Harleysville Group Ins. v. Heritage Communities, Inc.

THE STATE OF SOUTH CAROLINA

In The Supreme Court

Harleysville Group Insurance, a Pennsylvania
Corporation, Appellant/Respondent,

v.

Heritage Communities, Inc., a South Carolina
Corporation; Heritage Magnolia North, Inc., a South
Carolina Corporation; Buildstar Corporation, a South
Carolina Corporation; Magnolia North Horizontal
Property Regime; Magnolia North Property Owners
Association, Inc., a South Carolina Corporation; and
National Surety Corp., Defendants,

Of whom Heritage Communities, Inc., a South Carolina
Corporation; Heritage Magnolia North, Inc., a South
Carolina Corporation; Buildstar Corporation, a South
Carolina Corporation; and National Surety Corp. are
Respondents,

and Magnolia North Horizontal Property Regime and
Magnolia North Property Owners Association, Inc., a
South Carolina Corporation, are Respondents/Appellants.

Appellate Case No. 2013-001281

And

Harleysville Group Insurance, a Pennsylvania
Corporation, Appellant/Respondent,

v.

Heritage Communities, Inc., a South Carolina
Corporation; Heritage Riverwalk, a South Carolina
Corporation; Buildstar Corporation, a South Carolina
Corporation; Riverwalk at Arrowhead Country Club
Horizontal Property Regime; Riverwalk at Arrowhead
Country Club Property Owners Association, Inc., a South
Carolina Corporation; National Surety Corp.; and Tony
L. Pope and Lynn Pope, individually and representing as
a class all unit owners at Riverwalk at Arrowhead
Country Club Horizontal Property Regime, Defendants,

Of whom Heritage Communities, Inc., a South Carolina
Corporation; Heritage Riverwalk, a South Carolina
Corporation; Buildstar Corporation, a South Carolina
Corporation; National Surety Corp.; and Tony L. Pope
and Lynn Pope, individually and representing as a class
all unit owners at Riverwalk at Arrowhead Country Club
Horizontal Property Regime, are Respondents,

and Riverwalk at Arrowhead Country Club Horizontal
Property Regime and Riverwalk at Arrowhead Country
Club Property Owners Association, Inc. are
Respondents/Appellants.

Appellate Case No. 2013-001291

Appeal from Horry County

John M. Milling, Special Referee

Opinion No. 27698

Heard January 14, 2016 – Filed January 11, 2017

AFFIRMED AND AFFIRMED AS MODIFIED

C. Mitchell Brown, William C. Wood, Jr., and A.
Mattison Bogan, all of Nelson Mullins Riley &
Scarborough, LLP, of Columbia; and Robert C.
Calamari, of Nelson Mullins Riley & Scarborough, of
Myrtle Beach, for Appellant/Respondent.
 John P. Henry and Philip C. Thompson, Sr., both of
Thompson & Henry, P.A., of Conway, for
Respondents/Appellants.

JUSTICE KITTREDGE: These cases present cross-appeals from declaratory
judgment actions to determine coverage under Commercial General Liability
(CGL) insurance policies issued by Harleysville Group Insurance (Harleysville).
These cases arise from separate actions, but we address them in a single opinion as
they involve virtually identical issues regarding insurance coverage for damages
stemming from the defective construction of two condominium complexes in
Myrtle Beach: Magnolia North Horizontal Property Regime (Magnolia North) and
Riverwalk at Arrowhead Country Club Horizontal Property Regime (Riverwalk).
The Special Referee found coverage under the policies was triggered and
calculated Harleysville's pro rata portion of the progressive damages based on its
time on the risk. We affirm the findings of the Special Referee in the Magnolia
North matter, and we affirm as modified in the Riverwalk matter.

I.

The Riverwalk and Magnolia North developments were constructed between 1997
and 2000. After construction was complete and the units were sold, the purchasers
became aware of significant construction problems, including building code
violations, structural deficiencies, and significant water-intrusion problems. In
2003, the purchasers filed suit to recover damages for necessary repairs to their
homes.

The lawsuits were filed by the respective property owners' associations (the
POAs), which sought actual and punitive damages for the extensive construction
defects under theories of negligent construction, breach of fiduciary duty, and
breach of warranty.1 As to the Riverwalk development, individual homeowners

1
The Magnolia North trial involved claims of negligent construction, breach of
implied warranty of workmanlike service, and breach of fiduciary duty for failing
to repair or fund repairs needed in the common areas at the time the property was
turned over to the POA. In the Riverwalk litigation, the POA asserted similar
claims of negligence and breach of fiduciary duty.
also filed a class action to recover damages for the loss of use of their property
during the repair period.2 The defendants in the underlying suits were the related
corporate entities that developed and constructed the condominium complexes:
Heritage Communities, Inc. (the parent development company), Heritage Magnolia
North, Inc. and Heritage Riverwalk, Inc. (the project-specific subsidiary companies
for each separate development), and Buildstar Corporation (the general contracting
subsidiary that oversaw construction of all Heritage development projects), to
which we refer collectively as "Heritage."

During the period of construction from 1997 to 2000, the various Heritage entities
each maintained several liability insurance policies with Harleysville with per-
occurrence limits totaling between $3,000,000 and $4,000,000 on the primary
policies and between $9,000,000 and $13,000,000 on the excess liability policies.3
Heritage was uninsured after the last policy lapsed in 2001, and the financial strain
of numerous construction-defect lawsuits caused Heritage to go out of business in
2003.4

After receiving notice of the lawsuits, Harleysville informed its insureds that it

2
This class action was consolidated for trial with the Riverwalk POA suit.
3
Between August 1997 and November 1999, Heritage Communities, Inc.
maintained various policies with $1,000,000 in primary liability coverage and
$4,000,000 in excess coverage. From April 1997 to August 2000, BuildStar
Corporation maintained $1,000,000 of coverage in both primary and excess
policies. From June 1997 to June 2001, Heritage Riverwalk, Inc. maintained
policies of $1,000,000 in primary coverage and $4,000,000 in excess coverage.
From September 1998 to November 2000, Heritage Magnolia North maintained
$1,000,000 in liability coverage and $4,000,000 in excess coverage.

4
In January 2001, Heritage Communities, Inc., the parent development company,
filed for protection under Chapter 11 of the United States Bankruptcy Code and
thereafter was administratively dissolved by the South Carolina Secretary of State
in June 2011. See S.C. Code Ann. § 33-14-210(d) (2006) ("A corporation
dissolved administratively continues its corporate existence but may not carry on
any business except that necessary to wind up and liquidate its business and
affairs.") The remaining corporate entities, though not officially dissolved, have
ceased operations.
would provide for their defense; however, Harleysville contends this was done
under a full reservation of rights. Harleysville's efforts to reserve its rights were
generic statements of potential non-coverage coupled with furnishing most of the
Heritage entities with copies (through a cut-and-paste method) of the insurance
policies. There is no dispute that Harleysville would control the litigation.
Harleysville contends that all coverage issues would be litigated following the
entry of any adverse jury verdict.

At the outset of each trial, Harleysville's counsel for Heritage conceded liability,
and in both trials, the trial court directed a verdict in favor of the POA on the
negligent construction cause of action. See Magnolia North Prop. Owners' Ass'n v.
Heritage Cmtys., 397 S.C. 348, 369–70, 725 S.E.2d 112, 123–24 (Ct. App. 2012)
(observing that "during opening arguments, counsel [for Heritage] conceded
liability" and affirming the trial court's decision to direct a verdict in favor of the
POA); Pope v. Heritage Cmtys., 395 S.C. 404, 429–30, 717 S.E.2d 765, 778–79
(Ct. App. 2011) (quoting Heritage's concessions of liability during opening
statements and finding no error in the trial court's decision to direct a verdict in
favor of the POA). Thus, the only contested issue in the underlying trials was the
nature and extent of the damages resulting from the admitted negligent
construction.

In this regard, the parties presented various experts who offered widely different
estimates of the costs to correct the construction defects. According to the POAs'
experts, the cost of necessary repairs totaled approximately $9,200,000 at
Magnolia North and $8,600,000 at Riverwalk. In contrast, defense experts testified
the necessary repairs would cost much less—approximately $2,400,000 at
Magnolia North and $2,500,000 at Riverwalk. Ultimately, the juries declined to
adopt any one expert's estimate, instead returning verdicts somewhere between the
parties' figures. In the Magnolia North matter, the jury returned a general verdict
for $6,500,000 in actual damages and $2,000,000 in punitive damages, and in the
Riverwalk suit, the jury returned a general verdict of $4,250,000 in actual damages
and $250,000 in punitive damages in favor of the POA and $250,000 in loss-of-use
damages and $750,000 in punitive damages in the class action.

