Builders Mutual v. Island Pointe, LLC

The Supreme Court of South Carolina
Ex Parte:
Builders Mutual Insurance Company and Nationwide
Mutual Insurance Company, Appellants,
In Re:
Palmetto Pointe at Peas Island Condominium Property
Owners Association, Inc., and Jack Love, Individually,
and on behalf of all others similarly situated, Plaintiffs,
v.
Island Pointe, LLC; Leonard T. Brown; Complete
Building Corporation; Tri-County Roofing, Inc.;
Creekside, Inc.; American Residential Services, LLC
d/b/a Rescue Rooter Charleston; Andersen Windows,
Inc.; Atlantic Building Construction Services, Inc. n/k/a
Atlantic Construction Services, Inc.; Christopher N.
Union; Builder Services Group, Inc. d/b/a Gale
Contractor Services; Novus Architects, Inc. f/k/a SGM
Architects, Inc.; Tallent and Sons, Inc.; WC Services,
Inc., CRG Engineering, Inc.; Certainteed Corporation;
Kelly Flooring Products, Inc. d/b/a Carpet Baggers and
John Doe 1-60, Defendants,
Tri-County Roofing, Inc., Third-Party Plaintiff,
v.
Cornerstone Construction and Mark Malloy d/b/a
Cornerstone Construction; Gutter Works, Inc. and
Michael L. Segars d/b/a Gutter Works; Mr. Gutter;
Litchfield Seamless Gutters & Windows, LLC and
Thomas Litchfield d/b/a Litchfield Seamless Gutter;
Miracle Siding, LLC and Wilson Lucas Sales d/b/a
Miracle Siding, LLC; Mark Palpoint a/k/a Micah
Palpoint; Elroy Alonzo Vasquez; and Chris a/k/a John
Doe 61, Third-Party Defendants.
And
Complete Building Corporation, Inc., Third-Party
Plaintiff,
v.
Alderman Construction; Stanley's Vinyl Fence Designs;
Cohen's Drywall; and Mosley Concrete, Third-Party
Defendants,
Of Whom Palmetto Pointe at Peas Island Condominium
Property Owners Association, Inc. and Jack Love,
Individually, and on behalf of all others similarly
situated, Tri-County Roofing, Inc., and WC Services, Inc.
are the Respondents.
Appellate Case No. 2019-000238
ORDER
After careful consideration of Respondents' petition for rehearing, the Court grants
the petition for rehearing, dispenses with further briefing, and substitutes the
attached opinion for the opinion previously filed in this matter.
s/ Donald W. Beatty C.J.
s/ John W. Kittredge J.
s/ Kaye G. Hearn J.
s/ John Cannon Few J.
s/ George C. James, Jr. J.
Columbia, South Carolina
August 12, 2020
THE STATE OF SOUTH CAROLINA
In The Supreme Court
Ex Parte:
Builders Mutual Insurance Company and Nationwide
Mutual Insurance Company, Appellants,
In Re:
Palmetto Pointe at Peas Island Condominium Property
Owners Association, Inc., and Jack Love, Individually,
and on behalf of all others similarly situated, Plaintiffs,
v.
Island Pointe, LLC; Leonard T. Brown; Complete
Building Corporation; Tri-County Roofing, Inc.;
Creekside, Inc.; American Residential Services, LLC
d/b/a Rescue Rooter Charleston; Andersen Windows,
Inc.; Atlantic Building Construction Services, Inc. n/k/a
Atlantic Construction Services, Inc.; Christopher N.
Union; Builder Services Group, Inc. d/b/a Gale
Contractor Services; Novus Architects, Inc. f/k/a SGM
Architects, Inc.; Tallent and Sons, Inc.; WC Services,
Inc., CRG Engineering, Inc.; Certainteed Corporation;
Kelly Flooring Products, Inc. d/b/a Carpet Baggers and
John Doe 1-60, Defendants,
Tri-County Roofing, Inc., Third-Party Plaintiff,
v.
Cornerstone Construction and Mark Malloy d/b/a
Cornerstone Construction; Gutter Works, Inc. and
Michael L. Segars d/b/a Gutter Works; Mr. Gutter;
Litchfield Seamless Gutters & Windows, LLC and
Thomas Litchfield d/b/a Litchfield Seamless Gutter;
Miracle Siding, LLC and Wilson Lucas Sales d/b/a
Miracle Siding, LLC; Mark Palpoint a/k/a Micah
Palpoint; Elroy Alonzo Vasquez; and Chris a/k/a John
Doe 61, Third-Party Defendants.
