High Court affirms strict requirements
The South Carolina Supreme Court has issued a final ruling in a case that is significant for every liability insurer, and particularly for those that insure residential building contractors and subcontractors. The court’s July 26th opinion in Harleysville Group Insurance v. Heritage Communities, Inc. is significant because it changes prior law which allowed general reservations of rights. Also, it overturns prior law holding that coverage cannot be created by waiver and estoppel. In short, the Court imposed strict new requirements for reservation of rights letters. Although it is not entirely clear how the ruling will apply in future litigation, we are able to gather some guidance that will help providers.
Reservation of Rights Letters
- Letters “must give fair notice to the insured that the insurer intends to assert defenses to coverage or to pursue a declaratory relief action at a later date.”
- Insurers have “a duty to inform the insured of the need for an allocated verdict as to covered versus noncovered damages,” and that this may create a conflict of interest for defense counsel.
- Reservations “must be unambiguous; if it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured.”
- The court cited cases indicating that reservations must be made “prior to undertaking the defense” and the carrier “must specify in detail any and all bases upon which it might contest coverage in the future.”
Time on Risk
- The Supreme Court held that it was not an abuse of discretion for the trial court to refuse to conduct a building-by-building analysis of time on risk because a general verdict had been returned in the underlying case. As a corollary, the finding that the time on risk began on the date the first certificate of occupancy was issued at each project was upheld.
- The court upheld the use of the date of the last site visit prior to trial by the plaintiff’s expert as the date the time on risk ended.
- The court held that loss of use must be allocated by time on risk in the same manner as physical damage.
- The court held that punitive damages are covered under standard liability policies, and they are not subject to time on risk allocation.
Effect of a General Verdict in the Underlying Case
- The court held that insurers are entitled to a time on risk allocation even if a general verdict was rendered in the underlying case.
- In the final opinion, the court did not rely on the alternate holding that the insurer failed to obtain an allocation between covered and non-covered damages, as did the initial opinion. However, the court noted that this finding was made in the underlying case. The court provided no guidance as to the procedure by which such findings should be made.
For insurance providers operating in South Carolina, a review of reservation of rights letters is warranted. In that review, insurers should seek advice from coverage counsel, and to update letters when new information becomes available. Insurers should also be prepared to ask trial courts for special verdict forms so jurors can allocate verdicts between covered and non-covered damages, and forecast this action in their reservation of rights.
Brent M. Boyd, Tim J. Newton and Wesley B. Sawyer practice with the construction and coverage teams at Murphy & Grantland in Columbia, SC. The law firm defends businesses and professionals in broad variety of civil matters before State and Federal Courts.