UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1215
JESSCO, INC.,
Plaintiff - Appellee,
v.
BUILDERS MUTUAL INSURANCE COMPANY,
Defendant - Appellant.
Appeal from the United States District Court for the District of
South Carolina, at Charleston. Patrick Michael Duffy, Senior
District Judge. (2:08-cv-01759-PMD)
Argued: January 25, 2012 Decided: March 29, 2012
Before TRAXLER, Chief Judge, and AGEE and DIAZ, Circuit Judges.
Affirmed in part, reversed in part, and remanded by unpublished
per curiam opinion.
Stephen Peterson Groves, Sr., NEXSEN PRUET, Charleston, South
Carolina, for Appellant. Steven Lewis Smith, SMITH & KOONTZ,
PA, Charleston, South Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:
In this declaratory judgment action, Builders Mutual
Insurance Company (“BMIC”) appeals the district court’s
determination that it had a duty to defend and a duty to
indemnify under an insurance policy (the “Policy”) issued by
BMIC to Jessco, Inc. We conclude that BMIC had a duty to defend
Jessco, but we also conclude that the policy did not provide
coverage for the $10,000 re-grading allowance paid by Jessco to
the homeowners in the underlying construction-defect action. We
therefore affirm in part, reverse in part, and remand.
I.
Glenn and Tracie Mazyck hired Jessco to build a house for
them in North Charleston’s Coosaw Creek subdivision. Shortly
after moving into the house in September 2004, the Mazycks
provided Jessco with a punch list of mostly minor items to be
completed or repaired. The punch list matters were not resolved
to the Mazycks’ satisfaction, and in February 2005, they filed
suit against Jessco in state court. The complaint alleged,
among other things, that the lot flooded because it was not
graded properly to direct surface water into the wetlands area
adjacent to the lot. In May 2006, the state-court action was
stayed so the claims could be pursued through arbitration, as
required by the contract. In the fall of 2007, experts hired by
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the Mazycks identified substantial water damage to the house
caused by the flooding of the property. The experts believed
the problems were so severe that the best solution was to
demolish the house and re-build on a re-graded lot.
In October 2007, after the escalation in the Mazycks’
demands, Jessco finally notified BMIC of the underlying claims.
BMIC concluded that the Mazycks’ claims were not covered by the
Policy and that Jessco failed to promptly notify BMIC of the
lawsuit, and BMIC therefore refused to defend Jessco against the
Mazycks’ claims or to indemnify Jessco for any damages paid to
the Mazycks. Jessco thereafter filed a declaratory judgment
action in state court seeking a declaration that the claims in
the underlying action were covered by the Policy. BMIC removed
the action to federal court and counterclaimed, seeking a
declaration that it was not obligated under the Policy to defend
or indemnify Jessco.
The arbitration hearing on the Mazycks’ claims was
conducted over several days in October and December 2008. The
arbitrator issued his award in April 2009, ordering Jessco to
pay almost $55,000 in damages for various items that were in
need of repair or completion. As to the flooding issue, the
arbitrator relied on the testimony of the Mazycks’ experts to
conclude that the flooding was proximately caused by “the
overcapacitation of the wetlands, caused by the overall design
3
and development of the surrounding neighborhood.” J.A. 265.
Although the arbitrator specifically found that Jessco’s work
was “not the legal proximate cause of the flooding of [the
Mazycks’] property,” J.A. 265, the award included a $10,000
allowance for re-grading of the lot, which the arbitrator
indicated would provide better surface-water management.
After the arbitrator issued his award, BMIC moved for
summary judgment in the declaratory judgment action. The
district court concluded that while most of the Mazycks’ claims
did not fall within the scope of the Policy, the flooding-
related claims were covered by the Policy. The court rejected
BMIC’s assertion that Jessco’s untimely notice barred recovery
under the Policy, and the court therefore concluded that BMIC
breached its duty to defend Jessco against the claims. The
district court ordered BMIC to pay more than $68,000 in
attorney’s fees incurred by Jessco in defending against the
Mazycks’ claims and to reimburse Jessco for the $10,000 re-
grading allowance ordered by the arbitrator.
II.
Commercial general liability (“CGL”) insurance policies
like the one at issue in this case generally contain two
significant coverage provisions: “one, providing for the payment
by the insurer of sums the insured shall become obligated to
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pay, the other providing, in substance, for the defense of any
suit alleging bodily injury or property damage and seeking
damages payable under the terms of the policy.” Sloan Constr.
