South Carolina Supreme Court Provides Guidance On Reserving Rights

Today, we here at Abnormal Use take a brief hiatus from the realm of product liability todiscuss a recent decision from the South Carolina Supreme Court which will significantly impact insurers doing business in the state. The case, Harleysville Group Ins. v. Heritage Communities, Inc., et al., No. 2013-001281 (S.C. Jan. 11, 2017), is  a lengthy decision addressesing, for the first time in South Carolina, the content of reservation of rights letters. While the opinion also discusses the time on risk allocation for damages awarded under a general verdict and coverage for punitive damages, it is the discourse on reservation of rights letters that needs closer scrutiny.

As with most significant South Carolina insurance coverage matters in recent times, Harleysville arises out of two construction defect lawsuits. A little background is necessary. The underlying lawsuits involved the construction of two condominium developments constructed between 1997 and 2000. After construction was complete and the units were sold, the purchasers became aware of certain construction deficiencies and filed suit against Heritage Communities (and several subsidiary companies), the entities who developed and constructed the developments.

During the period of construction, the Heritage entities were insured under CGL and excess liability policies issued by Harleysville. Heritage was uninsured after its last policy lapsed in 2001. After receiving notice of the lawsuits, Harleysville agreed to defend the Heritage entities under a reservation of rights. According to the Court, Harleysville’s reservation of rights consisted of “generic states of potential non-coverage” coupled with a cut-and-paste of most of the Harleysville policy language. Nonetheless, Harleysville continued to provide a defense to the Heritage entities through trial. In each case, the jury returned a general verdict in favor of the plaintiffs, awarding both actual and punitive damages. Thereafter, Harleysville filed a declaratory judgment action seeking a declaration that it had no duty to indemnify Heritage for the verdicts. In the alternative, Harleysville sought an allocation of which portion of the juries’ verdicts constituted covered damages and whether those portions were subject to a time on risk allocation.

The declaratory judgment action was referred to a Special Referee. After staying the matter pending the South Carolina Supreme Court’s decision in Crossmann, 717 S.E.2d 589 (2011), the Special Referee determined that Harleysville failed to properly reserve its rights to contest coverage. As such, he found that coverage was triggered under the Harleysville policies because the general verdicts included some covered damages. While the Special Referee presumed that the verdict included certain non-covered damages (e.g. the repair/replacement of faulty workmanship), he determined it would be improper and speculative to allocate the general verdicts. As such, he ordered that the entirety of the actual damages was covered under the Harleysville policies, subject to Harleysville’s time-on-risk. In addition, the Special Referee held that the punitive damages were also covered under the policies. The parties subsequently filed cross-appeals.

The Court began its analysis with a review of Harleysville’s reservation of rights letters. The letters, sent in 2003 and 2004, explained that Harleysville would provide a defense, identified the insured entities and the lawsuit, summarized the allegations, and identified the policy periods for the policies. In addition, the letters contained 9-10 pages of policy provisions, including the insuring agreement, exclusions, and definitions. However, the letters contained no discussion of the various provisions or explanation of why Harleysville was relying on them. Except for the claim for punitive damages, the letters did not specify the particular grounds upon which Harleysville disputed coverage. Finally, the letters advised the insureds of potential uninsured exposure and recommended that the insureds consider retaining personal counsel. Also of note to the Court, the letters did not advise the insureds of the need for an allocation of damages between covered and non-covered losses, nor did they reference any potential conflicts of interest or notify the insureds of Harleysville’s intent to pursue a declaratory judgment action.

The Court affirmed the Special Referee’s finding that Harleysville properly reserved its rights as to punitive damages but failed to properly reserve rights to contest coverage for the general verdict. In doing so, the Court noted that a reservation of rights must provide the insured with sufficient information to understand the reasons the insurer believes the policy may not provide coverage. A generic denial of coverage with a verbatim recitation of all or most of the policy provisions is not sufficient. Instead, the insurer must alert the insured to the potential that coverage may be inapplicable; that conflicts may exist between the insurer and the insured; and that the insured should take steps necessary to protect its potentially uninsured interests.

