BRUCE HOWE HENDRICKS, District Judge.
This matter is before the Court on Defendant Pennsylvania National Mutual Casualty Insurance Company's ("Defendant" or "Penn National") motion for summary judgment. (ECF No. 40). For the reasons set forth in this Order, Defendant's motion for summary judgment is granted in part and denied in part.
Plaintiff Summer Wood Property Owners Association, Inc. ("Plaintiff"), brings this breach of contract and bad faith action as the assignee of Portrait Homes-South Carolina LLC and Portrait Homes-Summer Wood LLC ("Portrait"), which served as the general contractor for a townhome project known herein as the Summer Wood Project. Plaintiff sued Portrait, among other parties, in state court to recover damages for alleged construction defects related to the Summer Wood Project ("Underlying Litigation").
Plaintiff now alleges that during the Underlying Litigation, Defendant failed to recognize Portrait "as an additional insured" and failed "to provide what was due under the policies," specifically, indemnification and a defense. (ECF No. 1-1 at ¶¶ 49, 83). Plaintiff further asserts that Defendant acted in bad faith in one or more of the following ways:
(Id. at ¶ 91). As a result, Plaintiff seeks damages, fees, and costs.
This matter was removed to this Court on December 29, 2017, (ECF No. 1), after Defendant had filed an answer, (ECF No. 4).
The Court shall grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The movant bears the initial burden of demonstrating that summary judgment is appropriate; if the movant carries its burden, then the burden shifts to the non-movant to set forth specific facts showing that there is a genuine issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). If a movant asserts that a fact cannot be disputed, it must support that assertion either by "citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials"; or by "showing . . . that an adverse party cannot produce admissible evidence to support the fact." Fed. R. Civ. P. 56(c)(1).
Accordingly, to prevail on a motion for summary judgment, the movant must demonstrate that: (1) there is no genuine issue as to any material fact; and (2) that he is entitled to judgment as a matter of law. As to the first of these determinations, a fact is deemed "material" if proof of its existence or non-existence would affect disposition of the case under applicable law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue of material fact is "genuine" if the evidence offered is such that a reasonable jury might return a verdict for the non-movant. Id. at 257. In determining whether a genuine issue has been raised, the court must construe all inferences and ambiguities against the movant and in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962).
Defendant argues that Plaintiff's claims fail because Portrait suffered no damages, which is a necessary element of both a claim for breach of contract and for bad faith. Additionally, Defendant argues, Portrait failed to comply with the conditions of the Penn National Policies because it did not provide notice to Defendant with respect to the claims asserted in the Underlying Litigation. (ECF No. 40-1 at 6-16). In response, Plaintiff does not dispute that Portrait was fully defended and indemnified by its liability insurer, Admiral Insurance Company ("Admiral"), but contends that Admiral's payments constitute a collateral source that the Court should not consider in determining whether Portrait incurred damages that Plaintiff can recover as assignee. Additionally, Plaintiff asserts, Portrait did in fact request indemnification and a defense from Penn National "long before" Admiral settled the claim. (ECF No. 41 at 1). In reply, Defendant argues that the collateral source rule does not apply to Plaintiff's claims and, furthermore, Defendant has no documentation in its files that Portrait tendered the Underlying Litigation to Penn National. (ECF No. 42).
At the outset, the Court notes that the Parties do not dispute the terms or temporal scope of the Penn National Policies, Portrait's status as an additional insured under the Penn National Policies, Plaintiff's designation as Portrait's assignee, or that Admiral defended Portrait in the Underlying Litigation and funded the $3,000,000 settlement paid to Plaintiff.
