South Carolina Lawyer
SC Lawyer, July 2010, #1.
Bad Faith in South Carolina Insurance Contracts: From Tyger River Pine Co. v. Maryland Cas. Co. to Mitchell v. Fortis Ins. Co
South Carolina Lawyer July 2010 Bad Faith in South Carolina Insurance Contracts: From Tyger River Pine Co. v. Maryland Cas. Co. to Mitchell v. Fortis Ins. Co. By Professor Constance A. Anastopoulo Introduction
In 1933, the S.C. Supreme Court decided Tyger River Pine Company v. Maryland Casualty Company, 170 S.C. 286, 170 S.E. 346 (1933), and became one of the first states to establish a foundation not only for an insured's third-party claim for bad faith refusal to settle, but also for a claim for bad faith refusal to pay benefits. Because it is a judicially created doctrine, the doctrine of bad faith is refined with every related opinion of the Court. The S.C. Supreme Court's recent opinion on bad faith in
Mitchell v. Fortis, 2009 WL 2948558, Sup. Ct. Op. No. 26718 (S.C. Sept. 14, 2009), is particularly noteworthy for its post-judgment use of federal and state case law to review and ultimately reduce a punitive damages award for bad faith rescission of an insurance policy. This article provides a general overview of bad faith law, discusses its evolution in South Carolina from Tyger River to Mitchell, and suggests that the opinions of the S.C. appellate courts in this area will continue to shape the doctrine in South Carolina and also as it develops in jurisdictions across the country.
Bad faith in general
A claim for bad faith typically arises in either the first- or third-party context. See, e.g. Rakes v. Life Inv. Ins. Co. of Am., 582 F.3d 886, 895-96 (8th Cir. 2009).
First-party bad faith deals with the insurer's conduct in determining whether to indemnify the insured for loss suffered personally. See generally George J. Kefalos, et al.,
Bad-Faith Ins. Litigation in the South Carolina Practice Manual, 13-AUG S.C. Law. 18 (2001). Historically, courts construed a denial of benefits as a breach of contract and limited recovery accordingly. The nature of the insured-insurer contractual relationship, however, led to the emergence of a tort claim, providing additional theories of recovery intended to address the unique characteristics of the insurance contract. California was the first state to recognize an action for bad faith handling of a claim for first-party benefits in Gruenberg v. Aetna Insurance Company, 9 Cal. 3d 566, 108 Cal.Rptr. 480, 510 P.2d 1032 (1973).
Third-party bad faith, on the other hand, concerns the insurer's conduct in handling the insured's claim for coverage under a liability insurance policy. In this context, an insured files a claim for a defense to a third party's suit instituted against the insured and indemnification for the costs of any judgment suffered. Stated another way, the insurer owes two duties: (1) to defend a claim even if some or most of the lawsuit is not covered by insurance; and (2) to indemnify-to pay the judgment against the policyholder up to the limit of coverage. As these are contractual obligations, insurers must act with the utmost good faith and fair dealing in determining whether to and ultimately carrying out these duties.
Once the insurer has assumed control of the defense, including the right to accept or reject settlement offers, the implied duty of good faith and fair dealing requires the insurer to put the insured's interests on equal footing with its own. Thus, there is a duty to settle a reasonably clear claim against the policyholder within the policy limits to avoid exposing the policyholder to the risk of a judgment in excess of the policy limits. See, e.g., Frontier Insulation Constr. v. Merch. Mut. Ins. Co., 91 N.Y.2d 169, 175-78 (1997).
Closely tied to this "duty to settle" is the concept of the excess liability claim. The claim first arose in Crisci v. Security Insurance Company, 66 Cal. 2d 425, 426 P.2d 173 (1967), where a third party offered to settle within the policy limits. Id. at 428, 426 P.2d at 175. After the insurer refused the offer, the insured suffered a judgment at trial substantially exceeding the policy limits. Id. at 428, 426 P.2d at 176. The insurer thereafter paid out only the policy limit, which it considered the extent of its contractual...