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Legal Updates, Opinions and Relevant information on Insurance Coverage and Bad Faith Litigation

Carlock, Copeland & Stair, a civil litigation firm, has a reputation for forceful, creative and cost-effective advocacy on behalf of its clients. Formed in 1970 with five attorneys operating out of a downtown Atlanta office, we now have approximately 80 civil litigation attorneys handling legal matters across the Southeast from offices in Atlanta, GA, Charleston, SC and Chattanooga, TN.

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“Internal Corporate Screw-Ups” No Excuse; 4th Circuit Denies Coverage after Insured Gives Late Notice to Carrier

Following its recent decision to deny coverage based on an insured’s failure to timely notify its carrier (see post dated March 7, 2016), the Fourth Circuit again came to the rescue of St. Paul Mercury Insurance Company, affirming the district court’s decision that found an insured’s own “internal corporate screw-ups” could not justify the failure to timely notify the carrier of a pending lawsuit.

Plaintiff Amiel Cueto, a disbarred lawyer and convicted felon, filed suit against American Bank Holdings, Inc. (“ABHI”) and ten other defendants alleging they fraudulently failed to fund his $8 million sale of real property. ABHI failed to timely answer the complaint, and Cueto was able to obtain a default judgment in the amount of $7.3M in compensatory damages, $66.5M in punitive damages and $24.6M in attorneys fees ($98M total!).

ABHI eventually was able to get this default judgment overturned, but it took $1.8M in defense costs to do it. ABHI sought reimbursement of these costs from its insurer St. Paul Mercury Insurance, who denied coverage based upon ABHI’s failure to timely notify it of the lawsuit.

The lawsuit was served on ABHI on June 18, 2008, through its registered agent CT Corporation. CT Corp transmitted the suit papers to ABHI’s office, addressed to its CFO, in accordance with its standing instruction. As of that time, the CFO had left ABHI. Another officer of ABHI came across the suit papers and forwarded them to its local counsel in July 2008; but that lawyer claimed he never received the documents.

ABHI did not act on the lawsuit until February 2009, when Cueto attempted to collect on the default judgment. ABHI then notified St. Paul for the first time about the lawsuit. St. Paul formally denied coverage on April 15, 2009, based on a lack of timely notice.

Prior to notifying St. Paul, ABHI had already hired attorneys to attempt to unwind the default judgment. Ultimately, those attorneys were successful, but were paid $1.8M, which ABHI argued should be reimbursed under its policy with St. Paul.

The Fourth Circuit held that “the defining characteristic of the notice obligation is notice given ‘as soon as practicable.’” Under the facts of this case, considering more than six months had passed since proper service, no one could credibly argue the “as soon as practicable” obligation had been achieved.

Under Maryland law, even if notice is not provided as soon as practicable, the insurer must still establish that the lack of notice resulted in “actual prejudice.”

The Court indicated that ABHI’s late notice denied the insurer “the opportunity to participate in the selection of counsel, to speak with counsel, … to discuss credible defense strategies, … to consider[] the possibility of settlement negotiations prior to the default judgment and prior to the expenditure of $1.8M incurred by ABHI to vacate it.” In other words, St. Paul was denied the opportunity to properly defend the case in a timely fashion.

When late notice precludes an insurer from exercising meaningful contractual rights provided to it by its policy, this amounts to actual prejudice suffered by the insurer.

As a result, due to those internal corporate screw-ups, ABHI was left paying $1.8M in attorneys fees to overturn a judgment in a lawsuit it deemed “frivolous, if not fraudulent.”

This case is another hard lesson for insureds: failing to follow the terms of an insurance policy can be an expensive mistake.

The case is St. Paul Mercury Ins. Co. v. American Bank Holdings, Inc., No. 15-559 (4th Cir. April 14, 2016). If you would like a copy of this case or would like to discuss it further, please do not hesitate to contact us.

