In an opinion filed 1/11/17 that should be a cautionary tale for ALL carriers, the South Carolina Supreme clarified the rules for properly reserving the right to contest coverage, for determining whether punitive damages, and for determining the proper time period for coverage allocation in a construction defect case.
We issued the following Carrier/Client Alert regarding Harleysville Group Ins. v. Heritage Communities, Inc., Opinion #27698, filed 1/11/17 (search here):
South Carolina Supreme Court Issues Significant Insurance Coverage Opinion
Harleysville Group Ins. v. Heritage Communities, Inc., filed 1/11/17
- The sufficiency of Reservation of Rights letters
- Coverage for Punitive Damages
- Starting and ending events for a Time on Risk allocation of damages
Facts: Carrier (Harleysville) insured various Heritage entities which were sued for construction defects. Carrier defended the claims under a reservation of rights. Verdicts were returned against the Heritage entities for $4.5M actual damages and $1M in punitives. Carrier then filed a declaratory judgment action to determine the amount of covered damages.
- The Reservation of Rights letters were not specific enough for Carrier to now contest coverage: “[G]eneric denials of coverage coupled with furnishing the insured with a verbatim recitation of all or most of the policy provisions (through a cut-and-paste method) [are] not sufficient.”
- “Where the insurer fails to adequately reserve the right to contest coverage, the insurer may be precluded from doing so.”
- The reservation of rights here were insufficient because they:
- Failed to notify the insureds of the particular grounds upon which it might dispute coverage (simply pointing to or repeating policy provisions is not sufficient; the carrier must explain specifically how they apply to this claim);
- Did not advise the insured that some damages may be covered while others may not, and, therefore, that the carrier might seek a decision which would allocate damages between covered and non-covered losses; and
- Did not inform the insureds the Carrier would seek a declaratory judgment if there were adverse jury verdicts.
- Punitive Damages were covered:
- “Because the policies’ language did not unambiguously exclude punitive damages, the Special Referee applied well-established law and construed the policy language in favor of the insured, finding Harleysville was required to indemnify Heritage for punitive damages.”
- The Intentional Act exclusion did not bar coverage for punitive damages: “For an act to be excluded from coverage under the policy exclusion for losses ‘expected or intended from the standpoint of the insured,’ this Court has held that ‘not only the act causing the loss must have been intentional but the results of the act must also have been intended.’ “
- Punitive damages are not necessarily subject to a time on risk allocation. They are based on the bad acts, not the progression of damage. Therefore, to the extent a carrier seeks allocation of coverage for punitive damages, there must be a determination of when the bad acts occurred (i.e., within the coverage period or not), and the amounts attributed to each bad act.
- Time on Risk allocation – Start & End periods:
- The damage period can begin at the first exposure to injurious conditions (e.g., the first rain event after improper installation of building components), although actual decay/deterioration may not occur until later.
- The damage period ends when the building components are “sufficiently damaged to require replacement, notwithstanding any further progression and decay” (i.e., not when the replacement actually occurs).
For more information or questions regarding insurance coverage, construction defect, or related issues in South Carolina, or if you want to be added to our Carrier/Client Alerts, please contact me at firstname.lastname@example.org.