L-J, Inc. v. Bituminous Fire and Marine Insurance Company, Opinion No. 25854 (SC 8/9/2004)

• Decision Date: 09 August 2004
• Docket Number: Opinion No. 25854.
• Parties: L-J, Inc. and Eagle Creek Construction Co., Inc., Transcontinental Insurance Company, The Home Indemnity Company and The Maryland Commercial Insurance Group, Plaintiffs, Of Whom The Home Indemnity Company is Respondent, v. Bituminous Fire and Marine Insurance Company, Petitioner.
• Court: South Carolina Supreme Court

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L-J, Inc. and Eagle Creek Construction Co., Inc., Transcontinental Insurance Company, The Home Indemnity Company and The Maryland Commercial Insurance Group, Plaintiffs Of Whom The Home Indemnity Company is Respondent, v. Bituminous Fire and Marine Insurance Company, Petitioner.

Opinion No. 25854.

Supreme Court of South Carolina.

Heard April 21, 2004.

Filed August 9, 2004.

ON WRIT OF CERTIORARI TO THE COURT OF APPEALS.

Appeal From Charleston County, Thomas J. Wills, Special Master, Circuit Court Judge.

REVERSED.

Charles E. Carpenter, Jr., Francis M. Mack, and S. Elizabeth Brosnan, all of Richardson, Plowden, Carpenter & Robinson, P.A., of Columbia, and John J. Piegore, of Sanchez & Daniels, of Chicago, Ill., for Petitioner.

I. Keith McCarty and Amanda R. Maybank, both of Pratt-Thomas, Epting & Walker, of Charleston, for Respondent.

George E. Mullen and Allison Burke Thompson, both of Mullen, Wylie & Seekings, of Charleston, for Amicus Curiae

CHIEF JUSTICE TOAL:

In this declaratory judgment action, this Court is asked to determine whether damage caused by the faulty workmanship of L-J, Inc. (Contractor) and its subcontractors on a road construction project at the Dunes West subdivision in Mt. Pleasant is covered under the commercial general liability (CGL) policy issued by Bituminous Fire and Marine Insurance Company (Bituminous). We hold that the damage was not caused by an "occurrence" as defined under the CGL policy, and therefore the damage is not covered.

Factual/Procedural Background

In 1989, Dunes West Joint Venture (Developer) hired the Contractor to perform site development work and construct roads for the Dunes West subdivision. The Contractor completed the work in 1990,¹ and by 1994, the roads had deteriorated such that the Developer sued the Contractor for breach of contract, breach of warranty, and negligence.

During the period from 1989 to 1996, various CGL insurance providers issued policies to the Contractor.² Bituminous underwrote a policy covering the period from 1990 to 1992.

In 1997, the Contractor and the Developer settled the 1994 lawsuit, whereby the Contractor agreed to pay the Developer $ 750,000. The Contractor sought indemnification from Bituminous and the other three insurers that issued CGL policies for the road construction project. Bituminous refused to indemnify the Contractor, while the other three issuers contributed $ 362,500 to the settlement amount.

Because Bituminous refused to pay, the Contractor and the three respondent insurers brought a declaratory judgment action seeking a contribution from Bituminous to the settlement amount, coupled with an indemnification for all defense costs. The circuit court referred the action, with finality, to a special master, who found that the damage to the roadway system was covered under the Bituminous policy. More specifically, the special master found that the damage constituted an occurrence under the Bituminous policy, and the "expected or intended" and "your work" exclusions did not apply to work performed on the Contractor's behalf by the subcontractor. Finally, the special master found that the CGL "policy years" ran from 1989 to 1996, and because Bituminous's policy covered the two-year period from 1990 to 1992, it owed the other carriers a two-year contribution valued at $103,571.42.

Bituminous appealed, raising the issues of whether there was an "occurrence" and whether the policy exclusions were triggered. The court of appeals, in a 2-1 decision, affirmed the special master, finding that the property damage was an "occurrence" and that the policy exclusions did not apply. L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 350 S.C. 549, 567 S.E.2d 489 (Ct. App. 2002).

This Court granted Bituminous's petition for certiorari to review the following issues:

I. Did the court of appeals err in finding that the premature road deterioration constituted an "occurrence" as defined by the CGL insurance policy?

II. Did the court of appeals err in finding that the premature road deterioration was neither expected nor intended from the standpoint of the Contractor?

III. Did the court of appeals err in finding that the "your work" exclusion restored coverage because the exclusion did not apply to work accomplished by a subcontractor?

Standard of Review

This is an action at law, and in an action at law tried before a judge, the findings of fact will not be disturbed unless no reasonable evidence supports the judge's conclusions. Townes Assocs. v. City of Greenville, 266 S.C. 81, 86, 221 S.E.2d 773, 775 (1976).

Law/Analysis

I. "Occurrence"

Bituminous asserts that the court of appeals erred in determining that the property damage resulting from the faulty grading and construction of the roads at Dunes West constituted an "occurrence" under its CGL policy with the Contractor. We agree.

Only four years after the Contractor finished construction of the Dunes West road system, the roads began to deteriorate, showing many signs of alligator cracking — a form of cracking that looks like alligator skin. Two witnesses testified in deposition as to the cause of the alligator cracking. The first deponent, Kenneth Humphries, testified that approximately 50% of the cracking was caused by insufficient road subgrade preparation due to the Contractor (1) failing to remove tree stumps from the subgrade and (2) insufficiently compacting the soft, wet clay in the subgrade. The remaining 50% cause of the cracking, in Humphries' opinion, came from an insufficiently thick road course, improper drainage, and excessive traffic.

The second deponent, L.G. Lewis, testified that moisture damage resulting from the Contractor's failure to provide an adequate drainage system was the primary cause of the road deterioration. The other causes, according to Lewis, included an inadequate "edge of curb detail and the increased frequency of heavy wheel loads on the pavement."

Bituminous's CGL policy, subject to certain exclusions, covers the following:

We 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....

This insurance applies to "bodily injury" and "property damage" only if:

(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"

The policy defines "occurrence" as follows:

9. "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

The policy defines "property damage" as follows:

12. "Property damage" means:

(a) Physical injury to tangible property ...

While the alligator cracking may have constituted property damage, we find that no "occurrence" took place as defined by the CGL contract. According to the deposition testimony, the only "occurrences" were various negligent acts by the Contractor during road design, preparation, and construction that led to the premature deterioration of the roads. Those negligent acts included: (1) a failure to prepare the subgrade by both failing to remove the tree stumps and failing to remove or compact the wet clay in the subgrade; (2) an improperly designed drainage system; (3) a thin road course, ill-prepared to handle heavy wheel loads; and (4) an improperly designed curb edge detail. We find that all of these contributing factors are examples of faulty workmanship causing damage to the roadway system only, which does not fall within the contractual definition of "occurrence" under Bituminous's CGL policy.

This finding is consistent with the court of appeals' decision in C.D. Walters Construction Co., Inc. v. Fireman's Ins. Co. of Newark, NJ, 281 S.C. 593, 596-597, 316 S.E.2d 709, 711-712 (Ct. App. 1984), in which the court found that a CGL insurance provider is not liable for an economic loss resulting from faulty workmanship alone. The court stated:

T]he accidental injury to property or persons substantially caused by his unworkmanlike performance exposes the contractor to almost limitless liabilities. While it may be true that the same neglectful craftsmanship can be the cause of both a business expense of repair and a loss represented by damage to persons and property, the two consequences are vastly different in relation to sharing the cost of such risks as a matter of insurance underwriting.

In this regard Dean Henderson has remarked:

The risk...