Court holds duty to pay not triggered where liability insured not liable to a 3rd party

S.C. Appellate Court Holds Insurer’s Duty to Pay Not Triggered Where Insured as to Liability Coverage Not Liable to a Third Party

On August 1, 2012, the South Carolina Court of Appeals affirmed the decision of the trial court, holding that BMW was an insured only as to liability coverage, not comprehensive coverage, and therefore was not afforded coverage where it was not liable to a third party due to the damage caused to the vehicles.

Post by Logan Wells

In BMW of North America, LLC v. Complete Auto Recon Services, Inc. and Colony Insurance Co., BMW of North America entered into a service agreement with Complete Auto Recon Services (CARS) that stated CARS would provide washing and maintenance services on a fleet of BMW vehicles used at a BMW test track. One of CARS’s employees left the windows to six BMW vehicles open during a severe rainstorm, resulting in property damage totaling $601,720.

Colony Insurance Co. had issued a Garage Insurance Policy to CARS under which CARS was the only named insured. The policy included both liability and garage keepers coverage. Under liability, the coverage included "all sums an 'insured' legally must pay as damages because of 'bodily injury' or 'property damage' to which [the insurance applied] caused by an 'accident' and resulting from 'garage operations' other than the ownership, maintenance or use of covered 'autos'" and "all sums an 'insured' legally must pay as damages because of 'bodily injury' or 'property damage' to which [the insurance applied] caused by an 'accident' and resulting from 'garage operations' involving the ownership, maintenance or use of 'covered autos.'" Within the garage keepers coverage, the policy provided for two different types of coverage labeled "comprehensive" and "collision." Generally, the garage keepers coverage provided:

[The insurer will] pay all sums the "insured" legally must pay as damages for "loss" to a "customer's auto" or "customer's auto" equipment  left in the "insured's" care while the "insured" is attending, servicing, repairing, parking or storing it in your "garage operations" under:

a.         Comprehensive Coverage From Any Cause Except:

(1)        The "customer's auto's" collision with another object; or

(2)        The "customer's auto's" overturn . . .

c.         Collision Coverage Caused By:

(1)        The "customer's auto's" collision with another object; or

(2)        The "customer's auto's" overturn.

The Policy also included an endorsement naming BMW as an additional insured;

Under LIABILITY COVERAGE WHO IS AN INSURED is changed to include [BMW], but only for liability arising out of the ownership, maintenance and use of that part of the described premises which is leased to [CARS].

The endorsement did not mention any other types of coverage, nor did the Policy include any further endorsements with respect to BMW.

BMW filed a claim for the damage to the six vehicles with Colony. Colony investigated and declined to make payment. BMW sent two subsequent letters requesting Colony pay the claim, citing reprimands issued to two CARS employees and sufficient notice of the severe storms. Colony again denied BMW’s claim. BMW then filed suit against CARS and Colony. As to Colony, BMW alleged breach of an insurance contract and bad faith refusal to pay. Colony counterclaimed asking the court to enter a declaratory judgment stating Colony owed no duty to BMW with regard to the damaged vehicles.

Colony moved for summary judgment arguing it owed no duty to BMW because BMW’s coverage under the policy was limited to third party liability coverage, and BMW was not liable to a third party for the damage to the vehicles. BMW responded arguing that (1) because BMW was listed as an additional insured in the policy and the policy included comprehensive coverage, Colony owed a duty to BMW; (2) the policy language was ambiguous and should be interpreted in favor of coverage; (3) an interpretation that BMW was only afforded liability coverage under the policy would render it meaningless as to BMW; and (4) even without a breach of the policy, Colony could still be liable for a bad faith claim. The trial court granted Colony’s motion for summary judgment.

Coverage

On appeal, BMW argued the policy showed CARS was paying premiums for comprehensive coverage under the garage keepers coverage, which was separate and distinct from any liability premiums CARS paid, and BMW was an additional insured to that coverage. BMW further contended that the policy was ambiguous as to the comprehensive coverage. The court disagreed, finding that under the unambiguous language of the policy, BMW was only an insured for purposes of liability coverage: 

We find the trial court did not err in determining BMW was not afforded coverage under the Policy as to the Vehicles. BMW is not a named insured on the Policy itself. As a result, the Policy as a whole does not initially cover BMW as an insured. However, BMW is added to the Policy by way of an endorsement to the Policy. This endorsement, however, which is the only way BMW under the policy could be an insured, provides only liability coverage. Importantly, the endorsement makes no mention of comprehensive coverage. Additionally, the endorsement specifically provides, "The provisions of the Coverage Form apply unless modified by the endorsement." Thus, because "WHO IS AN INSURED" as to the comprehensive coverage was not modified by the endorsement, the original form applies, meaning only CARS, the named insured, is entitled to that coverage. Therefore, according to the plain language of the Policy, BMW is only an insured as to liability.

Accordingly, the court found that, in order for Colony’s duty to pay BMW as an insured to be triggered, BMW must have first been liable to a third party for the damage to the vehicles:

Because BMW is only an insured as to liability coverage under the Policy, for Colony's duty to pay BMW as an insured to be triggered, BMW must have first been liable to some third party. See Trancik v. USAA Ins. Co., 354 S.C. 549, 554, 581 S.E.2d 858, 861 (Ct. App. 2003) (stating liability insurance contracts are generally contracts "whereby the insurer . . . agrees to pay the insured . . . the amount of any damages the insured may become legally liable to pay to a third party"); see also Black's Law Dictionary 997 (9th ed. 2009) (defining liability as "[t]he quality or state of being legally obligated or accountable; legal responsibility to another"). BMW failed to present any evidence tending to show it was in any way liable to a third party due to the damage caused to the Vehicles. Further, in BMW's response to Colony's request for admissions, BMW admitted no one had filed suit against it regarding damage to the Vehicles.

Thus, the court found the trial court did not err in determining the policy did not afford BMW coverage with respect to the damaged vehicles.

