In Builders Mut. Ins. Co. v. Island Pointe, LLC, No. 27970, 2020 S.C. LEXIS 68 (May 13, 2020), the South Carolina Supreme Court clarified that insurers are not required and, absent unusual circumstances, should not be granted the right to intervene in construction defect cases to obtain an allocation of covered versus non-covered damages for any verdict rendered against their insureds. The court reaffirmed that insurers have the right and ability to contest whether or not a jury verdict consists of covered damages in a subsequent declaratory judgment action.
While the insurer and the insured are bound by the existence and quantum of any jury verdict on the merits, the insurer is not prohibited from litigating the question of whether any award consists of damages in a subsequent declaratory judgment action. Additionally, the court endorsed allocating damages on a percentage basis as the acceptable method where the damages cannot be precisely allocated.
Builders Mut. Ins. Co. v. Island Pointe, LLC arises out of a construction defect action brought by Palmetto Point at Peas Island Condominium Property Owners Association, Inc. against the insured contractors. The insured contractors each had one or more applicable commercial general liability (CGL) policies. The insurers properly appointed defense counsel to defend their insureds. Three years after the action began and at the end of discovery, the insurers sought to intervene and to be allowed to submit either a special verdict form or a general verdict with special interrogatories to the jury to determine what amount of any damages awarded against their insureds might be covered. The trial court refused to allow the insurers to intervene either as a matter of right under South Carolina Rules of Civil Procedure, Rule 24(a)(2), or permissively under Rule 24(b), because to do so would create a conflict of interest for the insureds’ defense counsel.
The court first held that under South Carolina law, insurers were not “real parties in interest” in the underlying construction defect action, so the court examined whether permissive intervention was appropriate, but found that the conflict that permissive intervention would create for defense counsel for the various insureds prohibited intervention. The court also expressed concern that allowing the insurers to intervene would cause undue delay in the underlying trial.
The court noted that allowing permissive intervention “would: 1) unnecessarily complicate the construction defect action including altering the Association’s burden of proof and possibly delaying the trial; and 2) create a conflict of interest for the insureds’ counsel, who were supplied to them by the insurers.” Id.
Rather than allowing intervention, the South Carolina Supreme Court reaffirmed the right of the insurers to pursue a subsequent declaratory judgment action as proper method for determining what portion of any verdict rendered against the insureds in the construction defect trial would be covered under the CGL policies. In any declaratory judgment action, the insurers and the insureds can either agree on a framework for allocating damages or use the default approach of allocating damages on a percentage basis where the amount of covered and non-covered damages cannot be precisely determined.
Other courts have reached similar conclusions. Bolt Factory Lofts Owners Ass’n v. Auto-Owners Ins. Co., 2019 COA 121 (Colo. App. 2019), cert. granted en banc, Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n, 2020 Colo. LEXIS 250 (March 16, 2020), involved a construction defects case in which the Association sued six contractors for alleged construction defects at one of its Denver condominium projects. AOIC had previously reserved its right to deny coverage. On the day the bench trial started, AOIC filed a motion to intervene, continue the trial, contest the settlement agreement, and protect its rights under the insurance policies. The court denied the motion to intervene because under Colorado law AOIC’s reservation of rights to deny coverage meant that it only had a contingent interest in the litigation, which was not sufficient to allow Rule 24(a)(2) intervention. As in Ex Parte Builders Mutual, the court held that AOIC could protect its interests in a subsequent declaratory judgment action regarding coverage, including any challenges to a settlement agreement entered into by its insured.
Emplrs Mut. Cas. Co. v. Holman Bldg. Co., L.L.C., 84 So. 3d 856 (Ala. 2011), involved a putative class action brought by plaintiff homeowners against defendants, a builder and a Chinese drywall supplier, in an action that was complex, involved numerous parties and was a multi-jurisdictional litigation. Employers Mutual sought to intervene, arguing that the jury could decide the coverage issues. The court analyzed whether the intervention would unduly delay or prejudice the adjudication of the rights of the original parties. Denying the motion, the court held that under Alabama law an insurer’s right to intervene in a civil action against its insured — either to seek a bifurcated trial or to request a general-verdict form with interrogatories or a special-verdict form — is permissive only.Further, “[a]n insurer has no absolute right to intervene in an action against its insured.”
 The Colorado Supreme Court granted certiorari, en banc and reframed the issues on appeal as “Whether an insurer is entitled to intervene under C.R.C.P. 24(a)(2) to exercise its “absolute right” to control the defense of its insured under a reservation of rights, where the defendant-insured entered into an agreement prior to trial assigning its rights to any future bad faith claims against the insurer to the third-party plaintiff.” Auto-Owners Ins. Co. v. Bolt Factory Lofts Owners Ass’n, 2020 Colo. LEXIS 250.