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 even if they were places for tourists to visit. 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 (10^th 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).

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.

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.

Idiosyncratic #appellate tip: Right after OA, I make a chart of all cases the panel has from hearing, and see how quickly they’re coming out

— Raffi Melkonian (@RMFifthCircuit) February 15, 2017

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.

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.

OC – who still uses AOL email – is refusing to stipulate to electronic service because “a lot of emails go to my spam that I am unaware of” pic.twitter.com/06LvKldjHJ

— Lawyer Cat* (@LawyerCat_) February 3, 2017