Harleysville Grp. Ins., Corp. v. Heritage Cmtys., Inc.

• Decision Date: 11 January 2017
• Docket Number: Appellate Case No. 2013-001281,Opinion No. 27698,Appellate Case No. 2013-001291
• Parties: Harleysville Group Insurance, a Pennsylvania Corporation, Appellant/Respondent, v. Heritage Communities, Inc., a South Carolina Corporation; Heritage Magnolia North, Inc., a South Carolina Corporation; Buildstar Corporation, a South Carolina Corporation; Magnolia North Horizontal Property Regime; Magnolia North Property Owners Association, Inc., a South Carolina Corporation; and National Surety Corp., Defendants, Of whom Heritage Communities, Inc., a South Carolina Corporation; Heritage Magnolia North, Inc., a South Carolina Corporation; Buildstar Corporation, a South Carolina Corporation; and National Surety Corp. are Respondents, and Magnolia North Horizontal Property Regime and Magnolia North Property Owners Association, Inc., a South Carolina Corporation, are Respondents/Appellants. And Harleysville Group Insurance, a Pennsylvania Corporation, Appellant/Respondent, v. Heritage Communities, Inc., a South Carolina Corporation; Heritage Riverwalk, a South Carolina Corporation; Buildstar Corporation, a South Carolina Corporation; Riverwalk at Arrowhead Country Club Horizontal Property Regime; Riverwalk at Arrowhead Country Club Property Owners Association, Inc., a South Carolina Corporation; National Surety Corp.; and Tony L. Pope and Lynn Pope, individually and representing as a class all unit owners at Riverwalk at Arrowhead Country Club Horizontal Property Regime, Defendants, Of whom Heritage Communities, Inc., a South Carolina Corporation; Heritage Riverwalk, a South Carolina Corporation; Buildstar Corporation, a South Carolina Corporation; National Surety Corp.; and Tony L. Pope and Lynn Pope, individually and representing as a class all unit owners at Riverwalk at Arrowhead Country Club Horizontal Property Regime, are Respondents, and Riverwalk at Arrowhead Country Club Horizontal Property Regime and Riverwalk at Arrowhead Country Club Property Owners Association, Inc. are Respondents/Appellants.
• Court: South Carolina Supreme Court

Harleysville Group Insurance,
a Pennsylvania Corporation, Appellant/Respondent,
v.
Heritage Communities, Inc., a South Carolina Corporation;
Heritage Magnolia North, Inc., a South Carolina Corporation;
Buildstar Corporation, a South Carolina Corporation;
Magnolia North Horizontal Property Regime; Magnolia North Property Owners Association,
Inc., a South Carolina Corporation; and National Surety Corp., Defendants,
Of whom Heritage Communities, Inc., a South Carolina Corporation;
Heritage Magnolia North, Inc., a South Carolina Corporation;
Buildstar Corporation, a South Carolina Corporation;
and National Surety Corp. are Respondents,
and Magnolia North Horizontal Property Regime and
Magnolia North Property Owners Association, Inc., a
South Carolina Corporation, are Respondents/Appellants.
And
Harleysville Group Insurance,
a Pennsylvania Corporation, Appellant/Respondent,
v.
Heritage Communities, Inc., a South Carolina Corporation;
Heritage Riverwalk, a South Carolina Corporation; Buildstar Corporation,
a South Carolina Corporation; Riverwalk at Arrowhead Country Club
Horizontal Property Regime; Riverwalk at Arrowhead Country Club
Property Owners Association, Inc., a South Carolina Corporation;
National Surety Corp.; and Tony L. Pope and Lynn Pope,
individually and representing as a class all unit owners at
Riverwalk at Arrowhead Country Club Horizontal Property Regime, Defendants,
Of whom Heritage Communities, Inc., a South Carolina Corporation;
Heritage Riverwalk, a South Carolina Corporation; Buildstar Corporation,
a South Carolina Corporation; National Surety Corp.; and Tony L. Pope
and Lynn Pope, individually and representing as a class
all unit owners at Riverwalk at Arrowhead Country Club
Horizontal Property Regime, are Respondents,
and Riverwalk at Arrowhead Country Club Horizontal Property Regime
and Riverwalk at Arrowhead Country Club Property Owners Association,
Inc. are Respondents/Appellants.

Appellate Case No. 2013-001281
Appellate Case No. 2013-001291
Opinion No. 27698

STATE OF SOUTH CAROLINA In The Supreme Court

Heard January 14, 2016
January 11, 2017

Appeal from Horry County
John M. Milling, Special Referee

AFFIRMED AND AFFIRMED AS MODIFIED

C. Mitchell Brown, William C. Wood, Jr., and A. Mattison Bogan, all of Nelson Mullins Riley & Scarborough, LLP, of Columbia; and Robert C. Calamari, of Nelson Mullins Riley & Scarborough, of Myrtle Beach, for Appellant/Respondent.

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John P. Henry and Philip C. Thompson, Sr., both of Thompson & Henry, P.A., of Conway, for Respondents/Appellants.

JUSTICE KITTREDGE: These cases present cross-appeals from declaratory judgment actions to determine coverage under Commercial General Liability (CGL) insurance policies issued by Harleysville Group Insurance (Harleysville). These cases arise from separate actions, but we address them in a single opinion as they involve virtually identical issues regarding insurance coverage for damages stemming from the defective construction of two condominium complexes in Myrtle Beach: Magnolia North Horizontal Property Regime (Magnolia North) and Riverwalk at Arrowhead Country Club Horizontal Property Regime (Riverwalk). The Special Referee found coverage under the policies was triggered and calculated Harleysville's pro rata portion of the progressive damages based on its time on the risk. We affirm the findings of the Special Referee in the Magnolia North matter, and we affirm as modified in the Riverwalk matter.

