The South Carolina Supreme Court found that the Special Referee correctly determined that the insurer failed to reserve the right to contest coverage of actual damages and punitive damages under the CGL policies. Harleysville Group Ins. v. Heritage Communities, Inc., 2017 S.C. LEXIS 8 (S.C. Jan. 11, 2017).
Two developments, the Riverwalk and Magnolia North, were constructed between 1997 and 2000 by Heritage. After construction and sale of the units, the purchasers became aware of construction problems, including building code violations, structural deficiencies, and significant water-intrusion problems. In 2003, the property owners' associations (POAs) filed suit to recover damages for repairs to their homes.
During the construction period, Heritage maintained several liability policies with Harleysville with per-occurrence limits between $3 and $4 million on primary policies and between $9 and $13 million on the excess liability policies. Harleysville agreed to defend. Harleysville attempted to reserve rights by making generic statements of potential non-coverage coupled with furnishing most of the Heritage entities with copies (through a cut-and-paste method) of the policies.
At the outset of each trial, Harleysville's counsel for Heritage conceded liability, and in both trials, the trial court directed a verdict for the POA on the negligent construction cause of action. The only contested issue in each trail was the nature and extent of the damages resulting from the admitted negligent construction. In the Magnolia North case, the jury returned a general verdict for $6.5 million in tender damages and $2 million in punitive damages. In the Riverwalk suit, the jury returned a general verdict of $4,250,000 in actual damages and $250,000 in punitive damages in favor of the POA.
Harleysville then filed the present declaratory judgment actions to determine what portion of the judgments would be covered under the policies. Harleysville contended it had no duty to defend. Alternatively, Harleysville sought a determination on what portion of the general verdicts constituted covered damages. Harleysville argued it could only be responsible for that portion of the damages occurring during the period of time its policies provided coverage.
The matter was referred to a Special Referee, who held an evidentiary hearing in December 2011. The Special Referee found that the costs to remove and replace the faulty workmanship were not covered. But he held that it would be improper and purely speculative to attempt to allocate the juries' general verdicts between covered and non-covered damages. Therefore, the Special Referee ordered the full amount of the actual damages in the construction defect suits would be subject to Harleysville's duty to indemnify in proportion with its time on the risk. The Special Referee calculated Harleysville's pro rata portion of the progressive damages based on Harleysville's time on the risk. Lastly, the Special Referee found punitive damages were covered and that no policy exclusion applied to preclude coverage.
On appeal, the Supreme Court agreed with the Special Referee that the generic 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) was not sufficient. By having a duty to defend, the insurer gained the advantage of exclusive control over the litigation. It would be unreasonable to permit the insurer to not disclose potential bases for denying coverage. Here, despite policy references in the reservation of rights letters, there was no discussion of Harleysville's position as to the various provisions or explanation of its reasons for relying thereon. Because Harleysville did not effectively reserve the right to contest coverage, it was unnecessary for the court to address claims of error regarding various policy exclusions.
Harleysville argued it was not responsible for an award of punitive damages which indicated the jury found that Heritage's wrongdoing and the results therefrom were not accidental. The court disagreed. The policy did not unambiguously exclude punitive damages. Because policy language was construed in favor of the insured to include punitive damages, the court affirmed the Special Referee's finding that punitive damages were covered.
The court turned next to the Special Referee's allocation determinations for Harleysville's time on the risk. Harleysville contended the actual damages awarded for loss of use in the Riverwalk case should be deemed progressive in nature and, thus, included in the amount subject to allocation based on Harleysville's time on the risk. The court agreed and modified the Special Referee's Riverwalk calculation slightly to include allocation of the actual damages resulting from loss of use.
Harleysville further argued that punitive damages, like actual damages, were subject to allocation based on time on the risk. The court disagreed under the circumstances presented here and affirmed. The POAs presented evidence that despite knowledge of the ongoing construction problems, Heritage deliberately targeted its sales efforts toward elderly, out-of-state residents and marketed its condominiums on the basis of quality and luxurious amenities, such as swimming pools and tennis courts, that were never constructed. The POAs contended that this evidence demonstrated Heritage willfully and repeatedly sold improperly constructed condominiums to innocent purchasers and that such conduct justified the imposition of punitive damages.
The Special Referee rejected Harleysville's argument that punitive damages were likewise subject to time on the risk allocation, observing that the formula only applied to damages that were deemed progressive. Although the court was not creating a bright-line rule that punitive damages could never be subject to allocation based on time on the risk, the evidence here demonstrated that all of Heritage's reprehensible acts that justified the punitive damages took place entirely during the period of time Harleysville's policies were effective. Therefore, the Special Referee did not err in finding punitive damages were not subject to reduction based on the time on the risk multiplier in these cases.