And
Complete Building Corporation, Inc., Third-Party
Plaintiff,
v.
Alderman Construction; Stanley's Vinyl Fence Designs;
Cohen's Drywall; and Mosley Concrete, Third-Party
Defendants,
Of Whom Palmetto Pointe at Peas Island Condominium
Property Owners Association, Inc. and Jack Love,
Individually, and on behalf of all others similarly
situated, Tri-County Roofing, Inc., and WC Services, Inc.
are the Respondents.
Appellate Case No. 2019-000238
Appeal from Charleston County
Jennifer B. McCoy, Circuit Court Judge
Opinion No. 27970
Heard February 11, 2020 – Filed May 13, 2020
Re-Filed August 12, 2020
AFFIRMED
John L. McCants, of Rogers Lewis Jackson Mann &
Quinn, LLC, of Columbia, for Appellant Builders Mutual
Insurance Company; and J.R. Murphy and Timothy J.
Newton, both of Murphy & Grantland, P.A., of
Columbia, for Appellant Nationwide Mutual Insurance
Company.
Justin O. Lucey and Joshua F. Evans, both of Justin
O'Toole Lucey, P.A., of Mt. Pleasant, for Respondents
Palmetto Pointe at Peas Island Condominium Property
Owners Association, Inc. and Jack Love; Steven L.
Smith, Zachary J. Closser, and Samuel M. Wheeler, all of
Smith Closser Wheeler P.A., of Charleston, for
Respondent Tri-County Roofing, Inc.; and James A.
Atkins, of Clawson & Staubes, LLC of Charleston for
Respondent WC Services, Inc.
Mark S. Barrow and Christy E. Mahon, both of Sweeny,
Wingate & Barrow, P.A., of Columbia, and Steven M.
Klepper, of Kramon & Graham, P.A., of Baltimore,
Maryland, all for Amici Curiae Hartford Fire Insurance
Company, Hartford Casualty Insurance Company, and
Hartford Underwriters Insurance Company.
Frank L. Eppes, of Eppes & Plumblee, P.A., of
Greenville, and Jesse A. Kirchner, Michael A. Timbes,
and Thomas J. Rode, all of Thurmond Kirchner &
Timbes, P.A., of Charleston, all for Amicus Curiae South
Carolina Association for Justice.
JUSTICE KITTREDGE: In this case, several insurance companies (the Insurers)
appeal the denial of their motions to intervene in a construction defect action
between a property owners' association (the Association) and a number of
construction contractors and subcontractors (the Insureds). The underlying
construction defect action proceeded to trial, resulting in a verdict for the
Association.
We find the Insurers were not entitled to intervene as a matter of right, and, further,
the trial court did not abuse its discretion in denying them permissive intervention.
Nonetheless, as we will discuss further, the Insurers most assuredly have a right to
a determination of which portions of the Association's damages are covered under
the commercial general liability (CGL) policies between the Insurers and the
Insureds. As such, we reaffirm our prior holdings allowing insurance companies to
contest coverage in a subsequent declaratory judgment action.
I.
Palmetto Pointe at Peas Island (Palmetto Pointe) is a condominium development
located in Charleston County near Folly Beach. Following Palmetto Pointe's
construction, the Association became aware of damage to the buildings, which they
attributed to the Insureds. As a result, the Association filed a construction defect
action against the Insureds for negligence, breach of implied warranties, and unfair
trade practices and sought $17.5 million in actual and consequential damages to
repair or replace various components of the condominiums. The Insureds each had
one or more applicable CGL policies with the Insurers, and, pursuant to the CGL
policies, the Insurers provided independent counsel to the Insureds to defend them
in the action, subject to a reservation of rights to later contest whether the damages
awarded in the action were covered by the CGL policies. The Insurers were not
made parties to the construction defect action and did not direct the Insureds'
defense.
Approximately three years later, at the tail end of the discovery period, the Insurers
individually motioned to intervene in the action "for the limited purpose of
participating in the preparation of a special verdict form or a general verdict form
accompanied by answers to interrogatories for [] submission to the jury during
trial." The Insurers disavowed any desire to be formally named as a party to the
action, citing the likely prejudice to themselves and their clients (the Insureds).1
However, by motioning to intervene, the Insurers essentially sought to force the
Association and the jury to itemize the damages against each Insured, which was
not otherwise required. In doing so, the Insurers hoped to ensure the jury would
determine which portions of the damages were covered by the applicable CGL
policies, thus obviating the need for the subsequent declaratory judgment action.
