I. Bad Faith by an Insurer

• Library: The Law of Automobile Insurance in SC (SCBar) (2015 Ed.)

I. Bad Faith by an Insurer

A. Statutory Bad Faith

1. General

South Carolina has enacted a number of statutes specifically aimed at addressing unfair trade and claim practices of insurers and insurance agents. In many cases, the General Assembly has adopted model legislation prepared by the National Association of Insurance Commissioners ("NAIC"). These statutes are found under the South Carolina Code in Title 38, Chapters 55 ("Conduct of Insurance Business"), 57 ("Trade Practices"), and 59 ("Claims Practices") and are briefly explained below. The general duties and regulations imposed upon insurers and agents as outlined in these three chapters also appear in other sections of the Code pertaining to other types of policies, including individual life insurance, individual annuities, and accident and health insurance. Additionally, Chapter 77 ("Automobile Insurance") provides detailed definitions, regulations, and obligations specifically concerning automobile insurance.

a. Enforcement by the Department of Insurance and Insurance Commission

To ensure insurers' good-faith practice and adherence to the statutory requirements, the General Assembly empowered the Department of Insurance, specifically the Department's Director (or designee), to enforce these regulations.¹ The Director is charged with supervising and regulating the rates and service of every insurer in South Carolina, seeing that all state laws governing insurers or relating to the business of insurance are faithfully executed, reporting violations of these laws to appropriate authorities, instituting civil actions, and holding an annual public hearing to provide the public with information and an opportunity to discuss raters, territory, and other pertinent issues.²

South Carolina insurance laws empower the Director with specific authority to license and supervise every insurer doing business in the State, with limited exception.³ No insurer may operate from a location within South Carolina unless it is licensed as an insurer by the Director.⁴ The Director may also revoke or suspend an insurer's certificate of authority to transact business relating to insurance in the State⁵ or impose monetary penalties as provided for in Section 38-2-10 in lieu of license revocation or suspension.⁶ This authority also extends over agents,⁷ managing general agents,⁸ and brokers.⁹

Frequently, the Department receives complaints from consumers who have had difficulty with claims processing and other coverage issues. These complaints are handled first by the Department's Office of Consumer Services. After a preliminary investigation by that division, if a possible violation has occurred, that complaint and any pertinent documentation is forwarded to the Legal Division where it is investigated by the Investigations Section. Violations that are substantiated are referred to the Legal Section for administrative disciplinary action in accordance with the South Carolina insurance laws either through the consent of the insurer, agent, or broker or following a hearing. These hearings are typically held before the Administrative Law Judge Division. Violations of the South Carolina insurance laws may be reported, in writing, to the South Carolina Department of Insurance, Attention: Legal Division, Post Office Box 100105, Columbia, South Carolina 29202-3105.

b. Chapter 55: Conduct of Insurance Business

Chapter 55 establishes general principles for transactions of insurance business procured by an insurer in South Carolina. In general, it prohibits discrimination in the making of insurance contracts and other special agreements except as specifically provided in sections of the Code. It also prohibits fraudulent conduct on the part of insureds, insurers, agents, and brokers. Accordingly, certain special inducements are also proscribed by this chapter. Importantly, the statutory provisions in this chapter require all terms of the insurance contract to be contained in the written contractual document. The chapter also contains several criminal penalties, as well as the Omnibus Insurance Fraud and Reporting Immunity Act.

Section 38-55-50 prohibits discrimination by an insurer, its agent, or an insurance broker doing business in South Carolina. Furthermore, an insurer, its agent, or an insurance broker may not make a contract of insurance or agreement as to a contract other than as plainly expressed in the policy issued.¹⁰ Violation of Section 38-55-50 is classified as a misdemeanor and is punishable by the administrative penalties found under Section 38-2-10.¹¹

The Omnibus Insurance Fraud and Reporting Immunity Act¹² "confront[s] aggressively the problem of insurance fraud in South Carolina by facilitating the detection of insurance fraud."¹³ To achieve this purpose, this Act provides criminal penalties for misrepresentation and making false statements in the course of transacting insurance business.¹⁴ Section 38-55-560 establishes an Insurance Fraud Division within the Office of the Attorney General to prosecute violations of Sections 38-55-170 (presenting false claims for payment) and 38-55-540 (misrepresentation and making false statements).¹⁵ Immunity from liability is recognized and defined within Section 38-55-580.