Having found that Harleysville’s reservation was not sufficient, the Court, relying primarily on case law from other jurisdictions, engaged in a lengthy discourse of the requirements of a proper reservation. Significantly, the Court stated that:

  • A reservation must be unambiguous. (citing World Harvest Church, Inc. v. GuideOne Mut. Ins. Co., 695 S.E.2d 6 (Ga. 2010)).
  • Prior to undertaking the defense, the insurer must specify in detail any and all bases upon which it might contest coverage. (citing Desert Ridge Resort LLC v. Occidental Fire & Cas. Co. of N.C., 141 F.Supp.3d 962 (D.Ariz. 2015)).
  • A reservation of rights letter must give fair notice to the insured that the insurer intends to assert defenses to coverage or to pursue a declaratory judgment at a later date. (citing United Nat’l Ins. Co. v. Waterfront N.Y. Realty Corp., 948 F.Supp. 263 (S.D.N.Y. 1996)).
  • Because an insurer has the right to control the litigation, an insurer has a duty to inform the insured of the need for an allocated verdict as to covered and non-covered damages. (citing Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819 N.W.2d 602 (Minn. 2012); Magnum Foods, Inc. v. Cont’l Cas. Co., 36 F.3d 1491 (10th 1994)).

The Court placed significant emphasis on the fact that an insurer has the right to control the defense and, thus, must keep the insured informed of all potential coverage issues to avoid prejudice. In the Court’s view, one of the primary deficits in the Harleysville reservation of rights letters was the lack of notice to the insured of the need for an allocated verdict as between covered and uncovered claims. Unfortunately, the Court does not expressly state who has the burden of actually seeking the allocation. Some of the language in the opinion seems to place the burden on the insured: “…in no way did the letters inform . . . [the insureds] that they should protect their interests by requesting an appropriate verdict.”  Other language, however, seems to place the burden on the insurer: “. . . an insurer typically has the right to control the litigation and is in the best position to see to it that the damages are allocated . . .” If the burden does, in fact, rest with the insurer, this decision should provide strong ammunition in support of an insurer’s  motion to intervene — which, in the past, South Carolina courts have generally disfavored. 

 Based on Harleysville, insurers must exercise special care when issuing reservation of rights letters.  At a minimum, reservation of rights letters should provide unambiguous notice to the insured of the following:

  • the specific issues raised in the underlying litigation or claim giving rise to the coverage dispute, including the particular grounds upon which coverage;
  • any potential conflicts of interest between the insurer and insured;
  • the intent to pursue a declaratory judgment, if applicable, in the event of an adverse jury verdict; and
  • the need to obtain a written explanation of the jury award that identifies the claims or theories of recovery actually proved and the portions of the award attributable to

Failing to provide a sufficiently specific reservation of rights may result in the insurer being precluded from disputing coverage.  With regard to covered and non-covered claims, because the Court has not expressly stated who has the burden of seeking an allocation/clarification from the jury, it is probably more prudent for insurers to take affirmative steps to protect their coverage position absent further guidance from the Court.

(Hat Tip: Jennifer Johnsen).

New Suit Alleges Popeyes Served Up Flesh Eating Screwworms

According to a report from the NY Daily News, Texas woman Karen Goode has filed suit against Popeyes Louisiana Kitchen, alleging that the fast food chain served her a helping of flesh-eating worms. Specifically, Goode alleges that some rice and beans she ordered from a San Antonio location were invaded by Cochcliomyia hominivorax, otherwise known as “New World screwworms.” Of course, Goode unknowingly ingested the worms, and then:

The flesh eating screwworms entered the Plaintiff’s digestive track, laid eggs which embedded in the interior lining of Plaintiff’s small intestines, and when hatched, infested Plaintiff’s body and began to eat Plaintiff alive from inside-out.

In addition to being consumed by flesh-eating worms, Goode also alleges that she injured her neck, shoulders, and arms. She seeks damages in excess of $1 million.

We here at Abnormal Use often write of fast food-related lawsuits. This is the first involving flesh eating screwworms. Nonetheless, the questions are the same. First, assuming the allegations have merit, how did New World screwworms get into the rice? The United States was thought to be free from New World screwworms by the early 1980’s. However, recently, there have been reports of a screwworm outbreak affecting deer in South Florida. However, to our knowledge, human exposure has been rare in recent years.

