Guest Editorial by Henry W. Brown The Latest (but not the last) on CGL Coverage for Construction Defects in South Carolina I have the pleasure of writing this editorial for the inau- gural issue of the South Carolina Construction News. Our office has been involved with its sister publication in North Carolina. We have found it to be well worth the read, and we are pleased to be a part of its commencement in South Carolina. Few readers will be surprised that my topic is related to commercial general liability (CGL) insurance coverage for construction defects, given the recent South Carolina Supreme Court decision in Harleysville Mut. Ins. Co. v. South Carolina (Opinion 27189, Nov. 21, 2012). In 2011, South Carolina enacted legislation (Act 26) requiring all CGL policies, including policies issued before the legislation took effect, to provide coverage for damages resulting from defective work on construction projects. Act 26 also pro- vided a definition of the word “occurrence” within CGL poli- cies. The passage of Act 26 followed the decision in Crossmann Communities v. Harleysville Mut. Ins. Co., No. 26909, 2011 WL 93715 (S.C. Jan. 7, 2011), more commonly referred to as Crossmann I. By the time the challenge to Act 26 was heard and decided, Crossmann II, or Crossmann Communities v. Harleysville Mut. Ins. Co., No. 26909, 2011 WL 3667598 (S.C. Aug. 22, 2011), had eliminated most of the differences. In Harleysville, the Court ruled that the retroactive effect of the legislation was unconstitutional, but held that the provisions of the legislation may apply prospectively to CGL policies issued on or after May 17, 2011. The Court’s opin- ion, in essence, was that (i) the legislature cannot retroac- tively redefine the terms of a negotiated contract, insurance or otherwise; (ii) there is a serious separation of powers issue only if the legislature concludes it wants to change the holding of a final opinion of the Court; and (iii) the lan- guage of gtCrossmann II the latest opinion of the Court and Act 26 are basically identical, so there is no harm to any pol- icy affected by it. You may fairly ask, “Why are you writing about it, then?” The answer is that Act 26 and the opinion in Harleysville continue to miss the mark in resolving this issue, because they both attempt to analyze coverage for defective work in the definition of “occurrence” instead of in the exclusions (and the exceptions to the exclusions) in the CGL policy. This is the origin of the “intellectual mess” described by Justice Kittredge in Crossmann I. The mess and the search for its resolution will remain as long as the word “occur- rence” is the focal point for determining whether the in- sured’s own defective work is covered under the standard CGL policy. To fully understand my premise requires a thorough re- view of the history of the standard ISO policies in effect since 1966 and their evolution in light of concurrent changes in the law. Such a review is too lengthy for this editorial. However, it can be summarized as follows: 14 – February / March 2013 — The South Carolina Construction News The 1966 version of the ISO policy, by use of an exclu- sion, did not cover any damages to the insured’s own work. The 1973 ISO policy provided essentially the same simple exclusion that voided coverage for damage caused both by the insured’s own defective work and the work for which the insured was responsible through subcontracts. Around 1976, the ISO created a broad form endorsement, for which the insured paid additional premium. That endorsement created two time periods—one before and one after com- pleted operations—and property damage occurring before completed operations was excluded if the damage was to work performed by or “on behalf of” the insured. The term “on behalf of” was dropped from the exclusion for com- pleted operations, thereby allowing coverage for subcon- tracted work when the damage occurs during the time frame that is defined as completed operations. It can be argued that this change was in response to the recognition of a builder’s post-sale liability and the resulting risk of the insured’s ability to obtain recourse from its subcontractors upon the discovery of defects years after completion. Ex- tending coverage for defective work during completed op- erations was accomplished by amending the exclusions, not by a new definition of “occurrence.” In 1986 the ISO dropped the idea of a base policy and the broad form, and a single policy was issued that changed the words “on behalf of” to “subcontractor.” The ISO concept, as created by the 1986 amendment and com- bination of the broad form and base policy has continued for the last 26 years, with endorsements available to delete the subcontractor exception to the exclusion. The South Carolina legislature has now, by statute, in- jected the concept of coverage for the insured’s own work into the definition of “occurrence.” However, if subsequent court opinions can focus on the exclusions as the ultimate resolution of what the policy intends to cover, then there is an opportunity for clarity and predictability. In addition, the marketplace can set the coverage at the time of the nego- tiations for purchase by use of the appropriate endorse- ments, rather than that issue being resolved by the arguments of lawyers after the damage has occurred and been discovered. Henry Brown, a Columbia-based attorney with Nexsen Pruet, practices primarily in the areas of construction litiga- tion, commercial litigation, mediation and alternate dis- pute resolution. He is a member of the South Carolina Bar and Richland County Bar Association. He can be reached at 803-771-8900 or hbrown@nexsenpruet.com.