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Insurance Companies Avoid Providing Coverage in Settlement of Defective Window Installation

In a recent decision coming from the Northern District of Illinois, a federal judge ruled that Allied Property & Casualty Co. (“Allied”) and Amco Insurance Co. (“Amco”) did not have to provide coverage for a window installer’s settlement of claims stemming from its poor workmanship which caused extensive water intrusion into the Metro North Condominium complex (“Metro North”). The judge found the policies did not cover damages included in the settlement agreement.

The judge granted Allied and Amco’s motion for summary judgment finding that most of the damages caused by water intrusion in Metro North were not recoverable under the policy.

CSC Construction, Inc. (CSC Construction) entered into a subcontract to provide window and glazing services for Metro North during original construction. Metro North is a condominium building located in Chicago, which is governed by Metro North Condominium Association. Allied and Amco provided commercial liability policies to CSC Construction from March 30, 2006 to March 30, 2007.

On October 2006, during original construction a rainstorm began to cause water intrusion issues. Metro North claimed the water intrusion caused damage to the building and to the unit owners’ personal property and brought claims against CSC Construction for breach of the implied warranty of habitability.

Allied and Amco provided CSC Construction with an independent defense in the underlying lawsuit under a reservation of rights. Ultimately, Metro North settled its claims with CSC Construction for $700,000 and accepted an assignment of the subcontractor’s rights against Allied and Amco.

Next, Allied and Amco sued Metro North requesting a ruling that their policies do not cover Metro North’s claims against CSC Construction because the damages sought are not recoverable based on a claim of breach of the implied warranty of habitability. The court looked at Illinois case law and determined in Illinois consequential damages tied to the breach of the implied warranty of habitability are not recoverable unless the property is rendered uninhabitable. The judge found Metro North was not rendered uninhabitable as a result of the water infiltration.

In concluding the opinion, the judge looked to make a determination regarding whether or not the defective work of CSC Construction was an accidental occurrence triggering coverage under the policies. He found, “when a subcontractor who installs windows performs defective work, the natural and ordinary consequence is water infiltration that will damage the rest of the building.” thus “there is no accident, so there is no occurrence, so there is no coverage.”

This case is an example of how a court may be hesitant to find consequential damages from the breach of implied warranty of habitability when construction defects are serviceable and do not render a building truly uninhabitable. Further in this case, the court held a CGL policy is not meant to cover “an accident of faulty workmanship but rather faulty workmanship which causes an accident.” In conclusion, this opinion serves as an example of the way jurisdictions can differ on their interpretation of CGL policies and how the consequential damages from the implied warranty of habitability are understood.

This case is Allied Property & Casualty Insurance Co. et al. v. Metro North Condominium Association, case number 1:15-cv-03925, in the U.S. District Court for the Northern District of Illinois. Please contact us if you would like a copy of the case or have any questions.

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Ninth Circuit to Insurers: If You Are Going to Deny Coverage, Do it Right

The Ninth Circuit recently upheld a Montana District Court decision that found an insurer breached its duty to defend by failing to issue a proper denial of coverage letter– and concluded, that as a result of that breach, the insurer was on the hook for settlement costs and costs to defend the underlying matter, as well as attorneys fees incurred in bringing the declaratory relief matter.

Scottsdale Insurance, Co. issued a policy to a homebuilder, Montana Pride, which had bought a piece of property and built a home on that property. Montana Pride maintained a Scottsdale policy throughout the construction of the home. Montana Pride was sued for construction defects a few years later by the purchasers of the home.

When Montana Pride tendered the case, Scottsdale issued a denial of coverage letter citing a number of exclusions in the policy, including an exclusion for “owned property” — which set forth that damage to “property you own, rent or occupy” was not covered. Scottsdale refused to defend Montana Pride.
A subsequent insurer of Montana Pride, Mountain West, defended Montana Pride in the homeowner’s lawsuit and ultimately paid $275,000 in settlement to resolve the matter. Montana West obtained an assignment from Montana Pride of any rights they may have against Scottsdale under their policy and then brought the declaratory judgment action.

