South Carolina

UNFAIR CLAIMS SETTLEMENT PRACTICES ACT
S.C. CODE ANN. §§ 38-59-10 to
38-59-50 (1987).

South Carolina courts have held that coverage is a prerequisite to a claim for bad faith refusal to pay. Also, more broadly, courts have noted that one element of a bad faith claim is a refusal to pay benefits due. While the South Carolina Supreme Court has held that breach of an insurance policy is not a prerequisite to a bad faith action, that ruling came in a unique fact pattern, where the insurer acted in bad faith prior to ultimately paying the claim (and essentially admitting coverage). An insured cannot successfully claim that an insurer has refused to pay a claim in bad faith where no coverage exists. BMW of N. Am., LLC v. Complete Auto Recon Servs., Inc., 399 S.C. 444, 453 (S.C. Ct. App. 2012).  “To demonstrate bad faith, plaintiff must present evidence of 1) the existence of a mutually binding contract of insurance between the plaintiff and the defendant; 2) a refusal by the insurer to pay benefits due under the contract; 3) resulting from the insurer’s bad faith or unreasonable action in breach of the implied covenant of good faith and fair dealing arising under the contract; 4) causing damage to the insured.” Lewis v. Omni Indem. Co., 970 F. Supp. 2d 437, 454-55 (D.S.C. 2013)(internal citation omitted). “[W]e decline to make breach of an express contractual provision a prerequisite to bringing the action.” Tadlock Painting Co. v. Maryland Cas. Co., 322 S.C. 498, 504 (S.C. 1996). Because insurer did not owe coverage, its conduct during settlement negotiations in the underlying lawsuit could not even potentially have constituted bad faith. Twin City Fire Ins. Co. v. Colonial Life & Acc. Ins. Co., 375 F.3d 1097 (11th Cir. 2004).

• Can insureds sue for bad faith (i.e., first party bad faith)? Yes
• Can third parties sue for bad faith (i.e., third party bad faith)? No

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FIRST PARTY BAD FAITH:

• Are there statutory grounds for the bad faith cause of action? If so, identify the source (i.e., an Unfair Claims Practices Act, or some other consumer protection statute) and its main provisions.  No.   S.C. Code of Laws includes § 38-59-20 Improper Claims Practices. The South Carolina Supreme Court held in Masterclean, Inc. v. Star Ins. Co., 347 S.C. 405, 556 S.E.2d 371 (2001), third parties do not have a private right of action under § 38-59-20. The Federal Court for the District of South Carolina, predicting how the South Carolina Supreme Court would rule, held in Ocean Winds Council of Co-Owners, Inc. v. Auto-Owners Ins. Co., 241 F.Supp.2d 572 (2002), that the Improper Claims Practices Act did not create a first-party cause of action.
• Is there a common law/judicially created bad faith cause of action (i.e., the implied covenant of good faith)? If so, identify the major case(s) and language of the standards applicable to bad faith cases.  Yes. In Tyger River Pine Co. v. Maryland Casualty Co., 170 S.C. 286, 170 S.E. 346 (1933), the Supreme Court joined a number of jurisdictions in holding that an insurer’s unreasonable refusal to settle within policy limits subjects the insurer to tort liability. In the Tyger River decision, the court also held, “The very thing which the appellant in the case which we have before us for determination undertook to do was to hold the respondent harmless in the disposition of Chesser's claim. If, in the effort to do this, its own interests conflicted with those of respondent, it was bound, under its contract of indemnity, and in good faith, to sacrifice its interests in favor of those of the respondent.” 170 S.E. at 348 (emphasis in original). Referring to that case, the Fourth Circuit Court of appeals held later, “Of course, this does not mean that in every instance an insurer must accept an offer within policy limits, but it must act reasonably and in good faith.” Smith v. Maryland Cas. Co., 742 F.2d 167, 169 (C.A.S.C.,1984).

Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983), the Supreme Court held that if an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim under the mutually binding insurance contract, he can recover consequential damages in a tort action. Actual damages are not limited by the contract. Further, if he can demonstrate the insurer’s actions were willful or in reckless disregard of the insured’s rights, he can recover punitive damages.

All bad faith actions--including claims based on bad faith processing of the claims when there is no breach of the insurance contract--arise out of the implied warranty of good faith and fair dealing. Ocean Winds Council of Co-Owners, Inc. v. Auto-Owners Ins. Co., 241 F.Supp.2d 572, 577 (D.S.C. 2002), citing Tadlock Painting Co. v. Maryland Cas. Co., 322 S.C. 498, 473 S.E.2d 52 (1996).

• What are the applicable statutes of limitations? Three years. S.C. Code § 15-3-530.
• What defenses are available to the bad faith cause of action (e.g.., the "genuine dispute of fact" doctrine; "wrong but reasonable")?  If there is a reasonable ground for contesting a claim, there is no bad faith." Crossley v. State Farm Mut. Auto. Ins. Co., 307 S.C. 354, 360, 415 S.E.2d 393, 397 (1992).

The South Carolina Supreme Court has ruled that a legitimate dispute over a novel legal issue is a reasonable basis to deny a claim as a matter of law. Myers v. Government Employees Ins. Co., 279 S.C. 70, 302 S.E.2d 331, 333. However, an insurer is not insulated from liability for bad faith merely because there is no clear precedent resolving a coverage issue raised under the particular facts of a case. Mixson, Inc. v. American Loyalty Ins. Co., 349 S.C. 394, 562 S.E.2d 659 (Ct. App. 2002).

An insured is not entitled to a judgment for bad faith against an insurer merely because the insured obtained judgment as a matter of law on the issue of coverage. Strickland v. Prudential Ins. Co. of America, 278 S.C. 82, 292 S.E.2d 301, 304 (1982)(affirming special referee’s judgment as to the existence of coverage, but reversing the judgment as to bad faith).

• What are the recoverable damages for the bad faith cause of action?

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Contract damages

Attorney’s fees are recoverable if the insurer fails to pay a covered claim and the trial judge finds the refusal to pay the policyholder's claim was without reasonable cause or in bad faith. S.C. Code § 38-59-40 (Supp.2001). This statute applies only to breach of contract causes of action, not to tort causes of action. Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 341, 306 S.E.2d 616, 620 (1983),

Consequential damages. Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 340, 306 S.E.2d 616, 619 (1983).

Punitive Damages. Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 340, 306 S.E.2d 616, 619 (1983).

• Are punitive damages recoverable? If so, what is the standard that must be met to recover them?  Yes. The insured must demonstrate the insurer's actions were willful or in reckless disregard of the insured's rights to recover punitive damages. Nichols v. State Farm Mut. Auto. Ins. Co., 279 S.C. 336, 340, 306 S.E.2d 616, 619 (1983).
• Does the state require independent counsel when there is an insurer-insured conflict?   This issue has not been addressed by the South Carolina state appellate courts. The Federal District Court for the District of South Carolina rejected a per se disqualification rule giving an insured the right to retain independent counsel of its own choosing at the insurer's expense where only a potential for a conflict of interest exists because a reservation of rights notice has been given. The court found cases from other jurisdictions rejecting the per se rule to be better reasoned, more in line with South Carolina jurisprudence, and in accordance with traditionally accepted practices in South Carolina. Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of South Carolina, LP, 336 F.Supp.2d 610, 621 (D.S.C.,2004).

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THIRD PARTY BAD FAITH:

• Are there statutory grounds for the bad faith cause of action? If so, identify the source (i.e., an Unfair Claims Practices Act, or some other consumer protection statute) and its main provisions.  No.
• Is there a common law/judicially created bad faith cause of action (i.e., the implied covenant of good faith)? If so, identify the major case(s) and language of the standards applicable to bad faith cases.  No.