Following these general jury verdicts against its insureds, Harleysville filed the
present declaratory judgment actions to determine what portion of the judgments in
the underlying construction-defect lawsuits would be covered under Heritage's
CGL policies. In filing these suits, Harleysville contended that, under the terms of
the policies, it has no duty to indemnify Heritage for these judgments.
Alternatively, if any of the damages were found to be covered, Harleysville sought
an accounting to somehow parse the jury verdicts and determine which portion of
the juries' general verdicts constituted covered damages. Harleysville further
argued it could be responsible for only that portion of damages occurring during
the period of time its policies provided coverage.

The matter was referred to a Special Referee, who held an evidentiary hearing in
December 2010. Because this Court's decision in Crossmann Communities of
North Carolina, Inc. v. Harleysville Mutual Insurance Co.5 was pending at the
time, the parties agreed for the Special Referee to stay the matter until Crossmann
was resolved. After Crossmann was decided in August 2011, the parties agreed for
the Special Referee to reopen the evidentiary hearing in December 2011 to hear
arguments and testimony regarding the applicability of the time-on-the-risk
formulation as set forth in Crossmann. The POAs objected to the admission of
evidence regarding time on the risk, arguing that it was inappropriate to parse the
juries' general, unallocated verdicts by evaluating Harleysville's time on the risk.

Ultimately, the Special Referee found coverage under the policies was triggered
because the juries' general verdicts included some covered damages. Although the
Special Referee found that the costs to remove and replace the faulty workmanship
were not covered under the policies, the Special Referee concluded that it would be
improper and purely speculative to attempt to allocate the juries' general verdicts
between covered and non-covered damages. Accordingly, the Special Referee
ordered the full amount of the actual damages in the construction-defect suits
would be subject to Harleysville's duty to indemnify in proportion with its time on
the risk. The Special Referee made factual findings regarding the dates of the
progressive damages period and the period during which Harleysville provided
coverage. The Special Referee thereafter calculated Harleysville's pro rata portion
of the progressive damages based on Harleysville's time on the risk. Lastly, the
Special Referee found punitive damages were covered and that no policy exclusion
applied to preclude coverage for any portion of those damages.

The parties subsequently filed cross-appeals. Harleysville is the primary
Appellant. Upon the parties' joint motion, these matters were certified from the
court of appeals to this Court pursuant to Rule 204(b), SCACR.

II.

5
395 S.C. 40, 717 S.E.2d 589 (2011).
"A declaratory judgment action is neither legal nor equitable, and therefore, the
standard of review is determined by the nature of the underlying issue." Auto
Owners Ins. Co. v. Newman, 385 S.C. 187, 191, 684 S.E.2d 541, 543 (2009) (citing
Colleton Cnty. Taxpayers Ass'n v. Sch. Dist. of Colleton Cnty., 371 S.C. 224, 231,
638 S.E.2d 685, 688 (2006)). "When the purpose of the underlying dispute is to
determine whether coverage exists under an insurance policy, the action is one at
law." Id. (citing Auto-Owners Ins. Co. v. Hamin, 368 S.C. 536, 540, 629 S.E.2d
683, 685 (Ct. App. 2006)). "In an action at law tried without a jury, the appellate
court will not disturb the trial court's findings of fact unless there is no evidence to
reasonably support them." Id. Indeed, this Court's scope of review "'is limited to
correcting errors of law.'" City of Hartsville v. S.C. Mun. Ins. & Risk Fin. Fund,
382 S.C. 535, 543, 677 S.E.2d 574, 578 (2009) (quoting State Farm Mut. Auto. Ins.
Co. v. James, 337 S.C. 86, 93, 522 S.E.2d 345, 348–49 (Ct. App. 1999)).

The threshold question in determining coverage under a CGL policy is whether the
claim at issue is for "property damage" caused by an "occurrence" within the
general grant of coverage in the CGL insuring agreement. Specifically, the CGL
policies at issue in these cases provide:

We will pay those sums that the insured becomes legally obligated to
pay as damages because of "bodily injury" [or] "property damage" . . .
to which this insurance applies. . . .

a. This insurance applies only:

(1) To "bodily injury" or "property damage":

(a) That occurs during the policy period; and

(b) That is caused by an "occurrence." 6

6
The language of the excess liability policies is similar and provides:

We will pay on behalf of the insured the "ultimate net loss" in excess
of the "applicable underlying limit" which the insured becomes legally
obligated to pay as damages because of:
The CGL policies define "property damage" as "physical injury to tangible
property, including all resulting loss of use of that property," and define an
"occurrence" as "an accident, including continuous or repeated exposure to
substantially the same general harmful conditions."7 Applying these terms to
ascertain the scope of coverage in construction-defect cases has resulted in
considerable litigation, not just in South Carolina, but across the country.

In L-J, Inc. v. Bituminous Fire & Marine Insurance Co., 366 S.C. 117, 621 S.E.2d
33 (2005), this Court explored the issue in determining whether costs to repair
negligently constructed roadways were covered under the general contractor's CGL
policy. Id. at 122, 621 S.E.2d at 35. Observing there was no claimed damage to
property other than to the defectively constructed roadway—in other words, the
completed work itself—this Court held the claimed losses were not covered by the
CGL policy. Id. at 123–24, 621 S.E.2d at 36–37. However, in L-J, we
foreshadowed that the coverage question would be resolved differently under
different circumstances. Specifically, we explained that where a claimed loss is for
damage to property other than the faulty workmanship itself, such as where
continuous or repeated water intrusion causes damage to otherwise non-defective
construction components, then the claim may be covered under the terms of the
policy, as it would not constitute a mere allegation of faulty or defective
workmanship. Id. at 123–24, 621 S.E.2d at 36 (citing High Country Assocs. v.
N.H. Ins. Co., 648 A.2d 474 (N.H. 1994)).

Consistent with our projection in L-J, several years later in Auto Owners Insurance
Co. v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009), we held that a
subcontractor's negligent application of stucco, which allowed water to seep into
the plaintiff's home causing damage to the home's framing and exterior sheathing,
constituted an occurrence under the builder's CGL policy. Although the Court
found the damages caused by the continuous moisture intrusion resulting from this
negligent construction were covered by the CGL policy, the Court emphasized that

a. "Bodily injury" or "property damage" covered by this policy
and caused by an "occurrence" which occurs during the policy
period . . . .
7
The definitions of "property damage" and "occurrence" are identical in the
primary and excess policies.
the costs of removing and replacing the defective stucco itself amounted to faulty
workmanship, which was not covered. 8 Id. at 194, 684 S.E.2d at 544–45.

Two years later, in Crossmann, the Court reaffirmed the result in Newman—that
costs to repair faulty workmanship itself are not covered under a CGL policy but
costs to repair resulting damage to otherwise non-defective components are
covered—while clarifying that the relevant policy term in the insuring agreement is
"property damage," rather than "occurrence." 395 S.C. at 48–50, 717 S.E.2d. at
593–94 (explaining the use of the phrase "physical injury" in defining property
damage suggests that such property was "not defective at the outset, but rather was
initially proper and injured thereafter"). We clarified that faulty workmanship was

8
On March 10, 2008, this Court issued an initial decision in Newman in which we
found all damages caused by water intrusion resulting from defectively installed
stucco were covered under the terms of the CGL policy. In so holding, we initially
affirmed the trial court's finding that the cost of repairing and replacing the
defectively installed stucco itself was included in the covered damages, as the
underlying damage could neither be assessed nor repaired without first removing
the exterior sheathing. Thereafter, Auto Owners filed a petition for rehearing on
April 21, 2008; on that same day, Harleysville filed a motion with this Court
seeking leave to file a brief as Amicus Curiae in support of Auto Owners' petition
for rehearing, which was subsequently granted. In its Amicus brief, citing
numerous cases from other jurisdictions in support, Harleysville urged this Court
to grant rehearing and argued, among other things, that the Court should reverse its
decision finding repair or replacement costs for the faulty workmanship to be
covered under the CGL policy, even if the Court ultimately determined other
resulting damage was covered. Auto Owners' petition for rehearing was granted on
August 22, 2008, and the case was reheard on November 6, 2008, prior to the
underlying Magnolia North and Riverwalk trials. On September 8, 2009, the Court
refiled its decision in Newman, this time determining that the cost to remove and
replace the defective stucco was not covered under the CGL policy; however, the
Court concluded that because there was no evidence in the record indicating which
portions of the arbitrator's award of damages may be attributed to the removal and
replacement of defective stucco, the entire damages award was covered. A key
point here is that Harleysville's presence in, and corresponding knowledge of, the
Newman litigation illustrates Harleysville's understanding at the time of the
underlying Riverwalk and Magnolia North trials of the distinction between faulty
workmanship and resulting property damage and the importance of that distinction
for purposes of determining coverage.
not covered because it did not constitute property damage—not because it did not
meet the definition of "occurrence." Id. (explaining the ongoing water penetration
fell within the expanded definition of occurrence—namely, the "continuous or
repeated exposure to substantially the same general harmful conditions"—and thus
constituted the relevant occurrence). This Court further found the scope of an
insurer's duty to indemnify was limited to damages accrued during the insurer's
time on the risk, overruling earlier case law that held an insurer's liability was joint
and several. Id. at 59–64, 717 S.E.2d at 599–01.

