Construction Defect Claims: Insurance Coverage Under South Carolina Law

By: Josephine H. Hicks, Parker Poe Partner

Construction projects often result in damages claims for construction defects. Securing insurance coverage for those claims will depend on many factors, including the specific facts and damages at issue, and which state’s law governs. The standard commercial general liability policy (“CGL”) provides coverage for “property damage” that is caused by an “occurrence.” Courts across the nation disagree on whether property damage caused by defective construction work is an “occurrence” as that term is defined in standard CGL policies.

Under South Carolina law, property damage resulting from faulty construction passes the first hurdle of constituting an “occurrence” under general liability insurance policies. The faulty construction itself, however, is not covered. For example, in a condominium project in Myrtle Beach, South Carolina, defective construction of exterior components resulted in water intrusion that caused damage to otherwise non-defective components of the condominium units. The property damage to non-defective components of the buildings was an “occurrence” that triggered coverage under general liability insurance coverage. See Crossman Communities of NC, Inc., et al. v. Harleysville Mut. Ins. Co., 395 S.C. 40 (2011). The cost of repairing the poorly constructed exterior components, however, was not covered by insurance. Continue Reading

Notice and Opportunity to Repair Statutes and CGL Carriers’ Duty to Defend: The Eleventh Circuit Weighs In, Sort of, on Florida’s Statute and an Insurer’s Duty to Defend

Over recent years and after a push from construction trade groups, states across the county adopted notice and opportunity to repair (“NOR”) statutes. The statutes generally provide that before a property owner files suit against a builder, the owner should give the builder notice of the alleged defect, permit the builder to inspect the property, and allow the builder to either reject the claim or offer to settle the claim through repairs or a payment.  The purpose of the statutes is to allow builders and owners to quickly and cheaply resolve construction defect claims without getting bogged down in litigation.

The effectiveness of these statutes has been hampered by their interplay, or lack thereof, with builders’ commercial general liability (“CGL”) insurance policies. Builders typically rely on CGL policies and the defense and indemnity they provide, to respond to, assess, defend against, and resolve construction defect claims.  Responding to and assessing an owner’s notice under a NOR statute requires personnel and legal and technical expertise that builders often do not have on staff and do not wish to pay for when a CGL carrier will cover those expenses should litigation ensure.  Also, a builder may be reluctant to offer to repair or settle a claim in response to a NOR notice without the builder’s CGL carrier covering the loss.  In addition to those issues, builders may need the assistance of legal counsel in responding to a NOR notice because in many states the builder’s response to the notice has important effects in any future litigation.

For these reasons, builders and their CGL insurers have been litigating whether a builder’s receipt of notice under a NOR statute triggers its CGL insurer’s duty to defend it. A CGL policy typically provides that the insurer must defend the insured whenever there is a “suit,” and to date four courts—California, Colorado, the United States Court of Appeals for the Tenth Circuit applying Utah law, and the United States District Court for the Southern District of Florida applying Florida law—have addressed whether a NOR notice constitutes a suit triggering the insurer’s duty to defend.

In the Florida case, the district court found a NOR notice was not a suit and the insurer had no duty to defend the insured contractor.[1]  The contractor appealed to the United States Court of Appeals for the Eleventh Circuit, and in August, the Eleventh Circuit issued a decision certifying the question to the Florida Supreme Court.[2]  The certified question means that the Florida Supreme Court will ultimately decide whether a NOR notice triggers the duty to defend under Florida law, but in certifying the question, the Eleventh Circuit gave a strong indication of its opinion that a NOR notice constitutes a suit triggering the duty to defend, and the statute of the Eleventh Circuit will likely influence the Florida Supreme Court and other courts addressing this issue.

Reviewing the district court’s conclusion that the term “suit” in the CGL policy was not ambiguous, the Eleventh Circuit expressed its opinion that “we are not as sure.” The Eleventh Circuit went on to note that “there are reasonable arguments presented by both sides” as to whether a NOR notice constitutes a suit, the existence of different reasonable interpretations of a term often indicates ambiguity, and ambiguity in an insurance policy is to be construed in favor of the insured.  Resolution of this issue in Florida awaits a decision from the Florida Supreme Court and even then, this issue will continue to play out on a state-by-state basis across the country, but the Eleventh Circuit’s recent statements place one more weight on the scale on the side of requiring CGL carriers to defend their insureds upon receipt on a NOR notice.