Second, how did Goode not realize her rice was infested with screwworms? New World screwworms are approximately 8-10 mm in length. While admittedly a bowl of rice can be deceptive when it comes to spotting larvae, the thought of mistaking a grain of Popeyes rice for a screwwworm is troubling. Probably not something Popeyes wants to put in its next advertisement.

But the biggest question facing any food contamination case of this type is how does Goode know that she encountered the screwworm at Popeyes and not something else she ate/came in contact with? Goode’s complaint does not state exactly when she discovered the screwworms, so it is unknown at this point whether Goode actually observed the worms in the rice at any point. If not, Goode may face an uphill battle. Presumably, if Popeyes had an issue, the screwworms would not have been confined to Goode’s meal and this would not be an isolated event. For the love of San Antonio, let’s hope that is the case.

Friday Links

The Slicing Eyeballs music blog has triumphantly returned! Matt Sebastian, its author, has decided to resurrect his famed music website. We here at Abnormal Use were longtime fans, and we’re happy to see the site back in the music blogosphere. Good times!

Did you see that many of Prince’s albums returned to Spotify this past weekend? (But most of the albums by The White Stripes have vanished).

Did anyone listen to the “Stranglers” podcast, which finished its twelve episode season this past week? We have some complicated thoughts on the podcast, which sought to reexamine the investigation into the Boston Strangler murders, but we’re still processing them. We’ll keep you posted on this front. Share your thoughts, too, if you have any!

Our favorite tweet of late comes from #AppellateTwitter.

Abnormal Use At The DRI Product Liability Conference (In Las Vegas)

We here at Abnormal Use have been writing about products liability cases for seven years now. Can you believe that? So, it may not surprise you, dear readers, that we will be attending the 2017 DRI Product Liability Conference this week in Las Vegas, Nevada. As you may suspect, we here at the blog and at Gallivan, White, & Boyd, P.A. are big fans of DRI and remain very active in that organization. (John Cuttino, one of our partners in Columbia, is the president of DRI!). Our editor, Jim Dedman, will be at this week’s products liability conference. If you see him, please introduce yourself. He may even have with him some snazzy promotional materials we created in support of our blogging efforts.

If Jim follows tradition, he will be live tweeting at least some portions of the conference. You can follow him either at his personal Twitter account, @JimDedman, or our firm’s official Twitter account, @GWBLawFirm. If you yourself are on Twitter (and surely you must be), please check it out and send us a note.

Friday Links

Of late, we have been listening to the Stranglers podcast, which recounts and reopens the investigation into the Boston Strangler case. It’s not unlike Serial, but it is different. We’re always looking for new podcasts, by the way, so if you have any recommendations, let us know.

Anyone at NCBA headquarters in Cary today for the “Post-Judgment Collections” CLE?

Our legal tweet of the week addresses the issue of service by email – a perilous topic indeed. We’re not always fans of service by email, but we understand this tweet.

Friday Links

Rest in peace, Mary Tyler Moore. There has been much talk this week about her great contributions to the medium of television, but let’s not forget her hilarious turn in the 1996 film, Flirting With Disaster.

Who is going to the DRI Product Liability Committee seminar in Las Vegas in February? Our editor, Jim Dedman, will be there, and if you see him, be sure to say hello.

So, apparently, the new Star Wars film, coming in December, is called The Last Jedi. We’re not quite certain what to think about that.

Very good news: The latest album by Japandroids arrives today. Miss this at your peril!

By the way, we here at Gallivan, White, & Boyd, P.A. and the Abnormal Use law blog are pleased to announce that Duffie Powers and Michelle Yarbrough have been elected as shareholders and Zach Weaver has been elected as a partner.

To Sit, Or To Stand?

There has been a recent movement involving the introduction of standing desks into traditionally sedentary work environments such as offices. In fact, you may have heard of a new, popular saying that “sitting is the new smoking.” This standing desk trend is gaining popularity based on medical studies correlating obesity, heart disease, and other physical ailments to sedentary lifestyles. As the aforementioned saying suggests, some of these studies have found that sitting for eight hours a day at a desk is physically more harmful for a person over the course of their life than smoking.

There have also been recent studies suggesting that standing at a desk compared to sitting is negligibly beneficial, if at all. So it appears that the jury is, arguably, still out on this issue. At this time, the best advice may be for a person to do what feels best and most beneficial for them.