The Ninth Circuit found that Scottsdale’s denial of coverage letter “merely quoted various policy provisions and exclusions” without explaining why the exclusions applied to the applicable facts set forth in the lawsuit. Under Montana law, Scottsdale was required to “demonstrate unequivocally” that its policy did not provide coverage to Montana Pride, which Scottsdale failed to do by merely reciting exclusions.

Because of Scottsdale’s breach of its duty to defend Montana Pride, the Ninth Circuit ordered Scottsdale to pay all settlement costs and all attorneys fees incurred in defending and resolving the homeowner lawsuit and all fees incurred by Mountain West in bringing the declaratory relief action.
The lesson to be learned? Pay careful attention to how you craft denial of coverage letters and always be sure to provide some level of explanation as to why there is no coverage under the policy.

The case is Dowson, et al v. Scottsdale Insurance Company, US Court of Appeals for the Ninth Circuit, Case No. 13-36087. If you would like a copy of the Order or would like to discuss this case further, please do not hesitate to contact us.

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In Georgia, Coverage for Lead Paint Exposure Excluded as Pollutant Under CGL Policy

This month, the Georgia Supreme Court held that a CGL policy did not provide coverage for brain damage to a child as a result of exposure to lead paint in a rental home.

The suit arose out of a toddler suffering brain damage due to exposure to lead paint in a rental home. The home was insured by a CGL policy issued to the landlord, and the insurer filed a declaratory judgment action arguing that there was no coverage for the claim because bodily injuries due to exposure to pollutants were excluded. Summary judgment was granted to the insurer in the trial court, but the Court of Appeals reversed, holding that the policy did not specifically exclude lead paint as a pollutant. On certiorari, the Georgia Supreme Court reversed the Court of Appeals, agreeing with the trial court that the pollution exclusion barred coverage for the claim.

Specifically, the policy excluded coverage for “(1) ’bodily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ (a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured.” “Pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

Ruling for the insurer, the Supreme Court acknowledged that the question of whether lead paint was a pollutant was one of first impression in the State, but it held that prior cases excluding coverage for different pollutants (such as carbon monoxide) under policies with similarly broad language were controlling. In keeping with those cases, the Court held that “lead present in paint unambiguously qualifies as a pollutant” and “the plain language of the policy’s pollution exclusion thus excludes [the claim] from coverage.” Key in this ruling was the Court’s lengthy discussion of the history and purpose of pollution exclusions in CGL policies.

The case discussed herein is Georgia Farm Bureau Mut. Ins. Co. v. Smith, No. S15G1177 (Ga. March 21, 2016). Please contact us if you would like a copy of the case or have any questions.

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Fourth Circuit Denies Coverage when Developer Failed to Timely Notify Insurer

The Fourth Circuit recently ruled against the Insured in a construction defect action as to coverage when the Insured failed to timely notify its insurance companies of a potential claim. The court ruled the Insured was not covered under its two insurance policies (St. Paul Mercury Insurance Co. and National Surety Corp.) because it delayed giving notice to the insurance companies, depriving them of the opportunity to pursue claims against the subcontractors involved in the project.

THF Clarksburg Development Two LLC (“THF”) entered into two agreements in 2002 with Lowe’s Home Centers, Inc. (“Lowe’s”) for over $4,000,000 to develop a large track of land in Clarksburg, West Virginia, including the preparation of a building pad area where a Lowe’s store could be built. THF subcontracted with CTL Engineering (“CTL”) to build the pad and provide geotechnical engineering certification that would support the construction of the Lowe’s store. CLT delivered the certified building pad to THF on April 9, 2002 and THF delivered it to Lowe’s on April 15, 2002.
Lowe’s built the store, but during the one-year inspection Lowe’s discovered a settlement problem that would likely cause worsening foundation failure and continued wall movement. Lowe’s notified THF of the issue on April 20, 2003. THF then notified CLT of the problem and hired them again to determine the cause of the settlement. CLT investigated and determined the problem was unrelated to the construction of the building pad and was likely caused by an external force. THF sent the findings to Lowe’s on March 20, 2005.

