Prior blogs explained the SC Supreme Court’s terrible decision in Crossmann and the resulting involvement of the SC Legislature in enacting a statute to overturn this decision. Now, the SC Supreme Court has come to its senses and has rendered a new decision effective August 22, 2011 overturning its prior opinion. Therefore, the Newman vs. Auto Owners  case still stands and contractor General Liability carriers can no longer use the “no occurrence claim denial strategy” which is positive for builders.

However, the new Crossmann decision expands the scope of its prior decision by overturning Century Indemnity to delve into the sharing of liability between successive insurance carriers in progressive property damage situations. First, the court upheld the “modified continuous trigger theory” under Joe Hardin where the period of damage was defined as the term in which the actual injuries occurred. Next, the court turned its attention to Century Indemnity.

Under Century Indemnity, liability among successive general liability insurers in progressive property damage situations was determined by a “joint and several” approach where each carrier was responsible for full indemnity for all damages.  Crossmann reasoned that the “joint and several” approach under  Century Indemnity allowed policyholders to take advantage of the system by choosing a single carrier with the broadest coverage form and by allowing coverage for periods of policy lapse. On the other hand, the approach adopted by Crossmann, the pro rata allocation method, corrects these abuses by assigning each triggered insurer a pro rata portion of the loss based on that insurer’s time on the risk.

Furthermore, Crossmann provides a basic formula for estimating time on the risk with a numerator that represents the number of years that an insurer provided coverage and a denominator that represents the total number of years during which the damage progressed. This fraction is multiplied by the total policyholder liability to the injured party in a progressive property damage situation to determine the liability of any carrier. This formula results in the fair allocation between the respective insurance carriers based on their proportionate time on the risk.

Overall, the new Crossmann decision is a victory for builders due to the defeat of the “no occurrence claim denial strategy”. However, even the court now points out in the footnotes that carriers have the right to use various exclusions (ex: CG 2294) to escape responsibility for covering construction defect claims. The overturning of Century Indemnity does represent a minor defeat for builders, since they are now out of pocket during periods where a carrier has an exclusion that applies or where there has been a lapse of coverage. But, this decision at least is consistent with the intent of the drafters of the General Liability policy form.

Source: John Sadler

See Crossmann Decision

As discussed in a number of prior blog postings, the recent SC Supreme Court decision of Crossmann v. Harleysville was a terrible decision that perverted the intent of the drafters of the General Liability policy and created a fiction that builders intended property damage to arise from accidental faulty construction. The ruling was opposed by a grass roots coalition of builders, developers, owners, subcontractors, and some attorneys. A bill, S 431, was quickly introduced to counter Crossmann and was passed overwhelmingly by the legislature and signed into law on May 17, 2011 as SC Code 38-61-70. This law prevents builder General Liability insurance carriers from using the “no occurrence claim denial” strategy.

“Section 38-61-70 (1)(b) mandates the 1986 CGL policy, to the extent that it applies to ‘construction professionals’ is ‘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 workmanship itself.”

However, the last word has not been spoken due to the following new developments:

1) The SC Supreme Court reheard arguments on the Crossmann case on May 23, 2011 as a result of complaints from the construction industry.

2) Harleysville Insurance Company filed a lawsuit on May 23, 2011 with the SC Supreme Ct arguing that 38-61-70 is unconstitutional and should be overturned. 

Expect a decision on both of the above within the next several months. Stay tuned.

The newly enacted SC Code 38-61-70 is a positive development that corrects a serious case of faulty logic and misunderstanding by the SC Supreme Ct as evidenced by Crossman v. Harleysville. However, it’s unfortunate that the legislature had to become involved.

Source: Construction Industry Scores Big Win With Anti-Crossmann Act, Ned Nicholson, McNair Law Firm, South Carolina Builder Journal, Volume 4, Issue 3, 2011

John Sadler, President of Sadler & Company, Inc., was quoted in an article that describes the efforts of the Home Builders Association Of South Carolina to support legislation to overturn the detrimental impact of Crossmann on builder General Liability policies.

Sadler points out that even if the proposed legislation passes, insurance carriers can still use Endorsement CG 2294 to deny construction defect claims under builder General Liability insurance policies.

Read full text of article: Leaky Legislation

In a prior blog, it was explained that it is highly unlikely that a remodeler’s General Liability policy would respond to a lead paint claim due to prevalence of the Absolute Lead Exclusion Endorsement. Instead, remodelers would need to look towards a Contractors Pollution Liability policy (CPL) for protection.

