South Carolina Supreme Court Rules on Attorney Client Privilege Treatment in Bad Faith Law

The SC Supreme Court recently addressed a novel issue of how attorney-client privilege is treated  with regard to insurance bad faith law.  The issue arose out of a construction defect lawsuit when the Insurer failed to defend its Insured, a contractor.  After settling out of the case personally, the Insured sued the Insurer for bad faith refusal to defend.  In discovery, the Insured sought the Insurer’s claim file including correspondence between the Insurer and its attorneys.  The Insurer claimed privilege over those communications, but the Insured argued that the Insurer’s denial of liability for bad faith and its affirmative defense of “good faith” resulted in waiver of the attorney-client privilege.  The discovery dispute ultimately found its way to the SC Supreme Court.

The Court held that a denial of bad faith and/or the assertion of good faith by an insurer does not, standing alone, place a privileged communication “at issue” such that the attorney-client privilege is automatically waived.  Instead, the Court adopted a middle-ground, case-by-case approach akin to Arizona law.  Per the Court’s holding, a client does not waive the attorney-client privilege simply by bringing or defending a lawsuit; rather, waiver requires the additional interjection of the issue of advice of counsel (either expressly or implicitly) by the client.  In other words, whether or not “advice of counsel” is raised as an affirmative defense, if the client defends based on the affirmative theory that the client’s mental state at the time at issue (such as when the Insurer denied the Insured’s claim) was based on an evaluation of the law and the facts then existing, such would equate to putting the legal evaluation “at issue” and thus result in a waiver of the privilege.

In re: Mt. Hawley Ins. Co., Op. No. 27892 (S.C. Sup. Ct., June 12, 2019)

South Carolina Supreme Court Holds That Statutory Service On An Insurer Through The Department Of Insurance Is Not Required Where The Policy Provides An Alternative Method Of Service

Insurers and attorneys in South Carolina have long recognized that the exclusive means of service on an insurer is through the Department of Insurance pursuant to S.C. Code § 15-9-270 (“The summons and any other legal process in any action or proceeding against it must be served on an insurance company . . . by delivering two copies of the summons or any other legal process to the Director of the Department of Insurance . . . .”); e.g. Equilease Corp. v. Weathers, 272 S.E.2d 789, 792 (S.C. 1980) (compliance with section 15-9-270 “is the proper and exclusive method of obtaining jurisdiction over the insurance company.”).

Not so says the Supreme Court, at least where the insurer has contractually agree to service by alternative means in the policy. In White Oak Manor v. Lexington Insurance Company, Opinion No. 27351 (S.C. January 15, 2014), the carrier was held in default after failing to respond to the declaratory judgment complaint seeking coverage for an underlying lawsuit settled by the insured. White Oak did not serve the carrier through the Department of Insurance, but instead relied on a provision in the policy that provided the following:

It is further agreed that service of process in such suit may be made upon Counsel, Legal Department, Lexington Insurance Company, 200 State Street, Boston, Massachusetts 02109 or his or her representative. . . .

White Oak served the complaint by certified mail at the insurer’s Boston address, then successfully moved for an entry of default after the carrier failed to respond within 30 days. The carrier subsequently appeared and contested default on grounds that service was ineffective, but the circuit court refused to set aside the default and entered a judgment against the Lexington for $153,266. The Court of Appeals reversed, holding that service on the Department of Insurance pursuant to S.C. Code § 15-9-270 was the exclusive means to perfect service on a carrier in South Carolina.

The Supreme Court accepted the case for review and reversed, holding that policy provisions creating alternative methods of service are valid and binding on insurers. The Court found that the well-settled principle that parties are free to agree to alternative methods of service or waive service altogether, is equally applicable to insurers notwithstanding section 15-9-270.

Service of process is intended to provide notice and obtain personal jurisdiction, and Lexington designated in its policy a method for an insured to accomplish both those goals. We hold Lexington is bound by its own policy’s terms. We reject the notion that the statute is intended to allow an insurance company to prescribe a method of service in its policy and then declare its own provision invalid under section 15-9-270.

The White Oak decision has far-reaching implications for insurers and counsel who previously relied on statutory service through the Department of Insurance as the exclusive means of service. While service through the Department of Insurance remains effective, policies should be reviewed for similar service-of-suit clauses that provide alternative methods of service.

South Carolina Supreme Court invalidates “owned vehicle” UIM exclusion for Class I insured to permit stacking, distinguishes Burgess

In Carter v. Standard Fire Insurance, Op. No. 27340 (December 11, 2013), the Supreme Court held that South Carolina’s UIM statute prohibits an insurer from excluding UIM coverage for a Class I insured when he is occupying a vehicle he owns but does not insure under the subject policy. In Carter, Michael Carter was seriously injured while riding as a passenger in a vehicle he and his mother owned. The involved vehicle was insured under an Allstate policy that provided liability and UIM limits of $250,000. Allstate tendered $750,000, representing the liability limits plus the UIM limits on the involved vehicle and a second vehicle insured under the same policy. Carter then sought UIM coverage from Standard Fire under a policy issued to his parents, which provided UIM limits of $250,000 for three vehicles insured under the policy, for a total of $750,000.

In Carter, the Court clarified that the rationale of Burgess is only applicable when the insured has the ability to purchase UIM coverage on the involved vehicle, but declines to do so.

Standard Fire asserted that an “owned vehicle” exclusion in the policy barred Carter from stacking the additional UIM coverage. The provision excluded UIM coverage for any person “while ‘occupying’ . . . any motor vehicle owned by you or any ‘family member’ which is not insured for this coverage under this policy.” It was undisputed that Carter and his mother owned the involved vehicle, and the involved vehicle was not insured under Standard Fire’s policy. However, Carter resided with his parents and therefore qualified as a resident relative Class I insured.

Standard Fire relied on language in Burgess v. Nationwide Mutual Insurance Company, 373 S.C. 37, 644 S.E.2d 40 (2007), that “public policy is not offended by an automobile insurance policy provision which limits the portability of basic ‘at home’ UIM coverage when the insured has a vehicle involved in the accident.” The Supreme Court found that the rationale of Burgess was not applicable.

Burgess involved a situation where the insured was injured while riding a motorcycle he owned that did not carry UIM coverage. Burgess sought to “port” UIM coverage from an at-home policy issued by a different insurer. The Burgess court found that under the circumstances, public policy was not offended by precluding UIM coverage where the insured was injured in a vehicle he owned but did not purchase UIM coverage for (to hold otherwise would permit an individual who owns multiple vehicles to purchase UIM for only one, yet have basic UIM coverage on all).

In contrast, Carter involved a situation where the insured did purchase UIM coverage on the involved vehicle and sought to stack the coverage available under his parents’ policy as a resident relative. TheCarter court held that the “owned vehicle” exclusion contravened the language of the UIM statute and was therefore invalid.

Standard Fire is not the first insurer to read more into Burgess than the Court intended. In Carter, the Court clarified that the rationale of Burgess is only applicable when the insured has the ability to purchase UIM coverage on the involved vehicle, but declines to do so. Here, Carter purchased UIM on the involved vehicle, and as a Class I insured, he was entitled to stack all available UIM coverage on each vehicle in an amount equal to the coverage on the involved vehicle.