Bad Faith

BMW also argued the trial court erred in granting Colony’s summary judgment motion as to the bad faith claim because BMW was an additional insured under the Policy and by ignoring BMW’s correspondence, refusing to provide explanations as to the denial of coverage, and refusing to acknowledge CARS’ liability, Colony acted in bad faith in processing and denying BMW’s claim. In response, Colony argued that because no coverage existed as to the claim BMW made, Colony could not have acted in bad faith in refusing to pay BMW. The court agreed with Colony, likening the case presented to situation in Myrick v. Prime Insurance Syndicate, Inc., 395 F.3d 485 (4th Cir. 2005):

As previously discussed, with respect to the Vehicles, the Policy did not afford BMW coverage for this claim. The Fourth Circuit, in Myrick v. Prime Ins. Syndicate, Inc., 395 F.3d 485 (4th Cir. 2005), while interpreting South Carolina insurance law, determined a similar situation to the present case provided reasonable grounds for the insurer to deny coverage. In Myrick, the insured sought to insure three pieces of equipment from loss. Just weeks after the policy became effective, a fire destroyed one of the pieces of equipment the insured sought to have covered under the policy. After the insured made a claim on the destroyed equipment, the insurer correctly determined although the policy at issue did provide property coverage for one machine of the type destroyed, it did not provide such coverage for the specific machine that burned. As a result, the court held that although the parties admitted a contract existed between them, the insurer's refusal to pay benefits was reasonable because the subject matter of the claim allegedly triggering payment did not actually fall within coverage.

The present case bears comparison to Myrick. Just as destruction of the machine in Myrick could never trigger coverage as to the insured because it was not covered in the policy, so too could there never be coverage under the Policy where, as here, BMW did not face any sort of liability to third parties. As a result, just as was the case with the insurer in Myrick, we find Colony had reasonable grounds upon which to not only contest, but also refuse BMW's claim.

(Internal citations omitted). The Court of Appeals further noted the Myrick court also determined that the insurer adequately investigated the insured’s claim; however, in the case presented, BMW’s argument regarding bad faith claims processing was not preserved. The court of appeals therefore found the trial court did not err in granting Colony summary judgment on BMW’s bad faith claim.

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Fireworks on the Fourth of July Lead to a Dispute Regarding a Landlord and Its Insurers’ Right of Action Against a Tenant

Post by Logan Wells

The Fourth of July is fast approaching, and so our thoughts turn to fun, freedom, and of course, fireworks. With that in mind, this post discusses a 2002 opinion of the United States Court of Appeals for the Fourth Circuit in which the court found that (1) S.C. Code Ann. § 38-75-60 did not bar an insured landlord’s action against its tenant for damages resulting from a July 4^th blaze; and (2) the presence of the landlord’s insurers in the action would not have reduced the amount of the insured landlord’s damages for which the tenant could be found liable.

In Balcor Equity Properties XVIII v. Caligo Limited, in early June 1994, Caligo began an industrial cleaning project in Greer, South Carolina. Caligo staffed the project in part with employees from outside the Greer area and housed these employees in apartments leased from Balcor, including Units 161 and 166. During the evening of July 4, some Caligo employees residing in Units 161 and 166 were discharging fireworks onto the ground from their outside balconies. The employees subsequently began shooting bottle rockets and Roman candles at each other. Shortly afterward, the wooden deck of Unit 164 (which was not leased by Caligo, but which was situated between Units 161 and 166) caught on fire, and the resulting blaze caused more than $1,000,000 in damage to the complex.

Balcor had purchased fire insurance coverage for the apartment complex from four different insurance carriers. After the fire, the carriers jointly paid Balcor $991,796.41, which represented Balcor’s claimed damages less its $100,000 deductible. Balcor then filed suit against Caligo in the United States District Court for the District of South Carolina, claiming Caligo was liable for the conduct of its employees in discharging the fireworks and seeking to recover damages in the full amount of the loss caused by the fire. Specifically, Balcor alleged, inter alia, that Caligo breached Paragraph 10 of the lease contract, which stated, “You agree ... to indemnify us from any damage or loss we may sustain because of any fire or the extinguishing of such fire originating in the premises which damages our property.” Caligo generally denied Balcor’s claims and also asserted that the action was barred by S.C. Code Ann. § 38-75-60, which provides as follows:  

Notwithstanding any other provision of law, no insurer has a cause of action against a tenant who causes damage to real or personal property leased by the landlord to the tenant when the insurer is liable to the landlord for the damages under an insurance contract between the landlord and the insurer, unless the damage is caused by the tenant intentionally or in reckless disregard of the rights of others.

In addition, Caligo moved to join Balcor’s insurers as involuntary plaintiffs; however, after the carriers stipulated that they would be bound by the judgment, the district court denied the joinder motion. The district court also struck Caligo’s § 38-75-60 defense, ruling the statute did not apply to Balcor’s suit, and inter alia, granted summary judgment to Balcor as to its breach of contract cause of action.

Caligo appealed, arguing the district court erred in granting summary judgment as to the breach of contract cause of action, in denying its motion to join Balcor’s insurers, and in striking its statutory defense. The court reversed the district court’s grant of summary judgment on the breach of contract claim. In addition, the court concluded the district court correctly ruled that § 38-75-60 did not bar the breach of contract claim because the statute bars insurers’, not landlords’, claims. For the same reason, the court also determined that the statute would not have barred Balcor’s claim even if Balcor’s insurers had been joined as involuntary plaintiffs. Thus, the court concluded that any error in denying Caligo’s motion to join the insurers was harmless.

On remand to the district court, following a jury trial, judgment was entered in Balcor’s favor for $1,050,000, which represented the entire amount of Balcor’s fire damage. Caligo moved to amend the judgment, arguing that it should be responsible only for the $100,000 in fire damage for which Balcor was not compensated by insurance benefits. Caligo further argued that Balcor’s insurers should have been joined as involuntary plaintiffs, and if they had been, § 38-75-60 would have barred recovery of the amounts paid by the insurers to Balcor. The district court denied the motion, noting that Caligo’s argument had been rejected earlier by the Fourth Circuit.

