§ 11.5 Fiduciary Duty - Attorney Selected by Insurer

• Library: Guide to South Carolina Liability and Property Insurance Law (SCBar) (2019 Ed.)

§ 11.5 Fiduciary Duty - Attorney Selected by Insurer

The federal district court addressed whether an insurer would be liable in bad faith for the actions of independent counsel retained to represent the insured in Hodges v. State Farm Mutual Automobile Insurance Co.³¹ The lawsuit arose out an accident in which an insured employee, who was driving the employer's vehicle, struck the claimant while the claimant was in his front yard. The employee admitted that he "consumed eight to ten beers" before the accident.³²

The insurer began conducting its investigation after the accident. The employee "was difficult to locate, resulting in [the insurer] sending to him a reservation of rights letter informing him that coverage could later be denied for failure to cooperate with the insurer."³³ There was a conflict in the testimony regarding the nature and extent of the settlement negotiations, but the court noted that the insureds' wrote to the insurer and stated that "he had heard the policy coverage was for minimum limits and that he would proceed to file suit immediately since the policy limits would not be sufficient."³⁴ Further, the court noted that the attorney "later stated that he did not begin to evaluate the case for settlement purposes until the default case went to the Supreme Court" and it was "confirm[ed] that no thought was given to settlement during the early stages of the lawsuit due to the minimal amount which the insurance company could be expected to contribute."³⁵

The court explained that when the insured was served in the underlying lawsuit he forwarded the papers to his private attorney to review and forwarded to the insurer. The private attorney contacted the insurer and the insurer sent someone to pick them up and take them to the attorney retained by the insurer to represent the insured. The retained attorney prepared the answers and forwarded them to the private attorney and then went on vacation. The private attorney signed the answers and again forwarded them to the retained attorney. However, the answers were not delivered to the retained attorney and when the private attorney discovered that they had not been delivered, he personally delivered them. In the meantime, a default judgment had been entered in the underlying lawsuit and the day after delivering the answers, the retained attorney moved to reopen the proceedings.

The trial court denied the motion to set aside the default, and "found an absence of excusable neglect on the part of [the insured]'s attorneys and that no meritorious defenses existed to plaintiffs' causes of action."³⁶ The court observed that the insured refused to provide an affidavit regarding the cause of the accident. The trial court's determination was affirmed by the South Carolina Supreme Court. The Court explained that after settlement negotiations with the insurer failed, the assignees' took an assignment of the insureds' causes of action...