803 S.E.2d 288
S.C.2017Background
- Two consolidated declaratory-judgment actions: Harleysville (insurer) seeks to limit indemnity for jury verdicts against its insureds (Heritage entities) in construction-defect suits for two Myrtle Beach condominiums (Magnolia North and Riverwalk).
- Underlying suits (filed by property owners’ associations and a class action) alleged negligent construction, breach of warranty, and breach of fiduciary duty; juries returned large general verdicts including actual and punitive damages.
- Harleysville defended under reservation of rights (sent form letters and controlled defense), then sued to declare what portion of the general verdicts it must indemnify and argued indemnity limited to its time on the risk for progressive damages.
- Special Referee: found some damages covered (progressive water intrusion), held Harleysville’s reservation letters (except as to punitive damages) were insufficient so Harleysville was precluded from contesting coverage of actual damages, applied Crossmann’s time-on-the-risk apportionment to progressive damages, and held punitive damages covered and not time-allocated.
- Supreme Court: affirms Special Referee for Magnolia North; affirms as modified for Riverwalk (includes loss-of-use in time-on-the-risk calculation and upholds coverage for punitive damages; rejects insurer’s attack on reservation letters except re: punitive damages).
Issues
| Issue | POAs' / Plaintiff's Argument | Harleysville / Defendant's Argument | Held |
|---|---|---|---|
| Standing to challenge insurer’s reservation-of-rights | POAs may challenge adequacy because they hold final judgments and insureds are defunct | POAs lack privity; only insured can assert reservation deficiencies | Court: POAs may challenge here given Heritage’s insolvency and POAs’ final judgments; standing upheld |
| Sufficiency of reservation-of-rights letters | Letters were inadequate (vague) — insurer failed to specify coverage defenses or need for allocation | Insurer’s form letters + some oral communications sufficed to reserve rights | Court: insurer’s letters (cut-and-paste policy excerpts + generic statements) were insufficient except as to punitive damages; insurer precluded from contesting coverage of actual damages |
| Coverage for punitive damages under CGL insuring clause | Punitive damages fall within “those sums” the insurer must pay if arising from covered occurrence | Punitive damages are not "accidental" and thus not an "occurrence"; insurer argues no duty to indemnify | Court: punitive damages are covered—the progressive occurrence (water intrusion) triggers coverage and policy language does not unambiguously exclude punitive damages |
| Applicability of "expected or intended" exclusion to punitive damages | POAs: punitive damages resulted from non‑intentional negligence; exclusion not met | Harleysville: punitive awards show insured intended or expected harm; exclusion applies | Court: insurer bears burden to prove exclusion; record supports Special Referee’s factual finding that insured did not intend resulting damage—exclusion does not bar punitive damages |
| Allocation of progressive damages — time-on-the-risk & general verdicts | POAs: general unallocated verdicts preclude parsing; insurer must pay full verdicts | Harleysville: progressive damages and punitive damages should be prorated by insurer’s time on the risk per Crossmann; loss-of-use and punitive damages allocated | Court: applies Crossmann time-on-the-risk to progressive actual damages; includes loss-of-use in Riverwalk allocation; refuses to apply time allocation to punitive damages here because insurer offered no evidence wrongful acts occurred outside its policy periods; general verdicts may be reduced by time-on-the-risk rather than parsing covered vs non-covered amounts |
Key Cases Cited
- Crossmann Communities of N. Carolina, Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717 S.E.2d 589 (clarifies "property damage" vs faulty workmanship; endorses time-on-the-risk for progressive damage)
- Auto Owners Ins. Co. v. Newman, 385 S.C. 187, 684 S.E.2d 541 (progressive water intrusion can be covered property damage; faulty workmanship itself not covered)
- L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 366 S.C. 117, 621 S.E.2d 33 (faulty workmanship that only damages the work itself is not covered)
- Boston Gas Co. v. Century Indem. Co., 454 Mass. 337, 910 N.E.2d 290 (discusses administrative/scientific impracticability of allocating progressive damage and supports time-on-the-risk approach)
- Carroway v. Johnson, 245 S.C. 200, 139 S.E.2d 908 (policy language construed to include punitive damages where language not limited to compensatory damages)
- Duke v. Hoch, 468 F.2d 973 (reservation-of-rights must be specific; general warning insufficient)