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

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

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.

 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

In the recent SC Supreme Court case of Crossmann v. Harleysville filed on January 7, 2011, the SC Supreme Court ruled that faulty workmanship which results in property damage to a builder’s work is no accident. Instead, such property damage is intended, foreseen, expected, and a natural and probable consequence of the builder’s faulty workmanship. Therefore, faulty workmanship does not rise to the level of an “occurrence” and as a result is not covered by a builder’s General Liability policy. 

The end result of Crossmann is that builders won’t be able to get construction defect coverage and homeowners will be left uncompensated when builders don’t have the assets to make repairs “out of pocket”. However, there is some hope that the insurance industry will develop a new endorsement to counter the Crossmann line of “no occurrence claim denials”. In addition, a bill is being drafted in the South Carolina legislature to do the same.

Summary Of “Occurrence” Requirement In Crossmann

In order for construction defect coverage to exist for a builder under a General Liability policy, the first hurdle to be cleared is that the claim must be the result of an “occurrence”. The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. In other words, the term “occurrence” is generally synonymous with “accident”.

In a prior blog, it was explained how the SC Supreme Court finally got it right in its Auto Owners v. Newman decision where it held that the resulting property damage from faulty construction was an “occurrence” under the General Liability policy. In the Auto Owners case, the court held that the defective application of stucco in itself was not an “occurrence”; however, the resulting continuous moisture intrusion to the walls and exterior sheathing resulting from the subcontractor’s negligence was an “occurrence” since it was unexpected and not intended.

Unfortunately, in Crossmann, the SC Supreme Court flip flopped and decided that it erred in the Auto Owners v. Newman case to the extent that the prior finding of an “occurrence” did not take into account the fortuity (chance) component of an “accident” but instead relied upon the “continuous or repeated exposure to substantially the same general harmful conditions” part of the definition in isolation. Crossmann clarifies that an “occurrence” must be unintended, unforeseen, and fortuitous.

In addition, the court in Crossmann made the following statements:

* “… in analyzing whether a claim is covered under a CGL policy, we first focus on whether there has been an ‘occurrence’… we then look to whether there has been ‘property damage’ as defined by the policy.” 

* “In finding no ‘occurrence’, we need not determine whether there is “property damage” and we believe to address this issue creates unnecessary confusion.”

* “To provide coverage under these circumstances would transform the CGL policy into a performance bond.”

* In footnote (5), distinctions are drawn between tort actions (damages to property of a third party or injury to a person) and contractual actions (faulty workmanship that damages only the insured’s project). It is implied that contractual liability does not result in an occurrence, but tort liability does. The standard CGL policy “does not cover an accident of faulty workmanship, but rather faulty workmanship which causes an accident”.

Is Property Damage Resulting From Faulty Workmanship Always Intended And Expected? 

The ruling in this case is an insult to the many professional builders that I’ve advised and insured over the past 25 years. For those builder clients that have had construction defect claims filed against them, to say that they intended and expected the construction problem to arise is not true in the majority of cases. Many of the claims were frivolous lawsuits where the true cause of the problem was lack of routine maintenance on the part of the homeowner such as lack of caulking. Other claims resulted from the use of synthetic stucco (EIFS) and similar products where the builder had no reason to believe that such products would ultimately be found to be inherently defective. However, the majority of the claims were caused by unknowing mistakes in the construction process where the builder certainly didn’t expect a problem to arise. 

Can Faulty Workmanship Be An Accident?

Can property damage to a contractor’s work caused by faulty workmanship occur accidentally? Or is such property damage always the natural and probable (intended) consequence of faulty workmanship and thus not an accident? In Crossmann, the court ruled the latter. But, is this correct? I don’t think that it is. 

The Independent Insurance Agents And Brokers Association (IIABA) prepared a well thought out response to this issue in a 2006 publication entitled the “No Occurrence Claim Denial”. To follow is an overview of the findings of the IIABA faculty as regards the issue of the validity of the “no occurrence claim denial”.

When The “No Occurrence Claim Denial” Is Valid (Deliberate, Shoddy Work)

* Contractor’s deliberate use of substandard materials, violation of local building codes, breach of the construction contract, disregard for design specifications, or use of substandard construction practices so that faulty workmanship is or should have been foreseeable and expected.

* When “fly by night” contractors enter a disaster area such as after a hurricane and perform shoddy repairs by cutting corners to maximize profit and then make a quick exit. This is a deliberate act of faulty workmanship and such contractors know that their work will fail 

* When work is subbed to a contractor who is known to be incompetent or who has a poor track record of past problems. In such cases, it is a reasonable certainty that defective construction will be an “ordinary or natural consequence”.

When The “No Occurrence Claim Denial” Is Not Valid (Ordinary Negligence)

* Most contractors want to make a profit and understand that their reputation is important to this goal. With this in mind, no contractor would intentionally engage in faulty workmanship or expect that its work product would deteriorate. Unless there is evidence to the contrary, it should be assumed that faulty workmanship was negligently and accidentally caused. 

