Coverage Analysis
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 (4th Circuit)


  Under South Carolina law, an "accident" means "an effect which the actor did not intend to produce and cannot be charged with the design of producing."  Goethe v. New York Life Ins. Co., 190 S.E. 451 (S.C. 1937), quoted in Manufacturers and Merchants Mutual Ins. Co., 1997 WL 785460 (App. December 22, 1997).  See USAA Prop. & Cas. Ins. Co. v. Rowland, 435 S.E.2d 879, 881-82 (S.C. Ct. App. 1993) (absent prescribed definition in policy, "accident" must be defined according to ordinary and usual understanding).

  An insured will be deemed to have "intended" to cause injury if he acted willingly and "knew or should have known the result would follow from his act."  Snakenberg v. Hartford Cas. Ins. Co., 383 S.E.2d 2 (S.C. App. 1989).  An action for alienation of affections necessarily implies an intent to cause harm and therefore is not an "accident" within the scope of a homeowner's policy. USAA Property & Cas. Co. v. Rowland, No. 2074 (S.C. App. September 20, 1993).

  Although allegations of intentional abuse are excluded from coverage, claims that an insured negligently failed to prevent a loss from occurring, as by permitting the plaintiff to come in contact with sexual molesters, have been held to give rise to a duty to defend.  Manufacturers and Merchants Mutual Ins. Co. v. Harvey, No. 2772 (S.C. App. December 22, 1997).  

  An exclusion for intentional acts will only apply if the act that produced the loss was intended and the result of the act were also intended.  Miller v. Fidelity-Phoenix Ins. Co., 231 S.E.2d 701 (S.C. 1977).  


  The U.S. Court of Appeals for the Fourth Circuit has predicted that the South Carolina Supreme Court would adopt a “time on the risk” approach for long-tail allocation disputes, including a share to policyholders for self-insured periods.  Spartan Petroleum Co., Inc.  v.  Federated Mut.  Ins.  Co., 162 F.3d 805 (4th Cir. 1998).


  South Carolina has both an intermediate appellate court and a state Supreme Court.


  Unfair or deceptive consumer practices are proscribed by S.C. Code Ann. § 39-5-10 (Law. Co-op. 1985). Unfair claims handling by insurers is regulated under S.C. Code Ann. § 38-37-1110.

  Under South Carolina law, there is an implied covenant of good faith and fair dealing in every insurance contract "that neither party will do anything to impair the other's rights to receive benefits under the contract."  Nichols v. State Farm Mutual Auto Ins. Co., 306 S.E.2d 616, 618 (S.C. 1983).  This obligation extends to all aspects of the insurer's obligations under its contract.  Carolina Bank & Trust Co. v. St. Paul Fire & Marine Ins. Co., 310 S.E.2d 163, 165 (S.C. App. 1983).  

  If an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim, the policyholder can recover consequential damages in a tort action.  Nichols v. State Farm Mutual Auto Ins. Co., 306 S.E.2d 616 (S.C. 1983).  Further, he can recover punitive damages if he can show that the insurer acted willfully or in reckless disregard of the insured rights. Id. and State Farm Fire & Cas. Co. v. Barton, 897 F.2d 729 (4th Cir. 1990). However, any unusual refusal to defend or afford coverage will not justify an award of punitive damages.  BP Oil Co. v. Federated Mutual Ins. Co., 1998 WL 30666 (S.C. App. January 26, 1998).  

  Under South Carolina law, the existence of a reasonable basis for denying or withholding coverage precludes a claim of bad faith.  Crossley v. State Farm Mutual Automobile Insurance Company, 415 S.E.2d 393, 397 (S.C. 1992).  

  These holdings have since been extended to claims involving liability policies.  Tadlock Painting Co. v. Maryland Casualty Co., 473 S.E.2d 53 (S.C. 1996).  Further, in Tadlock, the South Carolina Supreme Court ruled that bad faith may exist independently of an insurer's contractual obligations under a policy, rejecting the insurer's contention that there could not be bad faith if there was no coverage for a third-party claim.  The court ruled that a policyholder could still sue for damages arising from unfair claims handling, even if the insurer was ultimately correct in its determination that its loss was not covered.  

  Under South Carolina law, insurers have a duty to exercise reasonable diligence in the settlement of claims against their policyholders within policy limits.  Tyger River Pine Company v. Maryland Casualty Company, 170 S.E. 346 (S.C. 1933).  South Carolina courts have refused to extend the protection of this doctrine to parties who are not named insureds under the policies, including insurers.  See  Royal Insurance Company v. Reliance Insurance Company, 8:00-1256-13BG (D.S.C. April 19, 2001)(rejecting subrogation action by excess insurer against primary insurer on this basis).  