The trial court denied the motions to intervene, and the Insurers appealed to the
1
See, e.g., Rule 411, SCRE (prohibiting the admission of evidence tending to show
a person was insured against liability); Crocker v. Weathers, 240 S.C. 412, 424,
126 S.E.2d 335, 340–41 (1962) ("The long-established rule of our decisions is that
the fact that a defendant is protected from liability in an action for damages by
insurance shall not be made known to the jury. The reason of the rule is to avoid
prejudice in the verdict, which might result from the jury's knowledge that the
defendant will not have to pay it.").
court of appeals. We subsequently certified the Insurers' appeals pursuant to Rule
204(b), SCACR.
II.
"The decision to grant or deny a motion to join an action pursuant to Rule 19,
SCRCP, or intervene in an action pursuant to Rule 24, SCRCP, lies within the
sound discretion of the trial court." Ex parte Gov't Emps. Ins. Co. (Ex parte
GEICO), 373 S.C. 132, 135, 644 S.E.2d 699, 701 (2007). On appeal, this Court
will not disturb the trial court's decision absent a manifest abuse of discretion that
results in an error of law. Id. (quoting Jeter v. S.C. Dep't of Transp., 369 S.C. 433,
438, 633 S.E.2d 143, 145 (2006)). Moreover, the error of law must be so opposed
to the trial court's sound discretion "as to amount to a deprivation of the legal rights
of the party." Id. (citation omitted).
III.
The Insurers sought to intervene as a matter of right under Rule 24(a)(2), SCRCP.
This Court has explained an entity seeking intervention as a matter of right under
Rule 24(a)(2) must necessarily:
(1) establish timely application; (2) assert an interest relating to the
property or transaction which is the subject of the action; (3)
demonstrate that it is in a position such that without intervention,
disposition of the action may impair or impede its ability to protect
that interest; and (4) demonstrate that its interest is inadequately
represented by other parties.
Berkeley Elec. Coop., Inc. v. Town of Mt. Pleasant, 302 S.C. 186, 189, 394 S.E.2d
712, 714 (1990). With respect to the second element, we have compared having an
interest in the action with constitutional standing, in that the intervenor must be a
"real party in interest." See Ex parte GEICO, 373 S.C. at 138–39, 644 S.E.2d at
702–03 (describing a real party in interest as one who has a real, actual, material,
or substantial interest in the subject matter of the action, as distinguished from one
who has only a nominal, formal, or technical interest in, or connection with, the
action (citing Bailey v. Bailey, 312 S.C. 454, 458, 441 S.E.2d 325, 327 (1994)));
see also Restor-A-Dent Dental Labs., Inc. v. Certified Alloy Prods., Inc., 725 F.2d
871, 874 (2d Cir. 1984) (explaining the interest required for intervention as a
matter of right must be "direct," "immediate," and "significantly protectable,"
rather than "remote or contingent" (citations omitted)). As our precedent makes
clear, the Insurers are not "real parties in interest" to the construction defect action
and, thus, cannot satisfy the four-part test espoused in Berkeley Electric. See Ex
parte GEICO, 373 S.C. 136, 138–39, 644 S.E.2d at 701, 702–03.2
Because the Insurers have not shown they have a direct interest in the construction
defect litigation for Rule 24(a)(2) purposes, we hold the Insurers have not met the
requirements to intervene as a matter of right. See Berkeley Elec., 302 S.C. at 189,
394 S.E.2d at 714 (listing an interest in the action as one of four elements required
for intervention as a matter of right). As a result, we affirm the trial court's denial
of the Insurers' motions to intervene as a matter of right. See Restor-A-Dent, 725
F.2d at 876 ("We are frank to admit that we are also influenced here by practical
considerations that seem significant. A refusal to find a right under Rule 24(a) still
leaves open the possibility in an appropriate case of permissive intervention by an
insurer under Rule 24(b) for the purpose sought here, while a contrary holding
would open the door wider to such intervention regardless of any unfortunate
effect on the course of the main action. Moreover, a variety of factors properly
bear on whether the type of intervention sought here should be allowed, and the
trial judge's determination should ordinarily be accorded great weight. Application
of subsection (b) of Rule 24 rather than subsection (a) recognizes these
considerations, in view of the explicit emphasis in the former on undue delay or
prejudice in the main action . . . .").