"An insurance policy is a contract between the insured and the insurance company, and the terms of the policy are to be construed according to contract law." Auto Owners Ins. Co. v. Rollison, 663 S.E.2d 484, 487 (S.C. App. 2008) (citing Estate of Revis v. Revis, 484 S.E.2d 112, 116 (S.C. App. 1997)). On the other hand, claims for bad faith refusal to pay first party benefits due under an insurance contract sound in tort. Tadlock Painting Co. v. Maryland Cas. Co., 473 S.E.2d 52, 53 (S.C. 1996) (reaffirming that "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,'" and that "if an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim under their mutually binding insurance contract, he can recover consequential damages in a tort action") (quoting Nichols v. State Farm Mut. Auto. Ins. Co., 306 S.E.2d 616 (1983)). The Parties do not dispute that the elements of a breach of contract claim include (1) the existence of a contract; (2) its breach; and (3) damages caused by the breach. Hotel and Motel Holdings, LLC v. BJC Enterprises, 780 S.E.2d 263, 272 (S.C. App. 2015). Nor do they dispute that the elements of a claim for bad faith refusal to pay first party benefits under an insurance contract are as follows:
Crossley v. State Farm Mut. Auto. Ins. Co., 415 S.E.2d 393, 396-97 (S.C. 1992). See (ECF No. 41 at 3). "If the insured proves the insurer's conduct was willful or in reckless disregard of his rights under the contract, the insured also may recover punitive damages." Crossley, 415 S.E.2d at 397.
Accordingly, the Parties agree that to prevail in this action Plaintiff must establish that Portrait suffered damages as a result of Defendant's failure to indemnify and failure to provide a defense. See W.M. Kirkland, Inc. v. Providence Washington Ins. Co., 216 S.E.2d 518, 520-21 (S.C. 1975) (holding that an assignee holds no greater rights than those held by the assignor at the time of the assignment). Plaintiff asserts in the complaint that Portrait was damaged "in the amount of the attorney fees and expenses incurred in defending the Portrait Entities in the Summer Wood Litigation, and in the amount of the consideration required to obtain the settlement." (ECF No. 1-1 at ¶¶ 85, 93).
Defendant contends that Plaintiff can establish no damages because Admiral fully defended and indemnified Portrait, including payment of Portrait's attorney fees, litigation costs, and the settlement amount. (ECF No. 40-1 at 8). Defendant relies on Hartford Accident and Indemnity Company v. South Carolina Ins. Co., 166 S.E.2d 762, 765 (S.C. 1969) and Sloan Constr. Co., Inc. v. Cent. Nat'l. Ins. Co. of Omaha, 236 S.E.2d 818 (1977) to assert that under South Carolina law, "an insured who suffered no damages because it did not pay any of the attorneys' fees or other costs incurred to defend itself cannot assert an action against an insurer for failing to defend the insured." (ECF No. 40-1 at 6-7).
The Hartford case involved an action by an excess automobile liability insurer against the primary automobile liability insurer to recover expenses the excess insurer incurred in its defense of the common insured. The excess insurer took over defense of the action prior to trial, and the jury returned a verdict against the insured. The excess insurer contended that its defense of the action was prejudiced by the withdrawal of the primary insurer, and it brought a separate action to recover the cost of defending the action. Hartford, 166 S.E.2d at 764. On appeal, the South Carolina Supreme Court affirmed that the excess insurer was not entitled to recover its costs. The court explained that the allegations of the underlying complaint brought the claim of the injured plaintiff within the liability coverage afforded to the insured by the respective policies issued by the primary and excess insurers; therefore, the excess insurer's obligation to defend the action "was absolute," and "[t]he costs and expenses incurred by [the excess insurer] should be borne by it because such was an obligation that it owed to its insured under the policy contract." Id. at 765. The court further explained that each of the liability policies at issue contained a defense agreement and therefore neither insurer could object "if it is required to pay the costs and expenses which it incurred in defense of the action because such is the performance of the undertaking for which it accepted a premium." Id. In response to the excess insurer's argument that it was subrogated by the terms of its policy to the rights of the insured against the primary insurer, the court determined that the insured "never had a right of recovery against any person or organization because of fees paid to the attorney"; "[c]onsequently, the subrogation provision of the policy issued to the insured by [the excess insurer] had no application . . . ." Id. The court concluded by stating that the excess insurer "had an interest of its own to protect in [the action against its insured] and was entitled to employ attorneys, at the time of the institution of the suit, to participate in its defense for that purpose." Id.