  A third party claimant cannot sue an insurer for bad faith.   Klekley v. Northwestern National Casualty Company, 526 S.E. 2d 218 (S.C. 2000) and  Major v.  National Indemnity Co., 229 S.E.2d 849, 850 (S.C. 1976). 


  Held to encompass claims for mental distress in Allstate Ins. Co. v. Biggerstaff, 703 F.Supp. 23 (D.S.C. 1989).


  Insurer's rights must be substantially prejudiced.  Merit Ins. Co. v. Koza, 274 S.C. 362, 264 S.E.2d 146 (1980); Noisette v. Ismail, 299 S.C. App. 243, 384 S.E.2d 310 (1989).  In Vermont Mut. Ins. Co. v. Singleton, 446 S.E.2d 417 (S.C. 1994), the Supreme Court rejected the insurer's argument that an unreasonable delay should give rise to a presumption of prejudice. 


  Party seeking coverage has the initial burden of showing that its claim is within the scope of coverage.  Liberty Mutual Ins. Co. v. Edwards, 364 S.E.2d 750, 294 S.C. 368 (1988).

  Because the “known loss” doctrine is an affirmative defense, an insurer has the burden of proving it.  Stonehenge Engineering Corporation v. Employers Insurance Wausau, 201 F.3d 296 (4th Cir. 2000).


  South Carolina follows the rule of lex loci contractus.  Furthermore, even if a policy is issued out of state, it will be deemed to have been "made" in South Carolina under South Carolina Code §38-61-10 if it insures property in the state.  Sangamo Weston, Inc. v. National Surety Corp., 414 S.E.2d 127 (S.C. 1992).


  South Carolina law is mixed on whether clean-up costs are covered.  For the most part, it appears that South Carolina continues to follow the 4th Circuit's ruling in Armco that such costs are not "damages."  Cincinnati Ins. v. Milliken, 857 F.2d 979 (4th Cir. 1988); Sangamo Weston, Inc. v. National Surety Corp., C.A. No. 6:89-642-21 (D.S.C., October 27, 1992).  However, the South Carolina Court of Appeals, purporting to rely on Armco and Milliken, ruled in Braswell v. Faircloth, 387 S.E.2d 707 (S.C. App. 1989) that clean-up costs were covered so long as they were on account of existing pollution and not merely preventative in nature. 

  Relying on Milliken, a federal district court  ruled in Ellett Brothers, Inc. v. USF&G, No. 3:00-1269-19 (D.S.C. December 5, 2000), that the NAACP’s suit against various gun manufacturers fails to allege a claim for  “damages.”  Judge Shedd refused to find that the action for injunctive relief sought “damages,” nor did the court find that the boilerplate language at the conclusion of the complaint seeking interest, costs and attorney’s fees created any possibility of an award of “damages.”

  Likewise, a state trial court ruled in Helena Chemical Company v. Allianz Underwriters Insurance Company, Allendale County Court of Common Pleas No. 96-CP-03-43 (S.C. Cir. Ct. March 28, 2001) that  the cost of responding to governmental directives that it clean up environmental contamination at three pesticide manufacturing facilities are not “damages” under South Carolina law.  The court declared that “the plain language of the insurance policy states that reimbursement is not available for every cost or expense of the policyholder, or even for every obligation for which a policyholder may be obligated ‘to pay’ money...”  Nor did the policy’s “cover of a cost or expense that the company may have to pay because the company must comply with the law.  Businesses must absorb many such expenses on a daily basis during the course of operations.  Rather, these policies cover liabilities for damages to third parties or to third-party property.”  The court declared that this analysis of “damages” was consistent with its plain, ordinary and popular meaning even though Helena Chemical argued that it had cleaned up the sites pursuant to a statutory obligation to remediate pollution on its own property, it would otherwise have faced a lawsuit from the EPA to compel such cleanup or to reimburse the government for its own expenses, the court ruled that such statutory liabilities did not give rise to a finding of “damages.”


  The Fourth Circuit has ruled in National Union Fire Insurance Company of Pittsburgh v. Rite-Aid of South Carolina, Inc., No. 99-1539 (4th Cir. April 20, 2000) that a South Carolina District Court did not err in dismissing National Union’s declaratory judgment action against Rite-Aid of South Carolina concerning a claim that it had presented under a CGL policy that it had issued to Rite-Aid corporation, RASC’s parent company, inasmuch as Rite-Aid was a necessary and indispensable party albeit one whose joinder would destroy diversity jurisdiction in the federal court.  Despite the relationship between the parties, the court found that they might have different interests and it was therefore not clear that the subsidiary would adequately represent the parent company’s interests in the policy proceeds or that the parent corporation would necessarily be voluntarily able to participate to provide to provide necessary proofs and discovery.