Co. v. Central Nat’l Ins. Co. of Omaha, 236 S.E.2d 818, 820
(S.C. 1977). * “Although these duties are related in the sense
that the duty to defend depends on an initial or apparent
potential liability to satisfy the judgment, the duty to defend
exists regardless of the insurer’s ultimate liability to the
insured.” Id. BMIC’s challenges on appeal involve both the
duty to defend and the duty to indemnify Jessco.
A. Duty to Defend
Under South Carolina law, questions of coverage and the
duty to defend under an insurance policy generally “are
determined by the allegations of the complaint. If the
underlying complaint creates a possibility of coverage under an
insurance policy, the insurer is obligated to defend.” City of
Hartsville v. South Carolina Mun. Ins. & Risk Fin. Fund, 677
S.E.2d 574, 578 (S.C. 2009) (citation omitted). Although the
duty to defend typically is determined by the allegations of the
underlying complaint, “an insurer’s duty to defend is not
*
A federal court sitting in diversity must apply the
choice-of-law rules of the forum state. See Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941). The
parties agree that South Carolina law governs this dispute.
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strictly controlled by the allegations in [the c]omplaint.
Instead, the duty to defend may also be determined by facts
outside of the complaint that are known by the insurer.” USAA
Prop. & Cas. Ins. Co. v. Clegg, 661 S.E.2d 791, 798 (S.C. 2008).
(1)
The Policy provides coverage for sums Jessco becomes
legally obligated to pay as damages because of “property damage”
caused by an “occurrence” to which the insurance applies. J.A.
75. The Policy defines “property damage” as “[p]hysical injury
to tangible property, including all resulting loss of use of
that property,” and as “[l]oss of use of tangible property that
is not physically injured.” J.A. 87. “Occurrence” is defined as
“an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” J.A. 87.
BMIC does not dispute on appeal that the allegations of the
Mazycks’ complaint raised the possibility of “property damage”
caused by an “occurrence” within the meaning of the Policy. See
Horry Cnty. v. Insurance Reserve Fund, 544 S.E.2d 637, 641 (S.C.
Ct. App. 2001) (concluding that flooding of land was “within the
ordinary meaning of physical injury to property” and that
damages caused by flooding were thus “clearly within the
definition of property damage”); Auto Owners Ins. Co. v. Newman,
684 S.E.2d 541, 544-45 (S.C. 2009) (concluding that “continuous
moisture intrusion” causing damage to property other than the
6
insured’s work constitutes an occurrence). Instead, BMIC
contends that it had no duty to defend because coverage for the
Mazycks’ claims was excluded by the Policy’s “your work”
exclusion. See Clegg, 661 S.E.2d at 797 (“[A]n insurer has no
duty to defend an insured where the damage was caused for a
reason unambiguously excluded under the policy.” (internal
quotation marks omitted)).
The exclusion upon which BMIC relies is a standard
exclusion in CGL policies that excludes from coverage any claims
for “‘[p]roperty damage’ to ‘your work’ arising out of it or any
part of it.” J.A. 78. The Policy defines “your work” as
“[w]ork or operations performed by you or on your behalf,” J.A.
88, a definition broad enough to encompass and thus preclude
coverage for work done by the insured’s subcontractors. See
French v. Assurance Co. of Am., 448 F.3d 693, 700-01 (4th Cir.
2006). Many CGL policies have an exception to the your-work
exclusion that restores coverage for damage to work performed by
a subcontractor. See id. at 701; see also Newman, 684 S.E.2d at
546 (“[T]he subcontractor exception preserves coverage for
property damage that would otherwise be excluded as ‘your work’
. . . .”). In this case, however, the Policy contains an
endorsement that removes the subcontractor exception. According
to BMIC, that endorsement “completely eliminated all liability
insurance coverage to Jessco for any work done by or on its
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behalf by one or more of Jessco’s subcontractors.” Brief of
Appellant at 14. BMIC contends that all of the work on the
property was done by subcontractors on Jessco’s behalf and that
the your-work exclusion therefore bars coverage for all of the
claims asserted by the Mazycks. We disagree, albeit for reasons
other than those set out by the district court. See McMahan v.
Iron Workers Union Local 601, 964 F.2d 1462, 1467 (4th Cir.
1992) (“We of course have the power to affirm a judgment for any
reason appearing on the record, notwithstanding that the reason
was not addressed below.”).
