Opinion
Opinion No. 26450.
Heard January 23, 2008.
Filed March 10, 2008.
Appeal from Charleston County, B. Hicks Harwell, Jr., Circuit Court Judge.
AFFIRMED.John L. McCants, of Ellis Lawhorne Sims, of Columbia, for Appellant. Frank M. Cisa, of Cisa Dodds, of Mt. Pleasant, Joseph K. Qualey, of Qualey Beck, of Charleston, Michael S. Seekings and Amy E. Melvin, both of Leath Bouch Crawford, of Charleston, for Respondents.
George E. Mullen and Daniel F. Oberklein, both of Mullen Wylie Seekings, of Hilton Head Island, Kenneth E. Ormand, Jr., of Ormand Ashley Gibbons, of Columbia, and David E. Dukes and Williams C. Wood, Jr., both of Nelson Mullins Riley Scarborough, of Columbia, Laura A. Foggan and Parker J. Lavin, both of Wiley Rein, of Washington, D.C., for Amici Curiae.
The issuer of a homebuilder's commercial general liability policy sought a declaratory judgment to determine whether the policy covered a homeowner's claim for damages caused by the negligence of a construction subcontractor. The trial court determined that the homeowner's claim fell within the policy's coverage and this appeal followed. We affirm.
FACTUAL/PROCEDURAL BACKGROUND
Respondent Trinity Construction, Inc. ("Trinity") completed the construction of a home for Respondent Virginia Newman ("Homeowner") in May 1999. Shortly thereafter, the Homeowner filed a claim against Trinity for breach of contract, negligence, and breach of warranty, alleging defective construction primarily related to the installation of the stucco siding. Based on the report of an engineer hired by the Homeowner to inspect the home's construction, the Homeowner alleged that the application of the stucco did not conform to industry standards and that these nonconforming aspects of the stucco installation allowed water to seep into the home causing severe damage to the home's framing and exterior sheathing. The Homeowner and Trinity referred the action to binding arbitration in which an arbitrator issued the Homeowner an award of itemized damages due to the defective construction totaling $55,898.
At the time of construction, Trinity held a commercial general liability (CGL) policy issued by Appellant Auto-Owners Insurance Company ("Auto-Owners"). Following arbitration, Auto-Owners sought a declaratory judgment to determine its rights and obligations under the CGL policy, contending that the damages awarded by the arbitrator were not covered under the policy. The trial court determined that the policy covered the damages because they resulted from an "occurrence" and because Auto-Owners failed to show that any policy exclusions applied. Accordingly, the trial court determined that the CGL policy covered all but four items of the damages provided for in the arbitration award. Auto-Owners appealed.
This Court certified the case, and Auto-Owners raises the following issue for review:
Did the trial court err in holding that the damages awarded by the arbitrator for negligent construction were covered under a CGL policy?
STANDARD OF REVIEW
A declaratory judgment action is neither legal nor equitable, and therefore, the standard of review is determined by the nature of the underlying issue. Colleton County Taxpayers Ass'n v. Sch. Dist. of Colleton County, 371 S.C. 224, 231, 638 S.E.2d 685, 688 (2006). When the purpose of the underlying dispute is to determine whether coverage exists under an insurance policy, the action is one at law. Auto-Owners Ins. Co. v. Haman, 368 S.C. 536, 540, 629 S.E.2d 683, 685 (Ct.App. 2006). In an action at law tried without a jury, the appellate court will not disturb the trial court's findings of fact unless there is no evidence to reasonably support them. Id.
LAW/ANALYSIS
A. Negligent construction as an "occurrence" under the policy
Auto-Owners argues that the arbitrator's award for the Homeowner's property damage is not covered by the policy. Specifically, Auto-Owners argues that pursuant to this Court's opinion in L-J v. Bituminous Fire Marine Insurance Co., 366 S.C. 117, 621 S.E.2d 33 (2005), the subcontractor's defective installation of stucco did not cause an "accident" constituting an "occurrence" subject to coverage under the policy. We disagree.
The CGL policy issued by Auto-Owners in this case is the standard Insurance Services Office (ISO) CGL policy used since 1986, and is identical to that reviewed by this Court in L-J. The relevant policy provisions state that Auto Owners will "pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage' to which this insurance applies." The policy further explains that the insurance applies to such "bodily injury" or "property damage" only if it is caused by an "occurrence."