Additional medical research on this issue appears inevitable.  Likewise, litigation may also be inevitable. Maybe a potential workers’ compensation claim will arise from an employer’s alleged refusal to provide employees standing desks. Perhaps a consumer will suffer an injury while using a standing desk that could have arguably been avoided by sitting. Only time will tell. In the meantime, enjoy this chair-related clip from “Seinfeld.” (This clip doesn’t really address the concerns discussed above, but we really like “Seinfeld,” and we like to incorporate it herein wherever possible).

McDonald’s Hit With Value Meal Pricing Suit

We here at Abnormal Use have discussed many McDonald’s lawsuits over the years. Most of those suits involved hot coffee spills and often led to heated discussions over a producer’s liability for serving products in the manner nature intended. While those discussions were certainly interesting for us legal nerds, none were necessarily as critical to the fabric of our society as the most recent suit filed against the fast food giant. As reported by the Chicago Tribune, a new suit, which seeks class action status, has been filed against McDonald’s alleging that the company has committed fraud and deceptive trade practices through the pricing of its Extra Value Meals. Specifically, Plaintiff Kelly Killeen alleges that she purchased a Sausage Burrito Extra Value Meal at a downtown Chicago McDonald’s. Killeen paid $5.08 for her meal. However, a review of the menu revealed that had Kielleen purchased the meal (comprised of two burritos, hash browns and a medium coffee) a la carte, the meal would have cost $4.97. And, Killeen is none too pleased with being deprived of 11 cents, apparently.

Killeen’s suit follows a similar lawsuit filed in December alleging that 10 Illinois McDonald’s overprice the Two Cheeseburger Extra Value Meal by about 50 cents. That suit also seeks class action status.

While it may not have been discussed on the campaign trail, value meal pricing is a real issue for those of us that actually pay attention. From fast food restaurants to concessions at movie theaters and sporting events, the “value” of a pre-grouped meal is often minimal, if not non-existent. Whether it is fraud or just good sales psychology, we will leave that question for the jury. Regardless, it remains an issue we should all be conscious of as consumers. With that said, don’t count on us to join the class. Even though we loathe value meal pricing, we routinely order value meals. The reason – it is easy and convenient regardless of whether it makes economic sense. Ever try to order from a drive-thru for a bunch of kids in the backseat? The goal is just to make it through. In that situation, ordering by number will always outweigh the economic benefit of a la carte. So, McDonald’s, yes, you can keep our 11 cents.

Friday Links

Did anyone remember that it was Friday the 13th today, or was everyone simply to busy to notice?

If you’re in Charlotte, North Carolina next week, and you’re curious about music law, you might be interested in the Inn of Court event on Wednesday. Here’s the info:

“I fought the law, and the law won,” a rock band once proclaimed. At our next meeting, we will learn about the law of music from both a music performer and a rock musician turned lawyer. Entertainment lawyer and former disc jockey Coe W. Ramsey of Brooks Pierce’s Raleigh office represents radio and television stations, musicians, new media companies, and others in nearly every area of entertainment law. Before practicing in the area of workers compensation at Cranial Sumner & Hartzog, LLP in Raleigh, Michael Connell played guitar in The Connells, a power pop band that recorded 8 albums and toured the world. At this event, Coe will teach us the basics of music law and forming a band, while Michael will offer his practical insights on the rock world from the perspective of a musician and performer.

The event takes place next week on the evening of Wednesday, January 18, 2016 at Draught in Charlotte. For more details and to register, click here.

A recent tweet by our editor reveals the perils of new legal technology.

Lifestyle Changes — Not Simply Resolutions

The 1993 cult-classic movie, Groundhog Day, starring the great Bill Murray comes to my mind each January. It is most apparent to me when I see people who have lost sight of every wellness habit they began between January and October start anew following the holidays. They resolve to eat better, join a gym, actually go to the gym they joined, drink more water, get eight hours of sleep every night, et ceterea. Many of the most popular New Year’s resolutions center on living a healthier, more balanced life. Everywhere you turn, there are articles, blog posts, and news interviews on how to improve your health during the new year. It is commendable to start each year with wellness goals, and it is my sincere hope that each person who begins one has success. But until those resolutions become part of your lifestyle—rather than simply resolutions—each year you will begin anew.

