[ PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
________________________ JUNE 29, 2004
THOMAS K. KAHN
No. 03-14866 CLERK
________________________
D. C. Docket No. 99-00935-CV-D-N
TWIN CITY FIRE INSURANCE COMPANY,
Plaintiff-Counter-
Defendant-Appellant,
THE HARTFORD CASUALTY INSURANCE COMPANY,
Plaintiff-
Counter-Defendant,
versus
COLONIAL LIFE & ACCIDENT INSURANCE COMPANY,
Defendant-Counter-
Claimant-Appellee,
BUD PORTER, LUCAS WHITE,
Defendants.
________________________
Appeal from the United States District Court
for the Middle District of Alabama
_________________________
(JUNE 29, 2004)
Before BLACK and RONEY, Circuit Judges, and STROM*, District Judge.
PER CURIAM:
This is an appeal from a judgment in the amount of $75,000 compensatory
damages and $675,000 punitive damages against an insurance company which the
district court found had acted in bad faith in connection with the settlement of a case
against its insured, the defense of which the insurance company had undertaken with
a reservation of rights. The alleged act of bad faith involved the insurance company’s
initial offer to contribute $75,000 toward a large settlement of a case against its
insured, and then “inexplicably” withdrawing that offer pending settlement
negotiations. The district court, in a declaratory decree action, held that the insurance
company’s policy did not cover the underlying claim, but then, on a counterclaim by
the insured, found that the insurance company was nonetheless liable for bad faith in
failing to contribute to the settlement. We reverse for two alternative reasons: first,
_______________________________________
* Honorable Lyle E. Strom, United States District Judge for the District of Nebraska,
sitting by designation.
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there was no proven damage to the insured to support the compensatory damage
award to the insured, and without damage there was no basis for imposing punitive
damages; and second , since there was no coverage under the insurance policy for the
claim, there could be no duty to contribute to a settlement of the claim, and therefore
no bad faith claim for the insurance company’s refusal to so contribute.
Both parties to this lawsuit are insurance companies. The appellant insurance
company that issued the policy is The Twin City Fire Insurance Company, a
subsidiary of The Hartford Casualty Insurance Company, a Connecticut corporation
(collectively referred to as “Twin City”). The appellee insurance company that was
the insured under that policy is Colonial Life & Accident Insurance Company
(“Colonial”), a South Carolina corporation. Colonial maintained commercial general
liability policies (“CGL”) from three general liability carriers at the time the
underlying lawsuit was filed against it. Twin City was one of those insurance
companies.
The underlying lawsuit against Colonial was filed in Alabama state court by
Lucas White, an Alabama-based insurance salesman, on June 12, 1997. White
alleged that he had a lifetime employment contract with Colonial but was fired when
Colonial reassigned some of his accounts and restructured the workplace. Colonial
timely notified Twin City of White’s lawsuit. Twin City thereafter joined Colonial’s
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other two CGL insurance carriers to defend Colonial under a reservation of rights.
Twin City authorized Colonial to engage counsel to defend Colonial in the White
lawsuit. In a letter dated August 25, 1997, Mario Gonzalez, Twin City’s Claim
Service Consultant, wrote, “we will accept to pay for the defense of the case from the
time that the claim was received in our office which is June 24, 1997. It is my
suggestion that you immediately retain legal counsel of your choice in order to
provide an answer to the complaint . . ..”
In 1999, while White’s underlying Alabama state lawsuit was pending, Twin
City filed a complete diversity complaint seeking a declaratory decree in the Middle
District of Alabama that it had neither a duty to defend nor a duty to indemnify
Colonial in the White lawsuit under the insurance policy. In April 2000, intense
settlement negotiations took place in the White lawsuit. The following events
transpired that April. On April 5, 2000, White’s attorney sent a settlement demand
letter for approximately $1.5 million specifying an April 15 deadline to Attorney
Laura Nettles, an attorney from the law firm of Lloyd, Gray & Whitehead, P.C.
engaged by Colonial for its defense in the White lawsuit but paid by Twin City and
the other CGL carriers. Stephen Whitehead of that law firm orchestrated much of the
settlement negotiations. Nettles forwarded White’s April 5 demand letter to Gonzalez
at Twin City on April 7, stating, “Obviously we are disappointed that the number is
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so high. I would appreciate it if you would contact me after you have had an
opportunity to review this letter to advise whether you want to make any type of
responsive offer.”
