Vol. II, Issue 5 ~ November 18, 2010
DID YOU DRESS AS A LAWYER OR A CLAIMS REPRESENTATIVE FOR HALLOWEEN?
I once wore a pink and white bunny costume, and yes, I was an adult at the time. It was for a good cause, a Halloween party for children of the firm's employees, and at least I wasn't the guy who got stuck wearing the elf costume - complete with green tights and elf booties. While there are some incriminating photos floating around somewhere, playing the role of a bunny wasn't as dangerous as playing the role of an insurance advisor can sometimes be.
Insurers frequently retain counsel to assist in the investigation and adjustment of complex or particularly contentious claims. However, a recent decision reminds us that what begins as a quick review of a claims file and policy can result in the production of communications between counsel and insurer under a court order. In City of Myrtle Beach v. United National Insurance Company, 2010 WL 3420044 (D.S.C.) (slip op.), the South Carolina District Court ordered the insurer to produce communications between itself and two law firms who had been retained to assist it in obtaining and analyzing information regarding the defense costs and expenses being incurred by the City of Myrtle Beach in connection with its defense of a lawsuit brought by the NAACP, as well as attempting to negotiate a settlement of the coverage dispute, all prior to the City's institution of a bad faith and breach of contract action against the insurer. Lacking precedent from South Carolina's state courts, the court adopted an approach which purports to balance the protection of the attorney-client privilege with the duty of good faith and fair dealing owed by insurers to their policyholders.
Crucial to the outcome was the court's determination that the insurer had waived the attorney-client privilege by asserting defenses seeking to establish its mental state and the allegations that its actions were reasonable and based in good faith. While the insurer characterized the role of its attorneys as "coverage counsel," the City introduced the testimony of the assigned adjuster who testified that the outside counsel were acting in her place and that they were retained because the insurer wanted the outside counsel to allocate the defense costs between covered and non-covered claims. Outside counsel also communicated directly with the City in connection with bills and adjustments. Although the court noted that the insurer had not pled advice of counsel as a defense, it held that simply asserting that it acted reasonably and in good faith had the effect of waiving the attorney-client privilege. "By asserting the defenses in its Answer, it has injected into this case the issues of law and fact contained in the documents for which it seeks protection." Id. at 6.
Courts around the nation have been eroding the attorney-client privilege and work product doctrine for years. While most insurers are aware of the consequence of raising an "advice of counsel" defense, South Carolina appears to be on the verge of joining those jurisdictions that view any defense asserting the reasonability of the insurer's actions as an implied waiver of the privilege. Insurers will have to remain vigilant in defining the role of outside counsel in the claim investigation/adjustment setting lest outside counsel's communications and work-product become discoverable.
Submitted by Phillip E. Reeves
For a copy of the case discussed in this article, email firstname.lastname@example.org.
The District Court of South Carolina, Florence Division, denied an insurer's motion for summary judgment in a case involving whether an insured's motorcycle loss was included within a policy's comprehensive coverage for larceny. In Perkins v. General Ins. Co. of America, No. 4:10-cv-00439-RBH (D.S.C. October 6, 2010), an insured gave a friend permission to drive his motorcycle. When the friend never returned the motorcycle, the insured notified General of the loss. General subsequently denied the insured's claim for benefits on the grounds that the loss was not by way of larceny.
General argued that because the insured initially gave the friend permission to drive the motorcycle, it did not constitute a larceny which, at common law, requires the taking of one's property without the consent of the owner. The insured argued that his loss was the subject of a larceny as defined by the crime of breach of trust and should be covered under the policy. The Court noted that when the South Carolina legislature enacted Section 16-13-230 of the South Carolina Code creating the crime of breach of trust, it merely expanded the crime of larceny to include situations when possession was obtained lawfully. Citing McPhatter v. Leeke, 442 F.Supp. 1252, 1254 (D.S.C. 1978). Accordingly, the Court held that under South Carolina law, a breach of trust is a larceny and that there is a genuine issue of material fact as to whether General breached its contract and acted in bad faith in denying the insured's claim.
* This opinion expands South Carolina's definition of larceny to include some losses that occur following a lawful possession. It should be noted, however, that in Footnote 2, the Court acknowledged that actions constituting the tort of conversion do not necessarily preclude that the same actions constitute the crime of larceny.
For a copy of the case discussed in this article, email email@example.com.
NORTH CAROLINA - Indemnification
The North Carolina Court of Appeals held that an insurer was not entitled to indemnification absent a showing that a worker's injuries stemmed from a subcontractor's acts or omissions. In One Beacon Ins. Co. v. United Mechanical Corp., No. COA09-1691 (N.C. Ct. App. October 19, 2010), One Beacon filed suit against a subcontractor to recover damages for an alleged breach of an indemnity clause in a contract. The insured contracted with a company to have a duct work venting system installed in its facility. The company then subcontracted with the defendant to have the work performed. The contract between the company and the defendant included an indemnity clause providing that the defendant would protect the company and the insured from any liability arising out of any act or omission of the defendant. Subsequently, an employee of the defendant was injured and brought a personal injury claim against the insured. One Beacon settled with the employee and attempted to recover damages from the defendant.
The Court indicated that in order to recover damages under the terms of the indemnity clause and the language of North Carolina General Statutes Section 22B-1, One Beacon must allege facts showing (1) that the employee's claim stemmed from injuries that arose from an act or omission of the defendant and (2) that the insured was liable in damages for the defendant's act of omissions. One Beacon neither alleged any facts in its complaint tending to show that the employee's injuries arose from any act or omission of the defendant nor did it forecast any evidence of derivative liability. Accordingly, the Court held that the obligation on behalf of the defendant to indemnify One Beacon was not triggered absent a showing that the insured was liable for the defendant's acts or omissions.
* This opinion puts insurers in North Carolina on notice that they will not be able to seek indemnification following a settlement absent a factual showing that the insured was liable due to the third party's negligence. Without this factual showing, the insurer will not be indemnified for voluntary settlement payments.
South Carolina - Surface/ Flood Water Exclusions
The South Carolina Supreme Court held that damage caused by water that has been collected, concentrated, and cast onto adjoining property is not excluded from coverage under the surface water and flood exclusions contained in an insurance policy. In M & M Corp. of S.C. v. Auto-Owners Ins. Co., No 26883 (S.C. October 11, 2010)
, the insured's hotel was damaged when approximately 830,000 gallons of water were discharged onto its property from an incomplete drainage system being installed by the South Carolina Department of Transportation. The insurer denied coverage pursuant to the surface water and flood exclusions found in the policy.
Citing Lawton v. S. Bound R.R. Co
., 61 S.C. 548, 552, 39 S.E. 752, 753 (1901), the Court held that rain water was no longer naturally flowing and ceased to be surface water once it was deliberately contained, concentrated, and cast onto an adjoining landowner's property. The Court further explained that water does not regain its status as surface water once it is expelled from its concentrated source. Because the damage-causing water did not breach its containment, but was deliberately channeled and cast upon the insured's land, the Court held that it could not be flood water. Accordingly, the damage to the insured's hotel was covered despite the surface and flood water exclusions found in its policy.
* As Justice Pleicones notes in his dissenting opinion, the majority's decision essentially repeals the Common Enemy Rule. If water loses its status as surface water once it is artificially contained, but cannot regain that status once it is expelled, landowners are no longer fighting a "common enemy" when they collect, channel, and dispel of surface water onto the land of another.