IV.
Turning to permissive intervention, Rule 24(b), SCRCP, provides:
Upon timely application anyone may be permitted to intervene in an
action . . . (2) when an applicant's claim or defense and the main
action have a question of law or fact in common. . . . In exercising its
discretion the court shall consider whether the intervention will
unduly delay or prejudice the adjudication of the rights of the original
2
A significant number of courts discussing intervention as a matter of right under
similar factual scenarios found the insurance companies' interests were contingent,
rather than direct, for similar reasons. See, e.g., Am. Home Prods. Corp. v. Liberty
Mut. Ins. Co., 748 F.2d 760, 766 (2d Cir. 1984); Nieto v. Kapoor, 61 F. Supp. 2d
1177, 1194 (D.N.M. 1999); Davila v. Arlasky, 141 F.R.D. 68, 70–73 (N.D. Ill.
1991); Fid. Bankers Life Ins. Co. v. Wedco, Inc., 102 F.R.D. 41, 44 (D. Nev.
1984); Universal Underwriters Ins. Co. v. E. Cent. Ala. Ford-Mercury, Inc., 574
So. 2d 716, 723 (Ala. 1990) (citing U.S. Fid. & Guar. Co. v. Adams, 485 So. 2d
720, 721–22 (Ala. 1986)); Donna C. v. Kalamaras, 485 A.2d 222, 223 (Me. 1984).
parties.
An intervenor seeking permissive intervention must: (1) establish timely
application; (2) assert a claim or defense that has a question of law or fact in
common with the underlying action; and (3) prove his participation in the
underlying action will not delay or prejudice the adjudication of the rights of the
original parties. "A reversal of a denial of permissive intervention has been termed
'so unusual as to be almost unique.'" S.C. Tax Comm'n v. Union Cty. Treasurer,
295 S.C. 257, 262, 368 S.E.2d 72, 75 (Ct. App. 1988) (quoting New Orleans Pub.
Serv., Inc. v. United Gas Pipeline Co., 732 F.2d 452 (5th Cir. 1984)).
The record is replete with facts rationally supporting the trial court's denial of the
Insurers' motions for permissive intervention. We therefore conclude the Insurers
have failed to prove the trial court abused its discretion. See Ex parte GEICO, 373
S.C. at 135, 644 S.E.2d at 701. In affirming the trial court, we need look no further
than the third factor—the delay or prejudice to the original parties. There are facts
in the record supporting the trial court's decision that the Insurers' intervention
would (1) unnecessarily complicate the construction defect action, including
altering the Association's burden of proof and possibly delaying the trial, and (2)
create a conflict of interest for the Insureds' counsel, who were supplied to them by
the Insurers.
A.
As to the complication of the construction defect action, we note that, absent the
Insurers' intervention, the Association has no need to parse its damages into
categories corresponding to the coverage provided in a CGL policy.3 Rather, as
one of the Insurers conceded, the Association could properly request and receive a
general verdict against all of the Insureds. However, with the addition of special
jury interrogatories and verdict forms, the Association—as the plaintiff, with the
3
Generally, a CGL policy does not cover the cost of repairing or removing faulty
workmanship; however, the policy does cover the cost of repairing additional,
consequential damage caused by the faulty workmanship, such as water intrusion
caused by negligent construction. See S.C. Code Ann. § 38-61-70(B)(2) (2015);
Crossman Cmtys. of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 49–50,
717 S.E.2d 589, 593–94 (2011) ("In sum, we clarify that negligent or defective
construction resulting in damage to otherwise non-defective components [is
covered under a CGL policy], but the defective construction would not [be
covered].").
burden of proof—would have a heightened burden to itemize its damages into
Insurer-defined categories which the Association may not have intended to present
to the jury. The Association's counsel here specifically bemoaned this exact
problem. According to counsel, at the time the Insurers motioned to intervene
(three years into the action and at the end of discovery), the parties had conducted
"in excess of 40 depositions wherein the question[s that would be] relevant to the
special verdict [or] special interrogatory . . . weren't asked."
Further, in a subsequent declaratory judgment action, the Insureds and the Insurers
have the collective burden to show which portions of the general verdict are
covered under the CGL policies. See Gamble v. Travelers Ins. Co., 251 S.C. 98,
103, 160 S.E.2d 523, 525 (1968) (explaining the initial burden to prove that a loss
is covered under an insurance policy is on the insured, and once the insured has
done so, the burden shifts to the insurer to prove that an exclusion applies to defeat
coverage); see also Helena Chem. Co. v. Allianz Underwriters Ins. Co., 357 S.C.