* In “Hot Topics Involving Liability Insurance Coverage”, Clifford J. Shapiro explains “Acts that cause construction defects normally are undertaken with the intent to perform the work properly, but unknowingly are performed improperly by mistake. The property damage that results from these mistakes is therefore neither intended nor expected by the contractor performing the work. Accordingly, property damage that arises out of construction defects should be considered ‘accidental’ and held to qualify as an ‘occurrence’ under the CGL insurance policy.” 

Crossmann Disregards Intent Of Drafters Of General Liability Policy Form 

The drafters of the General Liability policy form, Insurance Services Office (ISO), designed the policy form to provide a broad grant of coverage for “bodily injury” and “property damage” caused by an “occurrence” in the initial insuring agreement. Then, the design called for a list of policy exclusions to whittle away coverage for various uninsurable risks such as business risks. Furthermore, it was intended that various policy endorsements could be tacked onto the policy form to further alter coverage.

In order for coverage to be triggered for a construction defect claim, the incident must first be considered to be “property damage” caused by an “occurrence” before the impact of various property damage exclusions can be considered. The Crossmann case, in ruling that construction defect cases are not an “occurrence”, cuts off all subsequent discussion of the property damage exclusions and special property damage endorsements. This is a distortion because it was the intent of the drafters of the General Liability policy, Insurance Services Office (ISO), to control which types of property damage claims are or are not covered through the exclusions section of the policy. In addition, various insurance carriers draft special policy endorsements to clarify their intent on paying these claims.

Insurance Industry Already Provides Solution For Carriers To Avoid Construction Defect Claims 

In a free market, insurance carriers should be able to decide whether or not to write General Liability policies for builders as well as their approach to coverage for construction defect claims. Some may want to exclude all property damage arising from construction defect and others may want to provide total or partial coverage. The design of the General Liability policy allows this flexibility through the use of special policy endorsements to alter or clarify the coverages of the basic policy form.

Carriers that wish to insure contractors, but avoid paying construction defect claims, merely need to add the ISO policy endorsement entitled “Exclusion – Damage To Your Work Performed By Subcontractors On Your Behalf” (CG2294). This endorsement has been in widespread use since 2004 and has proven to be very effective in denying construction defect claims.

In my opinion, the reason why the carriers are not satisfied with CG2294 is because they can’t use it to address construction defect claims that arose before the widespread use of the endorsement in 2004. Instead, their only option to escape responsibility for these claims is to pursue the “no occurrence claim denial” strategy.

 At the present time, several carriers in South Carolina are using special property damage endorsements that they drafted to provide partial coverage to builders for construction defect claims. Most of these endorsements take the form of excluding coverage for property damage to the faulty work itself, but providing coverage for resulting property damage to non faulty work. Many within the building community think that this is an acceptable compromise. 

Summary

The Crossmann decision creates a fiction that builders always intend or expect the property damage that results from even unknowing faulty construction. It also subverts the General Liability policy form drafter’s intent of basic policy construction, as well as the ability of insurance carriers to alter or clarify the coverage of the basic policy form through the use of special property damage endorsements.

The line of “no occurrence claim denial” cases should be remedied by the drafting of a new “occurrence” clarification endorsement by Insurance Services Office (ISO) or by individual carriers. Such an endorsement should clarify that continuous or repeated exposure to substantially the same general harmful condition(s) shall constitute an “occurrence”, and that there is no additional or accompanying requirement of an accident or fortuitous event to constitute an “occurrence”. If ISO or individual carriers don’t voluntarily address this problem, state legislatures will attempt to pass contractor friendly legislation that will go way beyond remedying the “no occurrence claim denial” strategy.

 John M. Sadler

Sadler & Company, Inc.

Sources: IIABA, “No Occurrence Claim Denial”, 2006; House Bill 10-1394, 67th Colorado General Assembly

The building industry is constantly experimenting with new building products and techniques in an effort to reduce costs, become more efficient, and to add value. Sometimes these products don’t stand the test of time as unforeseen problems may arise that result in construction defects. Examples include EIFS or synthetic stucco, Masonite siding, Georgia Pacific siding, polybutylene plumbing, and more recently, Chinese drywall.

The full weight of the construction defect crisis began to be felt by the insurance industry about ten years ago. Regionally, in the Southeast, the first wave of large-scale lawsuits arose over EIFS. The insurance industry fully funded a plaintiff attorney’s “gravy train” in this area since most of the costs were covered by General Liability insurance policies of manufacturers, distributors, builders, and installers. The EIFS epidemic, with its readily available funding source (General Liability carriers), seemed to fuel the spread of construction defect claims of all different types.

As a result, two trends emerged. The first was that most insurance carriers left the market and refused to write General Liability insurance for builders since they reasoned they couldn’t make a profit at any premium level. The second was that those few that remained in the market decided that they did not want to be a funding source for the next wave of construction defect lawsuits. In response, the insurance industry adopted an array of exclusionary endorsement forms from which carriers could pick and choose to limit their risk.

To follow is a listing and brief commentary of commonly found exclusions that can severely impact coverage for builders. In addition, solutions are provided where applicable.

Synthetic Stucco (EIFS) Exclusion: If you’re a builder and you install or repair EIFS, you need to buy a special General Liability policy from the high-risk marketplace to cover this type of work.

