Crossmann is a Bad Decision for S.C. Contractors

Bill aims to counter Crossmann ruling and force General Liability Policies to cover construction defects

The recent Crossmann decision by the South Carolina Supreme Court 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 resulted in the 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 the parties really understand the big picture?

I attended a S.C. Senate Banking and Insurance Committee meeting on February 9, 2011 about 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.

In my opinion

As I already 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.