We recently had the chance to analyze one of the leading Contractors Pollution Liability forms in the market. Here are some of the highlights of their special policy form that was designed for remodelers:

Basic Underwriting And Policy Information

* Carrier Financial Rating (Best’s Rated A IX)

* Eligible risks: remodeling, renovations, trade contractors that are impacted by EPA RRP regulation.

* Required: Lead Safe Work Practices Training Certificate for firm and individual renovators

* Ineligible risks: demo only contractors and pure abatement contractors (separate policy form is available for these contractors that includes higher rates and narrower coverages).

* Limits available: $1,000,000 to $10,000,000

* Occurrence policy form (superior to claims made policy form).

* Deductible: standard deductible is $5,000 per claim

Special Endorsements Adding Enhanced Coverages

* Lead Abatement: always make sure that all CPL policies include coverage for lead paint abatement as many don’t.

* Fines / Penalties: a reduced sublimit is available on a claims made for to cover certain EPA fines and violations.

* Lead Testing / Sampling: covers errors made in incidental lead testing and sampling per the EPA regulations. Coverage is on a claim made form.

* Transportation Including Loading and Unloading; covers exposure incidents resulting from auto accidents and loading and unloading if lead dust is released.

* Non Owned Disposal Site: covers remodeler if shot gunned into lawsuit due to use of non owned dump.

* Additional Insureds can be added

* Waiver Of Subrogation can be added

* Mold Coverage

Contractor Pollution Liability Sample Pricing (based on test ratings of remodelers in SC)

* Minimum premiums: around $2500 for $1,000,000 limit of coverage

* Rates based on per $1,000 of total revenues for both lead and non lead jobs.

* Sample $1,000,000 limit rates per $1,000,000 of revenue

   – Less than $1M in revenue: $2.55

   – $1M to $2M in revenue: $1.20

   – $3M plus in revenue: $1.11

Are Many Remodelers Currently Purchasing CPL policies?

Not yet, but demand is expected to increase as word spreads about high profile lawsuits with large settlements or jury awards. The EPA RRP regulation which will create liability for failure to comply with standards is approximately one year old and it takes time for claims to work their way through the legal system. In addition, attorneys specializing in lead paint will begin to educate the public and advertise for clients.

If you are interested in a quote, please contact Sadler & Company, Inc. via the contact information on our home page which can be found on this blog.

Source: John Sadler

The EPA’s Renovation, Repair, and Painting regulation, effective April 22, 2010, created new liabilities for remodelers that fail to comply with the work safe practices to eliminate lead paint dust exposure. The details of this regulation are outlined in our prior blog entitled Remodelers Impacted By EPA RRP Rule For Lead Paint Protection.

The answer as to whether or not a contractor’s General Liability policy will respond to claims under this act or to lead paint exposure claims in general requires a disciplined analysis of the policy form. However, in the vast majority of cases, General Liability policies won’t respond to these claims.

The most likely types of lead based claims or lawsuits are as follows:

* Allegations of bodily injury or property damage arising out of a lead paint dust contamination incident where a remodeler fails to follow safe workplace practices.

* The costs to clean up after an exposure incident.

* EPA fines resulting from an incident or failure to comply with the regulation.

The Standard General Liability Policy Form And Absolute Pollution Exclusion

Exclusion F. (2004 CG 0001) is commonly known as the “absolute pollution exclusion” and the highlights are summarized as follows:

No coverage for “bodily injury” or “property damage” arising out of … the discharge, dispersal, seepage, migration, release, or escape of “pollutants”… at or from the premises of the insured … or at or from any site on which the insured or contractors are performing operations if the pollutants are brought onto site in connection with operations….

The phrase “if the pollutants are brought onto site in connection with operations” excepts remodelers from the absolute pollution exclusion since they don’t bring the lead paint dust to the worksite.

Exclusion F. also addresses that coverage does not apply to operations to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. In addition, there is no coverage for demands by government for testing or clean up.

Based on the above, it is possible for remodelers to have coverage for “bodily injury” and “property damage claims” under the standard General Liability policy form.  However, endorsements to the General Liability policy must be analyzed as well.

Total Pollution Exclusion Endorsement

This endorsement is found on most contractor General Liability policies. It removes all exceptions to the “absolute pollution exclusion” including when pollutants are not brought to the jobsite by the remodeler. 

If this endorsement is present on the policy, remodelers can no longer depend on the exception under the standard policy form.