The CGL policy defines many of the particular terms used to outline the scope of its coverage. The policy defines "property damage" as "physical injury to tangible property, including all resulting loss of use of that property," and defines an "occurrence" as "an accident, including continuous or repeated exposure to substantially the same harmful conditions." The policy does not define the term "accident," however, and this Court has found that in the absence of a prescribed definition in the policy, the definition of "accident" is "[a]n unexpected happening or event, which occurs by chance and usually suddenly, with harmful result, not intended or designed by the person suffering the harm or hurt." Green v. U. Ins. Co. of America, 254 S.C. 202, 206, 174 S.E.2d 400, 402 (1970).
We begin our analysis in this case with a review of L-J, which all parties, as well as the trial court, assert in support of their respective resolutions of the issue. In L-J, a developer hired L-J, Inc. as contractor for the site development and road construction in a subdivision development. 366 S.C. at 119, 621 S.E.2d at 34. L-J hired subcontractors to perform most of the work and four years after construction was completed, the roads began to deteriorate due to negligent road design, preparation, and construction. Id. The developer sued L-J and the parties settled. L-J subsequently sought indemnification from Bituminous Fire and Marine Insurance Company ("Bituminous") and three other insurance companies who insured L-J under various CGL policies. Id. Bituminous refused to indemnify L-J and brought a declaratory judgment action to determine whether its CGL policy issued to L-J covered the damage to the roads caused by the negligent construction. Id. at 120, 621 S.E.2d at 34.
This Court found that although the deterioration to the roadways may have constituted "property damage" under the policy, the various negligent acts of the subcontractors upon which the developer based its claim did not constitute an "occurrence" for which the CGL policy provided coverage. Id. at 123, 621 S.E.2d at 36. Specifically, the Court found that the developer's claim alleged negligent construction causing damage only to the work product itself (i.e. the roadway), and that such a claim was merely one for faulty workmanship. Id. Because damages to the work product alone resulting from faulty workmanship could not typically be said to have been "caused by an accident or by exposure to the same general harmful conditions," the Court reasoned that such claims for faulty workmanship did not constitute an "occurrence" falling within the policy's coverage. Id.
The L-J court went on to explain, however, that a CGL policy may provide coverage where a claim for faulty workmanship alleges third party bodily injury or damage to other property. Id. n. 4. To illustrate this theory, the Court examined the case of High Country Associates v. New Hampshire Insurance Co., in which a condominium homeowners' association sued the condominium builder seeking damages allegedly due to negligent construction of the condominium buildings. 648 A.2d 474, 476 (N.H. 1994). The complaint alleged that the continuous moisture intrusion resulting from a subcontractor's defective installation of siding resulted in moisture seeping into the buildings, which caused widespread decay of the interior and exterior walls and loss of structural integrity over a nine-year period. Id. The High Country court found that the complaint was not simply a claim for faulty workmanship seeking damages to repair the defective work product itself, but rather, was a claim for negligent construction resulting in damage to other property. Id. at 477. The court determined that the continuous exposure to moisture due to the defective installation of siding constituted an "occurrence" under the policy and that, in this way, the homeowners' association had properly "alleged negligent construction that resulted in an occurrence, rather than an occurrence of alleged negligent construction." Id. at 478. Accordingly, High Country held that the CGL policy would cover the homeowners' association's claim against the builder, if successful. Id.
This Court's attempt to distinguish an "occurrence" of alleged negligent construction, such as that which took place in L-J, from negligent construction resulting in an "occurrence," such as that which took place in High Country, has apparently caused confusion in other courts' interpretations of the ultimate holding in L-J. See, e.g., Bituminous Cas. Corp. v. Altman Builders, Inc., 2006 U.S. Dist. LEXIS 53354, at *10 (D.S.C. 2006). In L-J, we phrased this distinction as "a claim for faulty workmanship versus a claim for damage to the work product caused by the negligence of a third party," noting that the latter could be covered under a CGL policy. 366 S.C. at 123, 621 S.E.2d at 36. Given our analysis of High Country in the L-J opinion, it should be clear that this Court intended the "third party" language to refer to subcontractors who are not a party to the CGL policy between the insurer and the contractor.