On April 14, Colonial’s Vice President & Managing Counsel, L. Kennedy
Boggs, sent a letter to the three CGL insurance carriers, including Twin City,
demanding that “you settle this action within the policy limits.” On April 17,
Attorney Nettles transmitted a detailed pre-trial report to Colonial and the three CGL
insurance carriers, advising them that Colonial had only a 30% chance for a defense
verdict and that Colonial could “sustain a verdict of over $10,000,000 in both
punitive and compensatory damages.” On April 19, Twin City’s Mario Gonzalez
authorized Attorney Nettles to make a contribution toward the settlement pool of
$75,000. On that same day, Colonial made a $100,000 contribution to the settlement
pool. The remaining two CGL insurance companies contributed $225,000 toward the
settlement, for a settlement pool totaling $400,000. These contributions were made
with the understanding that all insurance coverage disputes would be resolved and
“none of the liability insurers would seek to recover from Colonial any additional
sums or recoupment of any sums previously paid.” Specifically, Attorney Nettles
contacted Gonzalez demanding a “firm unconditional contribution towards an initial
counteroffer to try to settle the Luke White case and that would waive any declaratory
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[judgment] action or coverage dispute in the Luke White lawsuit for purposes of
getting Colonial to participate.” Twin City’s $75,000 contribution was thus made
“with no strings attached, waiving any coverage issues at this level.” On April 26,
White refused the $400,000 settlement offer, and White’s attorney communicated that
White was not willing to negotiate any settlement until an offer of $1,000,000 had
been made.
The next day, on April 27, White entered a formal counteroffer of $1.3 million,
which prompted Whitehead to request additional contributions from Colonial and two
of the three CGL insurance companies. Specifically, Whitehead requested a
contribution of $150,000 from Twin City. At some point on that same day, Twin City
made an internal decision to withdraw its $75,000 contribution toward the settlement
pool. This contribution withdrawal was communicated by Gonzalez to Attorney
Nettles the next day, on April 28. Colonial then increased its contribution amount to
$600,000, making up the $75,000 that was withdrawn by Twin City, and, combined
with the remaining two insurance companies, $1.1 million was raised and offered to
White. White accepted that offer on that same day, which was three days before trial
was scheduled to commence. There is no record evidence that the case could have
settled for any less amount, nor does Colonial so contend.
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On May 17, 2000, Colonial filed a three-count counterclaim to Twin City’s
complaint for declaratory judgment, alleging that Twin City had acted in bad faith
during the settlement negotiations in White’s underlying case, causing it both
compensatory and punitive damages. The counterclaim alleged breach of duty of
good faith and fair dealing (i.e., bad faith), fraud, bad faith breach of enhanced duty,
and breach of contract, asserting:
[Twin City] negligently, recklessly, and/or intentionally breached the
duty of good faith and fair dealing during the handling of the Luke
White case including but not limited to withdrawing on the Friday
before trial their previous monetary commitment to settlement offers and
by abandoning their earlier agreement to participate in settlement
efforts. . . . As a proximate result of the breach of these duties, Colonial
was injured and damaged.
A two-day bench trial was held in the district court addressing both Twin City’s
complaint for declaratory judgment and Colonial’s counterclaims. At the conclusion
of the trial and after the district court issued provisional findings of fact, it certified
questions to the Alabama Supreme Court to clarify whether South Carolina or
Alabama law applied to the asserted counterclaims. The Alabama Supreme Court
answered that “claims alleging a breach of the enhanced duty of good faith are
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contract claims” and the law of South Carolina, the location where the insurance
policy was issued, applies. Twin City Fire Ins. Co. v. Colonial Life & Accident Ins.