[1] Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 13-80831, 2015 WL 3539755 (S.D. Fl., June 4, 2015).

[2] Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., No. 15-12816 (11th Cir., Aug. 2, 2016).

The Near Death of the Outrageous Torts Exception and a Win for Arbitration in South Carolina’s Ongoing Struggle Over Arbitration Agreements

As noted previously on this blog, South Carolina courts are routinely hostile to arbitration agreements. However, in a decision issued in August, Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc.,[1] the South Carolina Supreme Court found a residential builder’s arbitration agreement enforceable and potentially did away with and certainly narrowed the Court’s “outrageous torts” exception to enforcing arbitration agreements.  The decision also rejected an unconscionability challenge to the arbitration agreement, and in doing so raised questions as to the scope of recent decisions refusing to enforce arbitration, particularly Smith v. D.R. Horton, Inc. which found an arbitration provision unenforceable because unconscionable.

In Parsons, the builder constructed a residential development on a brownfield site on which it thought it had removed all contamination.  The plaintiffs found a box filled with hazardous sludge on the property they purchased from the builder and filed suit against the builder.  The builder moved to compel arbitration based on an arbitration provision in the purchase agreement and warranty, and the circuit court denied the motion.

On appeal, in a plurality opinion, the Supreme Court held the outrageous torts exception, under which a party can avoid arbitration where the party’s claims arise out of outrageous tortious conduct unforeseeable at the time the parties entered into an arbitration agreement, did not bar arbitration. Two of the Court’s five justices expressed their opinions that the outrageous torts exception was created solely for avoiding arbitration agreements and that it accordingly violates federal law on the enforceability of arbitration agreements, and therefore, they would abolish the exception.

Two other justices expressed their opinion that the outrageous torts exception remains a valid basis for refusing to enforce an arbitration agreement but concluded the exception did not apply to the plaintiffs’ claims. In doing so, the justices set out a narrow conception of the outrageous torts exception and thereby effectively narrowed the exception to the point that it will no longer serve as a serious obstacle to enforcing arbitration agreements.  These two justices’ conception of the exception is that it bars arbitration of “a claim that does not fall within the scope of the arbitration agreement” and bars arbitration when there is no “significant relationship between the claims and the contract in which the arbitration agreement is contained.”  However, this view of the outrageous torts exception essentially gives it the same parameters of and collapses it into the existing determination of whether a claim falls within the scope of an arbitration provision.  Therefore, while a majority of the justices were not willing to outright abolish the outrageous torts exception, the constrained construction given to the exception likely renders it a nullity moving forward.

The plaintiffs also challenged the enforceability of the arbitration agreement on the grounds it was unconscionable, and the Court rejected this argument. The Court’s opinion does not provide any details as to the basis for the plaintiffs’ unconscionability argument and does not provide any reasoning for rejecting the unconscionability argument beyond stating that it was “without merit.”  While short on reasoning, the opinion does provide the text of the arbitration provision, and the fact that the Court found the provision enforceable despite an unconscionability challenge indicates some of the Court’s more recent decisions, like Smith v. D.R. Horton, Inc., finding arbitration agreement unenforceable as unconscionable may not be as strict as originally thought.  For example, the arbitration provision provided that the arbitration procedure was “the sole and exclusive remedy for the resolution of any and all disputes” and provided that the parties “waive any and all other right and remedies at law, in equity or otherwise which might otherwise have been available to them in connection with any such disputes.”

[1] Parsons v. John Wieland Homes & Neighborhoods of the Carolinas, Inc., Op. No. 27655 (S.C. Sup. Ct. filed Aug. 17, 2016) (Shearouse Adv. Sh. No. 33 at 28).