But Wait, About Half Of State Courts Rule That Lead Paint Is Not A “Pollutant”

“Pollutants” are defined as any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, soot, vapor, fumes, acids, alkalis, chemicals, and waste.

Some courts have a broad interpretation of the definition of “pollutants” and rule that lead paint falls under the definition since it is a contaminant.

Other courts have a narrow interpretation of the definition of “pollutants” and rule that it does not specifically list lead paint and that the reasonable expectations of the policyholder is that “pollutants” only apply to traditional environmental or industrial pollution and not to other contaminants such as those found inside a house.

The narrow interpretation which is prevalent in states with large metropolitan populations such as NY and CA can have the effect of defeating both the “absolute pollution exclusion” and the “Total Pollution Endorsement” and thus paving the way for coverage for a lead paint incident.

Absolute Lead Exclusion Endorsement

As would be expected, the insurance industry created a specific endorsement to address those courts that rule that lead paint dust is not a “pollutant”. The Absolute Lead Exclusion Endorsement and similar endorsements remove all questions that the General Liability policy does not respond to lead paint claims.

The majority of all contractor General Liability policies have included this endorsement for many years.

If you have this endorsement, don’t expect to have coverage under your General Liability policy; however, you should always turn a claim in and let the claims adjusters decide on the issue of coverage.

Summary

If the General Liability policy does not cover lead paint claims, what policy can be purchased to provide this coverage? Stay tuned for a future blog on Contractors Pollution Liability (CPL).

Source: John Sadler

The EPA rules governing renovation, repair, and painting activities on target housing or child occupied facilities constructed prior to 1978 went into effect on April 22, 2010. This regulation has widespread implications for residential remodelers requiring EPA certification of renovation firms and individual renovators. The main purpose of the rule is to protect against the disturbance of painted surfaces and the associated lead dust which can lead to lead poisoning.

Here is a summary of key elements but be sure to check out the full details in the links provided below:

Targeted Housing Impacted By Regulation

* Housing constructed prior to 1978 with the exception of housing for elderly persons with disabilities (unless children age 6 or under reside or are expected to reside).

* Child Occupied Facility where child age 6 or under regularly visits a building or portion of building constructed prior to 1978 on at least two different days within any week for at least 3 hours a day and combined weekly visits that last at least 6 hours, and combined annual visits that last at least 60 hours. See regulation for exceptions.

Exempt Activities

* Abatement activities are governed by rules applying to abatement contractors.

* Minor Repair or Maintenance that disturb less than the following square foot area over a period of 30 days:

  – 6 sq ft per room for interior activities

  – 20 sq ft for exterior

  – This exemption does not apply to window replacements, demolition of painted surface areas, and certain open flame burning/torching, high speed paint removal machines without HEPA, or operating heat gun at temperatures above 1100 degrees.

* No Lead Based Paint Will Be Disturbed per written verification by certified lead inspector or proper use of EPA recognized test kit by certified renovator.

* Do It Yourself work performed by owner on own residence.

The next question to be raised is if claims arising under this regulation are covered by a contractor’s General Liability policy. This issue will be addressed in a future blog.

For full details: epa.gov or  nchh.org

Source: National Center For Healthy Housing, April 22, 2008

Court cases nationwide are split on the issue of whether or not construction defects are considered as occurrences.

A ruling by the Georgia Supreme Court that negligent construction resulting in damage to surrounding property constitutes an occurrence under a commercial general liability policy is the latest in a string of such decisions with courts divided on the issue.

In another recent case in Hawaii, Group Builders Inc. and Tradewind Insurance Co. Ltd. vs. Admiral Insurance Co., the Hawaii Supreme Court ruled that damage from construction defects was not considered an occurrence. Because of this and other cases, some insurers and re-insurers have began to change policy language to say that poor workmanship does not constitute an occurrence. However, property damage stemming from the poor workmanship itself would be considered as an occurrence.

SOURCE: Michael Bradford, Business Insurance

We came across a fantastic article that outlines the various theories of recovery against residential builders in South Carolina under implied warranty and tort liability. South Carolina has strong pro homeowner case law and builders need to be aware of the theories of recovery in order to avoid liability. We often see these theories of recovery listed on lawsuits filed against our builder clients that purchase contractor General Liability policies.  

The article also distinguishes between the liability of professional builders versus homeowners who build homes for their own private use. In some cases, homeowner builders can escape liability under the implied warranties.

Here are the highlights of the article:

Implied Warranty Of Workmanship / Workmanlike Service

* Warrants that the home will be built with the quality one   would reasonable expect for a careful, diligent workman.

