Stoneledge at Lake Keowee v. Cincinnati Insurance Company

• Court: Court of Appeals for the Fourth Circuit
• Decided: December 13, 2022
• Docket: 19-2009
• Status: Unpublished

Opinion

USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 1 of 10

UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 19-2009

STONELEDGE AT LAKE KEOWEE OWNERS’ ASSOCIATION, INC.,

Plaintiff – Appellee,

v.

CINCINNATI INSURANCE COMPANY; BUILDERS MUTUAL INSURANCE COMPANY,

Defendants – Appellants.

Appeal from the United States District Court for the District of South Carolina, at Anderson. Bruce H. Hendricks, District Judge. (8:14-cv-01906-BHH)

Argued: October 28, 2022 Decided: December 13, 2022

Before WYNN and RUSHING, Circuit Judges, and MOTZ, Senior Circuit Judge.

Affirmed by unpublished per curiam opinion.

ARGUED: John Robert Murphy, MURPHY & GRANTLAND, PA, Columbia, South Carolina, for Appellants. Robert Thomas Lyles, Jr., LYLES & ASSOCIATES, LLC, Mt. Pleasant, South Carolina, for Appellee. ON BRIEF: Timothy J. Newton, MURPHY & GRANTLAND, PA, Columbia, South Carolina, for Appellants.

Unpublished opinions are not binding precedent in this circuit. USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 2 of 10

PER CURIAM:

In this diversity case, Stoneledge at Lake Keowee Owners’ Association, Inc.

(“Stoneledge”) seeks a declaratory judgment against Cincinnati Insurance Company

(“Cincinnati”) and Builders Mutual Insurance Company (“Builders Mutual”) to collect

damages arising out of a construction-defect lawsuit. 1 This appeal turns on the adequacy

of the insurers’ reservation of rights letters, which in turn determines insurance coverage

for judgments Stoneledge obtained from Cincinnati’s and Builders Mutual’s insureds.

Applying controlling South Carolina law, we hold that the reservations of rights here do

not provide a basis for denial of coverage. Accordingly, we affirm the judgment of the

district court.

I.

Stoneledge, a homeowners association, manages a community of 80 townhomes on

Lake Keowee in South Carolina. Construction of the Stoneledge townhomes proceeded in

two phases. Phase I consisted of the first 37 units, built initially by a different general

contractor and then by Marick Home Builders, LLC (“Marick”) and Marick’s managing

member, Rick Thoennes (“Thoennes”). Phase II consisted of the remaining units, all built

by Marick and Thoennes. In 2009, Stoneledge brought suit against Marick and Thoennes,

among other defendants, alleging construction defects in the townhomes that resulted in

water intrusion and other physical damage.

1 Previously, we placed this case in abeyance pending the Supreme Court of South Carolina’s final disposition of the underlying construction-defect litigation. 2 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 3 of 10

Marick and Thoennes held commercial general-liability policies through Cincinnati

and Builders Mutual covering, in relevant part, “property damage” as defined by the

policies. Builders Mutual issued policies covering the period from January 30, 2004 to

October 20, 2007, and Cincinnati issued policies covering the period from April 1, 2008 to

April 1, 2012. After Marick notified the insurers of the underlying action, Builders Mutual

sent Marick two reservation of rights letters, one in May 2009 and one in July 2009.

Cincinnati sent Marick one reservation of rights letter in March 2010.

As with the construction, the underlying construction-defect action was divided into

two phases with separate trials set for Phase I and Phase II. Stoneledge prevailed in the

Phase I trial, becoming a judgment creditor of the insureds. After a series of appeals, the

Supreme Court of South Carolina clarified the value of Stoneledge’s judgments for Phase

I: $286,022.06 against Marick for breach of warranty, $343,226.47 against Marick for

negligence, and $1,000,000 against Thoennes for breach of fiduciary duty. See Stoneledge

at Lake Keowee Owners’ Ass’n, Inc. v. IMK Dev. Co., 866 S.E.2d 542, 557–58 (S.C. 2021).

