Some of you may remember the Peanuts cartoons in which Snoopy, the Legal Beagle, was a lawyer to various characters. In one comic strip, Linus asks Snoopy if he does anything special to put his clients at ease when they come in for an interview. The next frame shows Snoopy holding out a balloon and thinking (because Snoopy never "talked"), "I give them a balloon."
If only it were that simple. But most of you reading this electronic newsletter are hundreds, if not thousands, of miles away. And we doubt if a balloon would make you feel at ease. Instead, we offer you another summary of significant cases affecting insurance interpretation and litigation in South Carolina.
This month, we feature the Auto-Owners v. Newman opinion issued by the South Carolina Supreme Court (its second version) last September. Both the construction defect bar and the insurance coverage bar have eagerly awaited the result of the re-argument. We also bring you a confusing decision out of the Fourth Circuit, also on CGL coverage for contractors, to compare with the Newman opinion. Finally, we grouped several cases involving automobile coverage issues in this newsletter - everything from cancellation and reinstatement to UIM setoff provisions - with our analysis on what you can learn from each case.
Our courts have been busy. From the vantage of an insurance carrier, some of the results are good, some are disappointing and some are just plain confusing. And while the results may not always be favorable, we hope that this newsletter, informing you of those results and how they might affect the insurance industry, is the functional equivalent of Snoopy's balloon - a little something special to put you at ease.
The South Carolina Supreme Court issued a 4-1 revised opinion in Auto-Owners v. Newman, Op. No. 385 S.C. 187, 684 S.E.2d 541 (2009), which retreats from some of
the Court's earlier broad holdings of coverage for general
contractors. Newman involved alleged defective stucco application by a
subcontractor which resulted in moisture damage to the residence's
framing and exterior sheathing. An arbitration of the homeowner's
claims against the general contractor resulted in an award for the
homeowner. The general contractor's insurer brought a declaratory
judgment action to determine whether the arbitration award was covered.
The trial court held not only that the subcontractor's negligence
constituted an "occurrence" under the policy, but also that the insurer
would have to pay for the costs of removing and replacing the defective
stucco because it was "incidental" to the cost of making the other
repairs. In its first opinion, the Supreme Court affirmed the trial
court in its entirety, holding that "the subcontractor's negligence led
to an 'occurrence' invoking coverage under the CGL policy for the
resulting 'property damage' to other property not the work product." Auto-Owners v. Newman, Op. No. 26450,(S.C.Sup.Ct. filed March 10, 2008)
(Shearouse Adv.Sh. No. 9 at 68). Moreover, the Court affirmed the
trial court's conclusion that the costs of removing and replacing the
defective stucco were covered, despite the work exclusion. "Because
this underlying moisture damage could neither be assessed nor repaired
without first removing the entire stucco exterior, the trial court
correctly concluded that the arbitrator's allowance for replacement of
the defective stucco was covered by the CGL policy as a cost associated
with remedying the other property damage that resulted from an
'occurrence.'" Id. at 72.
In its revised opinion, the Court re-affirmed that a
subcontractor's negligence can result in an "occurrence" which triggers
coverage for resulting "property damage." It regarded the negligence
of a subcontractor and the resulting property damages as "accidental"
from the perspective of the general contractor. However, in the
revised opinion, the Court scaled back its holding, stating that a
subcontractor's negligence which results in an "occurrence" falls
within a CGL policy's "initial grant of coverage" only for damage to
property other than the subcontractor's work. Auto-Owners v. Newman,
Op. No. 26450, (S.C.Sup.Ct. re-filed September 8, 2009) (Shearouse
Adv.Sh. No. 39 at 18). This subtle shift in the holding appears to
signal the Court's intent to maintain that subcontractor negligence
constitutes an "occurrence," thus triggering coverage, but is subject
to exclusionary language.
The Court also justified this result by stating that it gave effect
to the subcontractor exception to the "your work" exclusion. It again
rejected the insurer's argument that a general contractor's "work" is
the entire project and that the "your work" exclusion therefore applies
to the entire project. However, it deleted its earlier criticism of
Judge Norton's order in Bituminous Cas. Corp. v. Altman Builders, Inc.,
No. 2:01-4267-DCN, slip op. (D.S.C. July 28, 2006), which reasoned that
a general contractor's "work" is the entire project.