In so holding, the Court acknowledged that, when property damage is progressive
(as is the case with damages resulting from water intrusion), "it is often 'both
scientifically and administratively impossible'" to determine precisely what
quantum of property damage occurred during each policy period. Id. at 64, 717
S.E.2d at 601 (quoting Boston Gas Co. v. Century Indem. Co., 910 N.E.2d 290,
301 (Mass. 2009)). Thus, the Court determined that where it is impracticable to
calculate the exact measure of damages attributable to the injury that triggered
each policy, the default rule is that an insurer's pro rata share of the damages is a
function of the total number of years damages progressed and the portion of those
years a particular insurer provided coverage. Id. at 64–65, 717 S.E.2d at 602.

Although Crossmann represented a sea change in terms of adopting the time-on-
the-risk approach (and abandoning the "joint and several" approach), Crossmann
left unchanged the basic concept, first signaled in L-J then formally adopted in
Newman, that the cost of repairing faulty workmanship is not covered under CGL
policies but resulting property damage beyond the defective work product itself is
covered. With these principles in mind, we turn to the legal issues presented on
appeal.

III.

Coverage Issues

Harleysville and the POAs each contend the Special Referee made various errors
in declaring the scope of coverage under the policies. We disagree and address
these claims of error below.

A. Reservation of Rights to Contest Coverage

Harleysville first contends the Special Referee erred in finding it failed to properly

reserve the right to contest coverage as to the underlying damages that constitute

faulty workmanship, which are not covered under South Carolina law. We
disagree. It is axiomatic that an insured must be provided sufficient information to
understand the reasons the insurer believes the policy may not provide coverage.
We agree with the Special Referee that generic denials of coverage coupled with
furnishing the insured with a verbatim recitation of all or most of the policy
provisions (through a cut-and-paste method) is not sufficient. That is precisely
what happened here, with the exception of the coverage dispute concerning
punitive damages.

A basic understanding of reservation of rights to contest coverage may be helpful.
"A 'unilateral reservation of rights' is a notice given by the insurer that it will
defend [the insured in the lawsuit] but reserves all rights it has based on
noncoverage under the policy . . . ." 14 Couch on Ins. § 202:38. A reservation of
rights is a way for an insurer to avoid breaching its duty to defend and seek to
suspend operation of the doctrines of waiver and estoppel prior to a determination
of the insured's liability. Id. "Although a reservation of rights may protect an
insurer's interests, it also is intended to benefit the policyholder by alerting the
policyholder to the potential that coverage may be inapplicable for a loss; that
conflicts may exist as between the policyholder and the insurer; and, that the
policyholder should take steps necessary to protect its potentially uninsured
interests." 12 New Appleman on Insurance § 149.02[2][a].

"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 relief action at a
later date." United Nat'l Ins. Co. v. Waterfront N.Y. Realty Corp., 948 F. Supp.
263, 268 (S.D.N.Y. 1996). Moreover, because 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, courts have found that where an insurer defends under a reservation of
rights, an insurer has a duty to inform the insured of the need for an allocated
verdict as to covered versus noncovered damages. See Tyger River Pine Co. v.
Maryland Cas. Co., 170 S.C. 286, 170 S.E. 346, 348 (1933) (observing that where
an insurer reserves the right to control the defense, the insured is "directly deprived
of a voice or part in such negotiations and defense" and noting that if an insurer's
interests conflict with those of its insured, the insurer is " bound, under its contract
of indemnity, and in good faith, to sacrifice its interests in favor of those of the
[insured]"); see also Remodeling Dimensions, Inc. v. Integrity Mut. Ins. Co., 819
N.W.2d 602, 618 (Minn. 2012) (holding that "when an insurer notifies its insured
that it accepts the defense of a[] [] claim under a reservation of rights that includes
covered and noncovered claims, the insurer not only has a duty to defend the
claim, but also to disclose to its insured the insured's interest in obtaining a written
explanation of the award that identifies the claims or theories of recovery actually
proved and the portions of the award attributable to each"); id. (reasoning that the
"insurer is in a unique position to know the scope of coverage and exclusions in its
policies" and "the duty to notify [the insured] is not onerous").

"The right to control the litigation carries with it certain duties," including "the
duty not to prejudice the insured's rights by failing to request special
interrogatories or a special verdict in order to clarify coverage of damages."
Magnum Foods, Inc. v. Cont'l Cas. Co., 36 F.3d 1491, 1498 (10th Cir. 1994)
(citations omitted) (explaining "[i]f the burden of apportioning damages between
covered and non-covered were to rest on the insured, who is not in control of the
defense, the insurer could obtain for itself an escape from responsibility merely by
failing to request a special verdict or special interrogatories" (citing Duke v. Hoch,
468 F.2d 973, 979 (5th Cir. 1972))). Therefore, by "virtue of its duty to defend, an
insurer gains the advantage of exclusive control over the litigation," and "it would
be unreasonable to permit the insurer to not disclose potential bases for denying
coverage." Id. (internal citations and quotation marks omitted).

"If the insured does not know the grounds on which the insurer may contest
coverage, the insured is placed at a disadvantage because it loses the opportunity to
investigate and prepare a defense on its own." Desert Ridge Resort LLC v.
Occidental Fire & Cas. Co. of N.C., 141 F. Supp. 3d 962, 967 (D. Ariz. 2015).
Indeed without knowledge of the bases upon which the insurer might dispute
coverage, "the insured has no reason to act to protect its rights because it is
unaware that a conflict of interest exists between itself and the insurer." Magnum
Foods, 36 F.3d at 1498 (internal quotation marks and citation omitted). Thus,
"[t]he general rule precluding an insurer from raising new grounds contesting
coverage in a subsequent action is justified in th[is] []context." Id.

Where the insurer fails to adequately reserve the right to contest coverage, the
insurer may be precluded from doing so. See World Harvest Church, Inc. v.
GuideOne Mut. Ins. Co., 695 S.E.2d 6, 10–11 (Ga. 2010) (finding an insurer could
not assert a defense of noncoverage based on its failure to effectively reserve the
right to contest coverage). "For a reservation of rights to be effective, the
reservation must be unambiguous; if it is ambiguous, the purported reservation of
rights must be construed strictly against the insurer and liberally in favor of the
insured." Id. at 10. (citations and internal quotation marks omitted); see Desert
Ridge Resort, 141 F. Supp. 3d. 966–68 (explaining that where an insurer
undertakes and exclusively controls the defense of the insured under a reservation
of rights, prior to undertaking the defense, the insurer must specify in detail any
and all bases upon which it might contest coverage in the future since "[g]rounds
not identified in the reservation of rights may not be asserted later by the insurer");
id. (explaining the existence of a potential conflict of interest between insured and
insurer is what requires the insured to set forth the bases upon which it might
contend damages are not covered in a greater amount of detail than would
otherwise be required); Weber v. Biddle, 483 P.2d 155, 159 (Wash. Ct.App. 1971)
(underscoring that when an insurer controls the defense of the action against its
insured, "a high fiduciary duty [i]s owed by the insurer to the insured" and
observing a "general notice of reservation of rights failing to refer specifically to
the policy provision upon which the insurer wished to rely may be insufficient").