After eight months without a response from Lowe’s, THF sent another letter saying it presumed Lowe’s lack of response meant Lowe’s was in agreement with the findings in the report. After almost two years had passed, Lowe’s sent a letter to THF stating the delay in response was due to its own engineers investigating the issues. Lowe’s engineers ultimately determined the soil failures were a latent defect to which THF’s extended warranty applied and subsequently put THF on notice of the claims. On April 26, 2012, over nine years since becoming aware of the issue, Lowe’s filed suit.
In June 2012, THF notified its insurers St. Paul Mercury Insurance Co. and National Surety Corp. about the lawsuit and two years later, in 2014, the Insurers moved for a declaratory judgment seeking a determination by the court regarding of the existence of coverage. The Northern District of West Virginia determined THF was not entitled to coverage due to its delay in notifying the insurers of the potential claims.

The court determined the delay in notice prejudiced the insurers as a matter of law because West Virginia’s 10-year statute of repose would bar the insurers from asserting claims against the subcontractors. The court upheld the district court’s ruling in favor of St. Paul Mercury Insurance Co. and National Surety Corp. and against THF.

This case is a hard lesson of which developers, builders, design professionals, and contractors should take note. Whenever there is the existence of even a potential claim, the insurance carrier must be notified as soon as possible to avoid prejudice to the carrier. Even if the claims appear to be unrelated to a construction entity’s scope of work, allowing the Insurer to have the relevant information to determine liability could have a huge impact on the Insured as in the instant case. Finally, this case reinforces the ever-present need by attorneys and insurance carriers to determine relevant dates during construction and delivery to avoid issues related to statute of limitation and statute of repose in construction defect cases.

This case is St. Paul Mercury Ins. Co. v. THF Clarksburg Dev. Two, LLC, No. 15-1453, 2016 WL 715007 (4th Cir. Feb. 23, 2016). Please contact us if you would like a copy of the case or have any questions.

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Brokers Beware: California Court Confirms Assignability of Claims against Insurance Broker

In a recent decision the California Court of Appeal, Fifth District, held that a claim against an insurance broker is assignable, following similar decisions in other states and affirming what now appears to be the majority rule.

Amarjit Singh owned a two-story building in Sonora, California. His negligence caused a fire which spread through his building and to a neighboring commercial property and restaurant, causing extensive damages to all three buildings. The commercial property was insured by AMCO Insurance Company, which paid its insured for their losses and then filed a subrogation action against Singh. The neighboring restaurant owner sued Singh directly for losses suffered.

Singh tendered these claims, as well as his first party claims, to “his” insurance company, only to have those claims denied because there was no policy in effect at the time of the fire. Singh asserted that though he had recently received a notice of non-renewal from his insurer, he had communicated with his broker, All Solutions Insurance Agency, and believed he was insured at the time of the fire.

Singh stipulated to judgments in excess of $550,000 for the damages allegedly suffered by his neighbor and AMCO, and then assigned them the rights to a claim against his insurance broker for failing to obtain proper insurance. The restaurant Owner and AMCO then brought suit against the broker, alleging negligent failure to obtain an insurance policy and breach of contract.
The broker filed for summary judgment and won, in part because the lower court determined that in this scenario, Singh could not assign his cause of action against the broker. But the appellate court reversed, refusing to treat assignments of causes of action against an insurance broker like legal malpractice claims (which are not assignable). The Court held that the relationship between a lawyer-client and a broker-client are not similar because communications with a broker are not confidential and the standardized nature of insurance policies means that the product delivered is not highly unique or personal. As such, the legal validity of the assignment was upheld and the broker’s motion for summary judgment denied.

