Fourth Circuit Clarifies Coverage for Resultant Property Damage Versus Defective Work Under Owner-Controlled CGL Policies

Introduction

Houston Casualty Company v. Trident Construction Services, LLC is a 2025 Fourth Circuit decision arising from water-intrusion events at a luxury condominium development, The Gadsden, in Charleston, South Carolina. Acting as general contractor, Trident employed subcontractors whose defective stucco work allowed water to penetrate four units after severe weather. Facing approximately $613,000 in repair costs, Trident sought reimbursement under an owner-controlled commercial general liability (“CGL”) policy issued by Houston Casualty Company (“HCC”). When HCC reimbursed only $91,658.69—amounts it viewed as related to interior water damage—Trident claimed breach of contract and bad faith.

The district court granted summary judgment to HCC, holding that the bulk of Trident’s claim concerned non-covered costs to repair defective construction, economic losses, and “get-to” or “tear-out” expenses. On appeal, the Fourth Circuit affirmed that core conclusion but vacated the dismissal of Trident’s contractual and bad-faith counterclaims, remanding for consideration of whether other portions of the claim—i.e., costs tied to resultant property damage as opposed to faulty workmanship—may still be covered.

Summary of the Judgment

Coverage for Defective Work: Consistent with South Carolina precedent, the court held that replacing faulty stucco and related components is not “property damage caused by an occurrence.”
Economic & Tear-Out Costs: Consequential economic loss and costs incurred merely to access defective work are likewise outside the policy’s scope.
Potential Coverage for Resultant Damage: The panel found error in the district court’s failure to determine whether approximately $295,803 in claimed costs—arguably tied to interior water damage—are covered. Those expenses may fall within the policy’s grant if Trident can prove they are costs to repair otherwise sound property injured by water.
Disposition: Declaratory judgment for HCC affirmed in part; dismissal of Trident’s breach-of-contract and bad-faith counterclaims vacated and remanded for further proceedings.

Analysis

A. Precedents Cited

The Fourth Circuit’s reasoning draws heavily on South Carolina Supreme Court decisions interpreting standard CGL language:

L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 621 S.E.2d 33 (S.C. 2005) – held that defective workmanship, by itself, is a business risk not covered by a CGL policy.
Auto-Owners Ins. Co. v. Newman, 684 S.E.2d 541 (S.C. 2009) – recognized that resultant damage to non-defective property can be covered because an “occurrence” exists once faulty work causes unexpected physical injury to other property.
Crossmann Communities of N.C., Inc. v. Harleysville Mutual Ins. Co., 717 S.E.2d 589 (S.C. 2011) – clarified the Newman rule, emphasizing the need to distinguish between (i) costs to replace defective components (uncovered) and (ii) costs to repair collateral damage (potentially covered).
Bennett & Bennett Construction, Inc. v. Auto-Owners Ins. Co., 747 S.E.2d 426 (S.C. 2013) & Isle of Palms Pest Control Co. v. Monticello Ins. Co., 459 S.E.2d 318 (S.C. Ct. App. 1994) – reinforced that a CGL policy insures tort liabilities for property damage, not the insured’s contractual duty to make its own work conform to the contract.

By invoking this line of authority, the Fourth Circuit aligned its holding with state substantive law—essential in diversity jurisprudence—and confirmed that South Carolina’s bifurcated approach to construction defects continues to govern wrap-up CGL claims.

B. Legal Reasoning

Policy Language Controls – The court began with the grant of coverage: HCC must pay sums the insured is legally obligated to pay as damages because of “property damage” caused by an “occurrence.” Both terms are defined in standard ISO fashion.
No Occurrence for Pure Faulty Work – Following L-J, Inc., the negligent application of stucco did not, by itself, constitute an “accident”; it was the expected consequence of Trident’s contractual performance.
Resultant Damage Theory Survives – However, once water penetrated and damaged interior finishes, an “accident” arguably occurred, triggering the policy for that distinct injury.
Economic Loss & Tear-Out Exception – Costs incurred solely to remedy faulty work or to get access to it are treated as pure business risks, excluded implicitly because they do not involve injury to other property.
Premature Disposition of Counterclaims – Because HCC itself had labeled certain claimed amounts “potentially covered,” the district court erred in treating the entire controversy as resolved. The panel emphasized the insured’s right to develop evidence that those costs relate to resultant property damage, warranting further proceedings on breach and bad faith.

C. Impact

Owner-Controlled (“Wrap”) Programs: The decision is one of the first appellate opinions addressing defective work under a project-specific wrap policy in South Carolina. Contractors and project owners can expect insurers to continue applying the defective-work / resultant-damage dichotomy, even when the policy is purchased by the owner for the benefit of contractors.
Claims Handling & Bad Faith: Insurers that label portions of a claim “potentially covered” must meaningfully investigate or risk bad-faith exposure. The remand underscores that summary judgment is inappropriate where material facts remain about the nature of claimed expenses.
Pleading Strategy: Policyholders litigating in South Carolina federal courts should plead and segregate costs with precision, showing line-item connections to physical damage versus workmanship. The $295,803 spreadsheet Trident produced became the linchpin for reversal on the counterclaims.
Litigation on “Tear-Out” Costs: Although tear-out expenses are often argued as resultant damage, the Fourth Circuit solidified their status as uncovered if they relate merely to accessing defective work, not repairing separate consequential damage.
Judicial Economy: The opinion is a reminder that appellate courts will remand rather than decide coverage disputes in the first instance, emphasizing accurate district-court parsing of mixed claims.

Complex Concepts Simplified

Commercial General Liability (CGL) Policy: An insurance policy designed to protect businesses from liability for bodily injury or property damage to others. It is not a warranty of the insured’s workmanship.
Owner-Controlled Insurance Program (OCIP or “Wrap” Policy): A single insurance program covering all parties (owner, general contractor, subcontractors) on a construction project. Coverage disputes under a wrap are analyzed under the same policy language as a traditional CGL.
Occurrence: Defined in most CGL policies as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” An unexpected event that causes damage—not the deliberate act of construction itself.
Property Damage: (i) Physical injury to tangible property, or (ii) loss of use of tangible property that is not physically injured.
Resultant Damage: Damage to otherwise non-defective property arising from faulty workmanship (e.g., water ruining drywall after defective stucco allows intrusion). Often covered.
Defective Workmanship: The insured’s own faulty construction or installation work. Generally not covered because it is considered a “business risk.”
Tear-Out / Get-To Costs: Expenses to remove sound materials to reach and repair defective work. Under South Carolina law, these are usually excluded unless they repair separate property damage.
Bad Faith: A tort claim alleging an insurer’s unreasonable refusal to pay benefits due under a policy.

Conclusion

Houston Casualty Co. v. Trident Construction Services, LLC is significant for two reasons. First, it reaffirms South Carolina’s bright-line rule that a CGL policy does not insure the cost of fixing the insured’s own defective work or the purely economic consequences of that work. Second, it underscores that the policy can still cover damages stemming from resultant injury to other property—and that insurers must fairly evaluate such claims. By reversing the district court’s cursory dismissal of Trident’s counterclaims, the Fourth Circuit preserves a pathway for policyholders to recover for genuine property damage while protecting carriers from serving as de facto performance bonds. Future litigants should expect heightened scrutiny of cost allocations and robust discovery on what portions of a repair bill truly relate to “property damage” versus “faulty workmanship.” The decision thus provides a roadmap for courts, insurers, and contractors navigating the often-blurry line between covered and uncovered construction losses.