Turner Padget Insights

SC Supreme Court Provides Framework for Allocation of Covered and Non-Covered Damages in Declaratory Judgment Actions

Posted On May 14, 2020

The Supreme Court of South Carolina affirmed a trial court’s decision to deny several insurance companies’ (“Insurers”) motions to intervene in a construction defect action between a property owners’ association (“Association”) and a number of construction contractors and subcontractors (“Insureds”). The Insurers sought to intervene for the limited purpose of participating in the preparation of a special verdict form. The Insurers did not desire to be named as parties or participate in the defense.

The Insurers objective was to intervene to force the Association and the jury to itemize the damages against each Insured so that the Insurers would be able to determine which portions of the damages would be covered by the CGL policies between the Insurers and the Insured. The trial court denied their motions to intervene. On appeal, the Supreme Court affirmed the denial of the Insurers’ right to intervene for a number of reasons.

First, the Court held Insurers did not have a direct interest in the construction defect litigation to intervene as a matter of right. The Court evaluated Rule 24 on intervention and rationalized that intervention as matter of right and permissive intervention were not warranted under the present facts and case law stating Insurers are not “real parties in interest” to construction defect actions. This finding is likely to have implications in other actions as well.

Second, the Court stated allowing the Insurers to intervene in the construction defect action in an attempt to segregate covered and non-covered damages would effectively place an additional burden of proof on the Association. The Court reasoned that requiring the Association to itemize its damages into Insurer-defined categories would have an increased burden of proof than the Association would otherwise have. Additionally, the Court stated that “in a subsequent declaratory judgment action, the Insureds and the Insurers have the collective burden to show which portions of the general verdict are covered under the CGL policies.” Essentially, the Court held all coverage issues should be handled in a subsequent declaratory judgment action between the Insureds and the Insurers.

Third, the Court held that special verdict form would force counsel for the Insureds to alter their presentation of evidence to shunt as much of the Association's damages as possible into covered damages, thereby conceding the Insureds had, in fact, created faulty workmanship in the first place. Basically, the Court found that requiring the jury to focus on certain issues may prejudice the prosecution or defense of the plaintiff's claim, and may force the insured to take steps to assure coverage of claims rather than defend all claims.

Finally, the Court provided guidance on how the specifics of how a subsequent declaratory judgment action should allocate covered and non-covered damages. The Court stated that it does not oppose the parties coming to an agreement on a framework for allocating damages, subject to the approval of the court. However, if the parties fail to come to an agreement, the Court set forth a default approach to allow litigants to use percentages, rather than exact dollar amounts to determine the amount of covered and non-covered damaged in a general verdict.

It held “the primary source of evidence in the declaratory judgment action should be the transcript of the merits hearing.” Additionally, the Court, at its discretion, could consider narrowly tailored coverage evidence, such as expert testimony, but the transcript of the merits hearings will be the primary source of evidence. The trier of fact (a judge or jury) will make an allocation determination on a percentage basis what portion of the underlying verdict constitutes covered damages and what portion constitutes non-covered damages. The Court opined that the percentage based approach may not be perfectly precise but a fair approximation based on the transcripts of the trial.

In conclusion, the major takeaways are that insurance companies cannot intervene in construction defect actions for the purpose of limited purpose of submitting special interrogatories or special verdict form on damage allocation and that the Court provided a general framework for the allocation of damages in a subsequent declaratory judgment action. The parties will be able to consent to an allocation framework, pursuant to court approval, or the parties can allow the trier of fact to determine allocation on a percentage basis as to portion of the underlying verdict constitutes covered damages and what portion constitutes non-covered damages. The trier of fact allocation appears to be the default for now, thus it may be in the best interest of the parties involved in a declaratory judgment action to attempt to come to a reasonable framework regarding allocation to avoid allowing the judge or jury to exercise too much discretion on allocation. We will continue to monitor how the courts are handling the issue of allocation and update this post after this new framework has been put to the test.

If you have any questions or would like a copy of this opinion, please contact Nick Stewart at nstewart@turnerpadget.com.