In two posts earlier this year—South Carolina May No Longer Hold Insurers’ Reservations and The Insurer’s Mixed-Coverage Burden—we told you about an important decision issued by the South Carolina Supreme Court in Harleysville Group Insurance v. Heritage Communities, Inc. Those posts were written shortly after the court issued its original opinion on January 11, 2017. But on July 26, 2017, the court issued a new opinion replacing the original. So what has changed? Not much … and that’s a good thing for policyholders.
As a quick reminder, Harleysville involved claims of defective construction and water damage at two condo complexes. Condo owners and their condo associations (the owners) sued the developer, and the developer sought defense and indemnification under policies issued by Harleysville. Harleysville provided a defense—subject to a “full reservation of rights”—against the owners’ lawsuits. After the appointed defense counsel conceded liability for negligent construction, juries returned multi-million dollar verdicts against the developer. Harleysville then filed a declaratory judgment action against the developer, arguing that it owed no duty to indemnify the developer for those verdicts.
In our earlier posts, we described two important aspects of the original Harleysville decision. First, the court held that Harleysville’s reservations of rights letters were too vague to reserve Harleysville’s right to contest coverage; in other words, Harleysville was prevented from raising any policy exclusions or other potential limitations of coverage. Second, the court held that Harleysville had a duty to indemnify the developer for the entire general jury verdict, even though the verdict may have included uncovered damages. Neither of these holdings has changed.
Also unchanged are the court’s holdings that Harleysville’s reservations of rights had enough detail to reserve the right to challenge coverage for punitive damages; the Harleysville policies covered punitive damages (despite Harleysville’s challenge); and a pro rata, time-on-the-risk allocation applied to actual damages but not punitive damages.
The only substantive change is a new discussion of the owners’ standing. Harleysville argued that, because the owners were not parties to the insurance policies, they could not challenge the sufficiency of Harleysville’s reservations of rights letters. The court observed “that allowing a third party to challenge the adequacy of an insurer’s reservations of rights is the exception and not the rule.” However, the owners in Harleysville did have standing due to two “unique” facts. First, the developer was out of business and not defending itself against Harleysville’s declaratory judgment action. Second, the owners had final judgments against the developer, and the policies allowed the owners to sue Harleysville directly to recover those judgments. While the court does not describe what other “special circumstances” may be enough to allow an exception to the rule, this new aspect of the court’s decision is yet another coverage-friendly holding that makes Harleysville an even more powerful tool when fighting for coverage under South Carolina law.
If you are curious about exactly what the court changed in its new decision, we have created a detailed comparison document showing the court’s changes that you can review here.