Soil Movement Exclusion: Expansive soils have been a problem in some parts of the country and have been a major source of construction defect lawsuits. Its possible to pick up coverage for this exposure through the use of certain home owner’s warranty products such as HBW 2-10.

Fungus, Mold, And Mildew Exclusion: This exclusion was added almost immediately to most General Liability policies when toxic mold lawsuits began to first appear. This strategy proved to be effective in cutting off what many feared to be the next “gravy train” of construction defect litigation. Most versions of this exclusion only eliminate coverage for the “property damage” portion of the lawsuit but leave coverage in place for “bodily injury”. If you’re concerned about this exclusion, you can purchase a special Mold And Pollution Liability policy from the high risk insurance market. The minimum premiums start out in the $2,500 to $5,000 range and prices increase according to your sales.

Absolute Pollution Exclusion: This is a powerful exclusion that can have consequences beyond what you normally think of as pollution. This is exemplified in the recently emerging Chinese drywall crisis where its alleged that drywall from certain plants in China release noxious fumes that cause corrosion of metal in a home, a foul smelling odor, and health problems. The insurance carriers plan on denying these claims by using the Absolute Pollution Exclusion. Pollution is broadly defined under this exclusion as any solid, liquid, or gaseous contaminant or irritant. Once again, if you are concerned about this exposure, you can buy a special Pollution Liability policy through the high risk marketplace.

Prior Completed Operations Exclusion: The standard General Liability policy form normally picks up coverage for building operations completed prior to the start of the policy term as long as the covered “property damage” or “bodily injury” occurs during the policy term. However, with the addition of the Prior Completed Operations Exclusion, coverage for prior completed operations is eliminated. This presents a problem because the General Liability forms from the prior years don’t pick up this coverage to the extent that the “property damage” or “bodily injury” occurs after the expiration of the prior policy terms. Some versions of this endorsement limit its scope to “property damage” only. You may want to attempt to negotiate the elimination of this endorsement if it appears on your policy.

Products / Completed Operations Exclusion: This exclusion has perhaps the most devastating impact of any of the construction defect exclusions. Quite simply, this exclusion eliminates coverage for all “bodily injury” and “property damage” that occurs after the home has been sold. In my opinion, this exclusion is unacceptable for a builder under any circumstances resulting in the need to find a new insurance carrier.

Property Damage To Your Work Exclusion: This exclusion is not a stand alone exclusion like the rest that have been mentioned. Instead, it is part of the regular General Liability policy form and appears as exclusion L. This exclusion eliminates coverage for “property damage” to your “work” arising out of it…. However, there is an important exception where coverage is given back if the damaged work was performed on your behalf by a subcontractor. This exception is what historically gave builders (that were general contractors) broad coverage under their own General Liability policy for construction defect claims.

Exclusion: Damage To Your Work Performed By Subcontractors On Your Behalf (CG2294): Around 2004, most carriers began adding this exclusion to builder’s General Liability policies to eliminate the favorable coverage exception that was granted to builders (that were general contractors) under the Property Damage To Your Work Exclusion listed above. The presence of CG2294 eliminates coverage for construction defect claims. If CG2294 appears on your policy, there are two viable solutions. First, ask if your carrier has a “buyback” of the lost coverage for an additional premium charge. Second, search for a carrier that has a less severe version of this exclusion that only eliminates coverage for “property damage” to the faulty work itself but not to resulting “property damage” to the non-faulty work.

Unfavorable Case Law 

In order to have a favorable claim outcome, builders not only have to avoid the above mentioned exclusions, but also must not fall victim to unfavorable case law. Nationally, a number of courts have ruled that a contractor’s General Liability policy does not cover “property damage” to either faulty work or resulting non-faulty work under the theory that such damages don’t constitute an “occurrence”. The South Carolina Supreme Court ruled similarly in the road contractor case of L-J vs Bituminous. However, the South Carolina Supreme Court recently clarified its ruling for builders in the Auto Owners vs Newman rehearing. In this case, the court ruled that “property damage” to non-faulty work is an “occurrence” and thus subject to coverage (unless otherwise excluded). This is a mostly favorable ruling for builders in South Carolina but is still an overall coverage reduction to the extent that coverage is precluded for property damage to the faulty work itself.

Risk Management

Builders must employ aggressive risk management techniques to protect against out of pocked losses due to policy exclusions and unfavorable case law. Examples of such techniques include contractual transfer of risks to subcontractors (ex: hold harmless / indemnification provision and insurance requirements), the use of home owner warranties, thorough documentation of construction files, and being proactive in dispute resolution.

States that are noted to be in the danger zone for underwriters based on dramatic decreases in contruction activity growth include NJ, KY, LA, FL, and MS.

While the article does not speculate the reasons for such increased losses due to changes in growth, two common reasons are most often cited by other experts. A rapid increase in construction growth is normally associated with an increase in construction defect claims due to an influx of inexperienced contractors in the market. A rapid decrease in construction growth is normally associated with an increase in Workers’ Compensation claims because workers often become disgruntled due to layoffs or cut backs and file Workers’ Compensation claims in retaliation as a way to make up for income loss.