Co., 839 So.2d 614, 616 (Ala. 2002).
The district court ultimately issued a memorandum opinion declaring that the
insurance policy issued by Twin City to Colonial did not cover the claims asserted in
the White lawsuit. The court held, “The insurance policy applies only to ‘personal
injuries or to occurrences’ that lead to ‘bodily injury.’ White suffered neither
personal injury nor bodily injury.” It also concluded that because there was no
underlying coverage, had Twin City contributed to the settlement, it could have been
reimbursed by Colonial for the contribution.
On Colonial’s counterclaim, after a detailed choice-of-law analysis, the district
court applied South Carolina law and entered judgment on only the bad faith claim,
holding that Twin City acted in bad faith when it first agreed to contribute to the
settlement but then subsequently withdrew its participation. It reasoned that once an
insurer assumes the defense of the case, even if there was no underlying coverage, it
nonetheless owes its insured the duty to settle “if it is the reasonable thing to do.” It
further stated that Gonzalez, Twin City’s claim representative, was too preoccupied
with insurance coverage issues to be concerned with Colonial’s interest as far as
evaluating the lawsuit. The district court ultimately awarded Colonial $75,000 in
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compensatory damages and $675,000 in punitive damages. The sole issue in this
appeal is whether the district court erred in ruling for Colonial on its bad faith
counterclaim.
As an initial matter, Twin City argues that the district court erred by applying
South Carolina law to Colonial’s bad faith counterclaim. It asserts that because bad
faith is a tort under Alabama law and White’s alleged injury – regardless of the type
of injury – occurred in Alabama, Alabama’s choice-of-law provisions specify that the
district court should have applied Alabama law, the place where the alleged injury
occurred. Twin City contends that because the district court determined that there
was no insurance coverage in its declaratory decree, and Alabama law requires that
an insured prove benefits under an insurance policy in a bad faith claim, it would
have prevailed under Alabama law. Because both South Carolina and Alabama law
require insurance coverage as a prerequisite for liability for a bad faith failure to settle
a claim with the insurance company’s money, however, we need not address this
choice-of-law argument and apply South Carolina law, as did the district court.
Compare State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 318 (Ala. 1999)
(applying Alabama law, and noting that one who cannot prove she was entitled to
benefits under an insurance policy cannot recover on a bad faith failure to settle
claim) with Doe v. South Carolina Med. Malpractice Liab. Joint Underwriting Ass’n,
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557 S.E.2d 670, 674 (S.C. 2001) (applying South Carolina law, noting that “‘a
liability insurer owes its insured a duty to settle a personal injury claim covered by
the policy, if settlement is the reasonable thing to do,’” quoting Trotter v. State Farm
Mut. Auto Ins. Co., 377 S.E.2d 343, 349 (S.C. Ct. App. 1988)).
I. Requirements for Bad Faith Claim
The Supreme Court of South Carolina has described bad faith in the insurance
context as “a knowing failure on the part of the insurer to exercise an honest and
informed judgment in processing a claim. . . . [A]n insurer acts in bad faith where
there is no reasonable basis to support the insurer’s decision.” Doe, 557 S.E.2d at
674 (citations and quotations omitted). “[T]he elements of an action for breach of the
covenant of good faith and fair dealing in an insurance contract are as follows: (1) the
existence of a mutually binding contract of insurance between plaintiff and defendant;
(2) a refusal by an insurer to pay benefits due under the contract; (3) resulting from
the insurer[’s] bad faith or unreasonable action in breach of an implied covenant of
good faith and fair dealing in the contract; (4) that causes damage to the insured.”
Pitts v. Jackson Nat’l Life Ins. Co., 574 S.E.2d 502, 512-53 (S.C. Ct. App. 2002).