At the hearing before the Special Referee, Harleysville produced letters it sent to
former Heritage principals and counsel between December 2003 and February
2004.9 These letters explained that Harleysville would provide a defense in the
underlying suits and listed the name and contact information for the defense
attorney Harleysville had selected to represent Heritage in each matter. These
letters identify the particular insured entity and lawsuit at issue, summarize the
allegations in the complaint, and identify the policy numbers and policy periods for
policies that potentially provided coverage.10 Additionally, each of these letters
(through a cut-and-paste approach) incorporated a nine- or ten-page excerpt of
various policy terms, including the provisions relating to the insuring agreement,
Harleysville's duty to defend, and numerous policy exclusions and definitions.
Despite these policy references, the letters included no discussion of Harleysville's

9
The Magnolia North lawsuit was filed on May 28, 2003, but it was not until more
than six months later that Harleysville sent "reservation of right" letters—one to
Heritage Communities, Inc. on December 11, 2003, and another to Heritage
Magnolia North, Inc. on December 12, 2003. As none of the parties take issue
with this delay, we do not address the timeliness of Harleysville's letters.
10
Notwithstanding the production of various letters at the hearing, Harleysville
conceded it could not find a reservation of rights letter addressed to Buildstar
specifically regarding the Magnolia North litigation or any letter regarding the
individual homeowners' class action; however, Harleysville's construction-defect
litigation manager, Lee Wright, testified that such letters were sent by other
Harleysville officials and explained that Harleysville was unable to produce those
documents at trial because its copies had been misplaced.
position as to the various provisions or explanation of its reasons for relying
thereon. With the exception of the claim for punitive damages, the letters failed to
specify the particular grounds upon which Harleysville did, or might thereafter,
dispute coverage.

In contrast, concerning punitive damages, Harleysville did provide in detail the
basis for the potential denial of coverage:

The complaint filed against you seeks punitive damages.
[Harleysville] reserves the right to disclaim coverage for these since
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.

These letters further advised Heritage of the possibility it may face an uninsured
exposure or interest to the extent that any damages ultimately awarded exceeded
the policy limits. Harleysville therefore recommended that Heritage and its
principals consider employing personal counsel to represent any uninsured
exposure or interest, despite the Heritage entities having long been defunct at the
time of the construction-defect trials. Importantly, however, none of the
reservation letters advised Heritage of the need for allocation of damages between
covered and non-covered losses or referenced a possible conflict of interest or
Harleysville's intent to pursue a declaratory judgment action following any adverse
jury verdicts in the underlying lawsuits.

The Special Referee thoroughly analyzed these letters to determine whether
Harleysville properly reserved its rights. As to the substance of Harleysville's
letters to Heritage, the Special Referee found the letters were not sufficiently
specific to put Heritage on notice of Harleysville's specific defenses, particularly as
to the need for an allocated verdict.

Perhaps in recognition of the inadequacy of the letters, Harleysville additionally
relied on an oral reservation of rights based on conversations with representatives
of Heritage. The Special Referee considered this argument (and the evidence
advanced by Harleysville) and concluded that even if an oral reservation is
permitted in South Carolina, the oral reservations Harleysville claimed to have
communicated to the principals of the defunct Heritage entities "fall short of the
specificity [required] and are ambiguous at best," noting "[p]roviding timely and
specific policy defenses and disclosing actual or potential conflicts are important
fiduciary duties of the insurer[,] especially when, as here, Harleysville is
controlling the defense of its insured." The Special Referee concluded that
Harleysville failed to properly reserve its rights to dispute coverage as to actual
damages and, thus, Harleysville was precluded from attempting to do so in this
action.

Here, except as to punitive damages, Harleysville's reservation letters gave no
express reservation or other indication that it disputed coverage for any specific
portion or type of damages. Nor did the letters or testimony indicate that, in the
event Heritage was found liable in the construction-defect suits, Harleysville
intended to file the instant lawsuit to contest various coverage issues. Specifically,
Harleysville did not expressly put its insureds on notice that it intended to litigate
the issues of whether any damages resulted from acts meeting the definition of
occurrence, whether any damages occurred during the applicable policy periods,
what damages were attributable to non-covered faulty workmanship, and whether
certain damages resulted from intentional acts by the insured and were thus
excluded. And in no way did the letters inform the insureds that a conflict of
interest may have existed or that they should protect their interests by requesting an
appropriate verdict. As the Fifth Circuit found in Duke v. Hoch, Harleysville's
reservation "was no more than a general warning" and "too imprecise to shield [the
insurer]." 468 F.2d 973, 979 (5th Cir. 1972). We find there is evidence in the
record to support the Special Referee's finding that Harleysville's reservation letters
were insufficient to reserve its right to contest coverage of actual damages,11 and

11
Moreover, even were we to conclude there was no evidence to sustain this
finding, the ultimate disposition of the coverage question would nevertheless
remain unchanged. In addition to finding Harleysville's attempted reservation of
rights to be insufficient, the Special Referee also found "the Court has no basis
upon which to make a logical assessment of the jury's purpose when it awarded the
general verdict" as to the negligent construction, breach of warranty, and breach of
fiduciary duty claims, and the Special Referee refused to "engage in unguided
speculation with respect to this issue of [allocating losses], particularly when the
dilemma now confronting Harleysville is of its own making." Indeed, Harleysville
cannot overcome the law in South Carolina concerning general verdicts. See
Owners Ins. Co. v. Clayton, 364 S.C. 555, 561–62, 614 S.E.2d 611, 614–15 (2005)
(affirming trial court's holding in a declaratory judgment action that insurer had a
duty under the CGL policy to indemnify insured for the entire general verdict
where at least one of several claims was covered and explaining that when a jury
therefore, we affirm.12 Because we find Harleysville did not effectively reserve the

returns a general verdict, a finding of coverage as to any of the claims submitted to
that jury "answers the coverage question" as to the entire general verdict); see also
Newman, 385 S.C. at 198, 684 S.E.2d at 547 (finding that even though arbitrator's
award improperly included amounts for replacing and repairing faulty
workmanship itself, there was insufficient evidence in the record to allow the Court
to determine which costs were solely attributable to the non-covered faulty
workmanship and finding that the insurer's duty to indemnify therefore covered the
entire award). The dissent ignores the Special Referee's finding in this regard,
which serves as an alternative and independent basis upon which we affirm.
12
The dissent also suggests that the timing of this Court's decision in Newman
somehow precludes Harleysville from having set forth in its reservation of rights
letters the faulty workmanship versus covered damages distinction upon which it
now seeks to parse the general jury verdict. As noted, any claim that Harleysville
was not aware of this very distinction borders on frivolity because Harleysville
appeared in other earlier cases (e.g., Newman) for the express purpose of urging
the very distinction it now asserts. Moreover, as early as December 2004,
Harleysville had formally taken the position that faulty workmanship was not
covered in a dispute with a different insured in a South Carolina federal court.
Specifically, Harleysville filed a complaint seeking a declaration that it had no duty
to defend its insured, a Beaufort County homebuilder and general contractor, in
thirteen state-court actions, and arguing the damages at issue in those lawsuits
arose from the insured's faulty workmanship and, thus, were not covered under the
CGL policy. Harleysville Mut. Ins. Co. v. Cambridge Bldg. Corp., 66 Fed. R.
Serv.3d 811 (D.S.C. 2006) (quoting Harleysville's description of the coverage
questions presented as "'whether the claims arise from an "occurrence"; whether
they constitute "property damage"; and whether the claims allege only damage to
property arising from a defect, deficiency, inadequacy or dangerous condition in
[the insured's] work'"). Moreover, Harleysville further asserted that "'the law of
South Carolina is settled: there is no insurance coverage for construction defects.'"
Id. (quoting Harleysville's pleadings). Thus, regardless of any decisions by this
Court in the interim, the position taken by Harleysville—that faulty workmanship
is not covered under the insuring agreement— has been consistent since 2004, and
Harleysville demonstrated that it understood how to articulate its position in detail;
it simply failed to do so in the cases presently before the Court. Moreover, the
relevant language in Harleysville's policies has, at all times, remained unchanged,
as has South Carolina's common law regarding conflicts of interest and the high
right to contest coverage, we need not address Harleysville's claims of error
regarding various policy exclusions. We turn now to the issue of punitive
damages, the coverage of which Harleysville effectively reserved the right to
contest.

B. Punitive Damages—Insuring Agreement

Harleysville argues it has no duty to indemnify Heritage for punitive damages,
which it contends are not covered under the insuring agreement in the first
instance. Specifically, Harleysville contends that by awarding punitive damages,
the jury necessarily found that Heritage's wrongdoing and the results therefrom
were not accidental, which is required for losses to amount to an occurrence. We
disagree.