Defendant argues that Hartford is instructive, contending that the court therein rejected the excess insurer's subrogation argument on the basis that "the insured incurred no out-of-pocket expenses." (ECF No. 40-1 at 7). However, the court's explicit holding provides greater context for its ruling:
Id. at 766. Such a rationale is consistent with the Hartford court's finding, reflected throughout the opinion, that the insurer's obligation to defend the action was "absolute," and, therefore, the insurer should be made to bear the costs and expenses incurred by it because such expenditures were an obligation that the insurer owed to its insured under the policy contract. The Court notes that Hartford would be more instructive if Admiral were suing Defendant here.
The second case Defendant relies on, Sloan Constr. Co., Inc. v. Central Nat'l. Ins. Co., is closer to the facts of this case. In Sloan, an insured construction company was the defendant in a civil action and tendered the litigation to its two insurance carriers, both of which had a duty to defend the insured. One of the insurance carriers, Central, nonetheless refused to defend, and the second carrier, Liberty Mutual, undertook the defense. The insured prevailed and the costs of defending the lawsuit were taxed against the losing plaintiff, but execution resulted in a "nulla bona" return and the insured ultimately paid the attorney fees and costs with proceeds of a loan made pursuant to a loan receipt agreement with Liberty Mutual. Sloan, 236 S.E.2d at 819. The insured then instituted an action against Central to recover the attorney fees and costs plus interest. The South Carolina Supreme Court held that the insured was not entitled to recovery because it was not damaged by Central's refusal to defend on account that the insured "was never legally obligated to pay the costs of the defense." Id. at 820. In reaching its decision, the court relied at least in part on the fact that the lawsuit "was concluded without any loss or liability to [the insured]." The court reasoned that "[a]bsent any damage flowing to [the insured] as a result of Central's refusal to defend, [the insured] had no right to recovery against Central." Id. at 820.
Plaintiff argues that Sloan is inapposite because it (and Hartford) involve a party "seeking to recover for defense costs, not for indemnity." (ECF No. 41 at 4). More instructive, Plaintiff submits, is Otis Elevator, Inc. v. Hardin Constr. Co., 450 S.E.2d 41 (S.C. 1994), in which the South Carolina Supreme Court affirmed a jury verdict that Otis Elevator was entitled to indemnity from Hardin Construction but reversed the trial court's order reducing the jury's verdict to offset the amount of money Otis Elevator's insurer had paid the injured party. Otis Elevator was Hardin Construction's elevator subcontractor. While Otis Elevator completed installation of the elevators, it permitted Hardin Construction to use one of the elevators on a temporary basis pursuant to an agreement by which Hardin Construction assumed responsibility for loss or damage occasioned by any accident relating to the elevator. A carpeting subcontractor subsequently fell down the shaft of the elevator and sued Otis Elevator on several counts. Otis Elevator asked Hardin Construction to defend and indemnify it; Hardin Construction refused. Otis Elevator ultimately settled the lawsuit and thereafter sued Hardin Construction for indemnification. On appeal, the court affirmed the finding that Otis Elevator was entitled to indemnity and then addressed Otis Elevator's basis for appeal, which Plaintiff contends is analogous to the present issue. The court determined that the trial court had erred in reducing the jury verdict, explaining that "if one party is entitled to indemnity from another, the right to indemnity is not defeated by the fact that the loss to be indemnified for was actually paid by an insurance company." Otis Elevator, 450 S.E.2d at 45-46. In other words, Plaintiff asserts, the collateral source rule applies here, as it did in Otis Elevator, to ensure that Plaintiff, as Portrait's assignee, receives the benefit of its insured status with Defendant, regardless of Admiral's defense in the Underlying Litigation. (ECF No. 41 at 6) (citing South Carolina Jurisprudence, Damages § 11, p. 32 (1992) ("The defendant should not benefit from payments . . . provided for by the plaintiff's foresight, e.g., payment of insurance premiums. If anyone is to have a windfall, the cases argue, it should be the wronged plaintiff, not the wrongdoing defendant.")). Plaintiff contends, "Admiral's payment on behalf of Portrait is a collateral source that Penn National is not entitled to take advantage of," and, to illustrate the point, asserts, "if one party [Portrait] is entitled to indemnity from another [Penn National], the right to indemnity is not defeated by the fact that the loss to be indemnified for was actually paid by an insurance company [Admiral]." (Id. at 7 (quoting Otis Elevator, 450 S.E.2d at 45-46) (alterations in brief)).