631, 642 n.5, 594 S.E.2d 455, 460 n.5 (2004) (stating that, when relevant, the
insured bears the burden to prove an exception to the exclusion applies in order to
restore coverage). Allowing the Insurers to intervene in the construction defect
action in an attempt to segregate covered and non-covered damages would
effectively place that burden of proof on the Association. Through the trial court's
decision to leave all coverage issues to a subsequent declaratory judgment action,
the burden of proof concerning the coverage dispute will remain with the Insureds
and the Insurers respectively, where it properly belongs.
Likewise, even if the Insurers were permitted to intervene, it would only grant
them the ability to request special jury interrogatories and verdict forms under
Rule 49(a) and (b), SCRCP. However, it does not require the trial court use the
requested documents at all, much less without modification. See Thomas v.
Henderson, 297 F. Supp. 2d 1311, 1325 n.16 (S.D. Ala. 2003); Plough, Inc. v. Int'l
Flavors & Fragrances, Inc., 96 F.R.D. 136, 137 (W.D. Tenn. 1982). Were the
Insurers to object to the trial court's failure to submit the proposed interrogatories
or to the way the interrogatories were framed by the court, they could appeal and
grind the entire construction defect trial to a halt. See Restor-A-Dent, 725 F.2d at
877 (noting this complication, and stating, "While it is highly unlikely that such an
appeal would be successful in view of a [trial] court's broad discretion in this
context, nevertheless the possibility of this complication of the main action
remains." (citation omitted)).
B.
Additionally, a number of attorneys in this case raised concerns over the conflict of
interest inherent in allowing the Insurers to intervene.4 One of the most common
worries expressed by the attorneys was that if the trial court permitted a verdict
form with special interrogatories, it would place the Insureds' counsel in the
untenable position of essentially conceding liability so as to focus instead on
damages. In particular, several counsel explained a special verdict form would
force them to alter their presentation of evidence to shunt as much of the
Association's damages as possible into covered, consequential damages (e.g., water
intrusion resulting from faulty workmanship), thereby conceding the Insureds had,
in fact, created faulty workmanship in the first place. The concerns over the
possibility—and likelihood—of a conflict of interest in these types of situations are
echoed by a number of courts across the country. See, e.g., Nat'l Fire Ins. Co. of
Pitt., P.A. v. Bakker, 917 F.2d 22 (4th Cir. 1990) (per curiam); Restor-A-Dent, 725
F.2d at 877; Nieto, 61 F. Supp. 2d at 1195 (noting the insured would not only have
the burden of presenting a defense to the plaintiff's accusations, but were his
insurance company allowed to intervene, he would also have the additional burden
of having his insurance company interfere with his defense); High Plains Coop.
Ass'n v. Mel Jarvis Constr. Co., 137 F.R.D. 285, 290–91 (D. Neb. 1991); Wedco,
102 F.R.D. at 43; Allstate Ins. Co. v. Keltner, 842 N.E.2d 879, 882–83 (Ind. Ct.
App. 2006) (noting the insurance company's argument that its insured would not
want to seek an allocated verdict because it "would automatically expose [the
insured] to liability on" the non-covered damages portion of the allocated verdict);
Donna C., 485 A.2d at 225; Harleysville Grp. Ins. v. Heritage Cmtys., Inc., 420
S.C. 321, 363, 803 S.E.2d 288, 311 (2017) (Pleicones, A.J., dissenting) (opining it
would be impossible for an insurance company to intervene in a construction
defect suit and assert a defense against coverage without creating an impermissible
conflict of interest (citation omitted)); Christopher Lyle McIlwain, Clear as Mud:
An Insurer's Rights and Duties Where Coverage Under a Liability Policy is
Questionable, 27 Cumb. L. Rev. 31, 52–53 (1997) (explaining courts frequently
deny permissive intervention because "requiring the jury to focus on certain issues
may prejudice the prosecution or defense of the plaintiff's claim, and may force the
insured to take steps to assure coverage of claims rather than defend all claims").
We conclude there are facts in the record that support the trial court's decision that
permissive intervention here would present conflict of interest concerns and likely
cause undue delay and prejudice to the Association and the Insureds. Accordingly,
we hold the trial court did not abuse its discretion in denying the Insurers' motions
4
In fact, all counsel provided by the Insurers to the Insureds refused to take
positions on the motions to intervene for fear of a conflict of interest.
for permissive intervention. See, e.g., Restor-A-Dent, 725 F.2d at 877 ("Under all
of these circumstances, we cannot say that the district judge abused his discretion
here [in denying the insurance company's motion for intervention].").5
V.
