Insurance Coverage for Construction Defects in South Carolina: The Construction Industry’s Next Move

August 22, 2013

Insurance LawMy last post discussed the South Carolina Supreme Court’s recent decision in Bennett & Bennett Construction v. Auto Owners Insurance Co., __ S.E.2d __, 2013 WL 3723214 (S.C., July 17, 2013), holding that two exclusions in the standard form CGL policy remove coverage that the legislature had attempted to restore when it passed legislation overruling a previous decision of the court. I predicted that the construction industry’s previous success in the legislature will embolden the industry to make a similar attempt to have the Bennett & Bennett Construction case overruled. This post discusses the arguments the industry is likely to raise.

Ambiguity

The Bennett & Bennett Construction opinion does not address a possible ambiguity in the policy with respect to when operations are being performed within the meaning of exclusion j(d). Although the court quotes only the language of the exclusions on which it relies, the standard form policy addresses precisely the issue before the court in defining the scope of “completed operations” when it states, “Work that may need … repair, correction or replacement, but which is otherwise complete, will be treated as completed.” Arguably, if operations on property are complete despite the need for  “repair, correction or replacement” of the property, the work to repair, correct or replace the property does not qualify as “operations performed” within the meaning of the exclusion.

Contractual Intent

The court’s interpretation of exclusion n, known as the sistership exclusion, arguably expands the exclusion well beyond its original purpose—described in insurance industry publications—of excluding costs for costs incurred by a manufacturer to recall its goods from the market. The exclusion says that it applies when a policyholder’s “work … is withdrawn … from use … because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.” The construction industry’s attorneys will argue that the insured’s work is not “withdrawn from use” when it is repaired and corrected.