Defendant's rejoinder on reply is that the court in Otis Elevator applied the collateral source rule to a contractual indemnity claim asserted against a negligent party found to have been responsible for the underlying harm for which indemnity was sought. (ECF No. 42 at 4). Defendant asserts that it is neither a tortfeasor nor a "wrongdoer" who "caused the damages at issue" in the Underlying Litigation and therefore "owes contractual indemnity to Portrait Homes." (ECF No. 42 at 5). Rather, Defendant submits, according to Plaintiff, it "is a co-insurer (along with Admiral) of Portrait Homes that should have provided coverage to Portrait Homes under the Penn National Policies in relation to the claims asserted against Portrait Homes in the Underlying Construction Defect Litigation." (Id. at 5-6).
The purpose of the collateral source rule is to prevent a tortfeasor from obtaining a windfall. See, e.g., Dixon v. Besco Eng'g, Inc., 463 S.E.2d 636, 640 (S.C. App. 1995). More specifically, the collateral source rule provides that "compensation received by an injured party from a source wholly independent of the wrongdoer will not reduce the amount of damages owed by the wrongdoer." In re W.B. Easton Constr. Co., Inc., 463 S.E.2d 317, 318 (S.C. 1995). A source is wholly independent of the wrongdoer "when the wrongdoer has not contributed to it and when payments to the injured party were not made on behalf of the wrongdoer." Mount v. Sea Pines Co., Inc., 523 S.E.2d 464, 465 (S.C. App. 1999) (citation omitted).
The Court agrees, with respect to the breach of contract claim, that the pleadings governing this action do not suggest that Penn National is a tortfeasor or wrongdoer or is otherwise "at fault"; rather, the allegation is that Penn National is in breach of its agreement with Portrait. As such, the rationale set forth in Otis Elevator and underlying the collateral source rule does not apply here.
Another court in this District reached a similar conclusion in considering whether to apply the collateral source rule to exclude an offset for the funds received by an insured to reimburse it for the defense costs the insured incurred in an underlying lawsuit, and found that to so apply the collateral source rule would actually result in "an unjust windfall and double recovery" for the insured. Crossman Communities of North Carolina, Inc. v. Harleysville Mut. Ins. Co., No. 4:09cv-1379-RBH, 2013 WL 5437712, at *26 (D.S.C. Sept. 27, 2013). In so finding, the Crossman court considered that while South Carolina has not yet addressed the issue, "the clear majority of courts have rejected the application of the collateral source rule where more than one insurance policy or third party provides coverage for the same loss." Id. (collecting cases). The court further explained that the "national consensus exists for good reason," considering that tort law is concerned with deterrence and punishment, and an award of damages for breach of contract is intended to "put the plaintiff in as good a position as he would have been in if the contract had been performed." Id. at *27 (quoting Minter v. GOCT, Inc., 473 S.E.2d 67, 70 (S.C. App. 1996)). See Branche Builders, Inc. v. Coggins, 686 S.E.2d 200, 202 (S.C. App. 2009) (explaining that contractual damages are measured by the amount that the non-breaching party would have received if the contract had been performed as promised); 22 Am.Jur.2d Damages § 45 (limiting a party's recovery in a breach of contract action to "the loss that he has actually suffered by reason of the breach"). The Crossman court concluded that "[a]pplying the collateral source rule to contract law would `contravene this principle by awarding the non-breaching party more damages than necessary to compensate it for the breach." Crossman, 2013 WL 5437712, at *27 (quoting Midland Mut. Life Ins. Co. v. Mercy Clinics, Inc., 579 N.W.2d 823, 830 (Iowa 1998)).