The Economic Picture: A Positive Outlook for Increased Construction Work and the Important Impact of that Work on the Carolinas and Georgia, But a Lack of Skilled Workers to Perform It

Dodge Momentum Index Rises for Fifth Straight Month in August and Non-Residential Starts Increase

The Dodge Momentum Index increased by 1.3% in August, marking the fifth consecutive month in which the index grew.[1]  The Index measures non-residential construction projects entering the planning stages and generally serves as an indicator of construction spending one year in the future.  At the end of August, the Index was 16% above where it was one year ago.

Dodge Data & Analytics also reported that total construction starts experienced a strong 21% increase in August.[2]  Dodge’s chief economist concludes “the construction industry still has room for further expansion despite some recent deceleration.”  The rise in construction starts was lead by non-residential building construction with a 42% increase, followed by non-building construction with a 25% increase.  Residential construction starts registered a smaller 5% increase.

 

Construction’s Impact on South Carolina, North Carolina, and Georgia’s Economies

The Associated General Contractors recently released data on the economic impact of and growth in construction in South Carolina,[3] North Carolina,[4] and Georgia.[5]  Some of the key findings:

South Carolina

  • In South Carolina, construction contributes 4.5% of the State’s GDP which is higher than construction’s 4% share of the national GDP.
  • South Carolina’s construction employment increased by 6.3% from July 2015 to July 2016 which exceeds the national average of 3.2%.
  • From July 2015 to July 2016, the metropolitan areas experiencing the greatest increase in construction employment were Charleston (5%), followed by Columbia (4%), Greenville (4%), and Myrtle Beach (4%).

North Carolina

  • In North Carolina, construction contributes 3.5% of the State’s GDP which is less than construction’s 4% share of the national GDP.
  • North Carolina’s construction employment increased by 4.4% from July 2015 to July 2016 which exceeds the national average of 3.2%.
  • From July 2015 to July 2016, the metropolitan areas experiencing the greatest increase in construction employment were Charlotte (7%), Durham-Chapel Hill (5%), and Greensboro (4%), while Raleigh experienced a decrease in construction employment (-2%).

Georgia

  • In Georgia, construction contributes 3.7% of the State’s GDP, less than construction’s 4% share of the national GDP.
  • Construction employment in Georgia increased by 7.5% from July 2015 to July 2016, far exceeding the national average of 3.2%.
  • The metropolitan area most responsible for the increased construction employment and experiencing the greatest increase was, not surprisingly, the Atlanta metro area (7%). The Augusta and Savannah metro areas each experienced only a 2% employment growth and Columbus experienced a 2% decrease in construction employment.

 

Labor Shortages and Record Job Openings

The AGC also released a report at the end of September showing construction employment continues to grow across the United States but the rate of growth slowed. [6]  The report attributes the slowed growth to the skilled labor shortage, not to any decline in the volume of work available.  The report states “the new construction employment figures, combined with recent data on job openings in the sector, make it clear that firms in many parts of the country are having a hard time finding enough workers to hire” and finds that job openings have hit a ten year high.

[1] Dodge Data & Analytics, Dodge Momentum Index Continues Ascent in August, available at: http://construction.com/about-us/press/Dodge-Momentum-Index-Continues-Ascent-in-August.asp.

[2] Dodge Data & Analytics, August Construction Starts Jump 21 Percent, available at: http://construction.com/about-us/press/August-Construction-Starts-Jump-21-Percent.asp.

[3] The Associated General Contractors of America, The Economic Impact of Construction in the United States and South Carolina, available at: http://files.agc.org/files/economic_state_facts/SCstim.pdf.

[4] The Associated General Contractors of America, The Economic Impact of Construction in the United States and North Carolina, available at: http://files.agc.org/files/economic_state_facts/NCstim.pdf.

[5] The Associated General Contractors of America, The Economic Impact of Construction in the United States and Georgia, available at:  http://files.agc.org/files/economic_state_facts/GAstim.pdf.

[6] The Associated General Contractors of America, Construction Employment Increases in Three-Fifths of Nation’s Metro Areas Between August 2015 and August 2016 As Industry Job Openings Hit 10-Year High, available at: https://www.agc.org/news/2016/09/28/construction-employment-increases-three-fifths-nation%E2%80%99s-metro-areas-between-august.

Smith v. D.R. Horton, Inc.: The End of Arbitration for Residential Developers and Builders in South Carolina?

