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South Carolina insurer bad faith claim Punitive damages supportable by nominal damages

Liberty Mutual Fire Insurance Co. v. JT Walker Indus. Inc.
Fed.Appx - (2014) (unreported)

by Gregory Emrick, Associate
Semmes, Bowen & Semmes (

JT Walker Industries, Inc. and its subsidiary, MI Windows & Doors, Inc. (collectively, “MI”), manufactured windows used in new construction buildings. During the period of time that MI was insured by Liberty Mutual Fire Insurance Co. (“Liberty”), five (5) separate product defect cases were filed against MI in South Carolina resulting from alleged water infiltration through MI manufactured windows. In all but one of these cases, MI stated its need to litigate the claims through trial in order to protect its brand. While MI had given Liberty the exclusive right to manage the litigation and settle cases it deemed fit under the applicable insurance policy terms, MI also had a $500,000 deductible per claim. During the course of the litigation, the defense attorneys hired by Liberty provided their opinion that the cost to litigate was higher than the cost to settle the claims, especially when potential verdicts were considered. Liberty suggested that MI withdraw the claims and take over its own defense of the cases, which MI refused. Liberty then settled all five (5) of the cases, and sought indemnification from MI for the settlement amounts and the administrative fees, which fell below the deductible amount of the policies per claim. MI refused to pay the amounts on the four (4) cases it had desired to take to trial. Liberty filed suit for breach of contract, and MI cross-claimed asserting breach of the terms of the policy and the express and implied covenants of good faith and fair dealing (“bad faith”).

After a trial on the merits, both parties were found liable for contractual damages, and the jury also found Liberty liable for actual and punitive damages on the bad faith claim in the amount of $13,000,000 for settling the disputed cases. The trial court set aside the bad faith damages, holding that MI had failed to prove any actual damages and was therefore not entitled to punitive damages. The court affirmed the remainder of the jury’s verdict, but refused to award costs and pre-judgment interest. Both parties appealed.

The Court of Appeals for the Fourth Circuit reviewed the trial evidence, including the circumstances surrounding each of the five (5) cases settled by Liberty on behalf of MI. The Court then observed that South Carolina recognized a common law tort action for an insurer’s bad faith.

Bad faith claims subject insurers to tort liability where the insurer unreasonably refuses to settle within policy limits, and where an insured demonstrates “bad faith or unreasonable action by the insurer in processing a claim.”’ This tort is rooted in the implied covenant of good faith and fair dealing in every insurance contract.

Where an insurer refuses to provide benefits under a mutually binding insurance contract, the insured may prevail on a bad faith action by proving “the insurer’s bad faith or unreasonable action in breach of an implied covenant of good faith and fair dealing arising on the contract,” and damages stemming from that breach.

Applying South Carolina’s bad faith law, the Court found that the standard used by the trial court was proper, and that the jury verdict sheet indicated that the jury properly only awarded damages based on the settlements, not in any aspect of processing the claims not covered under South Carolina’s law. The Court also held that the trial court properly set aside the jury’s award for bad faith actual or consequential damages, observing that MI had not provided any evidence that the cost to litigate the case would have been less than the cost to settle, or that MI would have prevailed in the underlying lawsuits. The Court rejected MI’s argument that Liberty should have been burdened with demonstrating the costs to litigate versus the costs to settle, as the South Carolina court’s had never supported such a burden shift.

The Court, however, held that despite there being no evidence of actual or consequential bad faith damages, under South Carolina punitive damages law, MI may have been entitled to nominal damages, which could support punitive damages. The Court remanded the case to the trial court to determine if MI had presented evidence that supported the jury’s finding that Liberty acted “willfully, wantonly, or recklessly.” If the evidence was sufficient, then nominal damages were presumed and the court needed to consider whether the punitive damage award was appropriate or excessive.

MI further argued that Liberty was not entitled to recover damages incurred in bad faith. In rejecting this argument, the Court held that the contract was not illegal, and the contract terms required MI to reimburse Liberty for the costs associated with “defending, investigation, and settling the underlying claims.” The Court affirmed the trial court’s determination that prejudgment interest and costs were not recoverable, as the “district court could not determine the sum due Liberty until it resolved a contractual dispute regarding the parties’ rights. This contractual uncertainty could be enough to preclude a prejudgment interest award.” The trial court’s holding was affirmed in part and remanded for the purpose of addressing the propriety of punitive damages.

In his concurrence, Judge Davis cautioned that while he was unsure if the South Carolina Supreme Court would hold that nominal damages could support punitive damages absent actual damages, the majority opinion was a well reasoned attempt to harmonize the “bad faith” case law and principles of the State. Judge Davis also acknowledged that the district court had significant discretion in analyzing the issue upon remand, and could conclude that “this is a bridge too far."