I.

The Riverwalk and Magnolia North developments were constructed between 1997 and 2000. After construction was complete and the units were sold, the purchasers became aware of significant construction problems, including building code violations, structural deficiencies, and significant water-intrusion problems. In 2003, the purchasers filed suit to recover damages for necessary repairs to their homes.

The lawsuits were filed by the respective property owners' associations (the POAs), which sought actual and punitive damages for the extensive construction defects under theories of negligent construction, breach of fiduciary duty, and breach of warranty.¹ As to the Riverwalk development, individual homeowners also filed a class action to recover damages for the loss of use of their property

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during the repair period.² The defendants in the underlying suits were the related corporate entities that developed and constructed the condominium complexes: Heritage Communities, Inc. (the parent development company), Heritage Magnolia North, Inc. and Heritage Riverwalk, Inc. (the project-specific subsidiary companies for each separate development), and Buildstar Corporation (the general contracting subsidiary that oversaw construction of all Heritage development projects), to which we refer collectively as "Heritage."

During the period of construction from 1997 to 2000, the various Heritage entities each maintained several liability insurance policies with Harleysville with per-occurrence limits totaling between $3,000,000 and $4,000,000 on the primary policies and between $9,000,000 and $13,000,000 on the excess liability policies.³ Heritage was uninsured after the last policy lapsed in 2001, and the financial strain of numerous construction-defect lawsuits caused Heritage to go out of business in 2003.⁴

After receiving notice of the lawsuits, Harleysville informed its insureds that it would provide for their defense; however, Harleysville contends this was done

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under a full reservation of rights. Harleysville's efforts to reserve its rights were generic statements of potential non-coverage coupled with furnishing most of the Heritage entities with copies (through a cut-and-paste method) of the insurance policies. There is no dispute that Harleysville would control the litigation. Harleysville contends that all coverage issues would be litigated following the entry of any adverse jury verdict.

At the outset of each trial, Harleysville's counsel for Heritage conceded liability, and in both trials, the trial court directed a verdict in favor of the POA on the negligent construction cause of action. See Magnolia North Prop. Owners' Ass'n v. Heritage Cmtys., 397 S.C. 348, 369-70, 725 S.E.2d 112, 123-24 (Ct. App. 2012) (observing that "during opening arguments, counsel [for Heritage] conceded liability" and affirming the trial court's decision to direct a verdict in favor of the POA); Pope v. Heritage Cmtys., 395 S.C. 404, 429-30, 717 S.E.2d 765, 778-79 (Ct. App. 2011) (quoting Heritage's concessions of liability during opening statements and finding no error in the trial court's decision to direct a verdict in favor of the POA). Thus, the only contested issue in the underlying trials was the nature and extent of the damages resulting from the admitted negligent construction.

In this regard, the parties presented various experts who offered widely different estimates of the costs to correct the construction defects. According to the POAs' experts, the cost of necessary repairs totaled approximately $9,200,000 at Magnolia North and $8,600,000 at Riverwalk. In contrast, defense experts testified the necessary repairs would cost much less—approximately $2,400,000 at Magnolia North and $2,500,000 at Riverwalk. Ultimately, the juries declined to adopt any one expert's estimate, instead returning verdicts somewhere between the parties' figures. In the Magnolia North matter, the jury returned a general verdict for $6,500,000 in actual damages and $2,000,000 in punitive damages, and in the Riverwalk suit, the jury returned a general verdict of $4,250,000 in actual damages and $250,000 in punitive damages in favor of the POA and $250,000 in loss-of-use damages and $750,000 in punitive damages in the class action.

Following these general jury verdicts against its insureds, Harleysville filed the present declaratory judgment actions to determine what portion of the judgments in the underlying construction-defect lawsuits would be covered under Heritage's CGL policies. In filing these suits, Harleysville contended that, under the terms of the policies, it has no duty to indemnify Heritage for these judgments. Alternatively, if any of the damages were found to be covered, Harleysville sought an accounting to somehow parse the jury verdicts and determine which portion of

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the juries' general verdicts constituted covered damages. Harleysville further argued it could be responsible for only that portion of damages occurring during the period of time its policies provided coverage.

The matter was referred to a Special Referee, who held an evidentiary hearing in December 2010. Because this Court's decision in Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Co.⁵ was pending at the time, the parties agreed for the Special Referee to stay the matter until Crossmann was resolved. After Crossmann was decided in August 2011, the parties agreed for the Special Referee to reopen the evidentiary hearing in December 2011 to hear arguments and testimony regarding the applicability of the time-on-the-risk formulation as set forth in Crossmann. The POAs objected to the admission of evidence regarding time on the risk, arguing that it was inappropriate to parse the juries' general, unallocated verdicts by evaluating Harleysville's time on the risk.

Ultimately, the Special Referee found coverage under the policies was triggered because the juries' general verdicts included some covered damages. Although the Special Referee found that the costs to remove and replace the faulty workmanship were not covered under the policies, the Special Referee concluded that it would be improper and purely speculative to attempt to allocate the juries' general verdicts between covered and non-covered damages. Accordingly, the Special Referee ordered the full amount of the actual damages in the construction-defect suits would be subject to Harleysville's duty to indemnify in proportion with its time on the risk. The Special Referee made factual findings regarding the...