seeks to end the speculation created by constant waffling over the limits of insurance coverage pertaining to contractors in South Carolina. 

Further details state that the term “occurrence” must be either defined or, if not, deemed defined as follows: 

(1)  an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and

(2)    property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.

RETROACTIVITY

Quite possibly the most significant aspect of the bill allows for retroactivity.  “”This act takes effect upon approval by the Governor and applies to any pending or future dispute over coverage that would otherwise be affected by this section as to commercial general liability insurance policies issued in the past, currently in existence, or issued in the future.”