The South Carolina Supreme Court is trying to put me out of business

For nearly two years those of us who represent building owners--and the contractors we sue--thought the issue of liability coverage for building defects was settled in South Carolina. September brought not only the end of summer, but the end of certainty as well. In Auto Owners Insurance Company v. Newman, Opinion No. 26450 (Sept. 8, 2009), the Supreme Court determined one of the largest elements of a plaintiff’s damages in defective construction cases is not covered. Justice Pleicones went even farther, dissenting on the ground that a builder’s error in construction does not constitute an occurrence under the terms of a commercial general liability insurance policy.


At issue is whether faulty construction that causes physical damage to a building will trigger insurance coverage. Trinity Construction built a house for Virginia Newman in 1999. A subcontractor placed traditional stucco siding on the exterior. Shortly after she moved in, Ms. Newman noticed water leaking through the walls. She hired an engineer who determined the stucco was improperly installed and water was attacking the sheathing and framing. An arbitrator awarded Ms. Newman nearly $56,000 for her claims against Trinity.

Auto Owners had issued a CGL policy to Trinity. Unsurprisingly, it filed a declaratory judgment action contesting coverage. Prior decisions by the Supreme Court had led to some inconsistency in the way insurers evaluated their policy language. Originally the court issued an opinion in Newman that appeared to settle the issue once and for all. It held defective construction was an occurrence; that any exclusions in the policy were trumped by an exception for work performed by a subcontractor; and that the cost to remove the stucco was covered because it was the only way to reach the parts of the house that required repair.

At this point my colleagues on the north side of the V and I heaved sighs of relief. For years we had settled cases, or tried them and collected verdicts and awards, based on our conviction a standard ISO CGL policy covered damage from defective construction. Despite some fits and starts, the high court had finally vindicated us. There was no longer any doubt we could reach the policies.

Alas. Our celebration was short-lived. Eighteen months later the court withdrew and re-issued its opinion. Based on the "sistership" exclusion (traditionally invoked for product recalls), Chief Justice Toal reversed her earlier holding that the cost to remove the stucco was covered. At least she still ruled that a building defect was an occurrence. In his dissent, Justice Pleicones relied on the "business risk" exclusion (I have searched in vain for that language in the policy) to write out of coverage any cost to repair defective construction.

So where are we now? Well, we are in full retreat from the strong protection our courts have traditionally afforded homeowners. If you have experience with stucco claims, particularly artificial stucco, you know that the cost to replace sheathing and siding is relatively minor. The real expense is removing the siding to get to the repairs, and replacing it once the repairs are done. After Newman, there's no coverage for that. Presumably its logic would apply to wallboard removed to access defective plumbing connections or electrical wiring; roofing removed to replace soaked insulation; and windows pulled to install flashing omitted during original construction. The biggest losers, though, may be homebuilders and commercial contractors who purchased CGL policies over the years, believing they were covered for all damages. Amazingly, there is no clamor from the industry's lobbyists to reverse Newman in the legislature. The big winners? Insurance companies, of course. If the largest element of damage is excluded from coverage, it means the billions in premiums they collected over the last few years will be nearly pure profit.

I am working on a more scholarly article about Newman, one with real citations and stuff. I'll link to it when it's done and my friends have edited the article to avoid my disbarment.