• South Carolina Supreme Court Upholds Statute Requiring Builders' General Liability Policies to Cover Faulty Workmanship
  • January 31, 2013 | Author: George B. Hall
  • Law Firm: Phelps Dunbar LLP - New Orleans Office
  • The South Carolina Supreme Court recently upheld a state law requiring builders’ general liability policies to cover damages from faulty workmanship, but ruled that the statute cannot be applied retroactively to policies executed before the law’s May 17, 2011 effective date. Harleysville Mut. Ins. Co. v. State, 2012 WL 5870799 (S.C. Nov. 21, 2012).

    Following an earlier South Carolina Supreme Court decision that a standard CGL policy does not cover property damage resulting from faulty workmanship, the South Carolina General Assembly passed Act No. 26, which expanded the definition of the term “occurrence” to include property damage or bodily injury resulting from faulty workmanship. The insurer benefiting from the favorable Supreme Court ruling challenged the new law on grounds that (1) the legislature did not have authority to pass a law overturning the Court’s ruling due to the separation of powers doctrine, (2) the law unfairly targeted the insurance industry in violation of the equal protection clause of the state and federal constitution and (3) violated its rights under the contract clauses of both the state and federal constitution.

    The South Carolina Supreme Court noted that because it had reversed itself on the issue in a subsequent decision, the legislature had not retroactively overruled the Court’s interpretation of a statute, and therefore held there was no violation of the separation of powers doctrine. The Supreme Court held that the legislature had a “rational basis” for enacting the legislation, noting that the insurance industry was already highly regulated, but that insurance coverage for construction liability itself lacked “clarity” and was the subject of “significant litigation, particularly with respect to whether construction defects constitute ‘occurrence.’” Accordingly, it found no equal protection violation. Finally, while noting that it was generally within the legislature’s power to define the term “occurrence,” the Supreme Court held it would violate the contract clauses of both the federal and state constitutions to apply this definition retroactively as it would substantially impair pre-existing contracts by materially changing their terms.  It thus held that the legislation applied only prospectively to contracts executed on or after the act’s effective date of May 17, 2011.