Last month, the South Carolina Supreme Court issued a revised opinion in the case of Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909, 2011 WL 3667598 (S.C. Aug. 22, 2011) (Crossman II).  The Court withdrew its original opinion in that case, which it issued in January 2011, where it held that defective construction was not an “occurrence.”  In Crossman II, the Court properly found that consequential damages stemming from faulty workmanship were entitled to coverage under the insured’s commercial general liability policy.

Crossman Communities of North Carolina, Inc. (“Crossman”) was the developer of a series of condominium projects in Myrtle Beach.  In 2001, after construction was completed on 5 projects, homeowners sued Crossman alleging that the condos were defectively constructed, leading to their decay and deterioration as a result of water infiltration.  Crossman settled the case for approximately $16.8 million and sought coverage from its CGL carrier, Harleysville. The trial court found that “there was property damage that resulted from, and was in addition to, the subcontractors’ negligent work itself, and thus, the property damage was caused by an occurrence.” 

On its first review of the case, the Supreme Court explicitly overruled its prior decision in Auto-Owners Insurance Co., Inc. v. Newman, 684 S.E.2d 541 (S.C. 2009) and held that there was no “occurrence” triggering CGL coverage for Crossman.  Although the water intrusion may have been a continuous exposure to substantially the same harmful conditions, the Court reasoned that it was not an unexpected or unintended event because the natural consequences of Crossman’s faulty work was the damage to the condominiums.

On rehearing, the Supreme Court reversed course and held for the insured.  The Court explained that the term “occurrence”—once clearly and simply defined as an “accident”—has been expanded to include “continuous or repeated exposure to substantially the same general harmful conditions,” which is ambiguous especially where, as here, the damage occurred progressively over time.  “The lack of a clear meaning,” the Court explained,” leaves us with ambiguity, which we must construe against the insurer.”  Id. at *3.

The Court also adhered to (and indeed, expanded upon) its decision in Newman, another point of departure from its original decision in Crossman. Newman focused on whether there was an occurrence “solely through the lens” of whether there was a “continuous and repeated exposure to substantially the same harmful conditions.”  Id. The Crossman II court explained that it is necessary to not only consider the definition of “occurrence,” but also to analyze whether there has been “property damage.”  The Court emphasized “the difference between a claim for the costs of repairing or removing defective work, which is not a claim for ‘property damage,’ and a claim for the costs of repairing damage caused by the defective work, which is a claim for ‘property damage.’”  Id.  Applied to the insured’s claim in the instant case, the Court held that the defective construction which resulted in damage to otherwise non-defective work may constitute covered “property damage” and, interpreting the ambiguous “occurrence” term broadly, would be entitled to coverage.

Interestingly, the Crossman II court refused to consider a new statute enacted by the state legislature in direct response to Crossman: “In disposing of this appeal,  we elect to adhere to our precedent in Newman.  We do not address recent legislation that seeks in part to impose a construction on existing insurance policies in pending actions.”  Id. at *4 n.6.  The statute the Court referenced was introduced a mere two weeks after the original Crossman decision was issued and, in its enacted form, provides:

     B) Commercial general liability insurance policies shall contain or be deemed to contain a definition of “occurrence” that includes:
    (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.

S.C. Code Ann. § 38-61-70 (2011). Now that Crossman II has issued, the effect of § 38-61-70, if any, remains to be seen.