The primary difference in the revised opinion is that the Court
held that the "your work" exclusion excluded coverage for the costs of
removal and replacement of the subcontractor's defective stucco.
Nevertheless, because the arbitrator had not specifically identified
these costs, the Court held that the insurer had to pay the full
In his dissenting opinion, Justice Pleicones disagreed with the
majority stating that earlier precedent, which was not sufficiently
distinguished, required the Court to view the general contractor's
"work" as the entire project. Therefore, because the general
contractor's work product was the entire residence, there was no
"occurrence," only faulty workmanship which did not trigger the CGL
South Carolina law appears to have solidified somewhat - a
subcontractor's negligence can constitute an occurrence under a CGL
policy issued to a general contractor. Moreover, where a
subcontractor's negligence triggers coverage under that policy,
property damage caused by that negligence to any portion of the project
other than the subcontractor's faulty work, is generally covered. The
cost to remove, repair or replace the subcontractor's faulty work is
excluded under the "your work" exclusion. Based on the need to
differentiate the amount of covered versus uncovered damages, insurers
will want to consider intervention in construction defect actions to
itemize removal/repair/replacement costs which it believes will not be
The Fourth Circuit, applying Virginia law, held that a general contractor's commercial general liability policy covered claims that a subcontractor's defective work caused damage to the general contractor's otherwise non-defective work in Stanley Martin Companies, Inc. v. Ohio Casualty Group, No. 07-2102, slip op. (C.A.4 (Va) Feb. 12, 2009). The majority opinion attempted to reconcile two opinions: the Miller case, which held that damage to the general contractor's work caused by a subcontractor's defective performance is not unexpected or accidental and therefore not a covered occurrence, and the French case, which held that damage to surrounding non-defective components caused by a subcontractor's defective work constituted an accident and therefore an occurrence under the general contractor's policy. Although the Miller case was decided under Virginia law, the majority held it was not binding on the court because it pre-dated the French case, and the court construed the Miller case to be premised on defective work of the general contractor which caused damage to its own otherwise non-defective work, rather than the defective work of a subcontractor which damages the general contractor's non-defective work. Instead of applying the Miller analysis, the court applied the French analysis and held that any damage beyond the subcontractor's defective work was covered by the general contractor's policy. In a dissent, Judge Shedd noted that French was premised under Maryland, not Virginia, law and, in the absence of Virginia law on an issue he deemed difficult and important, the issue should have been certified to the Virginia Supreme Court.
For those handling construction defect claims in the Fourth Circuit (MD, VA, WV, NC, SC), but particularly in Virginia, the law could hardly be more unclear. The Fourth Circuit's application of Maryland precedent to essentially overturn Virginia precedent makes the determination of CGL coverage for construction defect claims, an already difficult area, unpredictable. Until the Virginia Supreme Court gives both insurers and contractors guidance, the rule, in Virginia and Maryland at least, appears to be that damage to the general contractor's work caused by a subcontractor is covered. This decision also appears to signal an intent by the Court to apply the French analysis to other jurisdictions within the Fourth Circuit.
Sitting en banc, the South Carolina Court of Appeals reversed both the trial court's decision and its own panel opinion which held that an agent's post-cancellation representation of coverage and acceptance of premium was binding on the insurer and effectively reinstated coverage. In Stringer v. State Farm Mutual Automobile Insurance Co., No. 4631, slip op. (S.C.App. November 10, 2008), the insured paid his original premium, but made policy adjustments which resulted in additional premium due. He received two notices of cancellation for failure to pay the additional premium and the policy was cancelled effective July 29, 2002. The insured was involved in an auto accident two days later and notified his agent. The agent advised that coverage would be uninterrupted if the insured paid the additional premium due. The insured paid the additional premium the following day, which the agent accepted and retained, and the agent issued a form verifying coverage. The insurer, however, denied coverage based on cancellation prior to the loss. The South Carolina Court of Appeals panel, in a split decision, held that the agent's representation of coverage and acceptance of premium effectively reinstated coverage. However, en banc, the court held that the policy clearly preserved the insurer's right to cancel coverage for failure to pay the premium and the employee's representation of coverage post-cancellation did not prevent the insurer's denial because the insured could not have relied upon the representation of coverage made after the loss occurred.
