If faulty construction work leads to property damage, who should pay for it? The construction company? The construction company's insurer? This question is leading to a legal puzzle when it comes to South Carolina business insurance policies.
In 2001, a group of South Carolina homeowners sued the construction company that had built their condos because poor construction had led to deterioration, according to the Insurance Journal. After settling with the homeowners, the construction company turned to its insurance company, arguing that its general liability policy should cover the millions it had paid in the settlement -- because the subpar work was the fault of a subcontractor. The insurance company disagreed, and the case eventually made it to the South Carolina Supreme Court -- which decided in favor of the insurance company.
Now, pending legislation in South Carolina seeks to reverse the Supreme Court's decision. Senate Bill 431 (S.431) would require that general liability insurance cover construction defects.
Examples of construction defects include:
- Improperly attached roofs.
- Poor-quality insulation.
- Uneven support beams in concrete foundations.
The bill would support coverage for contractor accidents, mistakes and even shoddy workmanship. Insurers would be able to refuse construction-defect claims only if:
- The issue didn't start (or get worse) while the insurance policy was in effect.
- The insured person knew about any defect before the policy's effective date.
- The insurance policy clearly excludes the specific defect.
Under the bill, general liability insurers would have to shoulder the burden of proof that construction defects performed were ineligible for coverage.
Insuring construction defects is a controversial, complex and often confusing topic.
According an article posted on the American Association of Insurance Services (AAIS) website, property insurance policies have traditionally excluded construction defects. However, these exclusions can vary significantly in scope, depending on insurance company underwriting rules as well as specific policy definitions, limitations and exclusions.
Consider an insured subcontractor that installs uneven support beams. Repairing the faulty support beams is excluded under many general liability policies because the construction professional had full control over and directly performed the installation. Such defects fall under "your work" exclusions under general liability policies. They may be covered under business risk insurance instead, according to AAIS. However, if the faulty support beams cause another subcontractor's drywall to crack, those losses typically are covered under the support beam subcontractor's liability policy as property damage.
Colorado serves as an example
S.431 in South Carolina is modeled after Colorado House Bill 10-1394, which became law in May 2010. HB 10-1394 confirms that faulty workmanship claims are eligible for coverage, unless insurance policy wording specifically excludes them (with a "your work" exclusion, for example).
The rules in Colorado are consistent with those in other states that also support construction-defect coverage, according to Denver law firm Sherman and Howard. These include Texas and Florida, two states with huge construction industries.
Insurance industry fights back
Following Colorado's lead, South Carolina's S.431 acknowledges that potential losses from construction flaws form a major reason why trade professionals buy general liability insurance in the first place. If insurers don't explain construction-defect exclusions when coverage is first sold, policyholders pay premiums only to face severe financial harm when their claims are refused.
Yet bill S.431 faces stiff opposition from the insurance industry. At a Senate Banking and Insurance Committee hearing in South Carolina, the American Insurance Association (AIA) demanded that S.431 not be enacted.
The AIA's position is that general liability business insurance
policies weren't priced to cover a broad range of construction defects. It also points out that the majority of states still exclude faulty construction from liability insurance.
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