After the Phase I trial, in March 2014, Stoneledge brought a declaratory-judgment

action against Cincinnati in state court, seeking coverage for the Phase I judgment in the

underlying action. The insurers removed the case to federal court, and in September 2016,

Stoneledge amended its complaint, adding Builders Mutual as a defendant and seeking

coverage for $2,000,000 in Phase II damages pursuant to a settlement agreement entered

into by Stoneledge, Marick, Thoennes, and the insurers before the Phase II trial was set to

take place. The parties cross-moved for summary judgment.

3 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 4 of 10

The district court granted Stoneledge’s motion for summary judgment, primarily on

the ground that the insurers failed to reserve the right to contest coverage. After the district

court denied the insurers’ motion to reconsider, the insurers filed this appeal.

II.

We review the district court’s grant of summary judgment de novo. DENC, LLC v.

Phila. Indem. Ins. Co., 32 F.4th 38, 46 (4th Cir. 2022). The parties agree that, because this

case arises under our diversity jurisdiction, South Carolina law governs. And where the

Supreme Court of South Carolina has spoken directly or indirectly on the issue before us,

we apply its jurisprudence. Private Mortg. Inv. Servs., Inc. v. Hotel & Club Assocs., Inc.,

296 F.3d 308, 312 (4th Cir. 2002).

In this case, the Supreme Court of South Carolina’s decision in Harleysville Group

Insurance v. Heritage Communities, Inc., 803 S.E.2d 288 (S.C. 2017), controls. Relying

on the “axiomatic” principle that “an insured must be provided sufficient information to

understand the reasons the insurer believes the policy may not provide coverage,”

Harleysville held that “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) is not

sufficient.” 803 S.E.2d at 297. Lodging a litany of grievances with the rationale in

Harleysville, and attempting to cast its holding as highly fact-specific, the insurers ask us

to look elsewhere for a rule governing coverage in this case. It is, however, not for us to

second-guess a decision of the Supreme Court of South Carolina on a matter of South

Carolina law.

4 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 5 of 10

The insurers first attempt to limit Harleysville to its particular context. They argue

that Harleysville stemmed from a unique posture: Applying a deferential standard of

review, the Harleysville court adopted the findings, including on the inadequacy of the

reservation of rights, made by a special referee after an evidentiary hearing. But the

Harleysville court never limited its holding to the posture or facts of the case before it, and

the insurers do not point to any subsequent cases that limit Harleysville’s holding in the

way they urge here. Rather, subsequent cases applying South Carolina law indicate that

Harleysville’s holding applies broadly to cases assessing the sufficiency of an insurer’s

reservation of rights. See, e.g., Am. Serv. Ins. Co. v. OnTime Transp., LLC, No. 5:17-cv-

01120-JMC, 2019 WL 3972820, at *12 (D.S.C. Aug. 22, 2019); State Nat’l Ins. Co. v.

Eastwood Constr. LLC, No. 6:16-cv-02607-AMQ, 2018 WL 8787543, at *20 (D.S.C. Sept.

5, 2018) (Quattlebaum, J.).

In a variation on their theme of limiting Harleysville to its facts, the insurers also

argue that the case at hand is distinguishable because, as to the Phase II damages, the

settlement agreement supplemented the reservation of rights letters. Even accepting that

contention, the settlement agreement sets forth a no more specific reservation of rights.

Rather, any reservation the settlement agreement does contain is of the general, “we will

let you know later” variety that Harleysville found inadequate. See Harleysville, 803

S.E.2d at 299. Simply agreeing to litigate coverage in a subsequent declaratory-judgment

action does not in itself create an adequate reservation of rights under Harleysville.