In this vein, we find High Country equally instructive in determining whether a CGL policy provides coverage for property damage in the instant case. The arbitrator in this case determined that the Homeowner suffered damage as a result of the negligent application of stucco by Trinity's subcontractor. Specifically, the arbitrator found that the defective stucco allowed for continuous moisture intrusion resulting in substantial water damage to the home's exterior sheathing and wooden framing. These findings, in our opinion, clearly establish that there was property damage beyond that of the negligently applied stucco itself. Although the stucco subcontractor's negligent application is not on its own sufficient to constitute an "occurrence," we find that under the reasoning of High Country — adopted by this Court in L-J — the continuous water intrusion into the home resulting from the subcontractor's negligence qualifies as an "accident" involving "continuous or repeated exposure to substantially the same harmful conditions." Accordingly, we hold that the subcontractor's negligence led to an "occurrence" invoking coverage under the CGL policy for the resulting "property damage" to other property not the work product. See also Penn. Mfrs. Assoc. Ins. Co. v. Dargan Constr. Co., 2006 U.S. Dist. LEXIS 53366 (D.S.C. July 13, 2006); Okatie Hotel Group v. Amerisure Ins. Co., 2006 U.S. Dist. LEXIS 2980 (D.S.C. Jan. 13, 2006).
According to expert testimony from the consulting engineer hired by the Homeowner, the subcontractor's application of stucco did not meet applicable building code requirements and deviated from industry standards. The expert testified that the subcontractor did not apply the stucco to the required thickness; failed to install a weep system or flashing around doors and windows; and used improper caulking and banding methods.
Moreover, as a matter of pure contract interpretation, we hold that the CGL policy covers the damage resulting from the negligent acts of the subcontractor in this case. On this matter, a brief history of CGL policies is instructive. A CGL policy in the home construction industry is designed to cover the risks faced by homebuilders when a homeowner asserts a post-construction claim against the builder for damage to the home caused by alleged construction defects. See Rowland H. Long, The Law of Liability Insurance, § 3.06(1) (2007). Several construction-specific exclusions in the standard CGL policy exclude from coverage certain types of property damage attributable to risks outside the scope of CGL recovery. See id. The primary exclusion is the "your work" exclusion which provides that the policy will not cover "`property damage' to `your work.'" In 1986, the insurance industry amended the "your work" exclusion to provide that even if the property damage is to the builder's own work, the "your work" exclusion does not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor." See French v. Assurance Co. of America, 448 F.3d 693, 701 (4th Cir. 2006) (discussing the evolution of the standard CGL policy). In doing so, the insurance industry extended liability coverage for property damage to the contractor's completed work arising out of work performed by the subcontractor. Id.
The facts of this case establish exactly the type of property damage the CGL policy was intended to cover after the 1986 amendment to the "your work" exclusion. In construing the provisions of an insurance policy, the Court must consider the policy as a whole and adopt a construction that gives effect to the whole instrument and to each of its various parts and provisions. Yarborough v. Phoenix Mut. Life Ins. Co., 266 S.C. 584, 592, 225 S.E.2d 344, 349 (1976). To interpret the term "occurrence" as narrowly as Auto-Owners suggests would mean that any time a subcontractor's negligence damaged any part of the contractor's overall project, a CGL insurer could deny coverage under the policy. This would render both the "your work" exclusion and the subcontractor's exception to the "your work" exclusion in the policy meaningless. See French, 448 F.3d at 705-06. Accordingly, we hold that the stucco subcontractor's faulty workmanship led to an "occurrence" justifying coverage for the resulting property damage under the terms of the CGL policy.
C.D. Walters Construction Co., Inc. v. Fireman's Insurance Co., cited by Auto-Owners in support of its argument, is distinguishable from the instant case because it denied coverage under a CGL policy based on the "your work" policy exclusion before the 1986 modification to cover damage resulting from subcontractor negligence. 281 S.C. 593, 597-98, 316 S.E.2d 709, 712 (Ct.App. 1984).
The presence of the subcontractor exception to the "your work" exclusion also establishes the scope of "work product" for purposes of determining whether a CGL policy covers a homeowner's negligent construction claim in cases arising out of a subcontractor's faulty workmanship. In cases of subcontractor negligence, consideration of whether a homeowner's complaint alleges property damage to other property or property damage to the work product alone must be limited to the subcontractor's own work product, and not extended to the contractor's entire project. To hold otherwise would obviate the purpose of the subcontractor exception to the "your work" exclusion in post-1986 CGL policies.