According to the Insurers, their motions to intervene were mandated by our
decisions in Auto Owners Insurance Co. v. Newman6 and Harleysville Group
Insurance v. Heritage Communities, Inc.7 We respectfully disagree, although the
Insurers' position is understandable, especially with respect to Newman.
In Newman, a homeowner sued a construction contractor for the alleged defective
construction of her home, and, following an arbitration proceeding, an arbitrator
issued an award in favor of the homeowner. 385 S.C. at 190, 684 S.E.2d at 542.
In a subsequent declaratory judgment action between the contractor and its
insurance company, the trial court found the CGL policy covered the damages
awarded by the arbitrator. Id. at 190–92, 198, 684 S.E.2d at 543, 547. This Court
affirmed in part and reversed in part, finding the CGL policy covered parts of the
damages awarded by the arbitrator but did not cover other parts of the damages.
Id. at 196, 198, 684 S.E.2d at 545–46, 546–47. However, the Court refused to
review or parse the arbitrator's award, finding that arbitration awards are generally
conclusive and will not be reviewed on the merits on appeal. Id. at 198, 684
S.E.2d at 547 (citing Pittman Mortg. Co. v. Edwards, 327 S.C. 72, 76–77, 488
S.E.2d 335, 337–38 (1997) (stating an appellate court must affirm an arbitration
award so long as it is "barely colorable")).
5
Following the denial of the Insurers' motions to intervene, the trial court
permitted the construction defect trial to go forward, despite the Insurers' pending
appeals of those motions. The Insurers thus also raise a question to this Court as to
whether the trial court erred in allowing the trial to proceed while the appeals were
still pending. Because we have found the trial court did not abuse its discretion in
denying the motions to intervene, the Insurers were not improperly excluded from
participating in the construction defect trial. As a result, this issue is moot, and we
do not address it.
6
385 S.C. 187, 684 S.E.2d 541 (2009).
7
420 S.C. 321, 803 S.E.2d 288 (2017).
It was not the intent in Newman to categorically foreclose a subsequent declaratory
judgment action to resolve a coverage dispute. To the extent Newman may be read
to foreclose an insurance company's subsequent declaratory judgment action to
resolve the coverage dispute, we modify Newman accordingly. South Carolina has
long recognized the efficacy of declaratory judgment actions in this context. See,
e.g., Sims v. Nationwide Mut. Ins. Co., 247 S.C. 82, 145 S.E.2d 523 (1965).
Turning briefly to Harleysville, a condominium property owners' association sued
a construction contractor for the alleged defective construction of the
condominium complex, and a jury awarded a general verdict to the property
owners' association. 420 S.C. at 329–31, 803 S.E.2d at 292–94. In the declaratory
judgment action between the insurance company and the contractor, the Special
Referee ordered the insurance company to pay the entirety of the general verdict,
despite the fact that the verdict included some losses that explicitly were not
covered under the CGL policy, because he found that "it would be improper and
purely speculative to attempt to allocate the [] general verdict[] between covered
and non-covered damages." Id. at 332, 803 S.E.2d at 294. Notably, in the
alternative, the Special Referee found the insurance company's reservation of rights
letter to the insured was inadequate and constituted an implied waiver of the
insurer's right to contest coverage in the declaratory judgment action. See id. at
336, 338, 803 S.E.2d at 296, 297. It was this latter basis—the inadequate
reservation of rights letter—that served as the basis of this Court's affirmance of
the Special Referee. See id. at 336–44, 803 S.E.2d at 296–301 (describing the
reservation letter as a "generic denial[] of coverage coupled with furnishing the
insured with a copy of all or most of the policy provisions (through a cut-and-paste
method)"). The Court concluded the reservation of rights letter was so lacking that
it was "insufficient to [actually] reserve [the insurance company's] right to contest
coverage of actual damages," and, therefore, affirmed the Special Referee's
decision. Id. at 343, 803 S.E.2d at 300. Harleysville neither mandates intervention
in the underlying construction defect action nor forecloses a declaratory judgment
action to resolve a coverage dispute.
VI.
