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The South Carolina Supreme Court adopted a new standard for determining when an insurer must defend the insured against litigation which may trigger coverage in USAA Property and Casualty Insurance Company v. Clegg, Op. No. 26476 (S.C.Sup.Ct. filed April 28, 2008) (Shearouse Adv.Sh. No. 16 at 52), 2008 WL 1848393. In Clegg, USAA's insured's non-resident 19-year old son killed his passenger in a single car accident. The car involved in the accident was owned by the son and was not insured under any policy issued to the son. Believing the car involved in the accident was owned by USAA's insured, the passenger's estate sued him for negligent entrustment and negligence. The insured tendered the lawsuit to USAA and demanded a defense based on the complaint, which alleged that he was the owner of the car, and the insuring agreement of the policy, which provided any insured a defense and indemnification if the claim arose from any auto accident, not just one in which the insured was a driver, and was the result of the ownership, maintenance or use of any auto, not just those autos which were listed in the policy's declarations. USAA denied the claim and instituted a declaratory judgment action to determine its obligations under the policy. The insured moved for partial summary judgment and the trial court granted his motion, holding that the insuring agreement alone obligated USAA to provide a defense.
USAA appealed and the South Carolina Supreme Court certified the case from the Court of Appeals. The court, in a unanimous decision, reversed the trial court's declaration of a duty to defend on several grounds. First, it held that the trial court did not properly analyze whether the allegations of the complaint triggered coverage under the policy. Using a 4-corners rule, the Court noted that neither the insured nor his son were insureds for purposes of the lawsuit's claims. Specifically, the son was not an insured because he was not a resident relative of his father. The father was not an insured because he did not meet the policy's requirement that he own, maintain or use the vehicle involved in the accident. Thus, even under a 4-corners analysis, neither father nor son was an insured under the policy for the claims made against them in the complaint.
Second, the Court held that the trial court erred in finding that USAA's insured could be potentially liable for negligent entrustment arising from the negligent use of a non-covered auto by someone who is not an insured under the policy. Distinguishing the cases relied upon by the trial court, the Court held that because the son was emancipated at the time of the accident, there is no statutorily imposed duty on the father for his son's negligence.
The Court went beyond these criticisms of the trial court's order and held that the trial court should not have limited its analysis of the policy to the insuring agreement. The policy contained an exclusion for ownership, maintenance or use of any non-covered auto which was clearly applicable and the Court emphasized that the "allegations of the [c]omplaint must be applied to the policy in its entirety, which necessarily includes the exclusion section." Id. at 64.
Finally, and most significantly, the Court discussed the standard for determining whether an insurer has a duty to defend. Citing the 4-corners rule, the Court noted that South Carolina had long held that the insurer's duty to defend is determined by whether the allegations in a compliant are sufficient to bring the claims within the coverage of the policy. However, it went on to adopt a new standard:
[A]n insurer's duty to defend is not strictly controlled by the allegations in the [c]omplaint. Instead, the duty to defend may also be determined by facts outside of the complaint that are known by the insurer.
Id. at 64. (citation omitted). The Court noted that there was no dispute as to the facts that the son was not a resident-relative and that the car involved in the accident was not described or covered under the USAA policy. Therefore, these facts, which were unknown to the plaintiff in the automobile accident case when she initially filed her complaint, but were not disputed by any party in the declaratory judgment action, should have been considered by the trial court in determining whether USAA had a duty to defend.
The Court's adoption of a new standard for determining whether a complaint triggers an insurer's duty to defend is probably more favorable to insurers than to insureds. For at least a decade, many attorneys in the plaintiff's bar, knowing the strict parameters of the 4-corners rule, have filed complaints that are deliberately vague as to dates of loss, specific damages and other facts in an effort to involve as many insurers as possible. The goal for them is not, of course, the defense of the defendant, but to get as much insurance coverage as possible to settlement negotiations. This tactic has been particularly prevalent in the context of construction defect cases. The advent of the new standard will allow an insurer to present to a court determining its duty to defend, undisputed facts outside of the vague allegations of the complaint which compel a finding of no coverage. Less often, insurers have been able to deny coverage and the duty to defend on the basis of a poorly pled complaint which technically failed to trigger coverage. In those cases, the insured will have the advantage of the new standard and be entitled to have the insurer and a court consider undisputed facts which would trigger the insurer's duty to defend.
The implementation of this new standard will be carried out at both the claims level and the trial court level. Insurers need to be aware that undisputed facts can and should be considered in determining whether they have a duty to defend the insured. Likewise, counsel for insurers should be aware of the new standard in issuing coverage opinions and in handling declaratory judgment actions, as well as contractual and extra-contractual litigation. The downside of this decision may be that insureds will more readily seek to force a defense by alleging facts outside the complaint, even though the facts are in dispute. Counsel for insurers will need to take efforts not to allow courts to become involved in fact-finding, which could lead to protracted and expensive discovery. Instead, they should use the Clegg case to limit the examination of facts outside the complaint to only those facts which are not in dispute and argue that disputed facts are not relevant to a determination of the duty to defend.
http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=26476
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