* Arises from he contract for construction for a new home.

* Applicable only to a builder who “is in the business of constructing homes”.

Implied Warranty Of Habitability / Fitness For A Particular Purpose / Merchantability

* Warrants the home will be fit for habitation

* Arises from the initial sale of a new home, not a used home

* Applicable to the home’s first seller only (not necessarily the builder) and not to any subsequent sellers.

 Tort – Negligent Construction

* Builder is liability for negligence in construction of a house

* Violation of building codes and industry standards

* Homeowner may recover for mere economic loss

* Existence of duty depends on foreseeability of future purchasers

 Lack Of Privity Of Contract Not A Defense For Builder

The concept of privity of contract is important in determining if a duty is owed by a builder under implied warranties. Both parties (builder and initial purchaser) are in privity of contract. However, subsequent purchasers are not in privity of contract with the builder. Builders have attempted to use lack of privity as a defense but the courts in SC have struck down that argument. Instead, if it’s reasonably foreseeable that a home will be used by subsequent purchasers, the builder owes a duty to them under implied warranty law. In most situations, it is foreseeable that the home built by a professional builder will be used by multiple subsequent purchasers.

 A House Is Not A Product Under Strict Liability / Product Liability

The SC courts have ruled that strict liability and product liability theories of recovery are applicable because the building of a house is the performance of a service and not the sale of a product.

The Uniform Commercial Code (UCC) And Implied Warranties

Article 2 of the UCC governs the performance of goods and the associated warranties of fitness for a particular purpose and merchantability closely track the home construction implied warranties of habitability and workmanship. SC courts have looked at rationale found under Article 2 of the UCC when deciding construction implied warranty cases; however, they have dismissed the argument that the UCC should govern the sale of a house.

Warranty Disclaimers

Builders often attempt to disclaim implied warranties but SC courts require stringent conditions such as a requirement for the disclaimer to be conspicuous, known to buyer, and specifically bargained for (i.e. price discount or other desired benefit to buyer).

Statutes Of Repose And Statutes Of Limitation

In 2005, the SC legislature adopted an 8 year statute of repose, which applies to actions based on defective or unsafe condition of improvements to real property such as breach of contract, breach of warranty, and tort claims. The 8 year time period starts upon substantial completion of improvement to real property, within which, normal statutes of limitations continue to run. The applicable statute of limitations to bring an action for implied warranty and negligence actions for a home is three years in SC.

Source: Caveat Venditor, South Carolina Lawyer, March 2011, Joshua D. Spencer

On March 9, 2011, The SC Supreme Court granted a petition for rehearing on the controversial Crossmann v. Harleysville decision, which was the subject matter of two prior blogs.

Hopefully, the SC Supreme Ct. will reverse its prior, unfortunate decision that not only perverted the intent of the drafters of the General Liability policy, but also insulted builders by stating that property damage which results from faulty construction is always expected and intended.

Oral arguments will be held on May 23, 2011. Expect the insurance industry to be opposed by various contractor trade associations.

Stay tuned.

Crossmann Is Bad Decision For SC Contractors

 The recent Crossmann decision by the SC Supreme Ct. is a bad decision that distorts the intent of the drafters of the General Liability policy and creates a fiction that all contractors intend or expect the property damage that arises from their faulty construction. Please see my prior blog for more details on the Crossmann decision.

The Crossmann case has set off a firestorm of protests in the contractor community and the resulting proposed legislation to overturn Crossmann which is modeled after a new Colorado law.

 Proposed Legislation Under Bill No: S. 431 Professional Contractor’s CGL Policy (February 8, 2011)

 After reviewing the proposed legislation, it’s my opinion that it’s favorable to the extent that it overturns Crossmann but it’s unfavorable to the extent that it forces other rules of interpretation for General Liability polices on the issue of coverage for construction defect.

The proposed legislation includes the following provisions that reinforce and add weight to existing common law principles of insurance policy interpretation for General Liability policies for construction professionals:

* favor interpretation of insurance coverage broadly for the insured

* favor broad interpretation of the duty to defend

* ambiguities in coverage settled in favor of insured

* consider reasonable expectations of coverage on behalf of insured 

The following additional provisions are included for dealing with construction defect claims under a General Liability policy for construction professionals which may go beyond existing common law principles of insurance policy interpretation:

 * in considering reasonable expectations of coverage for an insured, a court should look at

  – the reason why the insured purchased the insurance policy

  – whether the construction defect directly or indirectly resulted in bodily injury or property damage

  – any other sales or promotional materials from the carrier or ISO that describe the insurance policy that was sold and relied upon by the insured

* favor coverage if a provision that grants or restores coverage conflicts with a provision that excludes or limits coverage

* if carrier disclaims or limits coverage for a construction professional, the carrier bears burden of proving by a preponderance of evidence that a construction defect exclusion exists and there is no exception to the exclusion.

