Diamond Post

Insurance Coverage Newsletter

BEFORE AND AFTER
Extreme Makeover - Bad Faith Edition

I confess.  I cry during every episode of Extreme Makeover - Home Edition.  Don't tell him I said so, but my husband cries harder than I do.  The stories of brave families making do with so little or having suffered crushing losses get to us every time.  I have to watch a re-run of Sex and the City to get over my Extreme Makeover blues.

Lately, however, I've been disturbed - though not to the point of tears, yet - about the admissibility of evidence of bad faith conduct on the part of an insurer.  A couple of days ago, I sat in federal court and watched the opening arguments in what promises to be a humdinger of a bad faith trial.  Having followed this one quite closely, I know that the insured will be offering quite a bit of evidence about the insurer's conduct which took place after the claim was denied and after litigation was filed.  "Not relevant!" I hear you cry, and you may be correct.  But evidence in bad faith cases is undergoing a makeover to keep up with the changes in bad faith law.

Once upon a time, bad faith was simply the unreasonable denial of benefits due under a policy.  If the insurer was wrong and the benefits were due, the only relevant evidence was what information the insurer had available to it at the time of the denial.  Therefore, the conduct of the insurer after the denial or, in the event the insured filed a lawsuit before denial, after litigation commenced, was irrelevant and inadmissible.  See, Howard v. State Farm Mut. Auto. Ins. Co., 316 S.C. 445, 450 S.E.2d 582 (1994).

The new and improved bad faith claim is likely to be premised not only on the insurer's unreasonable denial of benefits, but also on the insurer's failure to properly investigate and handle the claim.  See, Tadlock Painting Co. v. Maryland Cas. Co., 322 S.C. 498, 473 S.E.2d 52 (1996) (third party claim); Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983) (first party claim). Like the case I was watching last Monday in federal court, one of the issues will be whether the insurer conducted a thorough and unbiased investigation before making the decision to deny the claim.  "But that only involves pre-denial conduct!" I hear you cry, and you're right.  But whether the insurer's investigation was thorough and unbiased may raise the question of what could have been or should have been considered.  Did the insurer deny the claim and continue investigating?  Why would it do that if its pre-denial investigation was thorough?  During litigation, did the insurer request documents it did not obtain prior to the denial?  Why would it request additional documents which might be relevant to a claim's determination after the denial?  Did the insurer obtain a statement from a witness after denial that it could have gotten pre-denial?  The "coulda, woulda, shoulda" game is dangerous for insurers.

The bad faith makeover is starting to result in some opinions in the Carolinas regarding the admissibility of evidence.  In Mitchell v. Fortis Insurance Co., 385 S.C.570, 686 S.E.2d 176 (2009), cert. denied _ S.Ct. _, 2010 WL 182941 (U.S.S.C. March 22, 2010), the South Carolina Supreme Court upheld the trial court's admission of evidence of an insurer's internal rescission process, post-claim underwriting, and conduct following institution of litigation but before the insured's policy was "officially" rescinded.  The jury's verdict of $150,000 on the insured's bad faith claim was upheld.  However, and this is the part that  makes insurance lawyers nauseas, the jury's $15 million punitive damage award was remitted to a mere $10 million.

As the bad faith claim has undergone a makeover, so has the relevance of evidence of bad faith.  And while the "after" homes on Extreme Makeover - Home Edition frequently make me drool with envy (not a pretty sight to accompany my red puffy eyes!), the made-over version of admissible evidence in a bad faith case is not a pretty sight for insurers.

Submitted by:  Jennifer D. Eubanks

SOUTH CAROLINA - Temporary Substitute Auto

The South Carolina Supreme Court affirmed a Court of Appeals decision which reversed summary judgment which had been granted to an auto insurer on the issue of underinsured motorist ("UIM") coverage in Zurich American Insurance Company v. Tolbert, Op. No. 26798 (S.C.Sup.Ct. filed April 12, 2010) (Shearouse Adv.Sh. No. 14 at 34).  The Tolberts owned a Honda Accord and leased a BMW through his employer, BMW of North America, LLC.  The Tolberts had rejected UIM coverage on the Honda, but the employer purchased coverage for the BMW which included UIM coverage.  The Tolberts were injured by a third party while driving the Honda and the at-fault party's liability coverage was insufficient to fully compensate the Tolberts for their damages.  Since there was no UIM coverage on the Honda, they made a UIM claim on the BMW's UIM coverage, which the insurer, Zurich, denied.
    
Although the trial court granted Zurich summary judgment, the Court of Appeals reversed.  Specifically, the Tolberts submitted an affidavit which indicated that they were operating the Honda at the time of the accident because the BMW "needed service."  As such, they contended that the Honda was a "temporary substitute" auto and, thus, they were entitled to UIM coverage under the BMW policy.  The Court of Appeals held that the simple statement that the BMW "needed service" was sufficient to defeat summary judgment and the South Carolina Supreme Court affirmed.  Chief Justice Toal, joined by Justice Kittredge, dissented, arguing that the Honda was not a "temporary substitute" because it was owned by the Tolberts and, thus, there was nothing "temporary" about its ownership or use.  Additionally, Chief Justice Toal, without support from Justice Kittredge, wrote that the allegation that the BMW needed an oil change did not constitute its being "out of service" as contemplated by the policy.

