SC Lawyer, Sept. 2003, #3. Commercial general liability insurance - finding coverage for faulty workmanship in construction defect cases.

AuthorBy Wesley D. Peel

South Carolina Lawyer


SC Lawyer, Sept. 2003, #3.

Commercial general liability insurance - finding coverage for faulty workmanship in construction defect cases

South Carolina LawyerSeptember 2003Commercial general liability insurance - finding coverage for faulty workmanship in construction defect casesBy Wesley D. PeelYou have just finished meeting with your new client, Norman Numonet. At first blush, it looks like a great case. Norman and his wife, D. Mandy, built their million-dollar dream home on the lake five years ago, but now the whole place is falling apart. Water is coming in around the windows and doors. The carpets are ruined. The whole house smells like a high school locker room. Bugco Exterminators says that the entire place is riddled with termites. D. Mandy was recently diagnosed as allergic to various fungi that thrive in wet environments, and she has recently suffered from severe respiratory problems.

Norman used a builder that provided a good quote, Heartoday Contractors. Heartoday's biggest selling point was that it could apply Sealedtite, a space-age skin system, on the home that was very energy efficient and could be applied in any color - so Mandy could get that hot pink home she always dreamed about. When the home was finished, it looked great. Norman liked it so much he decided to have Heartoday build his new vacation villa on Hilton Head Island using the same materials.

During the past two years, the Numonets began noticing discoloration of the interior walls around the doors and windows and a strong musty odor throughout the home. Norman hired an engineer to look at the home. The engineer's report indicates that substandard construction practices and an incorrect application of the Sealedtite skin caused the leaks and termite infestation. The Sealedtite must be stripped from the home, all the doors and windows must be replaced and there might be significant repairs required. The engineer also indicates that it is likely that the moisture intrusion began soon after the home's completion and continues to this day.

A little research reveals that Heartoday subcontracted the Sealedtite application work to Slapitup Applicators, LLC. You file suit shortly after meeting with Norman, but when you go to serve both companies you find that Heartoday ceased doing business two years ago and has no assets. Slapitup is nowhere to be found.

Through discovery you find that Heartoday carried a commercial general liability insurance policy from a different carrier every year that it was in business. You send a claim to Heartoday's carriers, but they all deny coverage. The insurers claim that general liability insurance is not a bond and does not cover faulty work. Even if they did accept coverage, they claim that Heartoday would be deemed self-insured for the last two years of progressive damage, and they are not responsible for the damage during the two years that Heartoday did not carry insurance.

Norman cannot repair the home because all of his cash is tied up in the house and the Hilton Head villa. The situation looks grim. Should you stop here and inform the client that it looks hopeless? If you do, you might find yourself in hot water down the road. Several states have assumed that an attorney's failure to pursue insurance coverage is legal malpractice. See Darby & Darby, P.C. v. VIS International, Inc., 678 N.Y.S.2d 482 (N.Y. App. Div. 1998); Ross v. Briggs & Morgan, 540 N.W.2d 843 (Minn. 1995). The attorney's exposure could be in the hundreds of thousands of dollars.

Time after time attorneys are faced with a situation similar to the one above. The entities responsible for the construction defects are no longer viable, and recovery seems unlikely. In these situations insurance might be the sole or major source of funding for any repair work. Therefore, it is imperative that the attorney review all opportunities for insurance coverage.

Luckily for you, South Carolina courts are in the vanguard of interpreting commercial general liability (CGL) policies in the context of construction defect cases. A careful analysis of CGL policy language along with the facts might enable you to invoke coverage. Several decisions over the past few years are very helpful. The recent South Carolina decisions are now being cited in other states that are struggling to interpret CGL policies in the context of construction defect cases.

Battle #1: Was there an occurrence?

To invoke coverage under a standard CGL policy, the facts must amount to an "occurrence" as defined in the policy. An occurrence is typically defined as an "accident, including continuous or repeated exposure to substantially the same general harmful...

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