* duty to defend a construction professional is triggered by a potentially covered liability described in a claim notice or legal papers filed against construction professional concerning a construction defect.

* carrier shall defend a construction professional regardless of whether another carrier may also owe a duty to defend

The following provisions greatly alter the terms of a General Liability policy for professional contractors faced with construction defect claims:

* occurrence is redefined to do away with the “additional or accompanying requirement of an accident or fortuitous event” as referenced in Crossmann. This provision overturns the impact of Crossmann.

* “Prior Completed Operations Exclusions” and similar exclusions found on some contractor policies are prohibited to extent that they exclude bodily injury or property damage arising from construction defect that occurred prior to the policy effective date unless the insured had knowledge of such bodily injury or property damage.

Do Parties Really Understand The Big Picture?

I attended a SC Senate Banking And Insurance Committee meeting on February 9, 2011 as regards Bill No: S. 431 Professional Contractors CGL Policy. The purpose of the meeting was to provide the committee with feedback from affected parties regarding the proposed bill. The room was filled with both pro contractor and pro insurance industry factions. The committee heard concerns from three parties in favor of the legislation (representatives from a home owners association, general contractor, and subcontractor) and from two parties against the proposed legislation (insurance industry lobbyist and lawyer representing insurance industry trade group).

While the meeting progressed with statements from the parties and questions and comments from legislators, it struck me that both sides are proceeding under mistaken beliefs about their own positions.

Pro Contractor Mistaken Beliefs

Claim: The legislation will force General Liability carriers to provide construction defect coverage for contractors on a going forward basis.

Reality: While Crossmann is a terrible decision, the proposed legislation does not solve the problem of readily available construction defect coverage on a going forward basis for the following reasons:

* Carriers can still use Exclusion CG2294 or similar exclusions to deny construction defect claims.

* Carriers can refuse to insure contractors if they don’t like the new legislation.

* Carriers can agree to cover construction defect claims but may resort to a construction defect coverage sublimit such as $5,000.

* Carriers will likely use the new legislation as reason to justify rate increases.

While the anti Crossmann battle is worth fighting, contractors should not be told that this legislation will solve their problems.  However, the legislation to overturn Crossman is crtical for contractors with pending claims where carriers are now threatening to walk away from their obligations due to the Crossmann decision.

Pro Insurance Industry Mistaken Beliefs

Claim: Insurance carriers need Crossmann to protect their interests of being able to control the construction defect risk on a going forward basis.

Reality: The current solution of using Exclusion CG2294 has worked well for carriers wanting to deny construction defect claims. CG2294 has been readily used since 2004 and has been generally upheld by courts. However, for those construction defect cases that arose before the widespread use of CG2294 in 2004, the Crossmann “no occurrence claim denial strategy” is critical for escaping liability.

In addition, supporting Crossmann hurts the insurance industry’s credibility since Crossmann distorts the intent of the drafters of the General Liability policy, Insurance Services Office (ISO), as explained in my earlier blog. The Independent Agents And Brokers Association (IIABA), the largest association of insurance agents, is on record in their Big I University publication as stating that the Crossmann line of “no occurrence claim denials” is a mistake. The faculty points out that the proper way to control the construction defect risk is through the use of Exclusions such as CG2294.

My Opinion

As has already been stated, Crossmann is a terrible decision and should be addressed. But how?

The proposed legislation goes way too far beyond solving the Crossmann problem. The additional rules about how General Liability policies apply to construction defect claims are an intrusion by the legislature on matters that should be left up to the courts.

If the courts fail to properly address a problem as in Crossmann and flip flop back and forth, matters of policy interpretation are better left up to state insurance departments working with Insurance Services Office (ISO). Bad rulings like Crossmann and proposed legislation will hopefully prompt state departments of insurance to get ISO to take action by issuing new clarification endorsements to settle matters of policy interpretation.

Even if the proposed legislation is limited (as I recommend) to overturning Crossmann, the positive effects for contractors will be minimal on a going forward basis for reasons outlined above under Pro Contractor Mistaken Beliefs.  However, overturning Crossmann is critical for contractors with pending construction defect claims.

Source: John Sadler