Caligo appealed, alleging inter alia that the district court erred in denying its motions to join Balcor’s insurers as involuntary plaintiffs. Specifically, Caligo contended that because Balcor’s insurers paid Balcor $991,796.41 as a result of the fire, the insurers owned a portion of Balcor’s claim. Caligo continued that had the insurers been joined as involuntary plaintiffs, they would have been prohibited under § 38-75-60 from asserting their claims, and therefore Balcor’s damages would have been reduced by $991,796.41.

The court rejected Caligo’s argument, finding the district court correctly ruled that the court had rejected Caligo’s precise argument in the first appeal. Further, the court found not joining Balcor’s insurers did not increase the amount of damages for which Caligo could be found liable:

In any event, Caligo’s argument that Balcor’s damages would have been reduced if its insurers had been joined as involuntary plaintiffs is simply incorrect. In partial subrogation cases, the insured’s right of action against the wrongdoer is "single and indivisible, even though the insurer is subrogated to the rights of the insured to the extent of the loss paid." Spearman v. J & S Farms, Inc., 755 F. Supp. 137, 141 (D.S.C. 1990); see Pringle v. Atl. Coast Line R.R., 47 S.E.2d 722, 724 (S.C. 1948). Additionally, South Carolina follows the "collateral source rule," under which compensation from insurance proceeds will not reduce the amount of damages for which the wrongdoer is liable. See Citizens & S. Nat’l Bank of S.C. v. Gregory, 463 S.E.2d 317, 318 (S.C. 1995); Otis Elevator, Inc. v. Hardin Constr. Co. Group, 450 S.E.2d 41, 45-46 (S.C. 1994) (applying rule in contractual indemnity setting). Accordingly, as we determined [previously], any error in not joining Balcor’s insurers as involuntary plaintiffs did not increase the amount of damages for which Caligo could be liable.

Accordingly, the court found Caligo was not prejudiced by the denial of its joinder motion, and therefore, affirmed the judgment of the district court.

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Fourth Circuit Rules in Favor of Insurer That Refused to Defend or Indemnify Trucker

Finds “Business Use” Exception to the Policy Applies to Bar Coverage for Accident While Under Dispatch

On June 27, 2012, in an unpublished opinion, the United States Court of Appeals for the Fourth Circuit ruled in favor of an insurer that refused to defend or indemnify a trucker based on the commercial auto insurance policy’s “business use” exception, affirming a decision of the United States District Court for the District of Maryland.  

Post by Logan Wells

In Forkwar v. Empire Fire and Marine Insurance Company, Hameed Mahdi was a contractor for J&J Logistics, Inc. (“J&J”), working under an independent contractor agreement. Madhi leased his tractor to J&J, which paid Mahdi for its exclusive use of the tractor. J&J’s ICC numbers and the name “J&J Logistics” were on Mahdi’s tractor. Pursuant to the contract, Mahdi called J&J’s office each morning to see if J&J had a job for him to do. On November 25, 2004, Mahdi called J&J and was instructed to pick up a load in Jessup, Maryland at midnight on November 26. Mahdi left his home on November 26 and began to drive to Jessup. On the way, Mahdi decided to stop to grab something to eat, but before he could exit the highway he was involved in a collision with Augustine Forkwar.

Mahdi had been issued a commercial auto insurance policy by Empire Fire & Marine Insurance Company (“Empire”). After receiving notice of the accident, Empire conducted an investigation and determined that the “business use” exception to the policy applied, relieving Empire of any obligation to defend or indemnify Mahdi for the accident. The business use exception provided as follows:

This Insurance does not apply to any of the following . . .

14. BUSINESS USE

“Bodily injury” or “property damage” while a covered “auto” is used to carry people or property in any business or while a covered “auto” is used in the business of anyone to whom the “auto” is leased or rented.

Forkwar filed the underlying suit against Mahdi and J&J in October of 2006, alleging Mahdi negligently caused injury to Forkwar and that J&J was liable under the doctrine of respondeat superior. Empire declined to defend Mahdi on the basis of the business use exception. During the trial, J&J moved for a judgment as a matter of law as to the claims against it, which Forkwar did not oppose. Later, the jury found that Mahdi was negligent in the operation of his vehicle and awarded Forkwar $180,756.67.

After securing judgment against Mahdi in state court, Forkwar filed the action against Empire. The action was removed to federal court, and the parties filed cross-motions for summary judgment. The district court denied Forkwar’s motion for summary judgment, granted Empire’s motion for summary judgment, and denied Forkwar’s counter motion for summary judgment. Forkwar appealed arguing (1) Empire was collaterally estopped by the judgment in the underlying action from arguing that the business use exception applied; and (2) the business use exception did not bar coverage.

Collateral Estoppel

Forkwar argued Empire was collaterally estopped from claiming the business use exception applied because the issue of J&J’s respondeat superior liability was litigated and decided in the underlying action. The court disagreed, finding Forkwar could not meet her burden because the issue in the underlying action was not identical to the one presented in the action in question:

Under Maryland law, the doctrine of respondeat superior permits “an employer to be held vicariously liable for the tortious conduct of its employee when that employee was acting within the scope of the employment relationship.” Oaks v. Connors, 660 A.2d 423, 426 (Md. 1995)....[T]here are four elements to establish respondeat superior in Maryland: (1) the existence of an employer-employee relationship; (2) the tortious act must have occurred “within the scope of the employment relationship;” (3) the employer consented, explicitly or implicitly to the use of the automobile; and (4) the employer had the right to control the employee in the operation of the automobile or the use of the automobile was vitally important in furthering the master’s business.

