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Home / Opinion Digests / Insurance / Insurance – CGL – Reservation of Rights Letter – Standing – Compensatory Damages – Time on the Risk – Punitive Damages – First Impression

Insurance – CGL – Reservation of Rights Letter – Standing – Compensatory Damages – Time on the Risk – Punitive Damages – First Impression

Harleysville Group Insurance v. Heritage Communities, Inc. (Lawyers Weekly No. 010-041-17, 40 pp.) (John Kittredge, J.) (Costa Pleicones, Acting Justice, dissenting) Appealed from Horry County (John Milling, Special Referee) Substituted opinion.

Holding: An insurer’s reservation-of-rights letter to its insureds was comprised of generic statements of potential non-coverage coupled with cut-and-pasted portions of the insured’s policy. Since the insurer would be controlling the litigation, it had a duty to – but failed to – inform the insured of the need for an allocated verdict as to covered versus potentially non-covered damages.

As to the novel issue of the allocability of punitive damages, since the insurer does not contend that any of the conduct which led to the punitive damage award occurred outside its policy periods, we uphold the special referee’s decision not to allocate the punitive damage award based on the insurer’s time on the risk.

We modify the special referee’s verdict slightly as to one of the underlying lawsuits but otherwise affirm the special referee’s finding as to the insurer’s duty to indemnify, including punitive damages.


The cases underlying these combined actions arose from the faulty construction of two condominium complexes in Myrtle Beach. The faulty construction allowed water intrusion, which led to further damage. Harleysville Group Insurance (the insurer) provided commercial general liability insurance to the developer and its related companies (Heritage), including the general contractor, for part of the time the damage was occurring.

The insurer assumed control of the underlying litigation. At trial, the insurer admitted liability. The jury returned a verdict in favor of the property owners’ associations (POAs), finding Heritage liable for compensatory and punitive damages.

A special referee (1) determined that the POAs had standing to challenge the insurer’s reservation-of-rights letters, (2) allocated compensatory damages based on the insurer’s time on the risk, and (3) ruled that the insurer was liable for the entire punitive-damage award.

Reservation of Rights

Generally, a third party has no basis to assert any perceived inadequacies in an insurer’s purported reservation of rights. But here, Heritage was defunct; moreover, the POAs had acquired final judgments against plaintiff’s insureds. By virtue of these final judgments, the policy terms themselves provide that the POAs are entitled to sue the insurer directly to recover their judgments against its insured.

An insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage. Generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) are not sufficient. That is precisely what happened here, with the exception of the coverage dispute concerning punitive damages.

Where an insurer defends under a reservation of rights, the insurer has a duty to inform the insured of the need for an allocated verdict as to covered versus non-covered damages. Without knowledge of the bases upon which the insurer might dispute coverage, the insured has no reason to act to protect its rights because it is unaware that a conflict of interest exists between itself and the insurer.

The fact that the insurer stated the specific grounds for contesting coverage for punitive damages stands in stark contrast to its otherwise non-specific purported reservation of rights. Significantly, none of the reservation letters advised Heritage of the need for allocation of damages between covered and non-covered losses or referenced a possible conflict of interest or the insurer’s intent to pursue a declaratory judgment action following any adverse jury verdicts in the underlying lawsuits.

There is evidence in the record to support the special referee’s finding that the insurer’s reservation letters were insufficient to reserve its right to contest coverage of actual damages.


The record supports the special referee’s calculation of the insurer’s time on the risk in the underlying suits brought by the POAs. However, the actual damages awarded for loss of use in the underlying class action should also be deemed to be progressive in nature and, thus, included in the amount subject to allocation based on the insurer’s time on the risk. Accordingly, we modify the special referee’s time-on-the risk calculation for the class action.

Punitive Damages

The insurer is contractually obligated to indemnify Heritage for those sums Heritage becomes legally obligated to pay as a result of the progressive water intrusion, and the policy does not limit “those sums” to compensatory or actual damages. Because the policy does not unambiguously exclude punitive damages, we construe the policy language in favor of the insured to include punitive damages.

The special referee found Heritage intended to construct quality condominiums and that the insurer failed to meet its burden of proving Heritage expected or intended its subcontractors to perform negligently or expected or intended the property damage that resulted from the negligent construction. Because there is evidence in the record to support the special referee’s findings, we must affirm the finding that the insurer failed to show that the expected-or-intended policy exclusion operates to exclude punitive damages from coverage.

Although this court has acknowledged punitive damages may also “compensate … for the willfulness with which the [plaintiff’s] right was invaded,” this court has unequivocally rejected the attempt to “blur all distinctions between actual and punitive damages by unduly emphasizing [any] compensatory aspect.” We therefore reject the insurer’s attempt to mischaracterize the punitive damages in these cases as compensatory.

We turn now to the novel question of whether punitive damages are subject to time-on-the-risk allocation. It is not our intent to create a bright-line rule that punitive damages may never be subject to allocation based on time on the risk. However, we conclude the punitive-damage awards are not subject to reduction under the facts of these cases.

The insurer does not contend that any of the reprehensible acts upon which punitive damages are predicated occurred outside the relevant policy periods. Thus, we conclude the special referee did not err in finding punitive damages were not subject to reduction based on the time-on-the-risk multiplier in these cases.

Affirmed and affirmed as modified.


(Pleicones, A.J.) I would hold the POAs lack standing to challenge the sufficiency of the reservation-of-rights letters. Were I to reach the merits, I would find the letters adequate.

I would allow the insurer to litigate its liability, including any liability for the punitive damages award, in these declaratory judgment actions. I would also reverse and remand the allocation of damages as any “time on risk” analysis is necessarily affected by the proper allocation of damages, and a determination of their “progression.”

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