(Article from Insurance Law Alert, February 2017)
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The South Carolina Supreme Court ruled that an insurer’s reservation of rights was ineffective and that the policy provides coverage for punitive damages. Harleysville Grp. Ins. v. Heritage Comtys., Inc., No. 2013-001281 (S.C. Jan. 11, 2017).
Harleysville provided a defense to Heritage under a reservation of rights in underlying construction defect litigation. After verdicts were entered against Heritage in those suits, Harleysville filed a declaratory judgment action, alleging that it had no duty to indemnify Heritage. Alternatively, Harleysville sought apportionment of the underlying judgments. A Special Referee ruled that coverage was triggered because the juries’ general verdicts included some covered damages. The Referee further held that it would be improper and speculative to allocate the general verdicts between covered and non-covered damages. Therefore, he ordered full payment of the damages, but limited Harleysville’s obligation to its pro rata time on the risk. Lastly, the referee ruled that punitive damages are covered by the policies. The South Carolina Supreme Court affirmed.
The court ruled that Harleysville failed to properly reserve the right to contest coverage by sending generic denials of coverage, coupled with “a verbatim recitation of all or most of the policy provisions.” The court held that a valid reservation must explain the insurer’s position as to the policy provisions invoked therein. Here, the reservation letters failed to advise Heritage of the need for allocation between covered and non-covered losses, Harleysville’s intent to dispute “occurrence” and policy period issues, or a potential conflict of interest, among other things. The court also rejected Harleysville’s reliance on oral reservations, explaining that even assuming that oral reservations are permitted in South Carolina, the statements at issue fell short of the specificity required. However, the court ruled that the reservation of rights was sufficient with respect to one issue – punitive damages – for which a detailed basis for denial was provided.
Nevertheless, the court ruled that the policy covers punitive damages because it does not expressly limit coverage to actual or compensatory damages. The court explained that punitive damages may be awarded in South Carolina for gross negligence and that the record did not establish a finding of an intent to cause harm.
Finally, the court ruled that punitive damages are not subject to pro rata time-on-the-risk allocation, notwithstanding the availability of pro rata allocation for actual damages. The court reasoned that time-on-the-risk allocation “was developed as a means of apportioning actual, compensatory damages where the injury progressed over time.” Therefore, the “logic and policy considerations underlying the time-on-the-risk method may not as easily lend themselves to the application of this concept to punitive damages.” Notably, the court declined to establish a bright-line rule in this context and expressly limited its holding to the facts presented.