In the recent decision of Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co., No. 26909, 2011 WL 93716 (S.C. Jan. 7, 2011), the South Carolina Supreme Court abrogated its prior holding in Auto-Owners Insurance Co., Inc. v. Newman, and held that defective construction does not constitute an occurrence unless the resulting damages are “fortuitous.”

Crossman Communities of North Carolina, Inc. (“Crossman”) was the developer of a series of condominium projects in Myrtle Beach, South Carolina.  In 2001, after construction was completed on five projects, various 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.”  The state supreme court reversed.

The court noted that the issue of whether a CGL policy provides coverage for faulty work and damages stemming from faulty work is a difficult issue that has resulted in an “intellectual mess.”  In its view, courts across the country have taken two positions on the issue: (1) claims of poor workmanship, standing alone, are not occurrences, although coverage is triggered where faulty workmanship causes bodily injury or property damage to a third party’s property; and (2) damage flowing from faulty work constitutes an occurrence regardless of the property injured so long as the insured did not intend or expect the result.

The Crossman court explicitly overruled its prior decision in Auto-Owners Insurance Co., Inc. v. Newman, 684 S.E.2d 541 (S.C. 2009), in which it held that  although the defective application of stucco to a home’s exterior “did not on its own constitute an occurrence, the continuous moisture intrusion resulting from the subcontractor’s negligence was an occurrence.”  The Crossman court examined the “fortuity” element of the definition of “occurrence,” and stated its new rule:

We hold that where the damage to the insured’s property is no more than the natural and probable causes of faulty workmanship such that the two cannot be distinguished, this does not constitute an occurrence.

Assume the insured is a general contractor that built an apartment building using various subcontractors to complete the work. Also assume a subcontractor installed all wiring in the apartment building.  After the building is complete and put to its intended use, a defect in the building’s wiring causes the building to sustain substantial fire damage.  In such an instance, an occurrence would exist, the insurer could point to the “your work” exclusion, but then the “subcontractor exception” would provide an exception to the exclusion.