The Court agrees with the Crossman court that the collateral source rule does not apply to the breach of contract claim; and further finds that under Sloan, Plaintiff cannot establish damages so as to state a claim for breach of contract. Accordingly, the Court grants the motion for summary judgment as to this claim.
However, the Court is not persuaded by the motion for summary judgment that Plaintiff cannot establish damages with respect to the bad faith claim. As stated above, bad faith claims sound in tort. See Tadlock Painting Co., 473 S.E.2d at 53. The South Carolina Supreme Court has expressly held that an insured can maintain a claim for bad faith separate and apart from a claim for breach of contract. Id. at 54, 55 (holding that "a bad faith action exists separately from an action in contract," and explaining that "the benefits due an insured are not limited solely by those expressly set out in the contract"). See Founders Ins. Co. v. Richard Ruth's Bar & Grill LLC, Nos. 2:13-cv-3035-DCN, 2:14-cv-03272-DCN, 2016 WL 3192811, at *5 (D.S.C. Jun. 8, 2016) (explaining that the Tadlock court "underscored its holding from previous cases that the covenant of good faith and fair dealing extends not just to the payment of a legitimate claim, but also to the manner in which it is processed").
Defendant's sole argument in support of summary judgment on the bad faith claim is that Plaintiff cannot establish damages. However, the case Defendant relies on for support, Sloan, is not instructive as to when damages are available for bad faith. The Sloan court considered the relatively narrow issue of whether the insured was entitled to recover attorneys' fees and costs, plus interest, from the insurer that had refused to defend, when the insured did not pay for those fees and costs out of pocket. The reasoning asserted by the court in Sloan suggests that the court (1) was concerned that Liberty Mutual was attempting through the loan agreement with the insured to improperly seek contribution from its co-insurer, and (2) viewed the matter of damages within the framework of contract law, i.e., to compensate for the loss the insured actually suffered. See Sloan, 236 S.E.2d at 821 ("[u]nder general principles of contract law, no right to recovery exists in such a situation"). It is not at all clear that the Sloan court was considering the question of damages in a bad faith tort context when it held that the insured, who had prevailed in the underlying litigation, had not been damaged by the insurer's refusal to defend. Indeed, the purpose of awarding damages for a tort claim is, at least in part, to deter and punish as much as to make an injured party whole.
In finding that neither Sloan nor Hartford establishes that Plaintiff cannot demonstrate damages with respect to the bad faith claim, and in further finding that it appears under South Carolina law that the collateral source rule could apply to claims for bad faith,
Defendant asserts that Portrait did not comply with the conditions for coverage under the Penn National Policies in that Portrait failed to provide any notice of its claim and failed to request coverage as an additional insured. Plaintiff asserts that Portrait's attorneys mailed a letter of tender to Defendant dated August 31, 2015. Both Parties offer affidavits in support of their respective positions.
