Opinion
C.A. No. 4:05-113-25-TLW-TER.
July 13, 2006
ORDER
On February 1, 2006, the plaintiff, Pennsylvania Manufacturing Associate Insurance Company, moved for summary judgment against the defendant, Dargan Construction Company, seeking a declaration from this Court that the plaintiff does not have to defend or provide coverage to the defendant on an underlying lawsuit. (Doc. #14). The defendant, alternatively, moved for summary judgment on February 1, 2006, seeking a declaration from this Court that the plaintiff is required to defend and indemnify on the same underlying lawsuit. (Doc. #16). The plaintiff responded to the defendant's motion on February 20, 2006 (Doc. #20) and a hearing on the issues was conducted before the undersigned on May 11, 2006. Both the plaintiff and defendant have stipulated to a set of facts. (Doc. #15).
FACTS
Originally, the defendant Dargan Construction served as general contractor on three separate projects in Horry County, South Carolina: The Patricia North Hotel, The Beach Cove Ocean Resort — Phase III, and The Sea Crest Resort Hotel. The defendant used subcontractors to perform the vast majority of the work on all three projects. (Doc. #15). The plaintiff insured the defendant with a commercial general liability policy (hereinafter "CGL") beginning July 1, 1997. (Doc. #15). Coverage began after the project had been finished and continued for a year thereafter. (Doc. #15).
Currently, those projects are the subject of construction-defect litigation in the Horry County Court of Common Pleas. (2005-CP-26-1632-R; 2002-CP-26-850; 2001-CP-26-6082). The plaintiff and defendant have stipulated that the complaints in the underlying case allege that, "The buildings were defectively constructed, which led to substantial water intrusion resulting in substantial deterioration including rot, rust, mold, mildew, and corrosion of the various components of the buildings." (Doc. #15).
The plaintiff's CGL policy states in pertinent part:
a. [PMA] 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. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. . . .
b. This insurance applies to "bodily injury" and "property damage" only if: (1) The "bodily injury" or "property damage" is caused by an "occurrence."
The policy also defines "Property Damage" as, "physical injury to tangible property, including all resulting loss of use of that property. . . ." Moreover, "Occurrence" is defined as, "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."
The plaintiff is defending Dargan in the underlying cases pursuant to reservations of rights letters. However, the plaintiff is seeking a declaration from this Court affirming its claim that it is not responsible for defending or indemnifying the defendant. The defendant seeks a declaration from this Court that the plaintiff must defend and indemnify.
DISCUSSION
Summary judgment shall be granted when the "pleadings, deposition, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56 (c). To grant summary judgment, the court must determine that no reasonable jury could find for the nonmoving party on the evidence before it. Perini Corp. v. Perini Const., Inc., 915 F.2d.121, 124 (4th Cir. 1990). All facts and reasonable inferences therefrom are viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). However, when both plaintiffs and defendants move for summary judgment, "the court must consider each party's motion individually to determine if that party has satisfied the summary judgment standard."Marylanders for Fair Representation, Inc. v. Schaefer, 849 F.Supp. 1022 (D.Md. 1994). In the present case, both parties have moved for summary judgment. Therefore, the Court will rule on each separate motion for summary judgment.
Both the plaintiff and defendant have moved for summary judgment based on the grounds that there are no issues of material fact. The plaintiff also asserts that the buildings currently at issue did not sustain damage that can be considered "property damage" for the purposes of coverage because there was no "occurrence" as defined by the insurance policy. The defendant moves for summary judgment, asserting that the buildings did experience "property damage" and citing the language of the policy to prove an "occurrence." The Court agrees that there is no issue of material fact in this action, as plaintiff and defendant have stipulated to a set of facts in the record. (Doc. #15). The Court has read the record, the applicable language in the insurance policy, as well as relevant case law to decide whether the buildings at issue sustained what can be considered "property damage" under the terms of the policy.
In the CGL policy, "occurrence" is defined as, "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." (Doc. #15). Property damage is defined as "physical injury to tangible property, including all resulting loss of use of that property." (Doc. #15). The CGL policy states that insurance would apply only to "property damage that is caused by an occurrence." (Doc. #15). Therefore, the Court must first decide if there was an "occurrence" in the underlying lawsuit that would provide for coverage.
The underlying action alleges that failing parts of the building caused continuous and repeated exposure to water intrusion resulting in substantial deterioration including rot, rust, mold, mildew and corrosion of the various components of the buildings. (Doc. #15). Moreover, the claim states that:
The Plaintiffs have been damaged in that [their] buildings do not meet the requirements of the plans and specifications; standard building code, industry standards or manufacturer's requirements; substantial water intrusion has caused complete degradation of the wall system. . . .
Plaintiffs are informed and believe that they are entitled to judgment against the Defendants in a sum sufficient to correct the construction and design deficiencies . . . and in addition a sum sufficient to reimburse the Plaintiffs for all rental, income and loss of use that will be lost as a result of the repair, renovation and reconstruction of the hotel[s] together with punitive damages as may be appropriate. (Doc. #15).
The Court has read the claim and thus finds that the plaintiffs in the underlying claim are asking for an award to correct the deficiencies in the building, as well as additional losses stemming from, but not alone caused by, the presence of the deficiencies.