While most would agree with Chief Justice Toal's definition of "temporary," perhaps underwriters should consider excluding from the definition of "temporary substitute" any vehicle owned or regularly furnished for the use of any insured.

For a copy of this case:
http://www.judicial.state.sc.us/opinions/displayOpinion.cfm?caseNo=26798

SC FEDERAL DISTRICT COURT - UIM Coverage Offer/Definition of Insured

The South Carolina Federal District Court granted summary judgment to the insurer in a matter involving two issues:  whether a meaningful offer of underinsured motorist ("UIM") coverage was made to a sophisticated insured and, even if UIM coverage existed, whether the claimant qualified as an insured for purposes of UIM coverage.  McWhite v. ACE American Ins. Co., C/A No. 4:07-cv-01551, slip op. (D.S.C. March 17, 2010).  In McWhite, ACE issued a commercial auto policy to Ahold, a large supplier of food products, which covered Ahold's truck fleet.  According to both Ahold and ACE, the policy was not to provide UIM coverage, except in those states where UIM coverage was mandatory, and then with only a $40,000 limit.  McWhite was an Ahold employee whose truck broke down in South Carolina.  He was in the process of putting out reflective warning triangles when he was struck by a passing vehicle.  He was found lying between the first triangle and the back of the truck, about 5 to 10 feet from the back of the truck.  He made a claim for UIM coverage under the Ahold policy which ACE denied on the grounds that the policy did not provide UIM coverage and, even if it did, McWhite was not "occupying" the covered auto at the time of the accident and, thus, did not qualify as an insured.

The Court found that while Ahold and ACE clearly intended that the policy not provide UIM coverage, it was questionable whether ACE made a meaningful offer of UIM coverage to Ahold as required by South Carolina's financial responsibility statutes.  Specifically, the UIM selection/rejection form was not signed by the insured, did not list the premiums for the UIM coverages offered and did not offer UIM limits up to Ahold's $5 million liability limits.  

Without deciding whether the UIM offer was meaningful, the Court went on to examine whether, assuming the policy was reformed to include UIM coverage, McWhite qualified as an insured.  McWhite argued that he was a statutory insured because he was a permissive user of the truck and, even if UIM coverage only extended to those "occupying" the truck, he was an insured because he was in the process of exiting the truck when he was injured.  The Court disagreed on both counts.  It held that because UIM coverage in South Carolina is voluntary, the parties are free to define "insured" as they wish.  As such, McWhite was not an "insured" merely by virtue of being a permissive user.  Moreover, the Court held that McWhite was not "occupying" the truck at the time of his injury.  It was undisputed that he was not in contact with the truck and his conduct in placing warning triangles behind the truck was not consistent with exiting the truck.  Therefore, the Court granted summary judgment to the insurer.

For a copy of this case, please email:  jeubanks@gwblawfirm.com

NORTH CAROLINA - Personal & Advertising Injury - Quality or Performance of Goods Exclusion

North Carolina has added some badly-needed depth to jurisprudence on the "Quality or Performance of Goods" exclusion.  In Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, Op. No. 272A08 (N.C.Sup.Ct. filed April 15, 2010) (2010 WL 1492136), the insured, a manufacturer of allegedly insect-repelling clothing, was sued for trademark infringement, false advertising and other similar theories by a competitor who alleged that the insured's claims that the clothing effectively repelled insects were false.  The insured's commercial general liability carriers sought a declaratory judgment that their policies afforded no personal and advertising coverage because the claims against the insured were excluded by the "Quality or Performance of Goods - Failure to Conform to Statements" exclusion.

The trial court entered partial summary judgment for the insured, holding that the policies provided coverage and the insurers were obligated to defend the insured in the underlying action.  The insurer was granted a discretionary appeal and a majority of a divided Court of Appeals panel affirmed the trial court.  However, the North Carolina Supreme Court reversed and remanded the matter for entry of summary judgment in favor of the insurers.

The allegations against the insured were key to the application of the exclusion.  According to the Supreme Court, the offending advertisements by the insured involved solely the quality or ability of their own goods and did not disparage the competitor's goods.  While the court acknowledged that the competitor might lose sales or market share based on the advertisement, it noted that competition is part and parcel of doing business and cannot be remedied in the court.  Accordingly, even if the insured falsely advertised the quality or performance of its own products, the Quality or Performance of Goods exclusion was applicable and excluded any obligation of the insurer to defend or indemnify.

With this case and the Super Duper case decided by the South Carolina Supreme Court last year, the Carolinas are starting to build a foundation of case law interpreting personal and advertising injury coverage and exclusions.  This case will also likely be guidance for other jurisdictions addressing this particular exclusion.

For a copy of this case:
http://www.aoc.state.nc.us/www/public/sc/opinions/2010/pdf/272A08-1.pdf