The insuring language in the CGL policies provides Harleysville will indemnify
Heritage for "those sums" Heritage becomes legally obligated to pay as damages
arising from an occurrence. The policies include the standard CGL definition of an
"occurrence" as an "accident, including continuous or repeated exposure to
substantially the same general harmful conditions."

In arguing punitive damages are not "accidental" and therefore not an occurrence,
Harleysville ignores that the progressive water intrusion constitutes the relevant
occurrence. Further, Harleysville disregards not only the progressive-damage
aspect of the occurrence definition (i.e., "continuous or repeated exposure to
substantially the same general harmful conditions") but also this Court's holding in
Crossmann that the insuring language of a CGL policy is triggered by progressive
damages caused by repeated water intrusion. Crossmann, 395 S.C. at 47, 717
S.E.2d at 593. Thus, Harleysville is contractually obligated to indemnify Heritage
for those sums Heritage becomes legally obligated to pay as a result of that
progressive water intrusion, and the policy does not limit "those sums" to
compensatory or actual damages.

Properly looking to the terms of the applicable policies, the Special Referee found
that if Harleysville intended to preclude coverage for punitive damages, it could

standards of conduct an insurer owes to its insureds. See Sims v. Nationwide Mut.
Ins. Co., 247 S.C. 82, 145 S.E.2d 523 (1965); Tyger River Pine Co. v. Maryland
Cas. Co., 170 S.C. 286, 170 S.E. 346 (1933). Thus, the suggestion in the dissent
that Harleysville is being held to a standard of clairvoyance must be rejected.
simply have added the word "compensatory" before the word "damages" in the
policies' insuring language. Because the policies' language did not unambiguously
exclude punitive damages, the Special Referee applied well-established law and
construed the policy language in favor of the insured, finding Harleysville was
required to indemnify Heritage for punitive damages.

"[A]mbiguities in an insurance contract must be construed in favor of the insured."
Whitlock v. Stewart Title Guar. Co., 399 S.C. 610, 615–16, 732 S.E.2d 626, 628
(2012). Moreover, this Court has previously found punitive damages are covered
as they constituted a sum the insured was "legally obligated to pay as damages."
Carroway v. Johnson, 245 S.C. 200, 204, 139 S.E.2d 908, 910 (1965); see S.C.
State Budget & Control Bd. v. Prince, 304 S.C. 241, 249, 403 S.E.2d 643, 648
(1991) ("Here, as in Carroway, the policy does not limit recovery to actual
damages. Instead, the policy uses broader language which, under the rules of
construction and interpretation of insurance policies, must be read as encompassing
punitive damages."). Because the policy does not unambiguously exclude punitive
damages, we construe the policy language in favor of the insured to include
punitive damages, and we therefore affirm the Special Referee's finding that
punitive damages are covered. See, e.g., Crossmann, 395 S.C. at 47, 717 S.E.2d at
593–94 (noting that an ambiguity in a CGL policy must be construed in favor of
the insured).

C. Punitive Damages—"Expected or Intended" Exclusion

Harleysville next argues the Special Referee erred in failing to find punitive
damages fall within the policy exclusion barring coverage for acts that are
"expected or intended." Harleysville contends that by awarding punitive damages,
the jury necessarily found that Heritage's wrongdoing was a "conscious failure"
and involved a "present consciousness of wrongdoing," and thus, Heritage's
wrongdoing and the results thereof were intended or at least expected damages,
which would be excluded under the policy.13 We disagree.

An insurance company bears the burden of establishing the applicability of policy
exclusions. Owners Ins. Co. v. Clayton, 364 S.C. 555, 560, 614 S.E.2d 611, 614
(2005) (citing Boggs v. Aetna Cas. & Sur. Co., 272 S.C. 460, 252 S.E.2d 565

13
On each jury verdict form, the jury answered "Yes" to the question, "Does the
Jury find by clear and convincing evidence that the Defendants' actions were
willful, wanton, reckless, and/or grossly negligent?"
(1979)). For an act to be excluded from coverage under the policy exclusion for
losses "expected or intended from the standpoint of the insured," this Court has
held that "not only the act causing the loss must have been intentional but [] the
results of the act must also have been intended." Miller v. Fidelity-Phoenix Ins.
Co., 268 S.C. 72, 75, 231 S.E.2d 701, 702 (1977) (explaining the insured must be
shown to have acted intentionally and to have intended the specific type of loss or
injury that resulted for the exclusion to apply). These questions of the insured's
intent are factual in nature. Id. "In an action at law tried without a jury, the
appellate court will not disturb the trial court's findings of fact unless there is no
evidence to reasonably support them." Newman, 385 S.C. at 191, 684 S.E.2d at
543 (citing Hamin, 368 S.C at 540, 629 S.E.2d at 685).

The Special Referee found Heritage intended to construct quality condominiums
and that Harleysville failed to meet its burden of proving Heritage expected or
intended its subcontractors to perform negligently or expected or intended the
property damage that resulted from the negligent construction. In so finding, the
Special Referee relied upon evidence that Heritage expected its subcontractors to
be reliable and skilled, that Heritage was actively addressing construction and
water-intrusion concerns to determine the source of the problems, and that post-
construction testing revealed a portion of the water intrusion was the result of
defectively manufactured components rather than improper installation. In this
regard, the Special Referee relied upon Pennsylvania Thresherman & Farmer's
Mutual Casualty Insurance Co. v. Thornton, 244 F.2d 823 (4th Cir. 1957), a Fourth
Circuit decision applying South Carolina law, in finding that an insured's negligent
conduct may be so gross as to form a basis for punitive damages yet not rise to the
level of an intentional act such that it would come within the ambit of the
expected-or-intended policy exclusion. Ultimately, the Special Referee concluded
there was nothing in the record demonstrating Heritage intended to injure the
POAs or homeowners and, thus, punitive damages were not excluded from
coverage.

Although Harleysville produced some testimony suggesting Heritage was aware of
certain instances of post-construction water intrusion around various windows,
there is other evidence that suggests Heritage was attempting to find the source of
the leaks and stop them. We recognize the counter-argument propounded by
Harleysville that Heritage approached the construction of these condominium
projects with the aim of doing as little as possible. The evidence of shoddy
workmanship would tend to support the argument that Heritage had knowledge
that the projects were substandard. But our standard of review as to this factual
issue of intent is not de novo. Because there is evidence in the record to support
the Special Referee's findings, we are constrained by the standard of review to
affirm the finding that Harleysville failed to meet its burden of showing the
expected-or-intended policy exclusion operates to exclude punitive damages from
coverage. See S.C. Dep't of Natural Res. v. Town of McClellanville, 345 S.C. 617,
623, 550 S.E.2d 299, 303 (2001) (observing that the determination of a party's
intent is a question of fact); State v. Tuckness, 257 S.C. 295, 299, 185 S.E.2d 607,
608 (1971) (explaining that the issue of intent is a question for the factfinder); see
also Miller, 268 S.C. at 75, 231 S.E.2d at 702 (noting that an insurer must
demonstrate not only that the insured acted intentionally but also that the insured
intended the specific type of loss or injury that resulted for the damages to be
excluded from coverage as "expected or intended" losses); Townes Assocs. v. City
of Greenville, 266 S.C. 81, 86, 221 S.E.2d 773, 776 (1976) (explaining that in an
action at law tried without a jury, an appellate court reviews the evidence, "not to
determine the preponderance thereof but to determine whether there is any
evidence which reasonably supports the factual findings of the judge").

IV.

Allocation Issues: Time on the Risk

Both Harleysville and the POAs contend the Special Referee made various errors
in allocating damages based on the time-on-the-risk formula set forth in
Crossmann. For the reasons below, we affirm the Special Referee's time-on-the
risk computation as to Magnolia North and affirm as slightly modified as to the
loss-of-use damages in the Riverwalk litigation.

In December 2011, the Special Referee reopened the evidentiary hearing to allow
the parties to present arguments and evidence regarding the application of
Crossmann's time-on-the-risk formula. During the hearing, the parties presented
evidence that following construction, the last certificate of occupancy was issued
in January 2000 at Riverwalk and August 2000 at Magnolia North. The evidence
also revealed that Heritage maintained insurance coverage through June 2001 at
Riverwalk and November 2000 at Magnolia North.