The parties offer varying approaches on the specifics of how a subsequent
declaratory judgment action should be tried. It appears a significant point of
contention is the Insurers' concern that any coverage decisions in the declaratory
judgment actions will be bound by factual determinations made in the construction
defect action. This point has been addressed by this Court in Sims v. Nationwide
Mutual Insurance Co.
In Sims, the Court explained that, generally, "where an insurance company has
notice and [an] opportunity to defend an action against its insured, the company is
bound by pertinent material facts established against its insured, whether it appears
in the defense of the action or not." 247 S.C. at 84–85, 145 S.E.2d at 524.
However, the Court reasoned that rule could not apply in situations where the
insurance company had a conflict of interest with its insured, such as when the
company claimed the acts being sued over were partially or wholly outside the
scope of the applicable insurance policy. Id. at 85–89, 145 S.E.2d at 524–26
(explaining the underlying purpose of the general rule is to obviate the delay and
expense of two trials upon the same issue between parties whose interests are
identical; and when a conflict of interest causes the parties' interests to diverge,
"the judgment against the [insured] does not decide issues as to the existence and
extent of the duty to indemnify," such that "in a subsequent action the [insurance
company] may show that the circumstances under which [it] was required to give
indemnity do not exist" (quoting Farm Bureau Mut. Auto. Ins. Co. v. Hammer, 177
F.2d 793, 799–801 (4th Cir. 1949) (citing the predecessor to the modern
Restatement (Second) of Judgments § 58 (2020)))).
As further explained in section 58 of the Restatement (Second) of Judgments:
[T]he indemnitor has a right to its day in court on whether the
indemnitee's liability is within the scope of the indemnity
obligation. . . .
. . . [A]n indemnitor who has an independent duty to defend the
indemnitee in effect has two legal capacities with regard to the
indemnitee. In his capacity as insurer against the indemnitee's risk of
being sued on claims that "might be found to be" within the indemnity
obligation, the indemnitor has a responsibility to provide counsel and
supporting assistance to defend the indemnitee without regard to the
indemnitor's interests . . . . In his capacity as indemnitor, he has a
responsibility to indemnify for such liability as may be within the
indemnity obligation. In the latter capacity, he should not be bound
by determinations in an action in which he participated in the former
capacity if there is a conflict of interest between the two.
See Restatement (Second) of Judgments § 58 & cmt. a (emphasis added).
Sims is directly applicable to the parties' dispute here. As explained above, there is
a conflict of interest between the Insurers and the Insureds as to the proper method
of calculating damages vis-à-vis what portions of the Association's total damages
are covered under the CGL policies. Thus, the Insureds and the Insurers are not
precluded from introducing evidence as to which damages are covered (or
excluded from coverage) by the CGL policies. See, e.g., Universal Underwriters
Ins. Co., 574 So. 2d at 723 ("Nevertheless, nothing in our law would bar [the
insurance company] from litigating the coverage issue in a declaratory judgment
action after the resolution of the underlying cases in this matter."); Donna C., 485
A.2d at 224. Having said that, the parties would be bound by the total amount of
any jury verdict in the construction defect action. See Restatement (Second) of
Judgments § 58(1) (explaining the parties in the declaratory judgment action may
not dispute the "existence and extent" of the judgment in the first action).
The Insurers and amici voiced their concerns that, in a declaratory judgment
action, courts may reject any efforts to allocate a general verdict into covered and
non-covered damages because that allocation requires some degree of speculation
as to what the jury may have intended when issuing its verdict. Cf., e.g.,
Harleysville, 420 S.C. at 332, 803 S.E.2d at 294 (explaining the Special Referee
found "it would be improper and purely speculative to attempt to allocate the []
general verdict[] between covered and non-covered damages"). We, too, are
concerned about the possibility an insurance company may be unjustly forced to
cover damages that are otherwise properly excluded under a CGL policy.8
Given that the parties in the declaratory judgment action are bound by the total
verdict in the construction defect action, how then do we attempt to fairly allocate
covered damages and non-covered damages? This seems to be the biggest
challenge to resolve. We begin by noting that we do not oppose the parties coming
to an agreement on a framework for allocating damages, subject to the approval of
the court. Failing an agreement of the parties, we set forth a default approach that
shall serve as the framework for use in declaratory judgment actions for allocating
covered and non-covered damages. This default framework is utilized in other
jurisdictions, and it allows litigants in a declaratory judgment action to use
8
In fact, the insurance company in Harleysville attempted to use a percentage-
based approach described more fully below, but the Special Referee rejected the
evidence as "irrelevant and speculative." Because the Harleysville majority issued
its decision on the basis of the insurance company's inadequate reservation of
rights letter, the Court did not address this finding by the Special Referee. To
avoid any future confusion, we reject the notion that, in a declaratory judgment
action, it is "improper and purely speculative" to allocate a general verdict into
covered and non-covered damages. See Harleysville, 420 S.C. at 332, 803 S.E.2d
at 294.
percentages, rather than exact dollar amounts, to determine the amount of covered
and non-covered damages in a general verdict.