II. Lack of Proof of Damages in Colonial’s Bad Faith Counterclaim
Colonial has failed to identify any damages in this case other than paying the
$75,000 portion of the settlement that it had wanted Twin City to pay. There is no
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record evidence that, had it not been for the actions of Twin City, Colonial would
have been able to settle the White lawsuit for less than what was paid to White. The
district court held that there was no coverage for Colonial under the White lawsuit,
and that if Twin City contributed $75,000 toward the settlement pool, because of its
reservation of rights, Twin City would have been entitled to reimbursement of that
amount from Colonial. In other words, there is no support for the compensatory
claim of $75,000 because Colonial would have had to repay the amount to Twin City.
Although Twin City’s offer to pay $75,000 toward a $400,000 settlement was
coupled with a waiver of coverage issues, which would indicate it could not have
recovered that amount from Colonial, that offer was effectively rejected when the
$400,000 settlement was refused by White, and Colonial then made a demand upon
Twin City for a $150,000 contribution to the settlement. It was error for the district
court to award the sum to Colonial and ignore its holding that Colonial owed that sum
back to Twin City. As such, no damages have been identified under the facts and
circumstances of this case. See, e.g., Ross Neely Sys., Inc. v. Occidental Fire & Cas.
Co. of North Carolina, 196 F.3d 1347, 1351 (11th Cir. 1999) (noting that an insured
suffered no damages when it would have been required to reimburse its insurer for
any uncovered amounts that the insurer would have advanced); see also Pitts, 574
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S.E.2d at 513 (noting that an insured must show that the insurer’s “breach of the
implied covenant of good faith and fair dealing . . . causes damage to the insured”).
Even though the White lawsuit could not have settled for any less amount than
was paid, Colonial, seeking to support an argument that it has a claim for damages
even though there was no coverage under Twin City’s insurance policy, contends that
the Supreme Court of South Carolina has expressly rejected the argument that an
“insurer can only bring a bad faith action if the insurer has breached some express
contractual provision” in Tadlock Painting Co. v. Maryland Cas. Co., 473 S.E.2d 52,
54 (S.C. 1996).
Tadlock is clearly distinguishable from the facts and circumstances of this case.
Tadlock recognized a cause of action for consequential damages, such as loss of
business revenues due to delay in processing claims against the insured, “allegedly
suffered because of the insurer’s bad faith handling of third party claims.” 473 S.E.2d
at 55. There was no evidence here that there was any failure to properly handle the
third-party claim of Lucas White against Colonial. The district court held that the
claim was properly settled. No extra-contractual consequential damages were alleged
as a result of the way that the White lawsuit was settled with White.
Since there was no compensatory damage, there is no basis for awarding
punitive damages.
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III. Requirement of Coverage Under the Policy For Finding of Bad Faith
Twin City argues that under South Carolina law, the law applied by the district
court, coverage under a policy is a prerequisite to a bad faith failure to settle claim.
The argument is that the first prong of the bad faith test is not met because there was
no mutually binding contract of insurance between Colonial and Twin City
concerning White’s claim against Colonial which is the basis of the bad faith action.
In effect, it contends that the bad faith claim was simply an attempt by Colonial to get
coverage of a claim for which it had not paid a premium.
Colonial contends that, even if there is no coverage under the policy, Twin City
owed a duty to contribute to the settlement fund and its last minute withdrawal of the
$75,000 contribution was done in bad faith, causing it to pay the $75,000 originally
promised by Twin City. The question is whether an insurance company providing a
defense under a reservation of rights also has a duty to make a monetary contribution
for its insured toward a settlement of underlying litigation that is outside the scope
of the insurance policy it had issued.