Additionally, the POAs offered the testimony of Drew Brown, an expert in
building diagnostics and general contracting, who testified that the water intrusion
damage at the Riverwalk and Magnolia North developments began at the time of
the first rain event following improper installation of the building components. In
terms of the progressive nature of the damages, Brown further explained:
 [D]amage and decay are two different things. Damage begins with
the water entering the sensitive, the moisture[-]sensitive building
products, and that's the standard of the [building] code. The
[building] code indicates that we must protect these building
components from damage, from water intrusion, which then will—
that water intrusion begins, the wood products begin to uptake that
water, that damage cycle has begun. Eventually, decay will begin,
which is a microbial process that will, will actually begin to destroy
the ability of the wood to carry any load . . . .

Brown testified that by the time he conducted site visits between December 2003
and April 2004, many of the building components at the developments were
damaged to the point they required replacement and that subsequent decay
eventually caused structural failure and collapse at both developments.14

In conducting the time-on-the-risk analysis, the Special Referee, mindful of the
general jury verdicts, specifically declined to conduct a per-building calculation
because the jury verdicts were not rendered on a per-building basis. The Special
Referee concluded that the most equitable way to proceed in these specific cases
would be to compare the total number of days in the damage period to the total
number of days of coverage under the Harleysville policies.

In determining the proper progressive-damages period, the Special Referee found
the damages began thirty days after the first certificate of occupancy was issued at
each development. As to the progressive-damages period end date, the Special

14
At the hearing, Harleysville proffered the testimony of a general-contracting
construction expert, who conducted site visits to survey the construction
deficiencies and prepared a report to estimate the percentage of damage
attributable to faulty workmanship at each development. Although this evidence
was ultimately excluded because the site visits and subsequent reports long post-
dated the jury verdicts and did not correspond with the evidence of damages
presented to the juries, we emphasize that even Harleysville's own expert testified
it was impossible to determine when the damage began or ended at either
development. Thus, even had the Special Referee admitted this evidence, it
nevertheless would not support the point Harleysville now urges—namely, that the
progression of damages was reasonably ascertainable.
Referee used the date of Brown's last site visit prior to the underlying trials as the
damages cut-off point, reasoning that by that date, the building components
identified in Brown's report were sufficiently damaged to require replacement,
notwithstanding any further progression and decay. Using those dates, the Special
Referee determined that damages progressed for a period of 2,347 days at
Riverwalk and 1,943 days at Magnolia North. The Special Referee further
determined that Harleysville provided coverage for 1,300 days in the Riverwalk
matter and 691 days in the Magnolia North matter. The Special Referee used those
figures to calculate a time-on-the-risk multiplier for each development, which he
then applied to calculate Harleysville's pro rata portion of the progressive damages.

On appeal, both parties take issue with the dates the Special Referee used in his
calculations, and Harleysville contends the Special Referee erred in failing to
conduct a per-building analysis and in refusing to include loss-of-use and punitive
damages in the figure to be reduced by the time-on-the-risk multiplier.
Additionally, the POAs contend application of the time-on-the-risk formula at all is
inappropriate because the jury rendered general verdicts, and therefore Harleysville
should be required to indemnify Heritage for the entire amount of all jury
verdicts—not a reduced amount proportionate to Harleysville's time on the risk.

A. Loss of Use—Actual Damages

Harleysville contends the actual damages awarded for loss of use in the Riverwalk
class action should be deemed to be progressive in nature and, thus, included in the
amount subject to allocation based on Harleysville's time on the risk. We agree
and modify the Special Referee's Riverwalk calculation slightly to include
allocation of the actual damages resulting from loss of use.

"An insurance policy is a contract . . . and the terms of the policy are to be
construed according to contract law." Auto Owners Ins. Co. v. Rollison, 378 S.C.
600, 606, 663 S.E.2d 484, 487 (2008) (citing Estate of Revis v. Revis, 326 S.C.
470, 477, 484 S.E.2d 112, 116 (Ct. App. 1997)). "Where [a] contract's language is
clear and unambiguous, the language alone determines the contract's force and
effect." McGill v. Moore, 381 S.C. 179, 185, 672 S.E.2d 571, 574 (2009) (citing
Schulmeyer v. State Farm Fire and Cas. Co., 353 S.C. 491, 495, 579 S.E.2d 132,
134 (2003)). "It is a question of law for the court whether the language of a
contract is ambiguous." Id. (citing Town of McClellanville, 345 S.C. at 623, 550
S.E.2d at 302–03).
The policies provide "'[p]roperty damage' that is loss of use of tangible property
that is not physically injured will be deemed to occur at the time of the 'occurrence'
that caused it."15 In this case, the relevant occurrence is the repeated infiltration of
water into the improperly constructed buildings, which is a progressive injury. See
Crossmann, 395 S.C. at 52 n.8, 717 S.E.2d at 595 n.8 (explaining a progressive
injury "results from an event or set of conditions that occurs repeatedly or
continuously over time, such as . . . the continual intrusion of water into a
building"). Because the underlying occurrence is progressive in nature, we find the
language of the policies unambiguously provides that loss-of-use damages must be
deemed to have progressed over the same period of time. Accordingly, we modify
the Special Referee's time-on-the risk calculation for Riverwalk as follows:

Riverwalk
Actual damages—POA $4,250,000
Actual damages—Class Action $250,000
Setoff16 ($1,028,821)
Adjusted actual damages $3,471,179
Time-on-the-risk multiplier 0.5538
Harleysville's pro rata share of actual $1,922,338
damages
Punitive damages—POA $250,000
Punitive damages—Class Action $750,000
Total amount covered by Harleysville's $2,922,338
policies

In sum, we affirm the findings of the Special Referee as modified above, and find
the policies covered $2,922,338 as to the Riverwalk litigation.

B. Punitive Damages

Turning to the issue of punitive damages, Harleysville argues that punitive
damages, like actual damages, are subject to allocation based on time on the risk.

15
The excess liability policies contain a similar provision: "All such loss of use
shall be deemed to occur at the time of the 'occurrence' that caused it."
16
By way of post-trial motion in the underlying construction-defect suit,
Harleysville was granted a setoff as a result of settlement amounts paid by
defendants other than Heritage.
Without establishing a categorical rule, we disagree with Harleysville in these
circumstances and affirm.

In the construction-defect trials, the POAs presented evidence that during the
construction process at both Riverwalk and Magnolia North (as well as several of
Heritage's other large-scale condominium developments in Horry County),
Heritage chose not to employ an inspecting architect to evaluate and approve or
disapprove any modifications and substitutions to the original construction plans
and specifications. The POAs contended the absence of an inspecting architect
resulted in the widespread and unchecked substitution of inferior building products
and improper structural modifications that ultimately led to the pervasive structural
and water-intrusion problems, all of which could have been avoided had the
original specifications been followed or properly modified. Further, the POAs
argued that although Heritage was aware of significant water-intrusion problems at
the other developments before beginning construction at Riverwalk and Magnolia
North, Heritage nevertheless continued the same inadequate construction practices
at these developments. The POAs presented additional evidence that despite
knowledge of the ongoing construction problems, Heritage also deliberately
targeted its sales efforts toward elderly, out-of-state residents and marketed its
condominiums on the basis of quality and luxurious amenities, such as swimming
pools and tennis courts, that were never constructed. The POAs contended that all
of this evidence demonstrated Heritage willfully and repeatedly sold improperly
constructed condominiums to innocent purchasers and that such conduct justified
the imposition of punitive damages. As noted, the jury verdicts included punitive-
damage awards of $2,000,000 in the Magnolia North suit, $250,000 in the
Riverwalk POA suit, and $750,000 in the Riverwalk class action.

Although the Special Referee determined the time-on-the-risk principles set forth
in Crossmann were applicable to the actual damages awarded by the juries, the
Special Referee rejected Harleysville's argument that punitive damages were
likewise subject to time-on-the-risk allocation, observing that the formula set forth
in Crossmann referred only to damages that were deemed to be progressive.

On appeal, Harleysville argues that punitive damages are necessarily predicated
upon the underlying progressive damages and, therefore, are also subject to time-
on-the-risk allocation. Harleysville further avers that, like actual damages,
punitive damages also serve a compensatory role, and since the pattern of
reprehensible conduct justifying the imposition of punitive damages took place
over a period of several years, "basic principles of fairness" require that
Harleysville not be saddled with the entire punitive damages award.

Initially, we find Harleysville seeks to blur the distinction between actual and
punitive damages and conflates the underlying purposes of these two different
types of damages. "The purpose of actual or compensatory damages is to
compensate a party for injuries suffered or losses sustained." Clark v. Cantrell,
339 S.C. 369, 378, 529 S.E.2d 528, 533 (2000) (emphasis added) (examining the
fundamental differences between actual damages and punitive damages and
rejecting the argument that punitive damages should be reduced by the proportion
of the plaintiff's comparative negligence). "The goal [of compensatory damages] is
to restore the injured party, as nearly as possible through the payment of money, to
the same position he or she was in before the wrongful injury occurred." Id.
(citations omitted).