For this same reason, we disagree with the reasoning set forth in Bituminous Cas. Corp. v. Altman Builders, Inc., in which the federal district court interpreted this Court's decision in Century Indemnity Co. v. Golden Hills Builders, Inc., 348 S.C. 559, 561 S.E.2d 355 (2002), to mean that a homebuilder's CGL policy would not cover damage to any work product component of a construction project when the damage resulted from the negligence of a subcontractor. 2006 U.S. Dist. LEXIS 53354, at *14-*17.
For these reasons, we hold that the trial court correctly found that the negligent application of stucco resulted in an "occurrence" of water intrusion, causing property damage that is covered under Trinity's CGL policy.
B. Operation of policy exclusion to exclude damages awarded for replacing the substrate
Auto-Owners argues that even if the subcontractor's negligent application of stucco resulted in an "occurrence" under the CGL policy, coverage for the resulting property damage is nevertheless barred by a policy exclusion. We disagree.
An exclusion found in the standard CGL policy prohibits coverage for "`property damage' expected or intended from the standpoint of the insured." Auto-Owners claims that pursuant to this exclusion, damages awarded by the arbitrator related to the framing and exterior sheathing of the home are not covered by the CGL policy because a construction professional would expect substantial moisture intrusion from defective stucco to result in these types of damages. In our opinion, and in the absence of any evidence otherwise, it is unreasonable to believe that Trinity expected or intended its subcontractor to perform negligently. Therefore, Trinity could not have expected or intended the resulting property damage. Accordingly, we hold that the property damage to the home's exterior sheathing and framing was not expected or intended by Trinity, and therefore, coverage of the Homeowner's damages is not barred by any exclusion within the CGL policy.
Auto-Owners asserts a similar argument urging this Court to find that the moisture intrusion was not an "accident," generally defined as "an unexpected happening or event," and therefore did not constitute an "occurrence" to bring the claim within policy coverage in the first instance. For the same reasons discussed in reference to the "expected or intended" policy exclusion, we find this argument to be unpersuasive.
C. Damages awarded for replacement of the defective stucco
Auto-Owners finally argues that even if an "occurrence" warrants policy coverage for damages to other property, the arbitrator's itemized allowance for replacing and repairing the defective stucco itself constitutes property damage to the work product alone. Auto-Owners therefore contends that the allowance for replacing the stucco is not covered under the CGL policy because it did not arise out of an "occurrence."
In support of its argument, Auto-Owners points to the arbitrator's decision concluding that the Homeowner was "entitled to have the stucco replaced" based on its defective application and because there were "sufficient other problems with the installation . . . [such] that allowance need[ed] to be made for replacement of the system." Auto-Owners contends that this amounts to a finding of damage to the work product alone which is not covered under CGL policies. Noting that the award of an arbitrator is a final judgment, see Palmetto Homes, Inc. v. Bradley, 357 S.C. 485, 494, 593 S.E.2d 480, 485 (Ct.App. 2004), Auto-Owners argues that it was not within the trial court's discretion to displace these findings with those of its own by determining that the policy covered the replacement of the defective stucco.
In our opinion, the analysis set forth by Auto-Owners is incomplete. The arbitrator's award itself "is the best evidence of its meaning, and the construction of its provisions is a matter for the courts." Renaissance Enters. v. Ocean Resorts, Inc., 330 S.C. 13, 19 n. 4, 496 S.E.2d 858, 861 n. 4 (1998) (citing Rueben I. Friedman, Annotation, Admissibility of Affidavit or Testimony of Arbitrator to Impeach or Explain Award 80 A.L.R.3d 155 (1977)). For this reason, we find that the trial court correctly determined that the arbitrator's specific awards for rough carpentry, windows and doors, thermal and moisture protection, and interior and exterior finishes, establishes that the arbitrator recognized the existence of the underlying water damage to the home resulting from the defectively-applied stucco. Because this underlying moisture damage could neither be assessed nor repaired without first removing the entire stucco exterior, the trial court correctly concluded that the arbitrator's allowance for replacement of the defective stucco was covered by the CGL policy as a cost associated with remedying the other property damage that resulted from an "occurrence."
Accordingly, we hold that the arbitrator's allowance for replacement of the defective stucco is covered under the terms of the CGL policy.
CONCLUSION
For the foregoing reasons, we affirm the trial court's decision finding that the CGL policy issued by Auto-Owners to Trinity covers the damages awarded by the arbitrator to the Homeowner.