The plaintiff argues that South Carolina case law supports a finding that there was no "occurrence." In L-J, Inc. v. Bituminous Fire and Marine Insurance Company, 336 S.C. 117, 621 S.E.2d 33 (2004), three CGL insurers sought indemnification and contribution from a fourth insurer for faulty road construction done by an insured general contractor. The road had begun to deteriorate, showing signs of "alligator cracking." Id. at 36. Expert witnesses testified that the damage to the road was caused by "insufficient road subgrade preparation" and "improper drainage." Id. The South Carolina Supreme Court found that, "Although the alligator cracking may have constituted property damage . . . an `occurrence,' as defined under the CGL policy did not take place." Id. The Court found that those, "negligent acts constitute faulty workmanship, which damaged the roadway system only." Id. (Emphasis added). Moreover, the Court articulated that, "to hold otherwise, the CGL policy would be more like a performance bond, which guarantees the work, rather than like an insurance policy, which is intended to insure against accidents." Id. at 124.
The defendant argues that the present case mirrors an alternative decision that the South Carolina Supreme Court analyzed and relied upon to come to its ultimate decision inL-J. In High Country Assocs. v. New Hampshire Ins. Co., 139 N.H. 39, 648 A.2d 474 (1994), a New Hampshire court held that a CGL insurer was obligated to provide coverage for property damage caused by continuous exposure to moisture. Id. Unlike L-J, the plaintiff in High Country sought an award for property damage resulting from negligent construction, not merely an award to cure the defective construction. Id. at 477. High Country held that the property damage, "caused by continuous exposure to moisture through leaky walls, is not simply a claim for the contractor's defective work." Id.
Although High Country and L-J came to two different conclusions, the South Carolina Supreme Court acknowledged the High Country case as a guiding factor in arriving at its own decision in L-J, stating, "We find the analysis used by the New Hampshire Supreme Court helpful in distinguishing between a claim for faulty workmanship versus a claim for damage to the work product caused by the negligence of a third party." L-J at 123. Even though the South Carolina Supreme Court distinguished L-J from High Country, the reference to High Country remains significant and provides insight in distinguishing when a policy would provide coverage and when it would not.
Since L-J, other courts in the District of South Carolina have come to the same conclusion in cases involving similar facts based on the analysis in the High Country case. In Okatie Hotel Group, LLC v. Amerisure Insurance Co., Civil Action No. 2:04-2212-23, a plaintiff hired a general contractor to build a hotel. During construction, the subcontractors improperly performed their work, and as a result, the hotel suffered extensive moisture damage. Id. U.S. District Court Judge Patrick Michael Duffy held that the property damage went beyond simple damage to the work product, although the damage to the work product in itself did not constitute an occurrence. Id. Rather, the property damage to the hotel that stemmed from continued exposure to moisture was sufficient to constitute an "occurrence." Id. In Bituminous Casualty Corp. v. R.C. Altman Builders, Inc., et al., Civil Action No. 2:01-4267-DCN-GCK, United States Magistrate Judge George C. Kosko concluded an "occurrence" existed when a home built by a general contractor in South Carolina sustained damage from continuous exposure to moisture as a result of faulty workmanship and defects in the residential construction. This Court finds the analysis in these two cases persuasive.
Judge Kosko reached this conclusion in a Report and Recommendation prepared for District Judge David Norton. The Report and Recommendation remains pending.
The Court notes, the facts of the present case significantly mirror the facts in High Country. In the present case, the underlying lawsuit alleges that the defendant constructed three buildings that suffered damage as a result of poor workmanship. The defects in the construction of the building are not, in themselves, sufficient to constitute an "occurrence." However, the lawsuit goes on to claim that, "the buildings were defectively constructed, which has led to substantial water intrusion resulting in substantial deterioration including rot, rust, mold, mildew, and corrosion of the various components of the buildings." (Doc. #15) (emphasis added). The defendants allege property damage beyond damage to the work product and/or improper performance of the construction task itself. This resulting damage was not solely because of poor workmanship. Instead, the damage occurred because of poor workmanship and continued and substantial water intrusion. (Doc. #15). Since the policy defines an occurrence as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions," the water exposure meets the requirements of the definition of "occurrence." Moreover, the degradation of the wall system constitutes "physical injury to tangible property," the very definition of "property damage" as provided by the CGL policy. Therefore, the Court concludes that there was an "occurrence" resulting in "property damage" in the underlying lawsuit that would provide for coverage under the CGL policy.
The plaintiff has also asserted an argument based on language in the L-J case that relates to "negligence of a third party." This Court has considered this position asserted by the plaintiff and does not find it persuasive.
Because the Court finds that there was an "occurrence" that compels coverage of "property damage" in an underlying lawsuit, the Court, as a matter of law, denies the plaintiff's motion for summary judgment. Since the Court has deemed it appropriate to apply the High Country analysis in this case, the defendant's motion for summary judgment should be granted. Therefore, the defendant's motion for summary judgment is hereby granted, and the plaintiff is required to defend and indemnify the defendant in the underlying lawsuits to the extent that coverage is provided for pursuant to this order and pursuant to High Country. THEREFORE, IT IS HEREBY ORDERED that the plaintiff's motion for summary judgment is denied. (Doc. #14). The defendant's motion for summary judgment is granted. (Doc. #16). The plaintiff is ordered to defend and indemnify the defendant as set forth herein.
IT IS SO ORDERED.