C. Unsettled Questions on the Scope of Consequential Damages

• Library: South Carolina Damages (SCBar) (2009 Ed.)

C. Unsettled Questions on the Scope of Consequential Damages

1. Acceleration of Future Benefits

Although South Carolina state courts have provided guidance on the extent of consequential damages in bad faith actions, the limits of such damages have not been fully explained. For example, it is uncertain whether an insured can recover anticipated future benefits under the insurance contract before the future benefits would be payable under the policy.⁴⁴ Two federal court decisions in the District of South Carolina take different positions on the recovery of future policy benefits in first party bad faith actions.⁴⁵

In Wright v. UNUM Life Insurance Co.,⁴⁶ the federal district court found no reason to exclude, as a matter of law, future benefits as an element of bad faith damages.⁴⁷ The reasoning was based in part on California law, which was the basis for South Carolina's first party bad faith cause of action.⁴⁸ At the time South Carolina adopted a first party bad faith action, California courts had already explained that consequential damages in bad faith actions should include recovery of future benefits.⁴⁹ South Carolina courts may hold that Nichols also allows recovery of future benefits as part of consequential damages.⁵⁰

However, South Carolina courts may not have extended bad faith damages to include future benefits. In University Medical Associates v. UNUMProvident Corp.,⁵¹ another federal district court found that two Supreme Court of South Carolina cases precluded recovery of future benefits.⁵² Although the two state cases were decided before Nichols, both denied claims for future benefits by insureds for their insurers' wrongful refusal to pay disability benefits under insurance contracts.

In 1935, the South Carolina Supreme Court reversed a trial court order that an insurer must pay "instalments [sic] on said policies during such disability."⁵³ The supreme court held that "only the rights and liabilities of the parties up to the time of the commencement of the action can be adjudicated."⁵⁴ South Carolina had not yet recognized a first party bad faith action.

Then in 1963, an insured brought an action for wrongful denial of disability benefits, claiming accrued benefits "plus such payments as would probably accrue in the future on the theory of an anticipatory breach of the contract."⁵⁵ A special referee awarded damages that included "monthly benefits as would probably accrue in the future reduced to their present value."⁵⁶ The circuit judge reviewing the award followed Odiorne and limited damages to the benefits that had accrued by the commencement of the action.⁵⁷ On appeal to the supreme court, the insured argued that the rule did not apply because this action was for "wrongful cancellation of a policy of disability insurance,"⁵⁸ not just for benefits due under the policy. The supreme court construed the complaint to state a cause of action only for recovery under the policy and upheld the limitation on damages.⁵⁹ Again, South Carolina had not yet recognized a first party bad faith action. The South Carolina Supreme Court will have to resolve whether these two state cases control recovery of future benefits in bad faith tort actions after Nichols.

The district court in University Medical Associates⁶⁰ also discussed three potential dangers of allowing acceleration of future benefits. First, the insured's condition that causes future benefits could either be temporary or eliminated.⁶¹ Second, an event triggering the end of future benefits, such as death, could occur sooner than anticipated.⁶² And third, acceleration of future benefits is not needed to protect the insured from bad faith because the availability of punitive damages deters repetition of bad faith.⁶³

These potential dangers do not conclude the uncertainty of South Carolina law on future benefits as an element of bad faith damages. Generally, damages in tort actions include future losses. Damages rules limit unreasonable recoveries by discounting to present value, using life expectancy tables, and preventing double recovery. These general rules should apply to bad faith claims too.

Any damages, including future benefits, must be proved and may not be based on conjecture. The insured will have to prove future damages are appropriate under the circumstances and that the condition for which benefits are owed is at least continuing or permanent. The uncertainty of the period for which future benefits should be calculated is contained within standards of proof and the life expectancy tables.

In addition, recovery of future benefits for bad faith may be necessary to protect the expectations of the insured. Without future benefits as an element of bad faith damages, the insured would be forced back into a contractual relationship requiring future benefits to be paid by the defendant who has acted unreasonably in denying or delaying performance under the insurance contract. This arrangement arguably defeats the purposes of the bad faith cause of action and makes unreasonable delay or refusal to perform capable of repetition. Punitive damages may become less effective as deterrence if the recent legislative "tort reform" movements and if the recent...