In contrast, punitive damages relate not to the plaintiff, but rather to the "the
defendant's reckless, willful, wanton, or malicious conduct." Id. at 379, 529 S.E.2d
at 533 (emphasis added); see also Mitchell v. Fortis Ins. Co., 385 S.C. 570, 584,
686 S.E.2d 176, 183 (2009) (observing that an award of punitive damages
"'further[s] a state's legitimate interests in punishing unlawful conduct and
deterring its repetition'" (emphasis added) (quoting BMW of N. Am., Inc. v. Gore,
517 U.S. 559, 568 (1996))); Genay v. Norris, 1 S.C.L. (1 Bay) 6, 7 (1784)
(focusing on the conduct of the defendant in affirming an award of "very
exemplary damages" and finding such damages were warranted where the
defendant's conduct was found to be "very wanton," particularly in light of the
defendant's special training and experience). "Although compensatory damages
and punitive damages are typically awarded at the same time by the same
decisionmaker, they serve distinct purposes." Cooper Indus., Inc. v. Leatherman
Tool Grp., 532 U.S. 424, 432 (2001). "The former are intended to redress the
concrete loss that the plaintiff has suffered by reason of the defendant's wrongful
conduct." Id. (citations omitted). "The latter . . . operate as 'private fines' intended
to punish the defendant and to deter future wrongdoing." Id.

Although this Court has acknowledged punitive damages may also "compensate
. . . for the willfulness with which the [plaintiff's] right was invaded," this Court
has unequivocally rejected the attempt to "blur all distinctions between actual and
punitive damages by unduly emphasizing [any] compensatory aspect." Clark, 339
S.C. at 379, 529 S.E.2d at 533 (citations and internal quotation marks omitted).
Indeed, "'[i]t is a well-established principle of the common law, that . . . a jury may
inflict what are called exemplary, punitive, or vindictive damages upon a
defendant, having in view the enormity of his offence rather than the measure of
compensation to the plaintiff.'" Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 15–
16 (1991) (emphasis added) (quoting Day v. Woodworth, 54 U.S. 363, 371 (1852));
see also id. at 54 (O'Connor, J., dissenting) ("Unlike compensatory damages,
which serve to allocate an existing loss between two parties, punitive damages are
specifically designed to exact punishment in excess of actual harm to make clear
that the defendant's misconduct was especially reprehensible."). We therefore
reject Harleysville's attempt to mischaracterize the punitive damages in these cases
as compensatory.

We turn now to the question of whether punitive damages, though not
compensatory in nature, are nevertheless subject to time-on-the-risk allocation.
The concept of time on the risk is a judicially created, equitable method of
allocating progressive damages "where it is impossible to know the exact measure
of damages attributable to the injury that triggered each policy," as is the case here.
Crossmann, 395 S.C. at 64, 717 S.E.2d at 602; see id. at 64–67, 717 S.E.2d at 601–
03 (explaining that the time-on-the-risk method is the "equitable approach [that]
best harmonizes" the language of CGL policies with the scientific and
administrative impossibility of identifying the precise quantum of property damage
occurring during each policy period). Ultimately, this method of allocation
"addresses a problem of proof" in cases involving progressive property damages
"where it is not feasible to make a fact-based allocation of losses attributable to
each policy period." Boston Gas Co., 910 N.E.2d at 316. At the heart of the time-
on-the-risk theory is the idea that the policy period is a temporal limitation upon an
insurer's indemnity obligation. See Crossmann, 395 S.C. at 60, 717 S.E.2d at 599
(rejecting the "joint and several" allocation approach because, inter alia, that
approach ignores "critical language" limiting the insurer's indemnity obligation to
those losses occurring during the policy period). As we explained in Crossmann,
the time-on-the-risk allocation is a determination of "how much coverage [is to] be
provided by each triggered policy." Id. at 59, 717 S.E.2d at 599. In other words,
the analysis begins with a determination of when coverage-triggering losses
occurred, then allocates losses based on the period of time each insurer was on the
risk.

A key point to the time-on-the-risk analysis is that this allocation method was
developed as a means of apportioning actual, compensatory damages where the
injury progressed over time. See Crossmann, 395 S.C. at 45, 717 S.E.2d at 591
("Where proof of the actual property damage distribution is not available, the
allocation formula adopted herein will serve as an appropriate default method for
dividing the loss . . . ." (emphasis added)). As such, the logic and policy
considerations underlying the time-on-the-risk method may not as easily lend
themselves to the application of this concept to punitive damages. Nevertheless,
the parties have presented this Court (and the Special Referee) with a paucity of
legal authority to inform our decision as to the allocability of punitive damages,
thus forcing us to resort to these policy considerations as our guide in navigating
this novel issue. We emphasize it is not our intent to create a bright-line rule that
punitive damages may never be subject to allocation based on time on the risk.
However, we conclude the punitive-damage awards are not subject to reduction
under the facts of these cases.

Specifically, the difficulty here is that Harleysville does not contend, and has
presented no evidence, that any of the reprehensible acts upon which punitive
damages are predicated occurred outside the relevant policy periods. To the
contrary, the evidence in the record demonstrates that all of Heritage's
reprehensible acts that justified the juries' imposition of punitive damages took
place entirely during the period of time Harleysville's policies were effective.
Thus, we conclude the Special Referee did not err in finding punitive damages
were not subject to reduction based on the time-on-the-risk multiplier in these
cases.

C. Time-on-the-Risk Allocation of the General Verdict

We next turn to the POAs' contention that it was error to apply the time-on-the-risk
allocation to the general verdicts based on the possibility that some portion of the
jury awards might include losses which are attributable to non-progressive
damages stemming from the POAs' breach of fiduciary duty or breach of warranty
claims. We affirm.

In rejecting this argument, the Special Referee determined that both covered and
non-covered (faulty workmanship) claims were submitted to the jury and
concluded that it would be too speculative and inappropriate to allocate the jury
verdicts between progressive damages subject to time-on-the-risk allocation and
fixed losses not subject to time-on-the-risk allocation. Thus, the Special Referee
concluded the entire amount of actual damages would be reduced in proportion to
Harleysville's time on the risk.

Essentially, the POAs attempt to use the general verdict rule as both a shield and a
sword, arguing first that the general verdict rule shields any evaluation of covered
versus non-covered damages, yet thereafter arguing application of time-on-the-risk
principles is wholly precluded by the possibility that some portion of the jury
verdicts might be attributable to non-progressive damages. We find the Special
Referee properly rejected this argument; the general verdict rule may not serve as a
basis for the POAs to obtain coverage for non-covered claims and simultaneously
serve as a basis to avoid time-on-the-risk apportionment of any aspect of the jury
verdicts. See Mitchell v. Fed. Intermediate Credit Bank, 165 S.C. 457, 164 S.E.
136, 140 (1932) (noting a party may not use the same argument as both a shield
and a sword) (citations omitted).

D. Factual Determinations

Lastly, we do not believe the Special Referee abused his discretion in refusing to
conduct a per-building analysis or in setting the policy period or progressive-
damages period dates, as there is evidence in the record to support those findings.
See Crossmann, 395 S.C. at 65–66, 717 S.E.2d at 602 (finding it is within the
sound discretion of the trial court to determine, in light of the particular facts and
circumstances of each case, the most appropriate manner for applying the basic
time-on-the-risk formula to reasonably approximate each insurer's time on the
risk); Newman, 385 S.C. at 191, 684 S.E.2d at 543 ("In an action at law tried
without a jury, the appellate court will not disturb the trial court's findings of fact
unless there is no evidence to reasonably support them."); BB & T v. Taylor, 369
S.C. 548, 551, 633 S.E.2d 501, 502–03 (2006) (explaining that when a
determination lies within the sound discretion of the trial court, the standard of
review on appeal is limited to determining whether there was an abuse of
discretion); see also Outboard Marine Corp. v. Liberty Mut. Ins. Co., 670 N.E.2d
740, 756–57 (Ill. Ct. App. 1996) (refusing to disturb the trial court's exercise of
discretion in apportioning progressive damages).

Based on the foregoing, we affirm the Special Referee's time-on-the-risk
calculation as to Magnolia North and affirm as slightly modified as to Riverwalk.

V.