Mark Twain famously wrote that the reports of his death were exaggerated.  Following the South Carolina Supreme Court’s decision in Smith v. D.R. Horton, Inc. last month,[1] you may have heard arbitration is dead for South Carolina residential builders.  In that decision, the Court found an arbitration agreement unconscionable and therefore unenforceable.  While the decision makes clear that South Carolina courts remain hostile to arbitration, reports of arbitration’s death are greatly exaggerated.  Despite the D.R. Horton decision, we believe residential builders can still use arbitration provisions so long as builders carefully draft the provisions to avoid the problems with the arbitration provision at issue in the D.R. Horton case.

When moving to enforce arbitration agreements, the most common challenge we see is an argument that an arbitration agreement is unconscionable.  For an agreement to be unconscionable, it must lack a meaningful choice by the party entering into it and contain oppressive, one-sided terms.  The D.R. Horton decision appears to make it easier for parties opposing arbitration agreements in contracts for the construction and sale of residences to establish both requirements.  First, the decision seems to create a presumption that such contracts do not provide a meaningful choice.  Second, the decision purports to expand courts’ consideration of whether oppressive, one-sided terms exist from just the arbitration terms to any related terms and to provide that disclaimers and limitation of liability provisions can be oppressive terms creating unconscionability.

For residential builders facing South Carolina’s construction defect litigation environment and the threat of class action suits, an enforceable arbitration provision can be crucial to reduce litigation costs.  The D.R. Horton decision certainly hurts residential builders, and the decision’s rationale and validity are questionable, but we believe the decision leaves room, through careful drafting, for residential builders to continue to use arbitration provisions.  We offer four suggestions for post-D.R. Horton arbitration provisions:

  1. Provide an option for purchasers to opt out of the arbitration provision in order to create a “meaningful choice,” but place the burden of opting out on the purchaser.
  1. Recognize that broad disclaimers and limitation of liability provisions are potentially unenforceable and may impact the enforceability of an arbitration provision. Draft narrow disclaimers and limitations that do not restrict the purchaser’s remedies exclusively to a limited warranty provided by the builder and do not eliminate the purchaser’s ability to recover direct damages.
  1. Locate the arbitration provision in a separate, distinct portion of the contract from all other provisions. Do not include any references in the arbitration provision to other portions of the contract.
  1. Include a severability clause providing that if a court finds any term unenforceable, the court is to sever that provision and enforce the remainder such that the parties’ intent to submit disputes to arbitration is still carried out.

Continue Reading

CBCA Provides Guidance on the Meaning of the Implied “Good Faith” Requirement in Government Contracts

Implied in every government contract is a requirement of “good faith and fair dealing” regardless of whether the written terms state such a requirement.  Therefore, contractors should be careful to avoid conduct that the written terms of the contract may not address but that would violate the implied good faith obligation.  The problem for contractors is the amorphous term “good faith” creates uncertainty as to what conduct violates the good faith obligation.  The Civilian Board of Contract Appeals provided helpful guidance in its recent decision in CAE USA, Inc. v. Department of Homeland Security.[1]

There a contractor claimed the government breached the implied duty of good faith, and the Board found it necessary to first define the duty of good faith before it could apply it to the contractor’s claim.  The Board noted that the duty of good faith “encompasses numerous concepts” and cannot be reduced to a single definition.

Continue Reading

The South Carolina Supreme Court Enforces a Contractual Waiver of Punitive Damages

We have all heard the saying that an ounce of prevention is worth a pound of cure.  This holds true for litigation arising from construction projects where it is much easier and cheaper to avoid a large judgment through careful contract drafting on the front end.  One important tool for doing so is a limitation of liability provision which is commonly found in construction contracts.

The South Carolina Supreme Court recently held in Maybank v. BB&T Corporation,[1] that such provisions can extend to prohibiting an award of punitive damages.  The potential for a punitive damages award in an amount many times a plaintiff’s actual damages is a serious concern for construction professionals, and the ability to contractually eliminate that risk is of great value.  However, as Maybank makes clear, a limitation of liability provision must be carefully drafted to provide the greatest likelihood that a court will enforce the provision.