Defendant asserts in its motion that on receipt of the complaint in the instant matter, it "searched its files for any notice by Portrait Homes to Penn National or request for additional insured coverage under the Penn National Policies," and that while it "located a letter from counsel for the plaintiff in the underlying litigation requesting that Penn National provide coverage to its named insured (JJA)," Defendant "did not find (and has not since found) any correspondence in its file from (or on behalf of) Portrait Homes providing any notice of the underlying litigation or requesting that Penn National provide additional insured coverage to Portrait Homes under the Penn National Policies for the claims at issue." (ECF No. 42 at 8-9). Defendant offers the affidavit of its claims specialist, Stephen Oliver, for support. (ECF No. 40-2). Mr. Oliver attests that he was involved with the investigation of the claims received in relation to the Penn National Policies, including claims arising out of the Summer Wood Project; he has "first-hand knowledge of the communication received in relation to the Penn National Policies as well as the efforts undertaken by Penn National to investigate such claims"; and Portrait "never provided notice to Penn National of the [Underlying Litigation]," and never "forwarded copies of the complaints or other pleadings in the underlying litigation to Penn National, or otherwise notified Penn National that it was claiming additional insured status or seeking coverage as an additional insured under the Penn National Policies issued to JJA."
In response, Plaintiff relies on the affidavit of Amber Gilliam, who, as a paralegal employed with the Hood Law Firm, LLC, worked with attorneys who represented Portrait in the Underlying Litigation. (ECF No. 41-2). Ms. Gilliam attests that "[i]n representing Portrait in the [Underlying Litigation], we tendered the defense and indemnity of Portrait as an additional insured to a number of insurers who had issued liability policies to the subcontractors who were involved in the [Underlying Litigation]." (Id. at ¶ 6). Ms. Gillam further attests as follows:
(Id. at ¶¶ 7-12). The document attached to Ms. Gilliam's affidavit is a copy of a letter, composed on the Hood Law Firm's letterhead and dated August 31, 2015, which references in capital letters the subject, "additional insured tender." (ECF No. 41-2). The letter identifies Jose Castillo d/b/a JJA Framing as the primary insured, "Portrait Homes-South Carolina, LLC, Portrait Homes-Summer Wood, LLC and Pasquinelli Homebuilding, LLC" as the additional insured, and Pennsylvania National Insurance Co. as the carrier. Id. The letter further references the policy number, start and end dates, and the claim as the underlying state court litigation.
(ECF No. 41-2 at 5). Also attached to Ms. Gilliam's affidavit is a copy of the return receipt for certified mail addressed to Pennsylvania National Insurance Co. in Harrisburg, Pennsylvania, dated September 3, 2015. (Id. at 6).
In reply, Defendant asserts only that it did not receive the Hood Law Firm's letter. Defendant does not contend that the letter is insufficient to satisfy Portrait's duty to tender the claim or otherwise provide notice to Defendant under the Penn National Policies. Nor does Defendant assert a separate basis on which to find that Portrait did not satisfy its obligations under the Policies.
"Where a question exists as to the failure of an insured to comply with the notice requirements contained in a liability insurance contract, the burden of proof rests with the insurer." Vt. Mut. Ins. Co. v. Singleton, 446 S.E.2d 417, 421 (S.C. 1994). The Court finds that the copy of the letter and the certified mail receipt create a genuine issue of material fact as to whether Portrait satisfied its obligations under the Penn National Policies to inform Defendant of the Underlying Lawsuit. See Anderson, 477 U.S. at 249 (instructing that the court is not to weigh the evidence, but rather determine if there is a genuine issue of fact); Founder Ins. Co., 2016 WL 3192811, at *5 ("When conflicting evidence is presented, summary judgment on the issue of bad faith is generally inappropriate . . . .") (quoting Shiftlet v. Allstate Ins. Co., 451 F.Supp.2d 763, 772 (D.S.C. 2006)). Accordingly, Defendant has not carried its burden under Rule 56 with respect to the bad faith claim and the Court denies the motion for summary judgment as to this claim.
After careful consideration of the Parties' briefs, the associated record, and the applicable law, the Court hereby grants Defendant's motion for summary judgment (ECF No. 40) with respect to the breach of contract claim and denies the motion with respect to the bad faith claim.
