E-Alert Case Updates

Fourth Circuit Holds that South Carolina District Court Abused its Discretion in Using the Doctrine of Estoppel to Create Insurance Coverage

First Financial Insurance Company v. Tonya Brumbaugh
Case No. 12-2452 (January 8, 2014)
by Jhanelle A. Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In First Financial Insurance Company v. Tonya Brumbaugh, the Fourth Circuit considered whether the district court properly applied principles of equitable estoppel, under South Carolina law, in requiring that an insurance carrier provide coverage to a third party not otherwise entitled to coverage under the terms of the policy at issue. Writing for the Fourth Circuit, Judge Keenan concluded that the district court abused its discretion in using the doctrine of estoppel to create coverage. Consequently, the Fourth Circuit vacated the district court’s judgment.

First Financial Insurance Co. (First Financial) issued a liability insurance policy to Gary Denaux, formerly the sole proprietor of Wholesale Transmission, an automotive transmission business located in Moncks Corner, South Carolina. The policy issued to Denaux (the “policy” or the “Denaux policy”) listed the named insured as “Gary Denaux DBA Wholesale Transmission.” The term “insured” was defined in the policy to include the named insured as well as his employees. In the section of the policy declarations entitled “form of business,” the policy listed “individual,” rather than alternative options including “partnership” and “limited liability company.” Under the policy, First Financial agreed to “pay all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ . . . caused by an ‘accident’ and resulting from ‘garage operations.’” By its terms, the policy was effective from May 23, 2007 through May 23, 2008. Under the heading “Transfer of Your Rights and Duties Under this Policy,” the policy provided: Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

Midway through the term of the policy, Denaux ceased operating his business. A former co-worker, Edward English, opened a new automotive transmission business in the same location, also named Wholesale Transmission. English and a friend, Garey Gorey, operated the new business through a newly formed limited liability company. Upon receiving a bill addressed to Denaux at the business’ address, English paid the last installment of the Denaux policy premium in February 2008. Denaux did not attempt to cancel the policy or to transfer his coverage under the policy to English. In April 2008, as the policy was nearing its termination date, First Financial sent by facsimile a blank insurance application to Lee Ann Wise, the independent insurance agent who had obtained the policy for Denaux and who also was acting as English’s agent. Wise thought that the application was for a renewal of the Denaux policy, which was to expire on May 23, 2008.

On May 2, 2008, Wise sent a completed application for a policy in English’s name to an underwriter for First Financial. Her facsimile transmission included a cover sheet, which stated, inter alia:

Gary Denaux is no longer the owner of this company. I made the changes on the app[lication]. I am not sure if you will need to re-quote it w[ith] the new owner [and] drivers. Please call me if you have any questions. On June 6, 2008, First Financial issued a new policy to “Steve Edward English DBA Wholesale Transmission” (the English policy), retroactively effective as of May 23, 2008, the same day that the Denaux policy expired.

Eleven (11) days before the expiration of the Denaux policy, but before the English policy went into effect, one (1) of English’s employees, Chad Kessing, was involved in a vehicle collision that resulted in the death of Wanda Holland (the accident). Tonya Brumbaugh, the personal representative of Holland’s estate, filed a wrongful death action in a South Carolina state court against Kessing, Wholesale Transmission, Denaux, English’s limited liability company, and English. First Financial later brought the present action in federal district court against Kessing, English, Denaux, Gorey, Wholesale Transmission, English’s limited liability company, and Brumbaugh, seeking a declaration that the Denaux policy did not provide coverage in the underlying liability lawsuit. The district court entered default judgment against all of the defendants except Brumbaugh.

After entering the default judgment order, and after considering the cross-motions for summary judgment filed by First Financial and Brumbaugh, the district court held as a matter of law that the Denaux policy did not provide coverage for the accident, because First Financial had not consented in writing to the transfer of Denaux’s rights under the policy to English and his employees. Following this determination, the district court held a bench trial to resolve the court’s additional question whether First Financial “should be equitably estopped from denying coverage, notwithstanding the fact that coverage does not technically exist under the terms of the Policy.” At the conclusion of the bench trial, the district court reiterated that the Denaux policy did not cover the accident, but nevertheless held that First Financial was equitably estopped from denying coverage because, by its conduct, First Financial had reasonably induced English to believe that Denaux’s rights under the policy had been transferred. First Financial timely appealed to the Fourth Circuit from the district court’s judgment imposing equitable estoppel in this case.

On review, the Fourth Circuit stated that the party asserting estoppel must demonstrate “(1) lack of knowledge, and the means of knowledge, of the truth as to the facts in question; (2) reliance upon the conduct of the party estopped; and (3) a prejudicial change of position in reliance on the conduct of the party being estopped.” Strickland v. Strickland, 650 S.E.2d 465, 470 (S.C. 2007). Further, estoppel can be established through a party’s silence when that party owes the other a duty to speak but “refrains from doing so and thereby leads the other to believe in the existence of an erroneous state of facts.” S. Dev. Land & Golf Co. v. S.C. Pub. Serv. Auth., 426 S.E.2d 748, 751 (S.C. 1993). Although estoppel is a flexible doctrine that requires consideration of the relative equities between the parties, see Pitts v. N.Y. Life Ins. Co., 148 S.E.2d 369, 371-72 (S.C. 1966), the doctrine’s reach is not unlimited.

Citing Pitts, Fourth Circuit reiterated that estoppel “cannot be used to extend the coverage of an insurance policy or create a primary liability, but may only affect the rights reserved therein.” Id. at 371. There is a narrow exception in which, after the insured’s coverage has terminated, the insurer retains premium payments made by the insured over a period of time. Id. at 370-71. By contrast, in the present case, English was not a named insured under the Denaux policy, and First Financial had no duty to inform English or his agent, Wise, that English lacked coverage under the existing Denaux policy. Further, at the time of the accident, the Denaux policy was still in effect for Denaux and his covered former employees, and English had not yet obtained his own policy. For these reasons, the Fourth Circuit concluded that Brumbaugh’s reliance on Pitts was misplaced, as she could not escape the general principle of insurance law, as applied by the South Carolina courts, which ordinarily does not allow use of the doctrine of estoppel to create insurance coverage when an insurer has not misled its insured to think that the risk in question was covered. The Court also observed that imposition of primary liability coverage in the present case would not promote the equitable considerations underlying the doctrine of estoppel. Moreover, the Court noted that Brumbaugh could not prove a required element of equitable estoppel, namely, that English did not know or have the opportunity to know the truth about the transferability of rights under the Denaux policy. For these reasons, the Fourth Circuit held that the district court abused its discretion in finding that First Financial was equitably estopped from denying coverage for the accident. Accordingly, the appellate court vacated the district court’s judgment and remanded for further proceedings consistent with its opinion.