AI Indemnity Does Exist!

By, Laura F. Locklair, Esq.

Believers in additional insured indemnity have a new soap box to stand on following the issuance of the court’s opinion in Portrait Homes – South Carolina, LLC and Portrait Homes – Persimmon Hill, LLC v. Pennsylvania National Mutual Casualty Insurance Company and the Persimmon Hill Homeowners Association, Inc., C.A. 2014-CP-08-2757 (Berkeley County Circuit Court, October 22, 2019). For too long carriers in South Carolina and elsewhere have, at best, ignored the idea of separate indemnity obligation owed by an insurer to an additional insured and, at worst, outright denied any independent obligation to indemnify an additional insured for its own scope of fault. However, the court in Persimmon Hill punished an insurer’s breach of its duty to indemnify its additional insured (and other improper conduct by the insurer) by, among other things, awarding to the additional insured as “damages proximately caused by the breach of the duty to indemnify” the $3,850,000.00 settlement that the additional insured was forced to negotiate and pay on its own behalf, “constrained [only] by a time on risk analysis and the limits of the applicable policies.”

In Persimmon Hill, a general contractor, Portrait Homes – South Carolina, LLC and Portrait Homes – Persimmon Hill, LLC (“Portrait”) sought a defense and indemnity under multiple commercial general liability policies of insurance issued by Pennsylvania National Mutual Casualty Insurance Company (“Penn National”) to the framer, Jose Castillo d/b/a JJA Framing Company and JJA Construction (“JJA Framing”), that subcontracted with Portrait on its Persimmon Hill project. Specifically, when Portrait was sued by homeowners in the Persimmon Hill project for alleged construction defects, Portrait tendered its defense and indemnity to Penn National as an additional insured under the JJA Framing policies. Penn National denied Portrait’s tender, inaccurately representing that the policies issued to JJA Framing did not cover completed operations. Faced with Penn National’s denial and “potential actual damages of $17,380,000 and exposure for punitive damages relating in whole or in part to JJA Framing’s work,” Portrait was forced to negotiate a settlement with the plaintiffs in the underlying construction defect case by paying $3,850,000 – without the involvement or assistance, financial or otherwise, of Penn National.

In addition to determining Penn National breached its duty to defend (which could easily be the subject of a separate blog post), the Court in Persimmon Hill also concluded that Penn National breached its duty to indemnify Portrait. In the order, the Court interpreted the endorsement CG 2037, which covers the additional insured for liability “arising out of” the named insured’s work, and the endorsement 71 11 45, which covers the additional insured for liability “caused, in whole or in part by,” the named insured’s work, “expansively in favor of coverage.” As a result, the Court concluded “[t]he coverage provided to Portrait Homes as an additional insured is not limited to its vicarious liability for JJA Framing’s work.” See also Capital City Real Estate, LLC v. Certain Underwriters at Lloyd’s London, 788 F.3d 375, 380 (4th Cir. 2015 ) (“[W]hile it is true that the additional insured is covered for its vicarious liability stemming from the named insured’s operations, the insurer’s attempt to limit coverage to that along ignores the [“arising out of” and/or “caused in whole or in party by] language of the additional insured endorsements.”). Accordingly, the Court in Persimmon Hill Court joined multitudes of other courts across the country in holding that an additional insured is insured for its own scope of fault under such endorsements.

After finding the settlement negotiated by Portrait “was fair and reasonable under the circumstances and…for ‘property damage’ caused by an ‘occurrence’ as those terms are used in the Penn National policies,” the Court applied an analysis of the limits of the policy ($500,000) and a time on the risk analysis (five policy years of coverage) to hold Penn National owed an indemnity obligation of $2,500,000 to Portrait as an additional insured. The Persimmon Hill Court further awarded prejudgment interest on the damages for, among other things, “breach of the duty to indemnify” from the date the order approving the $3,850,000 settlement in the underlying construction defect action was filed and Portrait’s “attorney’s fees and costs associated with prosecuting the claims against Penn National” given its “breach[ of] the insurance contracts.” As additional cause for carrier concern (and, again, ample material for another, separate blog post), the Court determined that “Penn National acted in bad faith and acted willfully and recklessly disregarded Portrait Homes’s rights when it breach the duty to defend and the duty to indemnify Portrait,” entitling Portrait to recover bad faith and punitive damages to be determined in a subsequent hearing.

As a result, Persimmon Hill demonstrates that additional insured indemnity is very real in South Carolina and serves as a cautionary tale to insurers that would disregard their indemnity obligations to their additional insureds as so doing risks being hit with the entirety of a settlement and/or verdict, prejudgment interest, attorney’s fees, bad faith, and punitive damages.

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