“The primary purpose of [the your-work] exclusion is to
prevent liability policies from insuring against an insured’s
own faulty workmanship, which is a normal risk associated with
operating a business.” Lee R. Russ & Thomas F. Segalla, Couch
on Insurance § 129:17 (3d ed.). Contrary to BMIC’s argument,
however, the exclusion does not withdraw coverage for any and
all work done by the insured or its subcontractors; it withdraws
coverage in cases where the insured causes property damage to
work done by the insured or its subcontractors: “By its plain
language, the ‘your work’ exclusion only excludes coverage for
damage to an insured’s work that arises out of the insured’s
faulty workmanship. It does not exclude coverage for damage to
a third party’s work.” Limbach Co. v. Zurich Am. Ins. Co., 396
F.3d 358, 365 (4th Cir. 2005) (per curiam); see also Couch on
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Insurance § 129:17 (“[W]here all of the damage that is being
claimed is damage to the work of the insured which is caused by
the work of the insured, the ‘your work’ exclusion will apply to
preclude coverage.”). Accordingly, the Policy’s elimination of
the subcontractor’s exception means that Jessco’s subcontractors
will not be viewed as third-parties for purposes of determining
whose “work” was damaged, but the elimination of the exception
does not, as BMIC contends, preclude coverage if Jessco’s work
in fact damages the work of a third party.
The question, then, is whether the Mazycks’ claims against
Jessco created a possibility that a third-party’s work or
property was damaged by the faulty workmanship of Jessco or its
subcontractors. We believe that question must be answered in
the affirmative. The contract between Jessco and the Mazycks
specifically contemplated that Glenn Mazyck would perform some
of the work, and Mazyck himself installed (or hired a
subcontractor to install) the flooring and landscaping. The
lot-flooding claim first asserted by the Mazycks thus created a
possibility of damage to the landscaping, which was Glenn
Mazyck’s work, not Jessco’s. See Limbach, 396 F.3d at 365
(“Since the landscaping and concrete work were performed by
third parties, the ‘your work’ exclusion does not preclude
coverage for the costs of repairing and replacing the
landscaping and concrete.”). And when the Mazycks’ claims
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expanded to include water damage to the house itself, those
claims likewise raised the possibility of damage to Glenn
Mazyck’s work. Accordingly, we reject BMIC’s claim that the
your-work exclusion barred coverage for the claims asserted by
the Mazycks.
(2)
The Policy requires Jessco to notify BMIC of claims or
lawsuits brought against it “as soon as practicable.” J.A. 83.
BMIC contends that even if the Policy otherwise provided
coverage, Jessco lost its right to coverage by waiting more than
two years to give notice of the Mazycks’ lawsuit.
Although Jessco contends that it notified BMIC as soon as
it became apparent that the Mazycks’ claims might be covered, we
will assume for purposes of this opinion that the notice was
untimely. Under South Carolina law, however, recovery under the
Policy is barred only if BMIC proves that it was substantially
prejudiced by the late notice. See Vermont Mut. Ins. Co. v.
Singleton, 446 S.E.2d 417, 421 (S.C. 1994) (“Where the rights of
innocent parties are jeopardized by a failure of the insured to
comply with the notice requirements of an insurance policy, the
insurer must show substantial prejudice to the insurer’s
rights.”); Squires v. National Grange Mut. Ins. Co., 145 S.E.2d
673, 677 (S.C. 1965) (“The burden of proof is upon the insurer
to show not only that the insured has failed to perform the
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terms and conditions invoked upon him by the policy contract but
in addition that it was substantially prejudiced thereby.”).
On appeal, BMIC asserts that the delay in notification
“substantially prejudiced [its] ability to investigate, manage,
handle, and/or settle the Mazycks’ claims.” Brief of Appellant
at 27. BMIC, however, presented no evidence of prejudice to the
district court, and it makes no effort to even explain to this
court how it was prejudiced by the delay even though it had
notice of the claims more than a year before the arbitration
hearing took place. Because prejudice to the insurer may not be
presumed, see Vermont Mut., 446 S.E.2d at 422, BMIC’s
unsupported assertion of prejudice is insufficient to establish
that it was substantially prejudiced by Jessco’s delay in
notification. The district court therefore properly rejected
BMIC’s assertion that Jessco’s delay in notification precluded
recovery under the Policy.