In a rare en banc opinion, the South Carolina Court of Appeals read the policy's provisions allowing the insurer to cancel the policy during the policy term for non-payment in context and found no ambiguity. It also reaffirmed the requirements for creation of coverage by estoppel and held that a representation of coverage made after a loss does not meet the requirement of a prejudicial change in position based upon the representation.
The United States District Court for the District of South Carolina issued two decisions on the issue of who constitutes a "resident relative" under different insurance policies. It held that a daughter was not a resident relative of her mother's and, thus, not an insured under the mother's policy of uninsured motorist coverage, even though mother and daughter lived at the same address. In Auto-Owners Insurance Company v. Collins, 8:07-3233, slip op. (D.S.C. Jan. 22, 2009), the daughter alleged that she was a resident relative of her mother's because, though she lived in an apartment and her mother lived in a mobile home, the structures were located on the same property, shared the same address and shared utilities. The court held, however, the daughter failed to meet two of the requirements to be considered a resident relative under South Carolina law. First, she must reside with the named insured under the same roof. It was undisputed that mother and daughter did not live under the same roof. Second, the relationship between the named insured and the claimant must be such that the parties would consider the relationship in contracting about such matters as insurance. The court held that it was undisputed that the mother did not procure insurance on the apartment, did not disclose the daughter as a resident of her household on the auto policy application and the daughter had spoken to an insurance agent about procuring her own auto policy several years prior to the accident, thus indicating that she did not rely on her mother to provide insurance for her.
Less than a month later, the United States District Court for the District of South Carolina affirmed that, under a homeowners' policy, a resident relative must live under the same roof as the named insured. In Nationwide Mutual Fire Insurance Company v. Grantham, 4:07-03831, slip op. (D.S.C. Feb. 13, 2009), the claimant sued his wife and in-laws for personal injuries he sustained when they allegedly negligently allowed a pan of grease to catch fire on the stove. The claimant and his wife lived in a mobile home owned and insured by the in-laws. The in-laws lived in a separate building about 100 yards away from the mobile home on the same property, but with a different address. The claimant and his family lived separately from the in-laws but did not pay rent to the in-laws. The court, analyzing the claim under the Waite test, held that the claimant was not a relative living in the same household as the in-laws because they did not live under the same roof, there was no evidence of an intimate and informal relationship and there was evidence which indicated that the duration of living arrangement was intended to be brief, only as long as it took for the claimant and his wife to find jobs and get back on their feet financially. As such, the court held that the claimant's wife was not an insured under the in-laws' homeowner's policy.
The District Courts' decisions in these cases underscore the factual nature of resident relative issues. In factually close cases, the court relied upon a literal interpretation of South Carolina precedent which requires both the named insured and claimant to reside "under the same roof." It is unclear, however, whether the South Carolina Supreme Court would have so literally interpreted this requirement.
An insurer who offset the amount of underinsured motorist (UIM) coverage available to its insureds by the amount of benefits paid under the policies' medical payments coverage (MedPay) did not violate South Carolina statutory law. In Rowzie v. Allstate Insurance Company, 556 F.3d 165 (4th Cir. 2009), Allstate's policy expressly allowed it to offset payments under the policy's UIM coverage by the amount paid to the insured under the policy's MedPay coverage. Plaintiffs were Allstate insureds who alleged they were entitled to the full limits of UIM coverage under their respective policies, though they had received the full limits of MedPay coverage under those policies. They alleged that Allstate's policy and practice violated South Carolina statutory law regarding the prohibition of set-off as applied to MedPay coverage and the prohibition of subrogation or assignment of UIM coverage. The Fourth Circuit, affirming the lower court's grant of summary judgment to the insurer, held that the prohibition of set-off applied only to the set-off of liability limits by the amount of MedPay coverage received, not UIM limits. It further held that the set-off of UIM coverage under the Allstate policies did not constitute a prohibited subrogation or assignment of UIM coverage.
