Court Opinion

ID: 8296066
Source: CourtListenerOpinion
Date Created: 2022-10-17 11:03:40.279599+00
Date Added: 2024-06-11T16:44:03.790044
License: Public Domain

ACTING JUSTICE PLEICONES:
I respectfully dissent and would reverse and remand to the special referee with instructions.
In my view, the critical dates necessary to the determination of the merits here are these:
May 2003: Magnolia North POA sues Heritage
December 2003: Riverwalk POA sues Heritage
December 2003-January 2004: Harleysville informs Heritage it will defend under a reservation of rights
November 10, 2005: L-J, Inc. v. Bituminous Fire & Marine Ins. Co., 366 S.C. 117, 621 S.E.2d 33 (2005) becomes final. Holds that faulty workmanship that damages only the work itself is not an “occurrence” within the meaning of a CGL policy.
January 2009: Riverwalk verdict
May 2009: Magnolia North verdict
October 29, 2009: Auto Owners Ins. Co. v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009) becomes final. Holds that progressive damage to other materials as the result of subcontractor’s faulty workmanship is “property damage” and therefore a covered occurrence under CGL policy, and interprets two policy exclusions.
A. Reservation of Rights
The majority finds Harleysville’s notices of its reservation of rights insufficient because they (1) failed to notify the insureds of the particular grounds upon which it might dispute coverage; (2) did not advise of the need to allocate damages between covered and non-covered losses; and (3) did not *360inform the insureds that Harleysville would seek a declaratory judgment if there were adverse jury verdicts. I note four things at the outset: (1) the majority cites no South Carolina authority that requires this type of information be included in a reservation of rights letter; (2) these letters were sent almost two years before L-J became final in November 2005, and more than eight months before the initial L-J opinion was filed in August 2004, at a time when ‘occurrence’ and ‘property damage’ definitions were unsettled; (3) the letters were sent more than five and a half years before Newman held that ‘progressive’ damages to other materials were property damage, and interpreted two standard CGL policy exclusions; and (4) the reservation of rights letters were sent by Harleysville to its sophisticated insured, Heritage Builders, and not to the POAs who now purport to contest the sufficiency of these notices.
Unlike the majority, I would hold that the POAs lack standing to challenge the sufficiency of the reservation of rights letters. While the majority recognizes that permitting this type of third party challenge is the exception rather than the rule, they offer no explanation of the “specific circumstances” or “unique circumstances” that distinguish this case from any other beyond, apparently, the developer’s bankruptcy. Further, they support the decision to uphold the Special Referee’s standing ruling by citing two cases, each of which I find distinguishable. In both Transamerica Ins. Co. v. Int’l Broad. Corp., 94 F.3d 1204 (8th Cir. 1996) and Stoneridge Dev. Co., Inc. v. Essex Ins. Co., 382 Ill.App.3d 731, 321 Ill.Dec. 114, 888 N.E.2d 633 (2008), the third party’s right to stand in the shoes of the insured was predicated on an equitable estoppel theory, in Transamerica where the allegation was that the third party had been induced to sign a waiver based upon the insurance company’s misrepresentation to him and in Stoner-idge based upon an allegation that the insurance company was acting under an undisclosed conflict of interest. Insofar as I can discern, there is no claim here that the POAs could prevail on a claim of equitable estoppel against Harleysville. In my opinion, these POAs lack standing to challenge the sufficiency of the reservation of rights letters.
Were I to reach the merits, I would And the reservation of rights letters adequate. In support of my conclusion, I quote *361from a letter sent by Harleysville (“HMIC”) on January 23, 2004:
RESERVATION OF RIGHTS
This letter is not intended to waive any of HMIC’s rights under any HMIC insurance policy or at law. HMIC continues to reserve it [sic] rights as set forth in its prior reservation of rights, and as set forth herein, including but not limited to the following issues:
1) Whether property damage or bodily injury was caused by an occurrence as defined by any policy or policies and happened during an HMIC policy period;
2) Whether notice was provided to HMIC in compliance with the notice provision of the policy or policies;
3) Whether the cooperation clause of any policy or policies has been complied with;
4) Whether the applicable limits of any and all applicable primary or excess policies of insurance have, in fact, been exhausted;
5) Whether or not any exclusion applies to preclude coverage under any policy or policies; and
6) Any additional coverage defenses which may arise during the investigation of this matter.
The pleadings seek punitive damages. HMIC reserves the right to disclaim coverage for these since under all of your policies, they would not arise from an “occurrence,” do not fit the definition of “bodily injury” or “property damage,” and/or were “expected and intended” within the meaning of exclusions in the policies.
If there is available to you coverage from any other insurance carrier or source in addition to that provided by HMIC, you should immediately notify the carrier or source of all the facts and circumstances surrounding this matter, and that you have been named as a defendant in this lawsuit. Please notify HMIC of the name and address of any such other insurance carrier, and of the policy number under which this additional coverage is available to you. Nothing contained in this letter should be deemed a waiver of the terms and conditions of the HMIC policy. HMIC expressly *362reserves the right to rely upon any term or condition of the insurance contract or any other ground which may be found to limit or preclude coverage.
In the event that it is determined that there is no coverage for this action under the HMIC policy, HMIC expressly reserves the right to recover the amounts incurred in the defense of this action from you or any of your other insurers that may be liable for these costs.
Please advise us of any information that you have that you believe may affect our determination concerning the coverage available under the HMIC policy.
HMIC’s position is based upon the facts which have been made available to it to date. HMIC expressly reserves the right to modify its determination concerning the potential for coverage under this policy if the information developed during our investigation of this claim warrants the modification.
In my opinion, the majority’s conclusion—that this language was insufficient to put the builder on notice, and its suggestion that an insurance company must explain its position or its reasons in order to reserve its rights, or must specify which types of damages it might dispute—is unwarranted. This is especially so when one considers these letters and conversations took place between sophisticated commercial entities long before L-J had settled (for a time) the meaning of the terms “occurrence.” Further, as the majority acknowledges, it was approximately four years later that the Court finally adopted “the basic concept ... that the cost of repairing faulty workmanship is not covered ... but resulting property damage beyond defective work product itself is” in Newman, supra. Finally, I find nothing in the punitive damages reservation of rights language that distinguishes it from the language quoted above-indeed, that section merely recites certain defined terms from the policy itself.
I would reverse the Special Referee’s finding that the POAs have standing to challenge the sufficiency of the reservation of rights letters, and, were I to reach the merits, his conclusion that Harleysville did not effectively reserve its rights. To the extent the majority relies upon Newman to suggest Harleys-ville is “at fault in not seeking an allocation of covered *363damages,” I point out the verdicts in Riverwalk (January 2009) and in Magnolia North (May 2009) predate Newman (October 2009) by at more than five months. Moreover, there is no suggestion how Harleysville could have intervened in these lawsuits and asserted a defense against coverage without creating an impermissible conflict of interest in violation of established South Carolina law. See Sims v. Nationwide Mut. Ins. Co., 247 S.C. 82, 145 S.E.2d 523 (1965). In my view, nothing in the general verdicts bars Harleysville from now litigating its liability under its reservation of rights letters.
For the reasons given above, I would allow Harleysville to litigate its liability, including any liability for the punitive damages award, in these declaratory judgment actions. I would also reverse and remand the allocation of damages as any “time on risk” analysis is necessarily affected by the proper allocation of damages, and a determination of their “progression.”
I respectfully dissent.