CGL Additional Insured Decision from Defective Construction in Myrtle Beach

In one of his earliest decisions as a newly appointed United States District Judge for the District of South Carolina, Judge Joseph Dawson waded into the complex world of additional insured insurance coverage for construction defect claims in Lendlease (US) Construction, Inc. v. National Fire Insurance Company of Hartford, No. 4:19-CV-959-JD, 2021 WL 4226164 (June 14, 2021). The decision was generally a straightforward application of commercial general liability insurance and additional insured law, but the decision deals with an all-too-common residential defect exclusion and also leaves one issue unanswered.

The decision concerns insurance coverage claims arising out of an underlying South Carolina state court construction defect case from Horry County, South Carolina. In the underlying state court action, the property owner sued three general contractors for defects in the design and construction of a mixed-used development of seven buildings in the Myrtle Beach area. The owner alleged the defective construction of exterior building components caused water intrusion and resulting damage to the buildings.

As part of the construction project, one of the general contractors entered into a contract with a roofing subcontractor which required the roofer to have commercial general liability (“CGL”) insurance and to name the general contractor as an additional insured (“AI”) on the CGL policy. The roofer’s CGL insurer issued a policy to the roofer with a blanket AI endorsement. The blanket AI endorsement provided AI coverage to any entity the roofer was contractually required to add as an AI. The AI endorsement limited the AI coverage to “liability due to your negligence specifically resulting from ‘your work’ for the additional insured” and excluded coverage for liability “resulting from the sole negligence of the additional insured.”

The general contractor filed a declaratory judgment action in federal court seeking a declaration that the roofer’s insurer must defend and indemnify the general contractor in the underlying state court action as an AI on the roofer’s CGL policies. The insurer moved for summary judgment contending the general contractor is not entitled to defense or indemnity as an AI.

The Court denied summary judgment on most of the insurer’s grounds on the basis that there were genuine disputes over the material facts regarding whether the underlying action involved defective work by the roofer and whether the roofer performed work during the policy period. However, the Court did grant summary judgment for the insurer under one of the two policies at issue because that policy contained a provision that if property damage occurs during more than one policy period, there is only coverage if the insured first knew of the damage during the policy period. The general contractor admitted it did not know of the property damage at issue in the underlying suit until years after the policy period.

Of note, one of the grounds on which the insurer moved for summary judgment was the policy’s inclusion of a “Residential Construction Defect” exclusion that barred coverage for claims arising out of defective residential construction where the claim was reported more than twelve months after the named insured completed its work. The decision does not contain any discussion as to why summary judgment was denied on this ground other than stating that there are genuine issues of disputed material facts. The decision seems to indicate the parties admitted that the claims were not reported until more than twelve months after the work was completed, so the disputed material facts must be as to some detail. Presumably, the Court found a disputed issue of material fact as to whether the exclusion applied because the development was a “mixed-use development” containing commercial and residential spaces.

The issue the order does not address is whether it would matter if the named insured, the roofer, knew of the property damage during the policy period but the additional insured general contractor did not know of the damage until years later. Whether the named insured knew of the damage during the policy period would seem to be an essential element in deciding whether that policy provision has been met, and it seems entirely possible that a named insured could know of property damage years before the additional insured general contractor. However, because the decision does not discuss the issue, there may have been no dispute on this issue and no reason to discuss it.