In the declaratory judgment action, the record of the merits trial shall be the
primary source of evidence concerning matters litigated in that trial, such as the
extent of the damages. Additional evidence that is relevant to the coverage dispute
determination may be presented in the declaratory judgment action, including
expert testimony,9 but the additional evidence should be narrowly tailored to
matters that were not actually litigated in the first trial.10 The trier of fact shall then
make a determination allocating on a percentage basis what portion of the
underlying verdict constitutes covered damages and what portion constitutes non-
covered damages. See, e.g., Duke v. Hoch, 468 F.2d 973, 984 (5th Cir. 1972)
(explaining that on remand to allocate a general verdict, the "primary source of
evidence will be, of course, the transcript of the merits trial, containing the
evidence on which the jury based its verdict. The trial judge, as trier of fact, will
be in the position of establishing as best he can the allocation which the jury would
have made had it been tendered the opportunity to do so. If it is impossible for the
court to make a meaningful allocation based on only the transcript, [the judgment
creditor, standing in the shoes of the insured,] should have the right to adduce
additional evidence and [the insurance company] to present evidence in rebuttal.");
MedMarc Cas. Ins. Co., 199 S.W.3d at 60, 63 (describing in a declaratory
judgment action the insureds' motion to allocate the general verdict in the
underlying suit, and remanding the trial court's initial decision to allocate 25% of
the jury verdict as covered damages because, while permissible to allocate by
percentage, the trial court did not specify how it arrived at the 25% number);
Keltner, 842 N.E.2d at 883 (noting the parties seemed to assume that if a general
9
For example, in Harleysville, the insurance company proffered expert testimony
from a general contractor who had prepared an estimate to completely repair the
damaged condominium buildings. The expert segregated the portion of his
estimate which constituted the cost to repair damages from water intrusion
(covered damages) and determined what percentage of his total estimated damages
that portion constituted. Finally, he took the percentage of the covered damages
and multiplied it by the jury's verdict, arriving at an amount representing the
approximate portion of the general verdict constituting the covered damages.
10
For example, if the underlying merits trial results in a general verdict, the parties
in the declaratory judgment action should be permitted to introduce evidence
related to determining which portion of the damages are covered by the policy (or
policies).
verdict was entered in the underlying action, there would be no later opportunity to
distinguish between covered and non-covered damages, but holding that a
supplemental proceeding in a declaratory judgment action "would offer an
occasion for presenting evidence and argument regarding a fair approximation of
the division of damages" (emphasis added)).
As we have acknowledged in this type of case in the past, perfect precision in
allocating damages is not always achievable. Where perfect precision is not
achievable, a fair approximation must suffice. See Crossman, 395 S.C. at 65–66,
717 S.E.2d at 602 (acknowledging that, after adopting a time-on-the-risk approach
to progressive damage allocation, the time-on-the-risk "formula is not a perfect
estimate of the loss attributable to each insurer's time on the risk. Rather, it is a
default rule that assumes the damage occurred in equal portions during each year
that it progressed. If proof is available showing that the damage progressed in
some different way, then the allocation of losses would need to conform to that
proof. However, absent such proof, assuming an even progression is a logical
default." (italic emphasis added) (emphasis in original omitted)). Our exhaustive
research persuades us that the percentage-based approach will best achieve a fair
allocation of damages.
VII.
For the foregoing reasons, we conclude the trial court did not abuse its discretion in
denying the Insurers' motions to intervene and, therefore, affirm. In doing so, we
also recognize that the Insurers have the right and ability to contest coverage of the
jury verdict in a subsequent declaratory judgment action. In that action, the
Insurers and the Insureds will be bound by the existence and extent of any jury
verdict in favor of the Association in the construction defect action. However, they
will not be bound as to any factual matters for which a conflict of interest existed,
such as determining what portion of the total damages are covered by any
applicable CGL policies.
AFFIRMED.
BEATTY, C.J., HEARN, FEW and JAMES, JJ., concur.