So as the co-chair for the South Carolina Bar’s wellness initiative, Living Above the Bar, next year, I want lawyers in South Carolina to resolve to keep the lifestyle changes they have made during 2017, instead of starting over.  But don’t get me wrong, keeping lifestyle changes does not mean refusing to try anything new as part of that lifestyle. It’s always helpful to challenge your muscles, including the mental ones, with something new.

As part of this initiative, the Bar’s Wellness Committee will offer a CLE and other wellness events during the South Carolina Bar Convention, January 19-22, 2017. The CLE presentation, entitled Fit to Practice: Finding Balance to Find Your Happy, will offer 3.0 MCLE Credit Hours, including up to 3.0 LEPR Credit Hours and 2.5 SA/MH Credit Hours and will take place on Thursday, January 19 from 1:45-4:45 pm. The purpose of the seminar is to provide multiple, short presentations from subject-matter experts on a wide range of topics, giving attendees a menu of options to maintain or regain optimal mental, physical, emotional, and professional fitness and wellbeing, healthy stress management, a healthy work/life balance, and the methods by which you can assist others whom you detect may be impaired.  The speakers include:

  • Jeena Cho, lawyer and author of The Anxious Lawyer, An 8-Week Guide to a Joyful and Satisfying Law Practice Through Mindfulness and Meditation;
  • A fellow bar member who will show that professional productivity can be increased by leading a healthier lifestyle and getting outside more frequently;
  • Fellow bar members who will discuss the impact of Rule 428, SCACR;
  • An Associate Athletic Director from Clemson University, who specializes in nutrition, discussing the effect dietary and nutritional choices have on lawyers’ wellness, stress levels, professional performance, and longevity;
  • A fellow bar member who has unique experience and insight into balancing the demands of legal practice with the unexpected challenges posed by familial and other non-work related obligations; and
  • A mental health advocate with strategies for recognizing mental health issues in yourself and others (lawyers, judges, clients and others), strategies for seeking help in treating mental health issues, and the de-stigmatization of mental health issues.

In addition to the CLE, the Wellness Committee has put together some wellness activities. For those attending the Bar Convention, Jeena Cho is also providing drop-in meditation instruction from 7:30-7:50 am on Friday, January 20. While many lawyers have never tried meditation—and even scoff at the mention of it—it is something that can improve your life and your practice. Don’t worry, it does not involve chanting or require you to sit in a certain way. Rather, it can be done at your desk or in your home with ease. For those unable to attend the Bar Convention, Jeena Cho’s blog provides tips and instruction (and you can even sign up to receive mindfulness tips directly in your inbox), and Headspace is an app that you can download to guide you through meditation directly from your phone.

Additionally, Greenville’s fitness community is providing amazing discounts and classes during the Convention. Specifically, Barre Evolution is providing a $10 off coupon for attendees to use to attend any of the regularly scheduled classes during the Convention; Zanti Power Yoga is offering a special discounted rate of $10 per regularly scheduled class for Convention attendees; Swamp Rabbit CrossFit is providing a $10 drop-in rate for Convention attendees who are already affiliated with another CrossFit; and CycleBar Greenville will be offering free classes for Convention attendees, including a group ride with instructor Greta Pierson on Saturday, January 21 at 12:30 pm. The group indoor cycle ride is not limited to Convention attendees only.  Rather, if you’re a member of the SC Bar’s Young Lawyers Division, a member of the Greenville Bar Association, or a Convention attendee, you can sign up to attend.  To sign up: 1. Click here; 2. Click to Reserve your bike; 3. Sign up for an account; and 4. Pick a bike in the class.

If you have never taken an indoor cycle class before, that’s okay, and this should be what you resolve to try in 2017.  Indoor cycle classes allow you to control your own resistance—even though when I used to teach it, I always told my students that I wished I had a button that would permit me to control their resistance for them. I’ll be on Bike 7 waiting for you!

Start your healthy lifestyle with us at the SC Bar Convention.  Resolve that this is the last year where you start a wellness regimen over again in January.  No more Groundhog Day for you. Next January, my hope is that you resolve to continue the success you create this year!