Miscellaneous Trial Issues

Harleysville argues the Special Referee erred in excluding certain evidence and in
making various factual findings. After a full review of the record, we find the
Special Referee did not abuse his discretion and affirm pursuant to Rule 220,
SCACR. See Am. Fed. Bank, FSB v. No. One Main Joint Venture, 321 S.C. 169,
174–75, 467 S.E.2d 439, 442 (1996) ("Conduct of a trial, including admission and
rejection of testimony, is largely within the trial judge's sound discretion, the
exercise of which will not be disturbed on appeal unless appellant can show abuse
of such discretion, commission of legal error in its exercise, and resulting prejudice
to appellant's rights." (citing Fetner v. Aetna Life Ins. Co., 199 S.C. 79, 18 S.E.2d
521 (1942))).

Additionally, Harleysville contends it was error for the Special Referee not to
construe its motion for judgment as a matter of law as being made pursuant to Rule
41(b), SCRCP. Rule 41(b), SCRCP, provides that, in a non-jury action, after the
plaintiff "has completed the presentation of his evidence, the defendant . . . may
move for a dismissal on the ground that upon the facts and the law the plaintiff has
shown no right to relief." (emphasis added). Here, Harleysville was the plaintiff—
not the defendant. Moreover, Harleysville in no way sought a ruling that it, as "the
plaintiff[,] has shown no right to relief." Indeed, Harleysville's motion sought a
ruling to the contrary, namely that Harleysville was entitled to relief as a matter of
law. Thus, we find the argument that the Special Referee erred in failing to
construe Harleysville's motion as one made pursuant to Rule 41(b), SCRCP, is
without merit. Cf. Waterpointe I Prop. Owner's Ass'n v. Paragon, Inc., 342 S.C.
454, 458, 536 S.E.2d 878, 880 (Ct. App. 2000) (construing defendant's "directed
verdict" motion in a non-jury action as a motion for involuntary non-suit under
Rule 41(b), SCRCP, and reviewing it as such). In any event, there can be no
prejudicial error here, for it is manifest the Special Referee rejected most of
Harleysville's arguments and had no intention of summarily ruling in favor of
Harleysville.

VI.

In sum, we find the Special Referee correctly found Harleysville failed to reserve
the right to contest coverage of actual damages and that punitive damages are
covered under the CGL policies. We also find there is evidence in the record to
support the Special Referee's factual findings as to the progressive damages
periods and that the Special Referee did not abuse its discretion in determining
Harleysville's time on the risk at Magnolia North. We find loss-of-use actual
damages at Riverwalk are subject to time-on-the-risk allocation but that punitive
damages at both developments are not. We thus affirm in the Magnolia North
matter and affirm as modified in the Riverwalk matter.

AFFIRMED AND AFFIRMED AS MODIFIED.

BEATTY, C.J., HEARN, JJ., and Acting Justice James E. Moore, concur.
Acting Justice Costa M. Pleicones dissenting in a separate opinion.
ACTING JUSTICE PLEICONES: I respectfully dissent and would reverse and
remand to the special referee with instructions.

In my view, the critical dates necessary to the determination of the merits here are
these:

May 2003: Magnolia North POA sues Heritage

December 2003: Riverwalk POA sues Heritage

December 2003 - January 2004: Harleysville informs Heritage
it will defend under a reservation of rights

November 10, 2005: L-J, Inc. v. Bituminous Fire & Marine
Ins. Co., 366 S.C. 117, 621 S.E.2d 33 (2005) becomes
final. Holds that faulty workmanship that damages only
the work itself is not an "occurrence" within the meaning
of a CGL policy.

January 2009: Riverwalk verdict

May 2009: Magnolia North verdict

October 29, 2009: Auto Owners Ins. Co. v. Newman, 385 S.C.
187, 684 S.E.2d 541 (2009) becomes final. Holds that
progressive damage to other materials as the result of
subcontractor's faulty workmanship is "property damage"
and therefore a covered occurrence under CGL policy,
and interprets two policy exclusions.

A. Reservation of Rights
The majority finds Harleysville's notices of its reservation of rights insufficient
because they (1) failed to notify the insureds of the particular grounds upon which
it might dispute coverage; (2) did not advise of the need to allocate damages
between covered and non-covered losses; and (3) did not inform the insureds that
Harleysville would seek a declaratory judgment if there were adverse jury verdicts.
I note four things at the outset: (1) the majority cites no South Carolina authority
that requires this type of information be included in a reservation of rights letter;
(2) these letters were sent almost two years before L-J became final in November
2005, and more than eight months before the initial L-J opinion was filed in
August 2004, at a time when 'occurrence' and 'property damage' definitions were
unsettled; (3) the letters were sent more than five and a half years before Newman
held that 'progressive' damages to other materials were property damage, and
interpreted two standard CGL policy exclusions; and (4) the reservation of rights
letters were sent by Harleysville to its sophisticated insured, Heritage Builders, and
not to the POAs who now purport to contest the sufficiency of these notices.

I disagree with the majority and find the reservation of rights letters to be adequate.
In support of my conclusion, I quote from a letter sent by Harleysville ("HMIC")
on January 23, 2004:

RESERVATION OF RIGHTS

This letter is not intended to waive any of HMIC's rights under
any HMIC insurance policy or at law. HMIC continues to
reserve it [sic] rights as set forth in its prior reservation of
rights, and as set forth herein, including but not limited to the
following issues:

1) Whether property damage or bodily injury was caused
by an occurrence as defined by any policy or policies
and happened during an HMIC policy period;

2) Whether notice was provided to HMIC in compliance
with the notice provision of the policy or policies;

3) Whether the cooperation clause of any policy or
policies has been complied with;

4) Whether the applicable limits of any and all
applicable primary or excess policies of insurance
have, in fact, been exhausted;

5) Whether or not any exclusion applies to preclude
coverage under any policy or policies; and

6) Any additional coverage defenses which may arise
during the investigation of this matter.

The pleadings seek punitive damages. HMIC reserves the right
to disclaim coverage for these since 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.

If there is available to you coverage from any other insurance
carrier or source in addition to that provided by HMIC, you
should immediately notify the carrier or source of all the facts
and circumstances surrounding this matter, and that you have
been named as a defendant in this lawsuit. Please notify HMIC
of the name and address of any such other insurance carrier, and
of the policy number under which this additional coverage is
available to you.

Nothing contained in this letter should be deemed a waiver of
the terms and conditions of the HMIC policy. HMIC expressly
reserves the right to rely upon any term or condition of the
insurance contract or any other ground which may be found to
limit or preclude coverage.

In the event that it is determined that there is no coverage for
this action under the HMIC policy, HMIC expressly reserves
the right to recover the amounts incurred in the defense of this
action from you or any of your other insurers that may be liable
for these costs.

Please advise us of any information that you have that you
believe may affect our determination concerning the coverage
available under the HMIC policy.

HMIC's position is based upon the facts which have been made
available to it to date. HMIC expressly reserves the right to
modify its determination concerning the potential for coverage
under this policy if the information developed during our
investigation of this claim warrants the modification.

In my opinion, the majority's conclusion - that this language was insufficient to
put the builder on notice, and its suggestion that an insurance company must
explain its position or its reasons in order to reserve its rights, or must specify
which types of damages it might dispute - is unwarranted, especially when one
considers these letters and conversations took place between sophisticated
commercial entities long before L-J had settled (for a time) the meaning of the
terms "occurrence," and much longer before the Court had interpreted the meaning
of certain policy exclusions. See, e.g., Newman, supra.

I would reverse the Special Referee's finding that Harleysville did not effectively
reserve its rights. To the extent the majority relies upon Newman to suggest
Harleysville is "at fault in not seeking an allocation of covered damages," I point
out the verdicts in Riverwalk (January 2009) and in Magnolia North (May 2009)
predate Newman (October 2009) by at more than five months. Moreover, there is
no suggestion how Harleysville could have intervened in these lawsuits and
asserted a defense against coverage without creating an impermissible conflict of
interest in violation of established South Carolina law. See Sims v. Nationwide
Mut. Ins. Co., 247 S.C. 82, 145 S.E.2d 523 (1965). In my view, nothing in the
general verdicts bars Harleysville from now litigating its liability under its
reservation of rights letters.

For the reasons given above, I would allow Harleysville to litigate its liability,
including any liability for the punitive damages award, in these declaratory
judgment actions. I would also reverse and remand the allocation of damages as
any "time on risk" analysis is necessarily affected by the proper allocation of
damages, and a determination of their "progression."

I respectfully dissent.