Under the right scenario, this outcome gives a defendant party with limited resources and no insurance coverage a way out of what could otherwise be a life-altering legal judgment. Confessing a judgment and assigning rights to a corollary claim may be the only way to avoid payment of money out of pocket. This leaves the door open to an exaggerated confession and may force brokers to defend inflated damages claims.

The case is AMCO Insurance Company v. All Solutions Insurance, Court of Appeal, Fifth District, California. Please contact us if you would like a copy of the case or have any questions.

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Judge finds Advisory Jury was Ill-Advised, rules Heinz’s Insurer can Rescind $25M Policy.

In a dispute between H.J. Heinz Company and its insurer, Starr Surplus Lines Insurance, over coverage for an estimated $30M in business interruption costs, a Pennsylvania judge rejected a crucial finding by an advisory jury that the insurer waived its right to rescind the $25M policy. The ruling cleared the way for Starr to rescind the policy based on Heinz’s failure to disclose prior contamination incidents in the policy application, which both the advisory jury and judge agreed were material misrepresentations.

The dispute stemmed from an Accidental Contamination and Government Recall (ACI) insurance policy that Starr issued to Heinz in July 2014. The policy provided $25M in coverage after a $5M Self Insured Retention (SIR). One month after the policy was issued, Heinz made a claim for business interruption costs following the discovery of lead in the company’s baby cereal by Chinese authorities. Starr’s investigation uncovered several prior contamination incidents that were not disclosed on the application. After Starr pressed Heinz to answer why it had not disclosed the prior incidents, the company filed a declaratory judgment action. Starr responded with a counterclaim for rescission. Heinz asserted waiver as an affirmative defense, contending that Starr knew about the prior incidents, but sold the policy anyway. In the first phase of the lawsuit, Starr’s counterclaim was submitted to an advisory jury in December. The jury agreed with Starr that Heinz made material misrepresentations in the application, but sided with Heinz on the issue of waiver.

On February 1, U.S. District Court Judge Arthur J. Schwab issued an opinion accepting the jury’s finding that Heinz’s application contained material misrepresentations, but rejecting its finding that Starr waived its right to rescind the policy. Heinz’s primary waiver argument was that Starr should have been aware of its misrepresentations at the time the policy was issued based on information outside of the policy application, including information from a prior application for a different insurance policy and a newspaper article in the underwriting file that discussed the undisclosed incidents. Judge Schwab found that these outside materials, “without more, would not trigger a reasonably prudent insurer to follow-up further.” Starr’s underwriters, the judge wrote, “acted professionally and prudently, and they should not have been expected to look at an application for a different type of insurance submitted at some other time, or to independently verify the entries on Heinz’s loss history, or to determine whether, at some point in history, Heinz disclosed something about one of the listed losses that might have prompted further inquiry, in order to properly assess the risk.”

Although the action was commenced in Pennsylvania federal court, Judge Schwab previously ruled that the claims were governed by New York substantive law. The ruling is a win for insurers facing challenges to underwriting practices based on materials outside of the application. For policyholders, the case is a reminder that all relevant information should be disclosed in a policy application.

The case is captioned H.J. Heinz Co. v. Starr Surplus Lines Insurance Co., Case No 2:15-cv-00631-AJS, in the U.S. District Court for the Western District of Pennsylvania. Please contact us if you would like a copy of the case or have any questions.

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First Circuit, Souter Grant Coverage despite Exclusion

Former Associate Justice of the Supreme Court David Souter returned to his First Circuit roots and participated in an August 2015 ruling declining to uphold a policy exclusion where the injured person was employed by a contractor with no written contractual relationship to the insured. The court’s rationale was the term “contractor” is ambiguous and the ambiguity should be construed against the insurer.