Moreover, we agree with the district court that if the reservation of rights letters are

deficient as to Phase I, they are similarly deficient as to Phase II. The insurers received

5 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 6 of 10

notice of the underlying action in 2009 and of the third amended complaint in 2012, when

the action had not yet been bifurcated. This thus provided the insurers ample opportunity

to set forth an adequate reservation of rights that would apply to both Phase I and Phase II

damages. They did not do so. That the parties later entered into a settlement agreement

for Phase II does not absolve the insurers of their obligation to set forth sufficiently specific

reservations of rights.

Next, the insurers challenge the retroactive application of Harleysville to the

reservation of rights letters in this case, which were issued years before Harleysville was

decided. But Harleysville itself held that, except as to one specific coverage defense, a

reservation of rights letter issued years prior to the court’s decision was inadequate. 803

S.E.2d at 298.

The insurers maintain, however, that the Harleysville court’s retroactive application

of its holding to the reservation of rights letter in that case resulted from the insurer’s failure

to raise a timely argument that waiver cannot create coverage under Laidlaw

Environmental Services (TOC), Inc. v. Aetna Casualty & Surety Co. of Illinois, 524 S.E.2d

847, 852 (S.C. Ct. App. 1999). But three years later, in Ex parte Builders Mutual Insurance

Company, the Supreme Court of South Carolina characterized its opinion in Harleysville

as concluding that an inadequate reservation of rights letter “constituted an implied waiver”

and therefore that the insurer could not deny coverage even though it disputed whether

there was an occurrence of property damage to create coverage in the first place. 847

S.E.2d 87, 94 (S.C. 2020). To the extent the Court of Appeals of South Carolina’s waiver

rule in Laidlaw conflicts with Harleysville and Ex parte Builders Mutual, we apply

6 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 7 of 10

Harleysville, the holdings of the Supreme Court of South Carolina, and so controlling

South Carolina law.

Finally, the insurers argue that Ex parte Builders Mutual dilutes some of the duties

of notice insurers have under Harleysville. If Ex parte Builders Mutual overruled any part

of Harleysville, it was only with respect to the special referee’s suggestion in that case that

insurers could not seek to allocate coverage in subsequent declaratory-judgment actions.

Ex parte Builders Mutual, 847 S.E.2d at 95 n.8 (citing Harleysville, 803 S.E.2d at 294).

Moreover, even if Ex parte Builders Mutual had diluted some of insurers’ duties to notify

insureds of potential conflicts of interest or the need for an allocated verdict, that has little

bearing on the reservation of rights issue. Rather, as Stoneledge argues, Ex parte Builders

Mutual did not overrule, but in fact reaffirmed, the holding of Harleysville concerning

reservations of rights. Id. at 94.

In sum, the insurers’ attempts to skirt Harleysville’s application in this case fail. We

therefore proceed to evaluate the reservation of rights letters sent here under the standard

set out in Harleysville.

III.

In Harleysville, the court found the reservation of rights letter insufficient because

the insurer merely “identif[ied] the policy numbers and policy periods for policies that

potentially provided coverage” and “incorporated a nine- or ten-page excerpt of various

policy terms, including . . . numerous policy exclusions and definitions.” 803 S.E.2d at

298–99. Specifically, the insurer failed to reserve its rights as to the following issues:

“whether any damages resulted from acts meeting the definition of occurrence, whether

7 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 8 of 10

any damages occurred during the applicable policy periods, and what damages were

attributable to non-covered faulty workmanship [e.g., the your-work exclusion].” Id. at

300. These are some of the coverage defenses the insurers raise here but did not set forth

in their reservation of rights letters.

Harleysville not only deemed a general reservation of rights without these defenses

insufficient, it also provides guidance as to what might constitute an adequate reservation

of rights. At the very least, an insurer should “discuss[] [its] position as to the various

provisions” and “expla[in] . . . its reasons for potentially denying coverage.” Id. If the

insurer’s reservation of rights is ambiguous, a court must construe the reservation “strictly

against the insurer and liberally in favor of the insured.” 14A Steven Plitt, Daniel

Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 202:48 (3d ed.