  An insured that is forced to bring a declaratory judgment action in order to recover the insurance benefits to which it is entitled under contract is also entitled to recover its attorneys' fees for bringing the action as consequential damages from the insurer's breach.  Gordon-Gallop Realtors, Inc. v. Cincinnati Ins. Co., 274 S.C. 468, 265 S.E.2d 38 (1980) and BP Oil Co. v. Federated Mut. Ins. Co., 1998 WL 30666 (S.C. App. January 26, 1998).  


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information



  The obligation of the insurer to defend is determined by the allegations in the complaint.   South Carolina Medical Practical JUA v. Ferry, 291 S.C. 460, 354 S.E.2d 378 (1987) and R.A. Earnhardt Textile Manufacturing Division, Inc. v. South Carolina Ins. Co., 282 S.E.2d 856 (S.C. 1981).  If the allegations set forth in the complaint do not create a potential for coverage, there is no duty to defend.  See also Snakenburg v. Hartford Casualty Ins. Co., 383 S.E.2d 2 (S.C. App. 1989).  

  Whether a defense obligation exists must be judged based upon the facts known at the time of tender.  An insurer cannot be held responsible for later-developed facts of which it was unaware at the time of tender.  Great American Ins. Co. v. McKemie, 244 Ga. 84, 259 S.E.2d 39, 40 (1979).  It is presumably the insured's responsibility to bring such facts to the insurer's attention, along with amendments to the pleadings or other developments that might implicate coverage. 

  A duty to defend is not automatically created by the inclusion of a claim in negligence where such allegations are mere "surplusage" when applied to a cause of action that by definition cannot be committed in a negligent manner. USAA Property & Cas. Co. v. Rowland, 435 S.E.2d 879 (S.C. App. 1993).
  An insurer may not terminate its defense obligation by tendering its limits.  Nationwide Mutual Ins. Co. v. Simmonds, 434 S.E.2d 277 (S.C. 1993).  

  A trial court ruled in F.W. Scheper v. USF&G, Beaufort County Court of Common Pleas No. 90-CP-07-879 (S.C. October 29, 1991) that PRP claims did not trigger any defense obligation. 


  Waiver is the voluntary and intentional relinquishment of a known right.  Janasik v. Fairway Oaks Villas Horizontal Property Regime, 415 S.E.2d 384, 387 (S.C. 1992, cited in Laidlaw  Environmental Services, Inc. v. Aetna Casualty & Surety Company, 524 S.E. 2d 847 (S.C. App. 1999).  The party claiming waiver bears the burden of establishing that the party against whom waiver is asserted possessed, at the time, actual or constructive knowledge of his rights or all of the material facts upon which those rights depended.  Id.  Neither waiver nor estoppel may be used as a basis for creating coverage or extending the policy beyond what it was originally intended to cover.

  A federal district court in South Carolina has ruled that an excess insurer has no right to pursue claims against a primary insurer, whether on theories of negligent failure to settle or equitable subrogation, despite the fact that the primary insurer’s payment of its policy limits to an injured employee allegedly created a “war chest” that significantly magnified the eventual recovery that the excess insurer was forced to pay in Royal Insurance Company v. Reliance Insurance Company, 8:00-1256-13BG (D.S.C. April 19, 2001).


  An insurer may not be required to provide indemnity for a consent judgment if as a condition of settlement the insured is not required to pay any of these amounts out of its resources.  Hitt v. Cox, 737 F.2d 421 (4th Cir. 1984) and Stonehenge Engineering Corporation v. Employers Insurance Wausau, 201 F.3d 296 (4th Cir. 2000).


 The “known loss” doctrine seeks to prevent the concept of an insurable risk from becoming a mere fiction when the insured knows there is substantial probability that it has suffered or will suffer a loss covered by the policy.  Stonehenge Engineering Corporation v. Employers Insurance Wausau, 2000 U.S. App. LEXIS 426 (4th Cir. January 13, 2000).  In Stonehenge, the Fourth Circuit limited the doctrine to cases in which the insured knew that it was actually liable or that its liability was “substantially certain.”  On the other hand, mere knowledge that insured was claimed to be responsible for damage to property did not preclude coverage.


  No cases.


  The South Carolina Supreme Court reversed a favorable construction of the pollution exclusion in Greenville County v. The Ins. Reserve Fund, 427 S.E.2d 913 (S.C. App. 1993), rev'd, 443 S.E.2d 552 (S.C. 1994) holding instead that the term "sudden" is ambiguous and may therefore only be construed as barring coverage for pollution that is "expected."   Earlier, the Court of Appeals had also upheld the application of the exclusion to gradual pollution in a case arising under North Carolina law. Harleysville Mutual Ins. Co. v. R.W. Harp and Sons, Inc., 409 S.E.2d 418 (S.C. App. 1991).  

