Last week, the South Carolina Supreme Court issued an opinion that is likely to heavily influence the fields of construction coverage law and construction litigation in South Carolina. The case, Harleysville Group Ins. V. Heritage Comms., Inc., Op. No. 27698 (S.C. Sup.Ct. field Jan. 11, 2017), arises out of the construction of two condominium complexes in Myrtle Beach, South Carolina. The complexes were constructed by Heritage Communities between 1997 and 2000, during which time various Heritage entities had liability policies through Harleysville. The last Harleysville policy lapsed in 2001, after which Heritage was uninsured and, ultimately, went out of business entirely.
When Harleysville received notice of the lawsuits against it, it agreed to assume Heritage’s defense under what it believed to be a full reservation of rights. Following general verdicts in favor of the Plaintiffs in the underlying cases, Harleysville filed a declaratory judgment action seeking a determination that there was no coverage for the losses, or, in the alternative, requesting that the court determine which portions of the general verdicts were covered damages. The case was referred to a Special Referee, who found that Harleysville failed to properly reserve its right to contest coverage as to the underlying damages constituting faulty workmanship because the reservation of rights letters were not sufficiently specific to put the insureds on notice of Harleysville’s specific defenses.
On appeal, the Supreme Court agreed with the Special Referee. The Supreme Court held that although the letters identified the particular insured entities, the lawsuits at issue, the allegations against the insureds in the Complaint, the policy numbers, the policy periods, and nine to ten pages of various policy terms relating to, among other issues, the insuring agreement, Harleysville’s duty to defend, and a number of policy exclusions and definitions, the letters lacked sufficient specificity to properly reserve Harleysville’s right to contest coverage, except as to punitive damages. The Supreme Court noted both the “cut-and-paste approach” to the policy provisions in the reservation of rights letter and the fact that, despite the inclusion of these provisions, “the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage.” The Supreme Court also noted that Harleysville’s letters did not “expressly put its insureds on notice that it intended to litigate the issues of whether any damages resulted from acts meeting the definition of occurrence, whether any damages occurred during the applicable policy period, what damages were attributable to non-covered faulty workmanship, and whether certain damages resulted from intentional acts by the insured and were thus excluded.”
The court also rejected Harleysville’s contention that subsequent oral reservations were sufficient to put the insureds on notice, without definitively determining whether oral representations may be sufficient in other circumstances. Thus, the court concluded that the reservation of rights letters were no more than a “general warning” and were “too imprecise to shield” Harleysville. Finally, the court made note of the more than six-month delay between notice of the lawsuit and the issuance of Harleysville’s reservation of rights letters, but also held that the issue was not raised by either party and, therefore, not preserved for review.
We are still unpacking the full meaning of this decision, not only for reservation of rights letters, but for construction law in general. In addition to the reservation issue, the Supreme Court also issued rulings affecting recovery for punitive damages under a liability policy, the effects of the use of a general verdict form on subsequent coverage litigation, and the proper time-on-the-risk analysis for damages, including loss of use and punitive damages, among other rulings. Thus, it is likely that this decision will continue to reverberate through the fields of construction coverage and litigation in South Carolina for years to come. Stay tuned for a more detailed analysis of this case in Copeland, Stair, Kingma & Lovell LLP’s next installment of its quarterly construction newsletter, “The Critical Path.”