SC Statute Defining “Occurrence” Upheld

How this affects builders

In Harleysville Mutual Insurance Co. v. South Carolina, (opinion 27189, November 21, 2012), the South Carolina Supreme Court left intact a state law that redefines an “occurrence” under a builder’s General Liability policy. The court ruled that while the new definition of “occurrence” for the purposes of General Liability insurance is constitutional, the retroactive application of the statute is not.

The new statute, South Carolina code 38-61-70, effective May 17, 2011, was an attempt to protect builders by overruling Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company (Crossman I). In Crossman I, the court ruled that faulty workmanship did not fall under the definition of an occurrence because “the damage to the insured’s property was no more than the natural and probable consequence of faulty workmanship.” Also, for faulty workmanship to give rise to potential coverage, the faulty workmanship must result in an occurrence as defined as unintended, unforeseen fortuitous or injurious event. The builder community was up in arms over the Crossman decision and lobbied heavily for the new statute which provided that an occurrence also meant “property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.”

Interestingly enough, on August 22, 2011, the Supreme Court issued a new opinion, which overruled Crossman and found in favor of coverage based on an “occurrence”. In the new opinion, Crossman Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company (Crossman II), the court reaffirmed his decision in Newman and clarified that negligence or defective construction resulting in damage to otherwise nondefective components may constitute property damage, but defective construction itself would not.

What this means for builders

Because the court ruled that the statute can’t be applied retroactively, it will have no effect on policies issued prior to May 17, 2011, which is the date of the Crossman I decision that impacts the interpretation of an occurrence for policies issued prior to that date. However, going forward, the powerful builder lobby proved that it is possible to correct a faulty court opinion.