  A South Carolina trial court has ruled that the application of the pollution exclusion depends merely on whether the discharges were unintended or unexpected, not whether they were unintended or unexpected from the standpoint of the insured.  Helena Chemical Company v. Allianz Underwriters Insurance Company, Allendale County Court of Common Pleas No. 96-CP-03-43 (S.C. Cir. Ct. March 28, 2001).  Even though the South Carolina Supreme Court has declined to limit the meaning of “sudden” to abrupt discharges, the court ruled that the insured not only had the burden of proving a “sudden and accidental” discharge but had failed to satisfy this burden by establishing that there had been unintended releases of pollution on the sites.  In light of evidence presented by the insurers that pesticide contamination had resulted from incidental releases of chemicals during the routine operations of grinding pesticide into dust, loading, unloading, bagging and formulating pesticides, the court ruled that such discharges were not “accidental.”  


  The U.S. Court of Appeals for the Fourth Circuit has sought guidance from the South Carolina Supreme Court concerning the scope of coverage for progressive property damage claims.  In Stoltz v. Golden Hills Builders, Inc., No. 00-1766 (4th Cir. April 21, 2001), the court certified four questions of law relating to the scope of the completed operations hazard and various business risk exclusions in a case involving moisture damage from defective synthetic exterior stucco that commenced while the plaintiff’s home was still within the possession and control of the insured contractor.


  Coverage required.  Carroway v. Johnson, 139 S.E.2d 908 (S.C. 1965); South Carolina State Budget & Control Board v. Prince, 403 S.E.2d 643 (S.C. 1991).


  Insurance policies are subject to normal rules of contract interpretation in South Carolina.  Gambrell v. Travelers Ins. Co., 280 S.C. 69, 71, 310 S.E.2d 814, 816 (1983) and Allstate Ins. Co. v. Mangum, 383 S.E.2d 464 (S.C. App. 1989)(rejecting argument that Court should adopt "reasonable expectations" doctrine).

  Under South Carolina law, policy exclusions are to be narrowly interpreted, whereas a grant of insurance will be broadly construed.  McPherson v. Michigan Mutual Insurance Company, 426 S.E.2d 770, 771 (S.C. App. 1993).  Where the words of an insurance policy are capable of two reasonable interpretations, the one most favorable to the insured will be adopted.  Fornier v. Butler, 460 S.E.2d 425, 427 (S.C. App. 1995).  Nevertheless, where contract language is clear and unambiguous, the language alone determines the meaning of the policy as terms must be construed to give effect to their “plain, ordinary and popular meaning.”  Dorman v. Allstate Insurance Company, 504 S.E.2d 127, 129 (S.C. App. 1998).  “Ambiguity may not be created in an insurance policy by singling out a sentence or a clause and courts may not torture the ordinary meaning of language to extend coverage expressly excluded by the terms of a policy.”  Falkosky v. Allstate Insurance Company, 429 S.E.2d 194, 196 (S.C. App.), as modified 439 S.E.2d 836 (S.C. App. 1993).  


  South Carolina courts have consistently refused to adopt theories of alternative liability, holding that plaintiffs have an obligation to prove that their injuries were caused by the defendant's product.  Mizell v. Eli Lilly & Co., 526 F.Supp. 589 (D.S.C. 1981)(rejecting market share for DES claims); Ryan v. Eli Lilly & Co., 514 F.Supp. 1004 (D. S.C. 1981)(rejecting conspiracy theory and enterprise liability for DES claims) and Boughman v. General Motors Corp., 627 F.Supp. 871 (D. S.C. 1985(tire rim cases).


  The Supreme Court of South Carolina has adopted an "injury in fact" approach to latent property damage claims arising out of construction defects.  In Joe Harden Builders, Inc. v. Aetna Cas. & Sur. Co., 486 S.E.2d 89 (S.C. 1997), the court declared that coverage would arise under all policies from the date that property damage first commenced forward but rejected the insured's argument that a continuous trigger should date back to the time of the insured's original negligent construction.  

  Earlier, the court had seemingly adopted a "manifestation" trigger in a leaking tank case. Spinx Oil, Inc. v. Federated Mutual Ins. Co., 427 S.E.2d 649 (S.C. 1993).  See also Safeco Ins. Co. v. Federated Mutual Ins. Co., 915 F.2d 1565 (4th Cir. 1990).  However, the Supreme Court declared in Harden that its earlier ruling in Spinx was specific to the "claims made" EIL policy at issue there.

  Relying on Harden, the Fourth Circuit later ruled in Spartan Petroleum Co., Inc.  v.  Federated Mut.  Ins.  Co., 162 F.3d 805 (4th Cir. 1998) that under an “injury in fact” approach, the trigger of coverage for an abutting property owner’s property damage claim was the point in time when pollutants migrated onto the plaintiff’s property, not the date of the original discharge on the insured’s land.

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