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In Favor of Coverage

A recent order, from the United States District Court for the District of South Carolina, found that a particular insurance policy-exclusion created “illusory” coverage resulting from an internal inconsistency in the policy.  The District Court then resolved this inconsistency in favor of the existence of coverage. E. Bridge Lofts Prop. Owners Ass’n v. Crum & Forster Specialty Ins. Co., 2015 U.S. Dist. LEXIS 156947 (D.S.C. Nov. 2, 2015).

The instant action arose from an insurer’s denial of coverage in a preceding construction defect action initiated by a condominium-owners association.  The East Bridge Lofts Property Owners Association (the “POA”) commenced a construction defect action against certain contractors and developers related to repairs and renovations on condominiums located in Mt. Pleasant, South Carolina.  This underlying action, filed in the Charleston County, South Carolina Court of Common Pleas, was presented to a jury, who returned a verdict in favor of the POA, finding $55 million dollars in damages. The POA also received an award of fees and costs in excess of $3 million dollars.

Following this verdict, the instant declaratory judgment and breach of contract actions arose. The POA joined by the underlying judgment defendants, Creekstone Builders, Inc. and Creekstone SC, LLC, brought this action against the underlying developer’s insurer, Crum & Forster Specialty Insurance Company (“C&F”).  The plaintiffs, herein, sought a determination that C&F, improperly denied coverage under a GCL Policy based upon a coverage exclusion provision, which purported to bar coverage for those claims arising from construction work performed in South Carolina.

The GCL Policy in question contained an endorsement entitled “STATE OPERATIONS EXCLUSIONS,” which sought to exclude coverage of those claims involving “any insured’s work, operations or contractual obligations in the following states: … South Carolina.”  Among several issues raised on cross-motions for summary judgment, the Court was presented an argument that a denial of coverage under the “STATE OPERATIONS EXCLUSIONS” would result in “illusory” coverage, which is disfavored in South Carolina.  

In support of this contention, the plaintiffs relied upon Isle of Palms Pest Control Co. v. Monticello Ins. Co., 319 S.C. 12 (S.C. Ct. App. 1994) involving a dispute over an exclusion for professional services in a policy issued to a pest control company.  “In Isle of Palms, the South Carolina Court of Appeals considered whether the professional liability exclusion contained in a liability insurance policy barred the insured’s claim for coverage.  The claim against the insured, a pest control company, arose from a termite inspection. The insurer argued that ‘inspecting homes and issuing termite letters are professional services excluded from coverage, while actual exterminating is not a professional service.’” LEXIS 156947, *14 (internal citations omitted).

The District Court noted that the Isle of Palms court failed to find, in the insurance policy or with the relevant case law, support for a distinction between a terminate-inspection and a termite-extermination and that to allow such an exclusion would make the underlying policy worthless since it would exclude from coverage the very activity intended, by the parties, to be insured through the policy.

Alternatively, C&F argued that the better authority on this question was answered by B.L.G. Enterprises, Inc. v. First Financial Ins. Co., 334 S.C. 529 (S.C. 1999).  “In BLG Enterprises, the court applied a liquor liability exclusion to deny coverage to a bar for negligently serving alcohol to a patron who in turn caused injury to a passenger.” LEXIS 156947, *17.  Before siding with the plaintiffs, the District Court distinguished BLG Enterprises.  First, the District Court noted that relevant caselaw indicates that a policy-exclusion will not be found to create “illusory” coverage when other well defined coverage remains intact.  In BLG Enterprises that might mean coverage over an incident where a customer slipped on a wet floor at the bar.  The District Court also recognized that caselaw suggested such liquor liability exclusions have been uniformly found unambiguous and upheld in numerous jurisdictions.

The District Court found that, as the name Creekstone SC suggests, this entity was formed specifically to perform work in the state of South Carolina. “Creekstone SC is a South Carolina entity that was only licensed to perform general contractor work in South Carolina.  It completed two construction projects in South Carolina before allowing its license to expire. Thus, the only claims Creekstone SC could make under the Policies would be for work performed in South Carolina.”  

Moreover C&F considered Creekstone SC’s previous work in the state of South Carolina when performing underwriting of the GCL Policy.  In fact, “Underwriting Rationale” for the Policy indicates states that they “were written with a $50K SIR [self-insured retention] due to past SC, CO Condo operations and $10K for other operations.” The District Court found that such an underwriting rationale supports a finding that the work Creekstone SC sought to be insured would be performed in South Carolina.

In relying on Isle of Palms, the District Court found that the State Operations Exclusion created “illusory” coverage with its internal inconsistency. The exclusion at issue attempts to remove coverage for those claims arising from the work sought to be insured. Such an internal inconsistency creates ambiguity that, according to the case, the Court must resolve in favor of coverage.

Illusory Insurance Coverage Resolved in Favor of Coverage