In July 2009, homeowners hired general contractor Benchmark Construction Services, Inc. to renovate their home in Massachusetts. The homeowners hired architect Thomas Huth to design the renovation plans. Huth hired Sara Egan d/b/a Painted Design to do some decorative painting to one of the interior walls of the home. Egan sent her employee, Meghan Bailey, to the perform the painting work. Benchmark did not have a written contractual relationship with Huth (architect), Egan (painter), or Bailey (painter’s employee). On March 5, 2010, while Bailey was applying decorative paint, she fell from a ladder that was standing on top scaffolding allegedly erected by Benchmark.

Bailey sued Benchmark in the Massachusetts Superior Court, alleging she was injured in the fall, Benchmark owed her a duty of care, and Benchmark negligently erected and maintained the ladder and scaffolding. Benchmark sought defense from its insurer, United States Liability Insurance Company (“USLIC”) but USLIC determined Bailey’s claims were not covered under Benchmark’s insurance policy. According to USLIC, an endorsement to the policy specifically excluded Bailey’s injuries from coverage. Therefore, USLIC has no duty to defend or indemnify Benchmark against those claims.

USLIC won on summary judgment, with the district court finding the endorsement to be “unambiguous.” Bailey’s claims were not entitled to indemnity because of a policy endorsement excluding coverage for employees of contractors and subcontractors injured while performing services. The district court said the term “contractor,” which was undefined in the policy, meant “anyone with a contract” and coverage for Bailey’s claims was excluded as her employer had contracted to do painting work.

The panel, including Souter, disagreed with the district court. Finding that “reasonably intelligent people” could differ regarding the meaning. “Anyone with a contract is surely a reasonable definition of the word ‘contractor,’ as the district court found, but so is a more narrow definition focused on the contractual relationship of the injured party and the insured.”

The court determined when disputed terms are “susceptible to multiple reasonable definitions, then the court will apply a reasonable definition that confers coverage, if one exists.” Ultimately concluding USLIC had a duty to defend and indemnify Benchmark in the underlying negligence suit.

The holding could be problematic to insurers because the court granted coverage to an injured party employed by any contractor or subcontractor on the project despite no contractual privity with the insured.

The case is U.S. Liab. Ins. Co. v. Benchmark Const. Servs., Inc., 797 F.3d 116 (1st Cir. 2015). Please contact us if you would like a copy of the case or have any questions.

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Party Claims Coverage as Additional insured based on Oral Agreement with Primary Insured … and just may get it!

Will an oral agreement by your insured be enough to create coverage for a third party? The Seventh Circuit Court of Appeals says yes – in the right circumstances.

Vita Food Products, Inc. is claiming status as an “additional insured” under a policy issued by Cincinnati Insurance Company to Painters USA, Inc.

The policy language allowed Painters to add an “additional insured” to the policy by its own agreement (oral or written) so long as that agreement preceded the “occurrence” and that “a certificate of insurance showing that person or organization as an additional insured has been issued.”

Vita hired Painters to provide painting services on its premises; Vita alleges that prior to work commencing, Painters agreed orally to add Vita as an additional insured on the Cincinnati policy. Cincinnati had not yet issued the certificate of insurance naming Vita as an additional insured when one of Painter’s employees was injured in an accident on Vita’s premises. Cincinnati issued the certificate of insurance a day after the accident.

The policy did not require permission from Cincinnati to create the additional insured status, so long as the two insureds had a relationship that makes the addition of a second insured consistent with the nature and aims of the policy, as when the original insured is providing products or services to the additional insured—as was the case here. The policy only required that a certificate ultimately be issued, which it was.

The certificate of insurance states that it is “issued as a matter of information only,” “confers no rights upon the certificate holder” and “does not affirmatively or negatively amend, extend or alter the coverage afforded by the policies.” The Court held that this language indicates that issuance of the certificate could not be a precondition to coverage, because it is just information and does not alter the policy.

