While not a South Carolina decision, a recent decision from a federal court in Illinois is a small victory for both homeowners and builders everywhere in that it is one more jurisdiction recognizing “rip-and-tear” damage as covered by a commercial general liability (CGL) insurance policy. The issues of whether rip-and-tear damage triggers insurance coverage under a CGL policy and whether a CLG policy covers rip-and-tear damage has not yet been decided by South Carolina’s appellate courts. However, the Illinois decision, Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp., is one more authority supporting coverage for this type of damage that South Carolina courts can rely on when they address this issue.
What is rip-and-tear damage?
Constructing any building involves placing successive layers of materials on top of previously installed components. The framing is installed on top of the foundation. The insulation is installed in the framing. The drywall is installed to the framing. This process of layering additional components onto the existing structure continues until the construction reaches the exterior and finished interior surfaces of walls. Because buildings are a system of components layered one on top of another, performing repair work to address any construction damage or malfunction usually involves removing other surrounding components. For example, if the framing in a wall was improperly installed, the wall coverings, the drywall or exterior veneer, will have to be removed to access and repair the framing. Damage to other building components required to access and repair an improperly installed building component is referred to as “rip-and-tear” damage.
How rip-and-tear damage relates to insurance coverage for construction defects?
Courts, including South Carolina courts, have held that the cost of repairing or replacing improper work itself is not covered by a CGL policy. Courts reason that the need to repair or replace improper work is not an unforeseen event for the insured contractor and thus, is not covered by the policy. However, courts, including South Carolina courts, have held that the cost of repairing other parts of a building damaged due to improper work is covered by the policy. For example, if an insured contractor builds a brick wall wrong and the improper construction results in water getting into the wall system and rotting the framing, the cost of repairing or replacing the brick wall may not be covered by a CGL policy, but the cost of repairing the damaged framing will be covered.
Rip-and-tear damage comes into play when the improper installation of a building component has not damaged another building component but that other building component will be damaged when the improperly installed component is repaired or replaced. Using the brick wall example, if the replacement of the brick wall will result in damage to and the need to also replace the existing weather barrier behind the brick wall, that damage would be considered a rip-and-tear damage. Courts across the United States have had to decide whether such rip-and-tear damage is covered by the policy and whether there is any insurance coverage if that rip-and-tear damage is the only damage to the building other than the defective work. South Carolina’s appellate courts have not yet addressed either issue.
The Chicago Flameproof Decision
In the Chicago Flameproof declaratory judgment action, a federal district court in Illinois held that rip-and-tear damages were covered property damages under a CGL policy and created insurance coverage even despite the lack of any other property damage. The facts of the case were that a lumber supplier was to provide one type of flameproof lumber but instead supplied a different type of flameproof lumber that did not comply with the requirements for the building. When the building owner discovered that non-compliant flameproof lumber had been installed, the owner required the non-compliant lumber be removed and replaced with compliant lumber. The contractor who installed the lumber and had to replace it brought suit against the lumber supplier. The lumber supplier in turn tendered the claim to its insurance carrier, and the insurance carrier filed the Chicago Flameproof declaratory judgment action seeking a declaration that there was no coverage for the lumber supplier.
In the contractor’s suit against the lumber supplier, the contractor alleged that the removal of the non-compliant lumber damaged the exterior walls, wiring, and insulation, i.e., rip-and-tear damage. Those rip-and-tear damages were the only alleged property damage.
The Illinois federal court held that the rip-and-tear damage triggered the CGL policy’s coverage and was covered by the policy. The court reasoned that property damage within the policy’s coverage existed because there were “actual allegations of physical alterations to property other than the insured’s product.”
Impact of Decision
While the Chicago Flameproof decision is just one decision by a lower court among many decisions across the country addressing rip-and-tear coverage issues, the decision is a recognition by another court that any rip-and-tear damage triggers coverage and is covered under the terms of the standard CGL policy. It is important to recognize the positive impact of the rip-and-tear damage decision for both builders and homeowners. Builders will now see an increase in the scope of insurance coverage protecting them when mistakes occur during construction. Homeowners will see increased access to insurance proceeds as a source for repairing defective construction work when defective work causes only rip-and-tear damages.