Jessco v. Builders Mutual Insurance Co

Filing

UNPUBLISHED PER CURIAM OPINION filed. Originating case number: 2:08-cv-01759-PMD Copies to all parties and the district court. [998820912]. [10-1215]

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Date Filed: 03/29/2012

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UNPUBLISHED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Affirmed in part, reversed in part, and remanded by unpublished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Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:
In
Insurance

this

declaratory

Company

determination

that

judgment

(“BMIC”)
it

had

a

indemnify under an insurance
BMIC to Jessco, Inc.

action,

Builders

appeals

the

duty

defend

to

district
and

a

Mutual
court’s
duty

to

policy (the “Policy”) issued by

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

Mazycks

moving

into

the

house

in

September

2004,

the

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

problems

were

so

severe

that

the

The experts believed
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.
the

action

to

federal

court

and

BMIC removed

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
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and development of the surrounding neighborhood.”

J.A. 265.

Although the arbitrator specifically found that Jessco’s work
was

“not

the

legal

Mazycks’]

property,”

allowance

for

proximate
J.A.

cause

265,

re-grading

of

the

the

of

the

award

lot,

flooding

included

which

of

a

the

[the

$10,000

arbitrator

indicated would provide better surface-water management.
After
summary

the

arbitrator

judgment

in

the

issued

his

declaratory

award,

BMIC

judgment

moved

action.

for
The

district court concluded that while most of the Mazycks’ claims
did

not

fall

within

the

scope

of

the

Policy,

related claims were covered by the Policy.

the

flooding-

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.
district

court

attorney’s
Mazycks’

ordered

fees

claims

incurred
and

to

BMIC

to

by

Jessco

reimburse

pay

more

in

than

defending

Jessco

for

the

$68,000

The
in

against

the

$10,000

re-

grading allowance ordered by the arbitrator.

II.
Commercial
like

the

one

general
at

issue

liability
in

this

(“CGL”)
case

insurance

generally

policies

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

damages payable under the terms of the policy.”

and

seeking

Sloan Constr.

Co. v. Central Nat’l Ins. Co. of Omaha, 236 S.E.2d 818, 820
(S.C. 1977). *
that

the

duty

“Although these duties are related in the sense
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

determined

defend
by

under

the

an

insurance

allegations

of

policy

the

generally

complaint.

If

“are
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

Date Filed: 03/29/2012

controlled

by

the

Page: 6 of 15

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.
75.

J.A.

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.”
“an

accident,

including

J.A. 87. “Occurrence” is defined as

continuous

or

repeated

exposure

substantially the same general harmful conditions.”

to

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
damages

meaning
caused

of
by

physical
flooding

injury
were

to

thus

property”
“clearly

and

within

that
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
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insured’s

work

Date Filed: 03/29/2012

constitutes

an

Page: 7 of 15

occurrence).

Instead,

BMIC

contends that it had no duty to defend because coverage for the
Mazycks’

claims

exclusion.

was

excluded

by

the

Policy’s

“your

work”

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.
546

(“[T]he

See id. at 701; see also Newman, 684 S.E.2d at

subcontractor

exception

preserves

coverage

for

property damage that would otherwise be excluded as ‘your work’
.

.

.

.”).

In

this

case,

however,

the

Policy

contains

endorsement that removes the subcontractor exception.

an

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.”
Appellant at 14.

Brief of

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

subcontractor to install) the flooring and landscaping.

a
The

lot-flooding claim first asserted by the Mazycks thus created a
possibility
Mazyck’s
(“Since
third

of

work,
the

for

landscaping

not

and

the
the

to

the

landscaping,

which

See

Limbach,

396

concrete

work

were

performed

exclusion

does

not

Jessco’s.

landscaping

parties,

coverage

damage

and

‘your

work’

costs

of

repairing

concrete.”).

And
9

when

and
the

was

F.3d

Glenn
at

365
by

preclude

replacing
Mazycks’

the

claims

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expanded
claims

to

Date Filed: 03/29/2012

include

likewise

Mazyck’s work.

water

raised

damage

the

Page: 10 of 15

to

the

possibility

house
of

itself,

damage

to

those
Glenn

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

provided

contends

that

even

if

the

Policy

otherwise

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.”
at 27.

Brief of Appellant

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.
presumed,

see

Because prejudice to the insurer may not be

Vermont

Mut.,

446

S.E.2d

at

422,

BMIC’s

unsupported assertion of prejudice is insufficient to establish
that

it

was

notification.

substantially

prejudiced

by

Jessco’s

delay

in

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

breach of its duty to defend.

of

damages

for

BMIC’s

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
11

to

defend

and

indemnify

the

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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 yourwork 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

substantively

the

attorney’s

address

it

in

fee

award

brief.

See,

by

failing

e.g.,

Wahi

to
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.
12

2004)

(“Williams

makes

no

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argument in her brief to support this assertion, and we deem it
abandoned on appeal.”).
B.
While

the

possibility

duty

of

a

Duty to Indemnify

to

defend

covered

claim,

exists
an

where

insurer

is

there

is

a

obligated

to

indemnify the insured only for claims that in fact fall within
the scope of the coverage provided by the policy.
BMIC

contends

that

the

$10,000

re-grading

On appeal,

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
allowance
negligence

was

claims

awarded

by

Jessco

against
by
in

the

Jessco.

arbitrator

grading

If
as

the

the

re-grading

compensation

property,

for

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.

Date Filed: 03/29/2012

Page: 14 of 15

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.

recover

2003)
for

(“It

injuries

negligence.”).

is

apodictic

proximately

that

a

caused

plaintiff
by

the

may

only

defendant’s

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-todefend issue.

The district court erred, however, in concluding

that BMIC was obligated to indemnify Jessco for the $10,000 regrading 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

15