In contrast, the business use exception applies whenever “a covered ‘auto’ is used to carry people or property in any business or while a covered ‘auto’ is used in the business of anyone to whom the ‘auto’ is leased or rented.” Plainly, the respondeat superior doctrine and the business use exception are not identical issues. While respondeat superior requires the existence of an employer-employee relationship, the business use exception has no such element. Thus, an individual like Forkwar who was acting “in the business of” J&J but who is an independent contractor rather than employee would be subject to the Policy’s exclusion without falling under the doctrine of respondeat superior.

In so finding, the court specifically addressed the Court of Special Appeals of Maryland’s language in Empire Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., 699 A.2d 482 (Md. Ct. Sp. App. 1997), wherein the Court of Special Appeals stated in construing Empire’s business use exception that it would “follow the course of other courts that have sought guidance from the analogous common law doctrine of respondeat superior.” Acknowledging there were some similarities in the requirements for the business use exception and the elements of respondeat superior, the court rejected the notion that the elements were identical:

It is true that the requirement in the business use exception that bodily injury occur while an auto “is used in the business of anyone” is quite similar to the second element for respondeat superior, that the accident occur “within the scope of the employment.” However, that is not to say that all of the elements are identical. Respondeat superior requires that there be an employer-employee relationship, and Maryland -- like other states -- recognizes a distinction between an employee and an independent contractor. See, e.g., Greer Lines Co. v. Roberts, 139 A.2d 235 (Md. 1958) (“Whether the relation of the parties is that of master and servant, or employer and independent contractor, depends upon the facts . . . .”). In contrast, no language in the business use exception suggests there must be an employer-employee relationship; it requires only that the accident occur while the auto is used in someone’s business. Thus at best Appellant has proven that one of the four elements of respondeat superior are met, but cannot establish the remaining three.

Accordingly, the court rejected Forkwar’s collateral estoppel claim.

Business Use Exception

Forkwar also argued the business use exception did not apply to the underlying action, arguing that Empire Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., 699 A.2d 482 (Md. Ct. Sp. App. 1997), was dispositive. The court disagreed, noting the timing of the accident in Liberty Mutual was different than the one involving Forkwar and Mahdi:

In ... Liberty Mutual ... the plaintiff, James Perry, was the owner and operator of a tractor that was contracted out to a shipping company, O.S.T.; the tractor’s I.C.C. license was in O.S.T.’s name. O.S.T. also had a similar method of assigning work: Perry contacted O.S.T. daily to obtain his next assignment. The timing of the accident, however, is different: Perry had completed his dispatch on January 16, dropped his tractor off at a service station that day, and returned four days later to pick it up. On his way home from the service station, he was involved in an accident. The Maryland court found that the business use exception did not apply, noting that Perry was driving to his home, not receiving any compensation from O.S.T., not operating under a bill of lading, not under dispatch, and not hauling a load at the time of the accident.

... While most of the facts parallel the instant case, in Liberty Mutual the accident occurred several days after the completion of Perry’s last dispatch, while he was driving home. Here, in contrast, Mahdi was under dispatch -- a fact expressly noted in Liberty Mutual.

(Internal citations omitted).

Lamenting the lack of additional case law on the applicability of the business use exception, the court sought guidance from outside the Fourth Circuit. Accordingly, the court followed the reasoning of the Seventh and Fifth Circuits, see Mahaffey v. Gen. Sec. Ins. Co., 543 F.3d 738 (5th Cir. 2008); Empire Fire & Marine Ins. Co. v. Brantley Trucking, Inc., 220 F.3d 679 (5th Cir. 2000); Hartford Ins. Co. v. Occidental Fire & Cas. Co., 908 F.2d 235 (7th Cir. 1990), and analyzed whether Mahdi’s conduct at the time of the accident “furthered the commercial interest” of J&J:

In applying the furthering-the-interests test to this case, we find that Mahdi’s conduct fell under the business use exception. The accident occurred while Mahdi was on his way to pick up a load for J&J; his driving to Jessup was a necessary step in completing his work. As the district court noted, Mahdi was not “pursuing leisurely engagement nor engaged in some frolic [or] detour.” Rather, he had received instructions from J&J to go to Jessup to pick up a load and was in the process of completing that task. Although Mahdi had decided just before the accident to stop for a meal before making his way to the warehouse, he was operating his vehicle at the time of the accident solely for the purpose of furthering J&J’s commercial interests.

The court therefore found that the business use exception applied to bar coverage, thereby affirming the decision of the district court.

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Jessco, Inc. v. Builders Mutual Insurance Co.: Part II - Appellate Attorney’s Fees and Costs

Here is Part II of our blog series regarding Jessco, Inc. v. Builders Mutual Insurance Co. 

Post by Logan Wells

You can read Part I here, which details a recent opinion of the United States Court of Appeals for the Fourth Circuit that addresses a multitude of issues presented in litigation involving commercial general liability policies – the “your work” exclusion, late notice, and the duty to indemnify.

On May 3, 2012, in Jessco, Inc. v. Builders Mutual Insurance Co., upon remand by the Fourth Circuit, the United States District Court for the District of South Carolina amended its previous Judgment and deducted $10,000.00 from the total amount previously awarded, $78,695.20, finding Jessco, Inc. (“Jessco”) was entitled to a judgment in the amount of $68,695.20 plus post-judgment interest. In the same order, upon Jessco’s Amended Motion for Award of Fees and Costs After Remand, addressing an issue of first impression, the court held that Builders Mutual Insurance Co. (“BMIC”) was obligated to pay Jessco’s attorney’s fees and costs incurred on appeal.

Citing Hegler v. Gulf Insurance Co., 270 S.C. 548, 550-51, 243 S.E.2d 443, 443 (1978), the court noted South Carolina courts have found an insured may be entitled to reasonable attorney fees and costs incurred in successfully defending a declaratory judgment action brought by the insurer in an effort to relieve itself of coverage under an insurance policy, reasoning that:

[A]n insured must employ counsel to defend — in the first instance in the damage action and in the second in the declaratory judgment action to force the insurer to provide the defense. In both, the counsel fees are incurred because of the insurer's disclaimer of any obligation to defend.

