Senate Bill 431: Fixing the "Crossman" problem

Senate Bill 431, which has made its way over to the House, is one of those pieces of legislation that few understand but have a major impact upon an entire sector of the state's economy. Given the impact this issue has upon the state's construction industry, it merits a serious look at quick action by legislators.

The bill was pushed forward to address a recent state Supreme court ruling: Crossman vs. Harleysville. In this ruling, the court ruled that a construction company's general liability insurance policy was not intended to cover claims for poor workmanship and that this was supposed to be addressed by performance bonds.

The urge to engage in "trial lawyer/tort reform" spin over this issue should be suspended, because the issue is far more complicated than that (as many issues are). This is an issue which needs to be addressed - and Senate Bill 431 can help move towards that problem.

As someone who is involved in loss control and insurance issues for my employer, this is one of those issues I know at least a little something about, so if you need some help sleeping this afternoon, read on ...

Senator Glenn McConnell has explained in a video why he sponsored the bill, discussing the issues and his concerns. I agree with his views and concerns on this matter.

In South Carolina, construction companies carry insurance policies to protect themselves from business risks, including Workers Comp, auto insurance, property and general liability. They pay rates based on a combination of level of risks associated with the kinds of work they do as well as their record of claims. When there are claims, insurers provide legal counsel, experts to investigate the claims and when necessary, pay any settlements or amounts which are awarded to plantiffs.

For many years, general liability insurance policies were marketed in South Carolina as covering construction defects, general contractors paid millions in premiums for that coverage, and insurers handled claims which were filed against these policies. While the court's ruling in the Crossman case may have attempted to bring clarity to this issue, the unintended consequences have created a big mess.

The court's ruling left most construction companies without insurance coverage for claims made against past projects, forcing them to pay legal defense costs and any damages or settlements out of pocket. The potential consequences could be devastating for the state's construction industry.

With slump in the state's construction industry entering its fourth year, many companies are struggling to remain in business. In the current economy, the costs of defending against lawsuits would push many companies into bankruptcy and having to pay a major award could easily put many general contractors out of business.

For the property owner, this means that a now-uncovered contractor, if a judgment goes against them, could only pay to the value of their cash and assets. Once that's gone and the company ceased to exist, the chances of collecting any remaining balance due on a judgment would be slim to none.

The current economy has already seen a number of the state's construction companies bought by out-of-state and foreign companies. Bankrupting SC-based general contractors would allow them to expand their market share considerably for bargain-basement prices.

Contrary to some of the spin which has been put out there, resolving the situation created by the Crossman ruling wouldn't profit lawyers. In fact, the status quo would be a bonanza for trial attorneys who could flood courts with lawsuits seeking to recover premiums paid for insurance coverage that was disallowed by the Crossman ruling.

The Crossman issue calls for the clarification of what is considered general liability coverage and what is considered a performance bond. Senate Bill 431 may not be all the answer that's needed, but it's a needed step in the right direction.

The bill is currently in the House, where Representatives need to act quickly to address these issues before the Crossman ruling's unintended consequences do further damage to the state's already-fragile construction industry.

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