United States: South Carolina Court Alters Time-On-Risk Approach, Holds Insurer Responsible For Unresponsive Insured's Defense

The South Carolina Court of Appeals recently affirmed a $27.3 million judgment against an insurer. It held that the insurer acted in bad faith in failing to defend its insured and the general contractor in a construction defect suit involving a Berkeley County townhome community. This opinion introduced a new approach to South Carolina's time-on-risk regime, based on language in Section I(c) of the standard commercial general liability policy's insuring agreement, potentially impacting the method of apportionment of damages across multiple policies in progressive damage cases.

What Led to the Lawsuit?

Portrait Homes v. Penn. Nat'l Mut. Cas. Ins, Co. arose out of alleged defective construction at Persimmon Hill, a 400-unit townhome community outside Charleston. An estimated two months after the certificate of occupancy was issued, the townhomes began experiencing water intrusion issues. In 2012, the Persimmon Hill Homeowners Association (HOA) brought suit against multiple defendants, including the general contractor, Portrait Homes, and a framing subcontractor, Jose Castillo d/b/a JJA Framing (JJA). JJA's insurer, Penn National, became aware of the suit after Portrait Homes wrote Penn National in June 2013 requesting a defense and indemnity as an additional insured under JJA's policies. JJA never itself provided notice of the lawsuit to Penn National.

Shortly after receiving notice of the suit from Portrait Homes, Penn National took the position that it would not retain counsel to JJA until a defense was requested by JJA. To this end, Penn National sent correspondence to JJA regarding the lawsuit on three separate occasions. Upon receiving no response, it sent an independent adjuster to the home of its principal, Jose Castillo, in May 2014. The independent adjuster testified that when she spoke with Mr. Castillo, he declined to give his contact information to Penn National and further said "no" when asked whether he wanted Penn National to defend him in the lawsuit. Accordingly, Penn National did not hire counsel for JJA. Further, Penn National denied Portrait Homes' additional insured tender, positing that there were no endorsements extending additional insured status for completed operations.

Portrait Homes and other subcontractors eventually settled their claims with the HOA for approximately $8.5 million. And because no appearance was made by JJA, a default judgment was entered against JJA for approximately $4.1 million in December 2013. Both Portrait Homes and JJA assigned their rights against Penn National to the HOA, and coverage litigation ensued.

The Court's Holdings

After a bench trial, the trial court determined that Penn National had breached its duty to defend and acted in bad faith toward both Portrait Homes and JJA, awarding the HOA $27,339,535 in actual and punitive damages (notwithstanding the fact that Penn National's five policies only provided $2.5 million in coverage). Penn National appealed to the South Carolina Court of Appeals.

The South Carolina Court of Appeals affirmed the trial court in its entirety, finding sufficient evidence in the record to support the trial court's finding of bad faith. Specifically, as to the defense of JJA, the court determined that Mr. Castillo's conversation with the independent adjuster was insufficient to abrogate Penn National's duty to defend, as important information—including JJA's multimillion-dollar liability exposure, the severity of defects and damages identified by the HOA, and that the lawyer and defense provided by Penn National were a paid-for policy benefit—was not disclosed to Mr. Castillo.

The court further rejected Penn National's argument that it could not hire defense counsel because the appointed lawyer would be ethically prohibited from filing an answer on behalf of JJA. It noted that not only was there an "instructive and persuasive" ethics opinion allowing for the appointment of counsel under these circumstances, but that Penn National never even attempted to appoint counsel to secure JJA's cooperation anyway. The court also rejected Penn National's efforts to raise JJA's failure to cooperate as a defense, finding that it could not show prejudice because it had clearly received notice of the suit.

As to Portrait Homes, the Court of Appeals determined that there were multiple blanket additional insured endorsements extending additional insured status to Portrait Homes for completed operations. It rejected Penn National's arguments that the contracts between Portrait Homes and JJA did not trigger the same based on discrepancies in the corporate name of JJA and its work locations identified in the policies.

Perhaps most importantly, the Court of Appeals also rejected Penn National's arguments that the trial court failed to properly apply South Carolina's time-on-risk approach with respect to the apportionment of damages under Penn National's five policies.

Specifically, the trial court determined that the default time-on-risk rule, as adopted by the South Carolina Supreme Court in Crossmann Cmtys. of N.C., Inc. v. Harleysville Mut. Ins. Co. (Crossmann II), had to be altered in light of the fact that the policy included additional language in Section I(c) providing that property damage "includes any continuous, change, or resumption of that . . . 'property damage' after the end of the policy period." Based on this additional language, the trial court determined that progressive property damage caused by continuous or repeated exposure to water intrusion after the end of a policy period is deemed covered under the policy.

Noting that Crossmann II suggested the default time-on-risk standard could be modified at the discretion of the trial court given the complexities inherent in application of the rule, the Court of Appeals held, without expounding further, that the trial court did not err in its reasoning with respect to the apportionment of damages.

What Does This Mean for South Carolina Insurers?

The Court of Appeals' opinion goes into greater detail on a number of other insurance-related questions with respect to the rights and obligations between Penn National, JJA, Portrait Homes, and the HOA, including the propriety of the award of punitive damages and attorney's fees. Most importantly, the Portrait Homes opinion provides an important lesson to insurers in South Carolina on their duty to defend in circumstances where an insured may be unresponsive or standoffish concerning a defense it may be entitled to. Without an insured's clear waiver or other disclaimer of a defense under a liability policy, made with sufficient information concerning the nature of—and potential liability at stake in—the underlying litigation (which should be provided to the insured by the insurer if necessary), the insurer's duty to defend remains intact.

Generally speaking, when on notice of a potentially covered claim, defense counsel should be appointed in an attempt to undertake the defense of the insured in order to preserve coverage defenses, including the failure to cooperate.

Additionally, Portrait Homes introduces a new approach for determining time-on-risk with respect to policies containing language providing coverage for damages that begin during a policy and continue to occur after the policy period ends. As such, insurers should be mindful that policies containing such language may be subject to greater liability than under the default Crossman II time-on-risk approach.

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