ERIE INSURANCE V. BUILDERS MUTUAL INSURANCE
June 19, 2015
In Erie Insurance v. Builders Mutual Insurance, the Court of Appeals (on May 21, 2013) held that a liability insurer which covered the builder on the date of the failure (a collapse of a slope damaging the house and personal property) was liable for defense costs and indemnifying the builder. This case is important because it addresses the date of manifestation in North Carolina, especially in construction defect cases.
In this case, the plaintiff (Erie Insurance) covered the builder at the time of construction, and the defendant (Builders Mutual) covered the builder at the time of the failure (collapse of slope, resulting in damage to house and personal property). The homeowner sued the builder. Erie defended under a reservation of rights, but Builders Mutual refused to defend. The case was settled, and Erie sought reimbursemet of defense costs and the amount of the settlement.
The court first ruled that there was an accident (or "occurrence"), because the builder did not intend or expect the damage to occur, even though arguably the damage was the result of faulty workmanship. This holding is important because many cases hold that faulty workmanship is not an accident, and therefore these cases tend to confuse different parts of the CGL policy. Some cases focus on the defective work, holding that this is not an accident, without regard to whether the subsequent failure is an accident. These cases also seem to confuse the issue of whether there is "property damage" with whether there is an "accident"; and they also seem to confuse the "occurrence" issue with several exclusions in the CGL policy (e.g. "Your work" and "your product" exclusions).
The court then addressed the "manifestation" issue; i.e. determining which policy provided coverage. The court provided an excellent analysis of this issue, and correctly concluded that the second policy covered the loss, because the damage occurred during this period. The court had to reach this ruling despite a 2004 case from the Court of Appeals (Hutchinson v. Nationwide) which arguably held that the triggering event is the defective construction, rather than the date of the occurrence (or damage).
Regarding the cost of defense, the court remanded because they were not sufficiently pled (as the case was decided on a Rule 12(c) motion). The court held that the Defendant was liable for the settlement ($170,000), pursuant to North Carolina law holding that an insurer which wrongfully refuses to defend is liable for the amount of the settlement (if reasonable and in good faith). The Court of Appeals was bound by prior precedent on this point, but this is "bad law" in North Carolina, as the insurer should not be liable for non-covered claims (e.g. portions of the claim excluded by the "your work" or "your product" exclusions), and there is no logical causal connection between the failure to defend and the coverage of the claims.
John Kirby has written and lectured extensively on insurance coverage in North Carolina, including construction defect claims, and he has litigated such claims.