c. Chapter 57: Trade Practices

Also known as South Carolina's Insurance Trade Practices Act, Chapter 57 regulates trade practices in the business of insurance in accordance with the intent of Congress as expressed in the McCarran-Ferguson Act¹⁶ (Public Law 15, 79th Congress).¹⁷ All unfair trade practices regarding the insurance business are regulated by this Act.¹⁸ This chapter defines, or provides for the determination of, all the practices in this state that constitute unfair methods of competition or unfair or deceptive acts or practices and prohibits the trade practices so defined or determined.

The unfair trade practices section in Chapter 77 is limited to automobile insurance.¹⁹

d. Chapter 59: Claims Practices

Section 38-59-20 enumerates improper claims practices, including knowingly misrepresenting pertinent facts or policy provisions, failing to acknowledge with reasonable promptness pertinent communications, failing to adopt and implement reasonable standards for the prompt investigation and settlement of claims, and so forth.²⁰

The general duties imposed upon insurers and agents as outlined in these three chapters also appear in other sections of the Code pertaining to specific types of policies including individual life insurance, group life insurance, individual annuities, accident and health insurance, and other types of policies. Like the statutory provisions cited above, these other sections of the insurance laws impose specific duties upon insurers to advertise properly and prohibit false or misleading information concerning the terms and conditions of the policy or its coverage provisions.

If, after due notice and hearing, the Director or his designee determines that the insurer has engaged in any of the improper claim practices defined in this section, he may impose a penalty as provided for in § 38-2-10,²¹ including substantial fines and possible revocation or suspension of the violator's authority to do business in South Carolina, varying according to whether the violator is an insurer, a health maintenance organization, or a person and to whether the violation is willful.²²

Section 38-59-40²³ provides that if an insurer refuses to pay a "claim, loss or damage" within 90 days of demand, and if a trial judge determines that the refusal was without reasonable cause or in bad faith,²⁴ then the insurer is liable for payment of the insured's attorney's fees in addition to the actual damages. Although previously this statute was applied only in state court actions,²⁵ Act 148²⁶ specifically provided that the section now "applies [as well] to cases filed or removed to federal court and cases appealed in the federal court system." The trial judge also determines the amount of the attorneys' fees awarded.²⁷ Prior to passage of Act 148, attorneys' fees were limited to the lesser of one-third of the amount of the judgment or the sum of $2,500.²⁸ Act 148 removed the $2,500 cap, and the maximum legal fee is now simply one-third of the judgment. When fees are awarded and the judgment is affirmed on appeal, the supreme court "shall allow" to the insured an additional sum as the court adjudges as reasonable attorneys' fees of the insured on the appeal.²⁹

In a case construing this statute, Benton & Rhodes, Inc. v. Boden, the South Carolina Court of Appeals reversed an award of attorneys' fees when the trial judge directed a verdict in favor of the insurer on the bad faith cause of action.³⁰ Similarly, the supreme court in Spinx Oil Co. v. Federated Mutual Insurance Co. rejected an insured's claim for attorneys' fees when the Master denied the claim, and no evidence in the record showed that the insurer's refusal to honor the insurance claim was without reasonable cause or done in bad faith.³¹ The Fourth Circuit in Shadow Creek Apartments, LLC v. Hartford Fire Insurance Co.³² also affirmed the South Carolina district court's denial of attorneys' fees under this statute because the fees were not expended as a result of the allegedly unreasonable behavior of the insurance adjustor. Determination of an insurer's liability for attorneys' fees is a question of fact.

This statute provides only for administrative remedies by the Director and arguably does not create a private right of action.³³ In Swinton v. Chubb & Son, Inc.³⁴ the court of appeals reasoned that the statute was designed to protect the public generally and to assure proper performance by imposing liability against the insurer in favor of the state, rather than making nonperformance individually and privately actionable. The court distinguished the case of G-H Insurance Agency v. Travelers Insurance Co.³⁵ on the ground that no additional statutory provisions existed in the Unfair Claims Practices Act that...