By Ashley Fletcher Frampton
aframpton@scbiznews.com
Published May 13, 2011

The S.C. House and Senate have approved legislation that effectively reinstates contractors’ insurance coverage for property damage caused by subcontractors’ faulty workmanship, coverage that a January court ruling removed.

The Senate on Thursday approved changes that the House had made to the bill, which now heads to Gov. Nikki Haley for approval.

The S.C. Supreme Court’s opinion in the case Crossmann Communities v. Harleysville Mutual Insurance Co. has sparked an uproar in the building industry this year.

The ruling meant that general contractors were on the hook financially for property damage caused by subcontractors’ defective work. In the past, they had relied on general commercial liability insurance to pay those claims.

But the court said that the insurance policies in question do not cover damage that is the natural and expected consequence of faulty construction, rather than damage caused by an outside event.

For example, water intrusion is the expected result of negligently installed flashing, the court said. Those problems are not an accident and therefore do not trigger insurance coverage.

Representatives of the construction industry said contractors thought the premiums they paid included that coverage. They said the ruling could force contractors out of business when faced with a bill for damage that they couldn’t pay, leaving homeowners and business to pay for the damage themselves.

Some insurance industry representatives argued that the coverage was not part of their policies, and that providing it would mean higher premium costs.

In response to the court ruling, state lawmakers filed legislation defining certain aspects of general commercial liability insurance policies in the way that they were understood prior to the Crossmann ruling.

While the legislation has passed, the court battle isn’t over.

The S.C. Supreme Court agreed to rehear the case on May 23, including arguments from more than a dozen other interested parties that filed amicus briefs.

The court’s decision to allow so many parties to make arguments is a unique situation, said Ned Nicholson, a lawyer representing the Home Builders Association of South Carolina and the National Association of Home Builders in the matter.

Along with insurance and builder groups, the list of parties scheduled to appear before the court includes school districts, universities and a homeowners association.

Nicholson said the issue is one with which other courts around the country also have struggled. The S.C. Supreme Court decided to rehear the case before it was clear that the legislation would pass, he said.

Mark Nix, executive director of the Home Builders Association of South Carolina, said the legislation, which applies retroactively, clarifies to both sides what is covered under general commercial liability policies.

“Free enterprise is good, as long as you understand what you’re buying,” he said.

Micaela Isler, state government relations manager for the Property Casualty Insurers Association of America, said it’s too early to tell how the legislation will affect premiums but that they could go up.

Isler said her organization disagrees with a “one-size fits all” approach to insurance contracts and also opposes the legislation’s retroactivity clause.

“It really negates the point of having a contract,” she said. “I would expect that that will be challenged in court.”

Reach Ashley Fletcher Frampton at 843-849-3129.