LJ, INC. v. Bituminous Fire and Marine

• Decision Date: 03 June 2002
• Docket Number: No. 3505.,3505.
• Court: South Carolina Court of Appeals
• 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 Transcontinental Insurance Company, The Home Indemnity Company and The Maryland Commercial Insurance Group, Respondents, v. BITUMINOUS FIRE AND MARINE INSURANCE COMPANY, Appellant.

350 S.C. 549

567 S.E.2d 489

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 Transcontinental Insurance Company, The Home Indemnity Company and The Maryland Commercial Insurance Group, Respondents, v. BITUMINOUS FIRE AND MARINE INSURANCE COMPANY, Appellant.

No. 3505.

Court of Appeals of South Carolina.

Heard April 9, 2002.

Decided June 3, 2002.

Rehearing Denied August 22, 2002.

Charles E. Carpenter, Jr., Francis M. Mack and S. Elizabeth Brosnan, all of Richardson, Plowden, Carpenter & Robinson, of Columbia, for appellant.

Sean K. Trundy and I. Keith McCarty, both of Pratt Thomas, Epting & Walker, of Charleston, for respondents.

GOOLSBY, J.

In this declaratory judgment action, Bituminous appeals the circuit court's order that it indemnify Eagle Creek Construction Co., Inc., for a portion of a settlement L-J, Inc., and Eagle Creek reached with Dunes West Joint Venture, a South Carolina General Partnership. We affirm.

FACTUAL/PROCEDURAL BACKGROUND

On July 14, 1989, Eagle Creek Construction Co., Inc., a subsidiary of L-J, Inc. contracted with Dunes West Joint Venture to develop the site and construct the roads for the Dunes West subdivision at a cost of $3,632,458.75. Eagle Creek hired subcontractor, U.S. Construction Co., Inc., to clear, grub, rough grade, fine grade, and construct the subbase and base for roads within the project. U.S. Construction, in turn, hired Site Prep, Inc., and Destiny Construction, Inc., to perform some of these tasks. Eagle Creek also subcontracted for Tidelands Utilities Co., Inc., to construct and install a water drainage system. Another subcontractor, Sanders Brothers Construction, Inc., paved the roads.

The subcontractors completed the roads in 1990. By 1994, the road surfaces had deteriorated and failed. Testimony indicated drainage problems and an inadequate subgrade due primarily to tree stumps left in the roadbed. The stumps prevented the soil from being adequately compacted and allowed surface water and moisture to seep into the road base, deteriorating the pavement.

Dunes West filed an action in 1994 against Eagle Creek and L-J alleging inter alia breach of contract, breach of warranty, and negligence. L-J and Eagle Creek filed a third-party complaint against several of the project designers and subcontractors engaged to work on the Dunes West construction.

In 1997, L-J settled with Dunes West and agreed to pay $750,000.00. L-J requested that its four insurers from 1989 until 1996 indemnify it for the settlement amount. During the time period in which Dunes West alleged the damage to the roads occurred, L-J was insured by several different commercial insurers: Transcontinental Insurance Company, Bituminous Fire and Marine Insurance Company, The Home Indemnity Company, and The Maryland Commercial Insurance Group. All insurance companies except Bituminous agreed to indemnify L-J for a portion of the settlement amount. The insurers paid $362,500.00, and the project designers and subcontractors paid $387,500.00.

L-J, Eagle Creek, Transcontinental Insurance, The Home Indemnity, and The Maryland Commercial Insurance brought a declaratory judgment action against Bituminous. L-J and Eagle Creek sought indemnification for all defense costs and settlement payments. The three insurance carriers also sought contribution from Bituminous for defense costs and any settlement payment made in the Dunes West litigation. The matter was referred to a special master with finality, and a hearing was held on April 27, 2000. The special master found the allegations of negligence set forth in Dunes West's complaint met the definition of "occurrence" under Bituminous's policy with L-J. The special master further found the failure of the road did not constitute damage "expected or intended" by Eagle Creek. The special master noted Bituminous's argument at the hearing that Dunes West's complaint alleged property damage to Eagle Creek's work "arising out of it and included in the products completed operations hazard," which is excluded from coverage under exclusion (l) of the policy. The special master, however, found the policy exclusion was inapplicable because the exclusion specifically provides it does not apply to damages resulting from work performed by a subcontractor and all the parties agreed the work to the roads was exclusively performed by subcontractors.