The Court indicated that reference in the policy to the certificate of insurance was ambiguous; issuance of the certificate could be regarded as a prerequisite to coverage or it could be intended merely to memorialize the agreement by its insured.
Stating that an oral agreement is a valid contract, the Court held that if Vita can prove that there was an oral agreement with Painters prior to the accident, it is entitled to coverage under the Cincinnati policy.

This case reinforces the rights of additional insureds and reiterates a court’s willingness to interpret insurance contracts against the drafter and in favor of coverage if an ambiguity can be found.

The case is Cincinnati Insurance Co. v. Vita Food Products, Inc., No. 15-1405, United States Court of Appeals, Seventh Circuit. Please contact us if you would like a copy of the case or have any questions.

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Christmas Comes Early to Crum & Forster in East Bridge Lofts Action – $2 Million Coverage Ruling Reversed

After ruling against Crum & Forster in November 2015 and ordering the insurer to pay $2 million of a $55 million judgment to its insured, South Carolina District Court Judge Richard Gergel reversed his ruling, in an order on the insurer’s motion to reconsider.

In November, Judge Gergel considered competing summary judgment arguments relating to the insurer’s denial of coverage to its insured, Creekstone Builders, Inc., in an underlying construction defect action, which resulted in a $55 million verdict against Creekstone. Crum & Forster denied coverage based on an exclusion in Creekstone’s CGL policies for work performed in South Carolina – an exclusion about which Crum & Forster insisted Creekstone was repeatedly warned before entering the contracts.
While the Judge refused to grant summary judgment on whether Crum & Forster acted in bad faith in denying coverage based on the exclusion, the Judge did rule that Crum & Forster could not enforce the exclusion for Creekstone’s South Carolina operations. Judge Gergel reasoned that enforcing the exclusion for South Carolina operations against a company that was licensed only to do business in South Carolina, created illusory coverage and an ambiguity in the policies, which must be resolved in favor of the insured. Ultimately the Judge concluded that a jury must decide who should pay the $55 million judgment; however, Crum & Forster must pay the $2 million in coverage limits under the policies issued to Creekstone.

But last week, the Judge reconsidered his November ruling, and reversed his earlier decision on whether Crum & Forster can be held legally responsible for the $55 million state court verdict in part or in whole.

In reversing his decision and finding that the SOE in the policies at issue preclude coverage for Creekstone’s South Carolina operations, the Judge considered extrinsic evidence regarding the parties’ intention to exclude South Carolina operations from coverage, which was not considered prior to the November ruling against Crum & Forster. Based on his extensive review of the extrinsic evidence presented that Creekstone had knowledge of the SOE in the policies, the Judge held that “no reasonable jury could find that the parties intended the policies at issue to cover Creekstone SC’s South Carolina operations.”

Concluding that, as a matter of law, the coverage provided under the policies was not illusory and that the SOE in the policies at issue precluded coverage for Creekstone’s South Carolina operations, Judge Gergel granted summary judgment in favor of Crum & Forster as to Plaintiffs’ declaratory judgment claim, Plaintiffs’ breach of contract claims, Plaintiffs’ reformation claim, Plaintiffs’ bad faith denial of coverage claim, and Plaintiffs’ bad faith failure to settle claim.

This ruling comes as good news for those who seek to rely on extrinsic evidence to resolve a coverage dispute. While South Carolina, historically speaking, has been a state slow to embrace the “reasonable expectations” doctrine of interpreting insurance policies, rulings such as this one and similar state court decisions suggest that our Courts may be moving in that direction, at least when the policy at issue contains ambiguities that cannot be resolved by looking at the policy alone. See Bell v Progressive Direct Ins. Co., 407 S.C. 565, 757 S.E.2d 399 (2014), reh’g denied (May 7, 2014) (applying a modified version of the reasonable expectation doctrine in interpreting insurance contracts and explaining the Court “will look to the reasonable expectations of the insured at the time when he entered into the contract if the terms thereof are ambiguous or conflicting, or if the policy contains a hidden trap or pitfall, or if the fine print takes away that which has been given by the large print.”).

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