Legislation Regulating Coverage for Faulty Workmanship Cannot be Applied Retroactively

On January 26, 2011 the general assembly of the South Carolina legislature amended S.C. CODE ANN. § 38-61-70 to require all commercial general liability insurance policies to provide coverage for “property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.” Subsection (E) of the code made the amendment required faulty workmanship coverage to apply to both pending and future suits which involved involving commercial general liability policies issued in the past, currently in existence, or issued in the future.

The statutory amendment was recently challenged on constitutional grounds.

In Harleysville Mutual Ins. Co. v. State, 2012 WL 5870799 (S.C. Nov. 21, 2012), the South Carolina Supreme Court held the statute unconstitutional to the extent that it applied retroactively. The statutory amendment was found to unconstitutionally violate South Carolina’s Constitution’s Contract Clause. See, S.C. CONSTITUTION, Art. I., Section 4 stating that South Carolina shall pass no law impairing the obligation of contracts.

In doing so, the Court found that the statutory amendment substantially impaired the contractual relationship between insured and insurer by mandating that all CGL policies be legislatively amended to include a new statutory definition of occurrence and by applying the mandate retroactively. Although the Court held that it was within the South Carolina Legislature’s power to statutorily define the meaning of “occurrence,” the statutory amendment violated the Contract Clause when the Legislature applied the new statutory definition of occurrence retroactively so as to substantially impair preexisting contracts by materially changing their terms. The Court then held that the unconstitutional portion of the statutory amendment was to be severed thereby making the amendment only applicable to new contracts going forward after the statute’s effective date.