The special master awarded the other carriers a proportionate contribution from Bituminous. The special master found that the years 1989 to 1996 represented a total of seven "policy years," and that Bituminous provided coverage to L-J for two years. Taking the total $362,500.00 paid by the other three carriers and dividing it by seven years of coverage, the special master determined that each carrier owed $51,785.71 per policy year. Thus, Bituminous owed the other carriers $103,571.42 for two years of coverage.

Bituminous appeals.

DISCUSSION

Bituminous argues the master erred in finding it had a duty to indemnify L-J because: (1) faulty workmanship cannot constitute an "occurrence" under the policy; (2) the policy excludes claims for faulty workmanship; and (3) exclusion (l) did not "extend" coverage for faulty workmanship.

"Questions of coverage and the duty of a liability insurance company to defend a claim brought against its insured are determined by the allegations of the third-party's complaint.¹ The underlying complaint alleged inter alia negligence, breach of contract, and breach of warranty. L-J seeks a declaratory judgment to compel indemnification under an insurance policy. A declaratory judgment action to determine coverage under an insurance contract is an action at law.² In an action at law, referred to a master for entry of final judgment, the appellate court will not disturb the findings of fact unless there is no evidence that reasonably supports them.³ Our scope of review in this case is therefore limited to correcting errors of law.⁴

Bituminous first contends the master erred in finding there was an "occurrence" under the policy because faulty workmanship can never constitute an "occurrence."

Insurance policies are subject to the general rules of contract construction. The Court must give policy language its plain, ordinary, and popular meaning. When a contract is unambiguous, clear, and explicit, it must be construed according to the terms the parties have used. Furthermore, exclusions in an insurance policy are always construed most strongly against the insurer.⁵

We thus look to the language of the policy to determine whether the deterioration and failure of the roads from repeated water runoff is an "occurrence." The policy provides coverage for property damage caused by an "occurrence" and defines "property damage" as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss shall be deemed to occur at the time of the "occurrence" that caused it.

There is no coverage for property damage that is "expected or intended from the standpoint of the insured." The policy defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." In this case, it is undisputed that repeated exposure to surface water runoff caused the pavement to fail. The pavement is tangible property. The policy provides coverage for continuous and repeated exposure to harmful conditions causing damage to tangible property. Under the clear language of the policy, the repeated exposure to water is an "accident" and therefore an "occurrence."

It is further undisputed L-J did not perform the work on the sub-road. The work was performed by subcontractors. There is no evidence L-J knew of the problems with the subroad until the surface pavement damage became apparent years later. Because L-J did not improperly construct the sub-road or have knowledge of the improper construction, there is no evidence that L-J expected or intended that the pavement would fail. Under the plain and unambiguous language of the policy, there is an "occurrence."⁶

Bituminous argues, however, that the policy language regarding the definition of "occurrence" should be construed in light of the business risk doctrine.

The business risk doctrine is the expression of a public policy applied to the insurance coverage provided under commercial general liability policies. Reduced to its simplest terms, the risk that an insured's product will not meet contractual standards is a business risk not covered by a general liability policy.

* * *

Significantly, under the business risk doctrine, harm to the property of a third party caused by the insured's defective work is not excluded from coverage.⁷

Relying on this doctrine, Bituminous disregards the damage to the pavement and contends that faulty workmanship alone is at issue and that there was therefore no "occurrence."⁸ Bituminous also argues that faulty workmanship can never be an "occurrence" under a comprehensive general liability (CGL) policy.

We agree that faulty workmanship, standing alone, does not constitute an "accident" and cannot therefore be an "occurrence." In Isle of Palms Pest Control Co.,⁹ this court construed identical policy definitions and found that faulty workmanship alone is not covered but faulty workmanship that causes an accident is covered. In that case, the court found that later termite damage to property caused by Isle of Palms's negligent failure to identify the presence of termites during its inspection was an "accident." The court noted "[h]ad there been preexisting termite damage, but no active termite infestation, the Purchaser's claim against Isle of Palms would...