If the insurer can force [the insured] into a declaratory judgment proceeding and, even though it loses in such action, compel him to bear the expense of such litigation, the insured is actually no better off financially than if he had never had the contract right mentioned above.

(Alteration and emphasis in original). However, whether an insured is also entitled to recover attorney fees and costs incurred on appeal when (1) the insurer appeals the trial court’s ruling for the insured in a declaratory judgment action, and (2) the appellate court affirms the lower court’s judgment with regard to the insurer’s duty to defend, had never been addressed by the South Carolina courts.

In support of its motion for attorney fees and costs, Jessco argued that whether the fees and costs arose in the context of a declaratory judgment action or in its appeal makes no difference; because in either case, the insured is doing nothing more than attempting to protect its contractual right to a defense. Thus, Jessco argued, the rationale in Hegler for providing relief to an insured that is “forced” into a declaratory judgment action and wins should apply equally when the insured is forced to defend its rights in the appeal of that action and wins. In opposition, BMIC argued the reversal by the Fourth Circuit as to BMIC’s duty to indemnify Jessco for the re-grading allowance necessitated a finding in favor of BMIC on Jessco’s motion. The court rejected BMIC’s argument, noting that South Carolina courts have established the duty to defend is separate and distinct from the duty to indemnify, and Jessco’s motion sought payment for fees and costs as damages suffered by Jessco for BMIC’s breach of its duty to defend, not its duty to indemnify. See USAA Prop. & Cas. Ins. Co. v. Clegg, 377 S.C. 643, 654, 661 S.E.2d 791 (2008) (quoting Sloan Constr. Co. v. Cent. Nat’l Ins. Co. of Omaha, 269 S.C. 183, 186-87, 236 S.E.2d 818 (1977)).

BMIC also argued there was “simply no legal authority” supporting an award of appellate fees and costs. However, BMIC failed to produce any authority demonstrating that Hegler did not apply to support such an award. In response, Jessco acknowledged that the motion presented a novel legal issue, but argued there was no logical reason why Hegler did not apply to fees and costs incurred on appeal. The court agreed with Jessco’s reasoning, finding as follows:

When BMIC appealed the declaratory judgment action, it was still seeking to avoid its obligation to defend, just as it sought to avoid its' duty to defend at the trial level. Thus, after prevailing at the trial level, Jessco was forced into the appellate process by BMIC, thereby bearing the expense, just as it was forced to bring the initial declaratory action to protect and enforce its rights. Jessco prevailed at the trial level, and on appeal, the Fourth Circuit found BMIC had a duty to defend and affirmed this Court's judgment and damages award on that issue. Hegler held that an insured is entitled to recover attorney's fees and costs following a successful defense of a declaratory judgment action. See Hegler, 270 S.C. at 548 (emphasis added). The holding in Hegler necessarily encompasses fees and costs incurred at the appellate level of that action. The appellate expenses, like the trial level expenses, are damages arising directly out of the insurer's breach of its duty to defend. Therefore, the Court finds that Jessco is entitled to recover reasonable attorney fees and costs of defending this action on appeal from BMIC, just as it was at the trial level. See Hegler, 270 S.C. at 551 ("After all, the insurer had contracted to defend the insured, and it failed to do so. It guessed wrong as to its duty, and should be compelled to bear the consequences thereof.").

The court also found that Rule 222, SCACR did not prohibit an award pursuant to Hegler, and further, did not divest the court of authority to make such an award:

Sections (a) and (b) of Rule 222 state: "When an appeal is affirmed or reversed in part or is vacated, costs shall be allowed only as ordered by the appellate court." "In addition, the party shall be entitled to recover an attorney's fee in an amount which shall be set by order of the Supreme Court." Rule 222(b). However, the Rule "`does not preempt an award of attorney's fees to which one is otherwise entitled.'" Muller v. Myrtle Beach Golf & Yacht Club, 313 S.C. 412, 416, 438 S.E.2d 248 (1993) (citing McDowell v. S.C.D.S.S., 304 S.C. 539, 543, 405 S.E.2d 830 (1991)). Thus, the Court may grant an award pursuant to Hegler because the authority pursuant to Hegler and the authority vested in the court of appeals pursuant to Rule 222 are not mutually exclusive.

Noting that, upon remand, the district court had jurisdiction to enforce the judgment and take any actions consistent with the Fourth Circuit’s ruling, and the Hegler rule did not limit the collection of attorney fees to a specific court or level of courts, the court found it could properly award appellate attorney fees and costs to an insured as damages flowing from an insurer’s breach of its duty to defend. Accordingly, the court granted Jessco’s Motion for Award of Fees and Costs After Remand.

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Jessco, Inc. v. Builders Mutual Insurance Co: Part 1 - “Your Work,” Late Notice, and the Duty to Indemnify

Post by Logan Wells

A recent opinion of the United State Court of Appeals for the Fourth Circuit addressed a multitude of issues presented in litigation involving commercial general liability policies – the “your work” exclusion, late notice, and the duty to indemnify.

On March 29, 2012, in Jessco, Inc. v. Builders Mutual Insurance Co., the Fourth Circuit affirmed in part, reversed in part, and remanded by unpublished per curiam opinion the judgment of the United States District Court for the District of South Carolina, thereby finding that Builders Mutual Insurance Co. (“BMIC”) had a duty to defend Jessco, Inc. (“Jessco”) in the underlying construction-defect action, but BMIC was not obligated to indemnify Jessco for the re-grading allowance it paid to the underlying plaintiff homeowners.

In Jessco, Inc., the Mazycks hired Jessco to build a house in a North Charleston subdivision. After moving into the house in 2004, they provided Jessco with a punch list of items to be completed or repaired. These items were not resolved to the Mazycks’ liking, and in 2005, they filed the underlying suit against Jessco, alleging, among other things, that their lot flooded due to improper grading. In 2006, the action was stayed so the claims could be arbitrated. In the fall of 2007, experts for the Mazycks identified water damage to the house caused by the flooding of the property.