Continue Reading

How to Avoid Financing State Projects, Also Known As Collecting Interest on Delayed Payments From the State of South Carolina

Unless a contractor wants to finance public construction projects, a contractor on a State project wants to collect interest on any late payments the State of South Carolina owes. South Carolina’s Prompt Payment Act permits contractors to recover interest on such late payments, but a recent decision shows contractors must carefully comply with the statute’s notice requirement to preserve this right.

In Consensus Construction & Consulting, Inc. v. Horry-Georgetown Technical College, Case No. 2015-003, (CPOC, March 15, 2016), the Chief Procurement Officer for Construction (“CPOC”) found the State wrongfully withheld payment from a contractor and then turned to the issue of whether the contractor was entitled to recover interest on the payment owed.  The State’s Standard Contract Modifications and Standard Supplementary Conditions replace the interest provisions in standard form contracts with a provision limiting the recovery of interest to only those situations where the State must pay interest under the Prompt Payment Act.  The CPOC held that the Prompt Payment Act applies to the State, but the contractor was not entitled to interest because of the Act’s notice requirement which provides:  “no interest is due unless the person being charged interest has been notified of the provisions of this section at the time the request for payment is made.”  S.C. Code Ann. § 29-6-50. Continue Reading

The Ongoing Tension Over Class Actions and Statistical Evidence and the Significance for Residential Developers and Builders

For developers and builders of single-family communities and multi-family housing, an increasingly common tactic is for plaintiffs’ counsel to assert a class action, a procedural device that allows one person to sue on behalf of related persons who are not parties to the lawsuit. Plaintiffs’ counsel then relies on statistical extrapolation from limited inspections of a few homes or units to prove liability and damages.  For example, a plaintiff’s expert may inspect three residences in a subdivision of one hundred single family homes, find water intrusion around windows in those three residences, and reach a conclusion that the windows and associated flashing must be removed and replaced in all one hundred homes.

The statistical extrapolation also occurs at each building inspected.  For example, a plaintiff’s expert may perform test cuts at three locations on a building, find water intrusion, and conclude the entire exterior veneer must be replaced.  In addition to making a statistically questionable generalized conclusion from a small sample, plaintiff’s experts also exhibit a selection bias by choosing for their sample those residences, units, or test locations they believe are most likely to exhibit damages.  Among the many problems this tactic creates for developers and builders are the weaknesses of using statistical methods in this manner and the inevitable pressure defendants feel to settle when faced with a large class action claim even if the plaintiff’s claims are very weak. Continue Reading

South Carolina Office of the State Engineer Publishes Notice of Intent to Adopt 2015 ICC Codes for State Buildings

The Office of the State Engineer proposed adopting the following building codes for state buildings which would take effect on July 1, 2016:

  • International Building Code (IBC), 2015 Edition
  • International Existing Building Code (IEBC), 2015 Edition
  • International Fire Code (IFC), 2015 Edition
  • International Fuel Gas Code (IFGC), 2015 Edition
  • International Mechanical Code (IMC), 2015 Edition
  • International Plumbing Code (IPC), 2015Edition
  • International Private Sewage Disposal Code (IPSDC), 2015 Edition
  • International Property Maintenance Code (IPMC), 2015 Edition,
  • International Residential Code for One and Two Family Dwellings (IRC), 2015 Edition
  • International Wildland – Urban Interface Code (IUWIC), 2015 Edition
  • International Code Council Performance Code (ICCPC), 2015 Edition
  • International Swimming Pool and Spa Code (ISPSC), 2015 Edition
  • National Electrical Code (NEC) [NFPA-70], 2014 Edition

South Carolina State Register, Vol. 40, No. 3, at 7 (March 25, 2016).

The new code editions will replace the 2012 edition of most of these codes as the applicable code for state buildings as set out in section 5.1.3(E) of the 2015 Manual for Planning and Execution of State Permanent Improvements. For a quick overview of the significant new provisions and modifications to existing provisions, see http://www.iccsafe.org/about-icc/periodicals-and-newsroom/key-changes-in-the-2015-international-codes-i-codes.

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