(3)
We turn briefly to the question of damages for BMIC’s
breach of its duty to defend. The district court ordered BMIC
to pay more than $68,000 in legal fees incurred by Jessco in
defending itself against the Mazycks’ claims and in prosecuting
the declaratory judgment action. See Unisun Ins. Co. v. Hertz
Rental Corp., 436 S.E.2d 182, 186 (S.C. Ct. App. 1993) (“An
insurer that breaches its duty to defend and indemnify the
11
insured may be held liable for the expenses the insured incurs
in providing for his own defense.”).
In the statement of the issues on appeal included in its
brief, BMIC lists ten issues, including two challenges to the
attorney’s fee award. In the body of its brief, however, BMIC
substantively addresses only three issues, none of which include
a challenge to the fee award independent from the merits of the
underlying duty-to-defend issue. That is, while BMIC argues
that the entire damage award must be set aside because the your-
work exclusion precluded coverage for all claims, BMIC does not
alternatively argue that, even if it had a duty to defend, the
award of fees as damages, or the amount of fees awarded, was
improper. Under these circumstances, BMIC has abandoned any
challenge to the attorney’s fee award by failing to
substantively address it in brief. See, e.g., Wahi v.
Charleston Area Med. Ctr., Inc., 562 F.3d 599, 607 (4th Cir.
2009) (“Federal Rule of Appellate Procedure 28(a)(9)(A) requires
that the argument section of an appellant’s opening brief must
contain the ‘appellant’s contentions and the reasons for them,
with citations to the authorities and parts of the record on
which the appellant relies.’ Because Wahi has failed to comply
with the specific dictates of Rule 28(a)(9)(A), we conclude that
he has waived his claims . . . .”); Williams v. Giant Food Inc.,
370 F.3d 423, 430 n.4 (4th Cir. 2004) (“Williams makes no
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argument in her brief to support this assertion, and we deem it
abandoned on appeal.”).
B. Duty to Indemnify
While the duty to defend exists where there is a
possibility of a covered claim, an insurer is obligated to
indemnify the insured only for claims that in fact fall within
the scope of the coverage provided by the policy. On appeal,
BMIC contends that the $10,000 re-grading allowance was not
compensation for loss caused by a covered risk and that the
district court therefore erred by requiring it to indemnify
Jessco for the re-grading allowance.
Resolution of this issue requires us to determine the legal
basis for the re-grading allowance ordered by the arbitrator.
In their state-court action, the Mazycks asserted contract- and
negligence-based claims against Jessco. If the re-grading
allowance was awarded by the arbitrator as compensation for
negligence by Jessco in grading the property, Jessco’s
negligence would constitute an “occurrence” and the Policy would
provide coverage.
Although the arbitrator stated that Jessco and the Mazycks
both “b[ore] some responsibility for the flooding,” J.A. 262,
the arbitrator ultimately determined that the flooding was
caused by “the overcapacitation of the wetlands, caused by the
overall design and development of the surrounding neighborhood,”
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J.A. 265. The arbitrator concluded that the development and
overcapacitation was “an unforeseen intervening cause,” and
Jessco’s work was “not the legal proximate cause of the flooding
of [the] property.” J.A. 265.
The arbitrator’s determination that Jessco’s work was not
the proximate cause of the flooding necessarily amounted to a
rejection of any negligence-based claim asserted against Jessco.
See, e.g., Hurd v. Williamsburg Cnty., 579 S.E.2d 136, 144 (S.C.
Ct. App. 2003) (“It is apodictic that a plaintiff may only
recover for injuries proximately caused by the defendant’s
negligence.”). While there may have been some negligent conduct
by Jessco, the proximate-cause determination means that Jessco
could not have been held accountable to a third-party for that
negligence. See, e.g., Howard v. Riddle, 221 S.E.2d 865, 866
(S.C. 1976) (“Plaintiff must show, as a matter of law, not only
that defendant was negligent but also that his negligence was a
contributing or proximate cause of the injury . . . .” (internal
quotation marks omitted)).
Because there was no actionable negligence on the part of
Jessco, the re-grading allowance could only have been awarded as
compensation for a breach of contract. The Policy, however,
unambiguously excludes coverage for breach-of-contract damages,
see J.A. 76, and BMIC therefore had no obligation to indemnify
Jessco for the re-grading allowance paid to the Mazycks.
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III.
For the foregoing reasons, we hereby affirm the district
court’s judgment and damages awarded with regard to the duty-to-
defend issue. The district court erred, however, in concluding
that BMIC was obligated to indemnify Jessco for the $10,000 re-
grading allowance paid to the Mazycks. Accordingly, we vacate
the district court’s judgment and remand for further proceedings
consistent with this opinion.
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED
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