In October 2007, after the escalation in the Mazycks' demands, Jessco finally notified BMIC of the underlying claims. BMIC concluded the claims were not covered by the Policy and Jessco failed to promptly notify BMIC of the lawsuit. Accordingly, BMIC refused to defend or indemnify Jessco with regard to the underlying suit. Jessco thereafter filed a declaratory judgment action seeking a declaration that the claims in the underlying action were covered by the Policy. BMIC counterclaimed, seeking a declaration that it was not obligated to defend or indemnify Jessco.

The arbitration hearing on the Mazycks' claims was conducted in late 2008. The arbitrator issued his award in April 2009, ordering Jessco to pay almost $55,000 in damages. As to the flooding issue, the arbitrator concluded the flooding was proximately caused by "the overcapacitation of the wetlands, caused by the overall design and development of the surrounding neighborhood." Although the arbitrator found that Jessco's work was "not the legal proximate cause of the flooding of [the Mazycks'] property," the award included a $10,000 allowance for re-grading of the lot. BMIC appealed, challenging the district court’s determination that (1) BMIC had a duty to defend Jessco in the underlying action; and (2) BMIC had a duty to indemnify Jessco for the re-grading allowance.

Duty to Defend

In asserting it had no duty to defend, BMIC argued (1) coverage for the Mazycks’ claims was excluded by the Policy’s “your work” exclusion; and (2) Jessco failed to notify BMIC of the underlying lawsuit “as soon as practicable” as required by the Policy.

BMIC did not dispute on appeal that the allegations of the underlying complaint raised the possibility of “property damage” caused by an “occurrence,” but instead contended it had no duty to defend because coverage for the claims was excluded under the “your work” exclusion, which excluded coverage for any claims of “’[p]roperty damage’ to ‘your work’ arising out of it or any part of it.” “Your work” was defined as “[w]ork or operations performed by you or on your behalf,” a definition broad enough to encompass and preclude coverage for work done by the insured’s subcontractors. Although the Policy included an exception restoring coverage for damage to work performed by a subcontractor, it also contained an endorsement removing the subcontractor exception.

BMIC argued all the work on the property was done by subcontractors on Jessco’s behalf, and therefore, the “your work” exclusion barred coverage for all underlying claims. The court disagreed, noting “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... ‘It does not exclude coverage for a third party’s work.’” (Emphasis in original) (quoting Limbach Co. v. Zurich Am. Ins. Co., 396 F.3d 358, 365 (4th Cir. 2005) (per curiam)). Thus, the court concluded, “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 court determined 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, noting the contract between Jessco and the Mazycks specifically contemplated that Mr. Mazyck would perform some of the work, and that Mr. Mazyck himself installed (or hired a subcontractor to install) the flooring and landscaping. Accordingly, the court found the “your work” exclusion did not bar coverage for the underlying claims.

With regard to “late notice,” BMIC argued even if the Policy otherwise provided coverage, Jessco lost its right to coverage by waiting more than two years to give notice of the underlying suit. Assuming for purposes of the opinion that notice was untimely, the court noted that under South Carolina law, “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 terms and conditions invoked upon him by the policy contract but in addition that it was substantially prejudiced thereby.”) Therefore, because BMIC failed to present any evidence of prejudice and “prejudice to the insurer may not be presumed,” the court rejected BMIC’s assertion that Jessco’s delay in notification precluded recovery under the Policy.

            BMIC also challenged the attorney fee award; however, it failed to substantively address the issue in its brief. Accordingly, the court found BMIC had abandoned the issue. See 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 . . . .”).

Duty to Indemnify

BMIC also contended that the $10,000 re-grading allowance was not compensation for loss caused by a covered risk. Recognizing the Mazycks asserted contract and negligence based claims against Jessco in the underlying action, the Court determined that 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. Thus, the court first determined the legal basis for the re-grading allowance ordered by the arbitrator:

Although the arbitrator stated that Jessco and the Mazycks both “b[ore] some responsibility for the flooding,” 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.” 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.”

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)).

Having established the arbitrator determined there was no actionable negligence on the part of Jessco, the court reasoned the re-grading allowance could only have been awarded as compensation for a breach of contract. Therefore, because the Policy unambiguously excluded coverage for breach of contract damages, the court found BMIC had no obligation to indemnify Jessco for the re-grading allowance paid to the Mazycks.

Having determined that BMIC owed a duty to defend Jessco in the underlying action, but did not owe a duty to indemnify Jessco for the re-grading allowance, the court vacated the district court’s judgment and remanded for further proceedings consistent with the opinion.

Part II of this blog post will discuss the decision of the district court on remand. We will post it on Tuesday.

Until then - have a wonderful Memorial Day. 

Logan

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Collins & Lacy wins motion to dismiss crossclaim, Opinion published in SC Lawyers Weekly

Post by Logan Wells

On April 17, 2012, in Barber v. American Family Home Insurance Co., the United States District Court for the District of South Carolina, inter alia, granted the cross-defendant’s motion to dismiss crossclaims.

The subject of the amended complaint and counterclaim was the insureds’ right to insurance proceeds, while the subject of the crossclaim was an alleged domestic dispute. The court found that the crossclaim did not arise out of the same transaction or occurrence as the amended complaint and counterclaim, and thus, did not comply with Fed. R. Civ. P. 13(g), or Fed. R. Civ. P. 14(a)(3) . The court also found that 28 U.S.C. § 1367(b) prohibited the exercise of supplemental jurisdiction over the crossclaim as the cross-claimant and cross-defendant were both citizens of South Carolina. The April 17, 2012 Order was identified as an important opinion by South Carolina Lawyers Weekly.  Here is the article as published on April 18, 2012.

