A. Introduction

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

A. Introduction

South Carolina courts first recognized a bad faith cause of action for an insurer's unreasonable refusal to settle on behalf of its insured within the policy limits in Tyger River Pine Co. v. Maryland Casualty Co.¹ In Nichols v. State Farm Mutual Automobile Insurance Co.,² South Carolina extended the bad faith cause of action to first party insurance contracts for the wrongful denial or delay in payment of benefits,³ explaining that both cases "are merely two different aspects of the same duty."⁴

The bad faith cause of action is a tort action, separate from any breach of contract action.⁵ The legal duty for bad faith is based on the implied duty of good faith and fair dealing in contracts that is protected by tort liability because of the special relationship created by insurance contracts.⁶ Once the insurance contract has been made,⁷ insurersmust deal fairly and in good faith with claims by or against their insureds.

Although as a general rule only insureds may assert bad faith causes of action,⁸ bad faith claims arise in both first party and third party contexts.⁹

First party insurance contracts¹⁰ include policies for health,¹¹ disability,¹² nursing home care,¹³ life,¹⁴ fire,¹⁵ homeowners,¹⁶ home warranty,¹⁷ rental dwelling,¹⁸ property,¹⁹ automobile,²⁰ marine,²¹ workers' compensation,²² and commercial.²³

Third party contexts usually involve liability policies where the insured is being sued.²⁴ A third party may obtain a judgment against an insured in excess of the policy limits but be unable or unwilling to execute the judgment against the insured. In this type of situation, the insured may have a claim against the insurer for bad faith refusal to defend or to settle within the policy limits. Alternatively, the third party judgment creditor may be able to assume or be assigned the insured's rights against the insurer for bad faith and then seek recovery against the insurer in excess of the policy limits. However, the third party judgment creditor is not the insured and has no independent standing to sue the insurer.²⁵ Likewise, spouses do not necessarily have standing just because of their relationship to the insured.²⁶

Insureds in South Carolina have been secure in asserting bad faith actions in third party contexts for seventy years and in first party contexts for more than twenty years.²⁷

Where a valid bad faith claim exists against the insurance company, the insured may recover actual, consequential, and punitive damages. This chapter attempts to delineate the nature of recoverable damages and the scope of those damages, and it highlights the damages issues that are unsettled under current law.

--------

Notes:

^[1] 163 S.C. 229, 235, 161 S.E. 491, 493 (1931) (now known as the "Tyger River Doctrine") (commenting that a liability insurer owes its insured a duty to settle, if it is reasonable to settle, a personal injury claim covered by the policy) (quoting Cavanaugh Bros. v. Gen. Accident Fire & Life Assur. Corp., 106 A. 604, 604 (N.H. 1919)).

^[2] 279 S.C. 336, 306 S.E.2d 616 (1983).

^[3] Id. at 340, 306 S.E.2d at 619.

^[4] Id. at 339-40, 306 S.E.2d at 619.

^[5] See, e.g., TadlockPainting Co. v. Md. Cas. Co., 322 S.C. 498, 502-03, 473 S.E.2d 52, 55 (1996); Charleston County Sch. Dist. v. State Budget & Control Bd., 313 S.C. 1, 7-8, 437 S.E.2d 6, 9-10 (1993).

^[6] The special relationship was derived from the primary purpose of insurance contracts: "An insured does not contract to obtain any kind of commercial advantage or leverage but only to protect himself against the spectre of accidental [or unavoidable] loss." Nichols, 279 S.C. at 340, 306 S.E.2d at 619 (alteration in original) (internal quotation marks omitted) (quoting Trimper v. Nationwide Ins. Co., 540 F. Supp. 1188, 1193 (D.S.C. 1982)); see also Masterclean, Inc. v. Star Ins. Co., 347 S.C. 405, 410, 556 S.E.2d 371, 374 (2001) ("A bad faith tort action arises from the common law due to special characteristics of the insurance relationship, not simply because it is a regulated industry."); Tadlock, 322 S.C. at 502, 473 S.E.2d at 54 ("[B]argaining for security from financial loss [is] the primary goal motivating the purchase of insurance...."); Brown v. S. C. Ins. Co., 284 S.C. 47, 54, 324 S.E.2d 641, 646 (Ct. App. 1984) ("Ordinarily, the insured conceives himself to be purchasing a package of 'protection,' including the services of the insurer in processing claims under the policy. In a very real sense, therefore, the relation of insurer to insured is more than a simple debtor-creditor relationship."), overruled on other grounds by Charleston County Sch. Dist., 313 S.C. at 7-8, 437 S.E.2d at 9 (explicitly overruling Brown only to the extent that it suggested a bad faith action is one in contract rather than tort). In the absence of a mutually binding insurance contract, the insured has no cause of action for bad faith refusal to pay benefits. Gaskins v. S. Farm Bureau Cas. Ins. Co., 343 S.C. 666, 672, 541 S.E.2d 269, 272 (Ct. App. 2000).

The consequence of a special relationship created by insurance is well established in South Carolina: "[W]here the contract creates a certain relationship between the parties, and certain duties arise by operation of law, irrespective of the contract, because of this relationship, then the breach of such duties warrants an action in tort." Meddin v. S. Ry.-Carolina Div., 218 S.C. 155, 165, 62 S.E.2d 109, 112 (1950); see also Tadlock, 322 S.C. at 503 n.5, 473 S.E.2d at 55 n.5. More recently, the court of appeals discussed this special relationship created by insurance contracts in holding that such a special relationship does not exist in the employment context and limiting recovery in employment situations to contract damages for breach of the implied covenant of good faith and fair dealing. Williams v. Riedman, 339 S.C. 251, 268-69, 529 S.E.2d 28, 36-37 (Ct. App. 2000).

^[7] The duty that gives rise to a bad faith cause of action is triggered by the existence of a valid, enforceable insurance contract. As a general rule for insurance coverage, the applicant must pay the premium, and the insurance company must accept the application. In some instances, however, courts have recognized the existence of an insurance contract where the application was not expressly accepted, the premium was not paid, or both. Rickborn v. Liberty Life Ins. Co., 321 S.C. 291...