Under South Carolina law, an insurer has a duty to settle a third-party lawsuit
against its insured within an insurance policy’s limits if the settlement is “the
reasonable thing to do.” Tyger River Pine Co v. Maryland Cas. Co., 170 S.E. 346,
349 (S.C. 1933) (quotation omitted); Tiger River Pine Co. v. Maryland Cas. Co., 161
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S.E. 491 (S.C. 1931) (noting that an insurance company “which assumes the duty of
defending a claim owes the assured the duty of settling the claim if that is the
reasonable thing to do, and that, if the insurer negligently makes no serious attempt
to settle until matters are in such a shape that the claim cannot be settled as
advantageously to the assured as formerly, the assured may recover of the insurer the
loss so occasioned him”) (quotation and citation omitted). “Of course, the rule does
not apply if the [claim] is not covered by the policy.” Trotter, 377 S.E.2d at 349. The
Trotter court noted, “If an insurer undertaking the defense of a suit covered by the
policy unreasonably refuses or fails to settle within the policy limits, it is liable to the
insured for the amount of the judgment against him in excess of the policy limits.”
Id. (citing Miles v. State Farm Mut. Auto. Ins. Co., 120 S.E.2d 217, 222 (S.C. 1961)).
Stated differently, under South Carolina law, an insurer is liable for bad faith
if it fails to settle a case within the policy limits for an insurer if doing so is the
reasonable thing to do and if the claim is covered by the policy. Trotter, 377 S.E.2d
at 349. Indeed, Colonial’s letter of April 14, 2000 was simply a demand to “settle
this action within policy limits.” The cases holding bad faith for failure to settle
within policy limits, however, are not applicable here because the district court held
there was no coverage, and therefore there were no “policy limits.” To extend Twin
City’s duty to contribute under a reservation of rights to a settlement that is outside
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the scope of its insurance agreement simply because South Carolina law, such as
Tiger River, holds that there can be bad faith in circumstances where an insurer has
failed to settle a case “covered” by an insurance policy within the limits of that policy
if settling the same is the reasonable thing to do would unreasonably extend the
obligations undertaken by insurance companies in third-party settlement negotiations.
Neither the district court nor Colonial has cited any South Carolina case that
holds an insurer liable in tort for declining to contribute money toward a settlement
of a third-party claim when there is no coverage of the claim under the insured’s
policy at all. Here, any contribution that Twin City might have made to a settlement
in the White lawsuit, since it took the position there was no coverage under the policy,
would have been realistically based on its evaluation of the coverage claim it had with
Colonial and not based on the exposure of Colonial in the White lawsuit. Colonial
confuses these two, arguing that Twin City had some duty to Colonial to compromise
its coverage claim because of Colonial’s exposure in the White lawsuit.
Twin City undertook to provide Colonial a defense under its reservation of
rights to contest coverage by funding Attorneys Whitehead and Nettles to represent
Colonial’s interests in the White lawsuit. The record reveals that these attorneys,
unimpeded with concern over the question of coverage, obviously complied well with
an attorney’s responsibility not only to provide a defense but to actively attempt to
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settle the case, which they successfully did. Colonial has not contended that but for
Twin City’s conduct and its concern over its insurance coverage with Colonial, the
case could have been settled for less, and the district court found that “the decision
to settle, and the settlement itself, was fair and reasonable. The contributions by
Colonial and the other carriers were reasonably and prudently made.” In fact, the
record reflects that Attorney Nettles’s pre-trial report stated that Colonial had only a
30% chance for a defense verdict in the White lawsuit and that Colonial could
“sustain a verdict of over $10,000,000 in both punitive and compensatory damages.”
Absent evidence the White lawsuit could have been settled for less, a settlement of
$1.1 million suggests that Colonial’s interests were not compromised.
There is simply no evidence that the dispute over Twin City’s coverage of the
claim overshadowed Colonial’s interest in a fair settlement in the White lawsuit. The
excess policy coverage cases relied upon by Colonial, such as Tiger River/Tyger
River, all involve whether an insurance company has failed to settle within the policy
limits, i.e. within the amount that is undisputedly covered by the policy. See, e.g.,
Trotter, 377 S.E.2d at 349. They do not involve the situation here where there is no
coverage for the claim at all.
IV. Conclusion
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Accordingly, the district court erroneously entered judgment for compensatory
and punitive damages in favor of Colonial on its bad faith counterclaim.
REVERSED.
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