The Fourth Circuit's opinion that a set-of of UIM coverage by amounts paid for MedPay benefits was valid hinged on the fact that the set-off was expressly provided for by the policy language. It is doubtful that such a set-off would be upheld in the absence of such a clear provision.
The Fourth Circuit affirmed the lower court's finding of implied permissive use and coverage in Harleysville Mutual Insurance Co. v. Davis, No. 08-1132, slip op. (4th Cir. April 10, 2009). In Davis, the insured, a used-car dealership, permitted a customer to use one of its cars while her car was being repaired. The customer was told she could use the dealership's car just as she used her own. Without the customer's express permission, a friend of the customer's who lived with her took the keys to the dealership's car and was later killed in an accident involving it. The court acknowledged that the customer's friend did not have express permission to use the dealership's car from either the dealership or the customer. However, it held that he had implied permission because he was routinely permitted to use the customer's car which was being serviced by the dealership and the dealership permitted the customer to use its car as a replacement. Therefore, the court concluded that the customer's ongoing implied consent to drive her car was transferrable to the dealership's car and held that the friend was an insured under the dealership's auto policy.
This appears to be a results-oriented decision. In the absence of an outright theft of an auto, be prepared for most courts to attempt to find permissive use.
Sitting en banc, the Tenth Circuit jettisoned its minority position, and adopted the majority position, with respect to the effect of an MCS-90 endorsement on a liability policy. In Carolina Casualty Insurance Co. v. Yeates, 584 F.3d 868 (10th Cir. 2009), the court reversed the district court and the Tenth Circuit panel which, relying on Tenth Circuit precedent, held that the MCS-90 endorsement could be used to alter the terms and conditions of an underlying insurance policy, even where alternate coverage satisfied the terms of the Motor Carrier Act of 1980. Yeates involved a motor carrier with a policy of auto liability insurance which specifically covered the at-fault truck, but which did not contain an MCS-90 endorsement. The motor carrier also held a policy of general liability insurance, which, by its terms, did not extend coverage to the at-fault vehicle but which contained an MCS-90 endorsement. The auto liability carrier tendered its limits of $750,000. The general liability carrier then instituted a declaratory judgment action to determine whether it owed any duty to the motor carrier or injured party based on the MCS-90 endorsement.
Relying on Empire Fire & Marine Insurance Co. v. Guaranty National Insurance Co., 868 F.2d 357 (10th Cir. 1989), the district court and Tenth Circuit panel held that the MCS-90 endorsement to the general liability policy rendered that policy primary and could be called upon to satisfy any judgment rendered against the motor carrier. Recognizing that the Tenth Circuit's view had evolved to a minority position, the court agreed to a rehearing en banc. The resulting opinion recognizes the reasoning of the majority position and adopts it, holding that "when an injured party obtains a negligence judgment against a motor carrier, an insurer's obligation under the MCS-90 endorsement is not triggered unless (1) the underlying insurance policy (to which the endorsement is attached) does not provide liability coverage for the accident, and (2) the carrier's other insurance coverage is either insufficient to meet the federally-mandated minimums or non-existent. Once the federally mandated minimums have been satisfied, however, the endorsement does not apply." Yeates, supra, slip op. at 23. Applying the majority view, the court held that the auto liability insurer's tender of $750,000 (the federally mandated minimum limit of surety) to the injured party, combined with the fact that the general liability policy did not extend coverage to the at-fault truck, failed to trigger the MCS-90 endorsement and the injured party could not recover under it.
With the Tenth Circuit's adoption of the majority position, only the Sixth Circuit (Michigan, Ohio, Kentucky and Tennessee) maintains the minority view that the MCS-90 endorsement alters an insurance policy even though other coverage is applicable and meets federally mandated limits. The Third, Fourth, Fifth, Seventh, Eighth, Tenth and Eleventh Circuits have adopted the majority view. The First, Second, Ninth and District of Columbia Circuits have not issued opinions on this subject. However, within the Ninth Circuit, the U.S. District Court for the Western District of Washington adopted the majority view in Canal Insurance Co. v. Lincoln General Insurance Co., C07-533-JPD, 2008 WL 3103270 (W.D.Wash. Aug. 4, 2008). The case is currently pending appeal in the Ninth Circuit.