2021) (citing Harleysville, 803 S.E.2d at 298). With those guiding principles in mind, we

turn to the reservation of rights letters before us now. The letters here, like the letter in

Harleysville, fail to inform the insureds that the insurers intend to litigate coverage issues

and do not apprise the insureds of potential conflicts of interest. Both insurers agreed to

defend the claim. And for almost all of the coverage issues here, the reservation of rights

is of the Harleysville “we will let you know later” variety. See 803 S.E.2d at 299.

Builders Mutual’s May 2009 reservation of rights letter merely refers the insured to

certain policy exclusions and summarizes the general nature of those exclusions. That is

exactly the sort of general reservation of rights that Harleysville deemed insufficient.

Builders Mutual’s July 2009 reservation of rights letter, in similar fashion, refers to

“coverage issues” generally and then advises the insured that “your work product is not

8 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 9 of 10

covered,” again directing the insured to consult exclusions in the policy. J.A. 365. Under

Harleysville, simply stating a policy exclusion — without more — does not constitute a

sufficient reservation of rights.

Cincinnati’s March 2010 reservation of rights letter presents a closer question. The

letter lists certain policy exclusions and notes that “coverage may be limited by several

other exclusions and endorsements.” J.A. 360–62. Applying Harleysville, that is still

insufficient to reserve the right to dispute coverage as to the policy exclusions. However,

the Cincinnati letter continues, with respect to whether coverage is triggered in the first

place, stating that “[i]t is doubtful that the claim alleges the happening of an ‘occurrence’”

or that the “claim alleges ‘property damage’ within the policy definition,” and if there is

no “occurrence” or “property damage” as defined by the policy, there is “no coverage.” Id.

In assessing whether this is a sufficient reservation of rights under Harleysville, we

look to the punitive-damages provision in Harleysville itself, for which the court found an

adequate reservation of rights. There, the letter stated that the insurer “reserves the right

to disclaim coverage for [punitive damages]” because “under all of your policies, they

would not arise from an ‘occurrence,’ do not fit the definition of ‘bodily injury or property

damage,’ and/or were ‘expected and intended’ within the meaning of exclusions in the

policies.” Harleysville, 803 S.E.2d at 299. Unlike the reservation of rights as to punitive

damages in Harleysville, Cincinnati’s letter is devoid of any explanation for why Cincinnati

finds it “doubtful” that there is an “occurrence” or “property damage” within the meaning

of the policy. At best, Cincinnati’s purported reservation is ambiguous. And so, although

9 USCA4 Appeal: 19-2009 Doc: 59 Filed: 12/13/2022 Pg: 10 of 10

Cincinnati’s letter fares slightly better than the other challenged reservation of rights letters,

it still fails to meet Harleysville’s standard for a sufficient reservation of rights.

Undeterred, the insurers raise other coverage defenses with respect to the breach of

fiduciary duty cause of action, the applicable policy periods, and the known-loss exclusion.

However, these appear to be reservation of rights issues in a new guise, 2 and as we

concluded above, the insurers’ reservation of rights letters here were inadequate.

Therefore, we find no reversible error in the district court’s application of Harleysville to

the reservation of rights letters in this case.

IV.

For the foregoing reasons, the judgment of the district court is

AFFIRMED.

2 One issue arguably falls outside the Harleysville reservation of rights ambit. In their supplemental opening brief, the insurers raise for the first time the argument that the breach of fiduciary duty judgment against Thoennes has been extinguished, thereby precluding coverage entirely for that judgment. Even if that were true (we do not believe it is), the insurers have waived any such argument in this appeal. Grayson O Co. v. Agadir Int’l LLC, 856 F.3d 307, 316 (4th Cir. 2017) (“A party waives an argument by failing to present it in its opening brief . . . .”). 10