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Civil Practice – Federal Jurisdiction – Diversity – Interpleader – Insurance Proceeds – Non-Diverse Counterclaim Defendant – Crossclaim — Domestic Dispute

By S.C. Lawyers Weekly staff
Published: April 18, 2012
Time posted: 4:25 pm
Tags: Civil Practice, Crossclaim, Diversity, Domestic Dispute, Federal Jurisdiction, Insurance Proceeds, Interpleader, Non-Diverse Counterclaim Defendant

Barber v. American Family Home Insurance Co. (Lawyers Weekly No. 002-075-12, 9 pp.) (Joseph F. Anderson Jr., J.) 3:11-cv-02328; D.S.C.

Holding: Plaintiff Nancy Barber filed a breach of contract action against the defendant-insurer after the insurer made a check for insurance proceeds payable to both Nancy Barber and Kelly Barber. The insurer removed on the basis of diversity jurisdiction and filed a counterclaim against Nancy and Kelly Barber, both of whom are S.C. residents. Under United Capitol Insurance Co. v. Kapiloff, 155 F.3d 488 (1998), adding a non-diverse party as a counterclaim defendant does not destroy complete diversity for purposes of federal jurisdiction.
Plaintiff’s motion to remand to state court is denied. Plaintiff’s crossclaims against Kelly Barber are dismissed.

Plaintiff’s crossclaims against Kelly Barber arise out of an alleged domestic dispute. For the most part, evidence related to the crossclaims is entirely different than evidence regarding the insurance contract. The logical relationship between the complaint, the counterclaim, and the crossclaims is not sufficiently meaningful to satisfy Fed. R. Civ. P. 13(g) (crossclaims) or 14(a)(3) (third-party claims).

Because the torts alleged in the crossclaims do not involve the same transaction or occurrence as the complaint and counterclaim, the crossclaims do not fall within the scope of Rules 13(g) and 14(a)(3). As such, the assault, battery, intentional infliction of emotional distress, negligence per se, and gross negligence claims should be dismissed.

Furthermore, Kelly Barber has been made a party pursuant to Rule 13, via either Rule 19 (compulsory joinder) or Rule 20 (permissive joinder). Because the Barbers are both S.C. citizens, this court’s exercise of supplemental jurisdiction over Nancy Barber’s crossclaims against Kelly Barber would be inconsistent with the jurisdictional requirements of 28 U.S.C. § 1332. Such supplemental jurisdiction is expressly prohibited by 28 U.S.C. § 1367(b); thus, this court is constrained to dismiss all of the causes of action asserted in the crossclaim against Kelly Barber.

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Insured's Participation in Investment Scheme Triggers Business Enterprise Exclusion

Post by Logan Wells

Fourth Circuit Finds Insured’s Participation in Investment Scheme Triggers Business Enterprise Exclusion Under Professional Liability Policy

On March 29, 2012, in an unpublished opinion, the United States Court of Appeals for the Fourth Circuit affirmed the judgment of the Eastern District of Virginia, holding that an insured’s activities as investor in companies for which the insured acted as legal counsel triggered the Business Enterprise Exclusion ("BEE") contained in the professional liability policy issued to the insured, thereby precluding coverage.  

In Minnesota Lawyers Mutual Insurance Company v. Antonelli, Terry, Stout & Kraus, LLP, the Antonelli firm and attorney Stout sought coverage for Ferguson v. Stout, a malpractice suit arising out of the alleged activities of the firm and attorney with respect to certain business entities they represented. According to the Ferguson complaint, inventor Andrew A. Andros formed Telefind Corporation in 1986 to develop and market wireless email technology (“WET”). In 1987, Andros and Telefind retained the Antonelli firm and Stout to perform patent prosecutions on its behalf; however, over time their role evolved from that of pure attorneys to equity investors to increasingly immersing themselves in counseling and managing Telefind’s strategy and operations.

Telefind received substantial financial backing from a group of outside investors (“Richards Investors”). The Richards Investors lent Telefind $6 million via a loan through Flatt Morris, S.A. The loan agreement stated Stout would serve as trustee for Flatt Morris and hold Telefind’s intellectual property in trust for Flatt Morris’s benefit. Over time, Stout and the Antonelli Firm acquired a majority equity share of Flatt Morris, including its Telefind assets.

Later, when it became necessary to protect the WET from Telefind’s creditors, Stout devised a legal strategy that he told the Richards Investors and Andros would legally protect Telefind’s interest in the WET, recommending placing the patents in a separate legal entity and stressing that their entire interest in the WET would be lost if they did not follow his advice. To implement the strategy, three employees of ESA Telecommunications (“ESA”), a company Telefind worked with previously, filed the WET patents in their names. Stout emphasized that for the strategy to be successful Andros and the Richards Investors could not have any documented direct ownership interest in the WET, assuring them they would continue to participate in any benefits associated with the WET. Andros and the Richards Investors disavowed their legal interest in the patents and the ESA employees assigned the patents to Stout. In 1992, Stout created NTP, Inc. to hold the WET patents.

Andros passed away in January 2001. Later that year, NTP filed a patent infringement action against Research in Motion Limited. RIM settled the suit in March 2006 for $612.5 million. The Ferguson complaint alleged the money was divided between Stout, his partners at the Antonelli firm, and others associated with NTP. When the Richards Investors and Andros’s surviving family contacted Stout regarding their interest in the proceeds of the RIM settlement, Stout denied the existence of any agreement conferring such an interest. Neither Andros’s estate nor the Richards Investors received any portion of the settlement. The Ferguson action ensued, asserting, on the bases of the above facts, claims of breach of fiduciary duty, breach of contract, unjust enrichment, and promissory estoppel. The Ferguson plaintiffs did not challenge NTP’s ownership of the WET patents, arguing only that the implicit understanding was that the Ferguson plaintiffs would receive a share of any WET profits.

The Antonelli firm and Stout notified their professional liability carrier, Minnesota Lawyers Mutual Insurance Company (“MLM”), of the Ferguson action. MLM filed a declaratory judgment action seeking a declaratory judgment that MLM was not obligated to defend the Ferguson action. Thereafter, the parties filed cross-motions for summary judgment. The district court granted MLM’s motion, finding that coverage for the Ferguson action was excluded by the policy’s BEE, which provided:

[This policy does not provide coverage for] any claim arising out of professional services rendered by any insured in connection with any business enterprise:

(a) owned in whole or in part;

(b) controlled directly or indirectly; or

(c) managed, by any insured, and where the claimed damages resulted from conflicts of interest with the interest of any client or former client or with the interest of any person claiming an interest in the same or related business enterprise.

The Antonelli firm and Stout appealed, arguing the Ferguson action was covered because (1) a number of terms within the BEE were ambiguous; and (2) even if the BEE applied to the Ferguson complaint on the whole, the Ferguson plaintiffs “might prove only the allegations falling within coverage without proving the allegations within the exclusion.”

Ambiguity

The Antonnelli firm and Stout first argued that a number of terms within the BEE were ambiguous and therefore should be construed in their favor, contending that favorable construction would demonstrate that the Ferguson complaint did not fall within the BEE.  Addressing each part of the BEE individually, the court rejected the argument:

Under the terms of the Policy, the BEE excludes coverage for claims (1) “arising out of professional services” (2) rendered “in connection with any business enterprise” (3) owned, controlled, or managed, by any insured, and (4) resulting “from conflicts of interest with the interest of any client or former client.”

There is no dispute that this case “aris[es] out of professional services” that Appellants provided to the Ferguson plaintiffs, thereby satisfying the first requirement of the BEE. Appellants counseled Andros and others to renounce their interest in the WET patents in order to avoid their creditors....

Further, and just as clearly, these “professional services” were rendered “in connection with [a] business enterprise,” meeting the second requirement of the exclusion. The phrase “in connection with” is a common insurance phrase that is given particularly broad scope. See, e.g., Goldman Paper Stock Co. v. Richmond, F. & P.R., 212 Va. 293, 296 (Va. 1971) (“in connection with” broader than “arising out of”); see also Coregis Ins. Co. v. Am. Health Found., Inc., 241 F.3d 123, 128-29 (2d Cir. 2001) (explaining “in connection with” encompasses more than causal connection); Metro. Prop. & Cas. Ins. v. Fitchburg Mut. Ins., 793 N.E.2d 1252, 1255 (Mass. App. 2003) (“In connection with” should “not be construed narrowly but [is] read expansively in insurance contracts.”) (collecting cases). Moreover, although the phrase “business enterprise” is not defined by the policy, there can be little dispute that it encompasses the various corporations involved here -- Telefind, Flatt Morris, and NTP.

The Ferguson complaint also clearly meets the third requirement of the exclusion since it alleges that Appellants owned, controlled, or managed at least Flatt Morris and NTP. Stout served as a trustee for Flatt Morris, and Appellants eventually acquired a majority equity interest. Similarly, Stout helped incorporate NTP. NTP had no employees and Stout, other attorneys at the Antonelli Firm, and their families were among NTP’s few shareholders.

Finally, the asserted damages surely resulted “from conflicts of interests.” The defendant attorneys in this case allegedly obtained complete ownership and control of their clients’ assets and exploited those assets for personal benefit. This conduct violates any number of Virginia professional ethics rules....

Accordingly, the court found the allegations of the Ferguson complaint fell unambiguously within the BEE.

Potentiality

The appellants also argued that even if the BEE applied to the Ferguson complaint on the whole, because the Ferguson plaintiffs “might prove only the allegations falling within coverage without proving the allegations within the exclusion, the district court should have found a duty to defend.” For example, the appellants argued, the Ferguson plaintiffs might prove that appellants provided professional services by advising their clients how to avoid their creditors, but fail to show that these services were rendered “in connection with any business enterprise” or resulted “from conflicts of interest.” Essentially, the appellants argued that the Ferguson action could amount to only a claim for legal malpractice.

The court of appeals rejected the appellants’ argument, pointing out that Virginia’s potentiality rule required the court to examine the complaint and determine whether any potential judgment under that complaint would fall within the policy. Such a process, the court emphasized, does not disregard the actual allegations that are made:

In the Ferguson complaint, each cause of action is premised on an agreement between plaintiffs and Appellants that they would share any WET proceeds. As both parties acknowledged at oral argument, because the plaintiffs consented to every initial step of Appellants’ strategy, if Appellants had shared the WET proceeds with the Ferguson plaintiffs, there would be no loss for the Ferguson plaintiffs to recover. Without any potential loss, there can be no duty to defend. See Va. Elec. & Power Co. v. Northbrook Prop. & Cas. Ins. Co., 475 S.E.2d 264, 265-66 (Va. 1996) (explaining insurer has no duty to defend where there is no possibility that insurer will be required to indemnify insured). Thus because the breach of the agreement is central to any potential recovery, Appellants cannot obtain a defense by having a court assume plaintiffs will fail to prove the heart of their allegations. Rather, we must evaluate the Ferguson complaint presuming that plaintiffs will prevail. In doing so, we conclude that MLM has no duty to defend because the BEE applies.

The court also rejected the appellants’ reliance on authority finding a duty to defend where alternative allegations fall within the policy:

Appellants’ reliance on authority finding a duty to defend where some alternative allegations fall within the policy is also unavailing. Cases considering alternatively worded complaints do not look to any conceivable cause of action. They require that the complaint actually asserts the claim. See, e.g., Fuisz v. Selective Ins. Co., 61 F.3d 238, 245 (4th Cir. 1995) (avoiding intentional act exclusion because “each of the four causes of action” alleged “reckless disregard” in addition to “actual malice”). Given that the Ferguson complaint does not assert legal malpractice as an alternative theory, we will not infer such potential liability.

Thus, the court found that the BEE exclusion applied to exclude coverage for the Ferguson action.

 

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