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Founders Insurance Co. v. Richard Ruth's Bar & Grill LLC

United States District Court, D. South Carolina, Charleston Division

June 8, 2016

FOUNDERS INSURANCE COMPANY, Plaintiff,
v.
RICHARD RUTH’S BAR & GRILL LLC, RICHARD RUTH, SR., JANE RUTH, and GEORGE GIANNARAS, as guardian for EMMANUEL KEHAGIAS, Defendants. RICHARD RUTH’S BAR & GRILL LLC, RICHARD RUTH, SR., and JANE RUTH, and GEORGE GIANNARAS, as guardian for EMMANUEL KEHAGIAS, Plaintiffs,
v.
FOUNDERS INSURANCE COMPANY, BROWN & BROWN, INC., HULL & COMPANY, INC., and UTICA MUTUAL INSURANCE COMPANY, Defendants.

          ORDER

          DAVID C. NORTON UNITED STATES DISTRICT JUDGE.

         This matter comes before the court on bad faith action (2:14-cv-03272) defendant Founders Insurance Company’s ("Founders") motion for summary judgment in the bad faith action. ECF No. 86. For the reasons set forth below, the court grants in part and denies in part Founders’s motion for summary judgment.

         I. BACKGROUND[1]

         This is a consolidated matter that involves two separate but related actions. The first is a declaratory judgment action, 2:13-cv-03035, in which plaintiff Founders requests that the court declare that it is not required to provide coverage under a general liability policy ("the Policy")[2] because the insureds failed to provide timely notice of the underlying personal injury lawsuit. The second action is a bad faith action, 2:14-cv-03272, filed by declaratory judgment action defendants and bad faith action plaintiffs Richard Ruth’s Bar & Grill LLC ("Richard’s Bar"), Richard Ruth, Sr. ("Mr. Ruth"), Jane Ruth ("Ms. Ruth") (collectively "the Ruths"), and Kehagias, as the Ruths’ assignee, alleging that Founders, Utica Mutual Insurance Company ("Utica"), [3] Hull & Company, Inc. ("Hull"), and Brown & Brown, Inc. ("Brown")[4] failed to properly handle the underlying personal injury claim.[5]

         On September 29, 2012, a patron of Richard’s Bar struck Kehagias during a pool game, and Kehagias suffered severe injuries and permanent brain damage as a result. After the incident, George Giannaras ("Giannaras"), Kehagias’s brother-in-law, was appointed to serve as Kehagias’s Guardian. On November 21, 2012, the Anastopoulo Law Firm sent Mr. Ruth a letter ("notice letter") notifying him that Kehagias retained the firm to represent him in connection with the injuries he sustained at the bar. Kehagias’s Mot. Summ. J. Ex. 1. The notice letter asked that Mr. Ruth "[p]lease forward this letter to any and all insurance carriers with policies applicable to Richard’s Bar and Grill, Richard Ruth, and the building housing Richard’s Bar and Grill immediately." Id. On November 26, 2012, Ms. Ruth sent the notice letter to their local agent, Cherie Dumez ("Dumez") at the Cherie Dumez Agency. Ex. 17. The following day, Dumez emailed the notice letter to Hull. Ex. 18. Kehagias filed the underlying injury suit on December 19, 2012 in the Court of Common Pleas for the Ninth Judicial Circuit.[6] Ex. 7. Ms. Ruth was served with the Summons and Complaint on January 8, 2013.[7] Dumez emailed the notice letter to Hull a second time on January 9, 2013. Ex. 19.

         Kehagias contends that the Ruths notified Dumez and that Dumez in turn notified Hull, the insurance wholesaler. Kehagias further contends that "Hull either failed to forward the letter to Founders, or, if they did, Founders failed to process it." Kehagias Mot. for Summ. J. 7. Neither the Ruths, nor anyone on their behalf, filed an answer, and on February 22, 2013, the court entered an Order for Entry of Default against the Ruths in the underlying action. Ex. 26. Founders received notice of the underlying lawsuit on May 15, 2013 when Hull sent the notice letter to Founders. Ex. 20 (email from Hull to Founders describing the claim as a "new claim" and requesting the "claim number ASAP as the agent originally submitted in January"). Founders disputes Kehagias’s claims that the Ruths notified Dumez after being served and that Dumez notified Hull. Founders’s Resp. 5 n.5. Upon receiving notice, Founders assigned the claim to adjustor Carlos Ortiz ("Ortiz"), and he began an investigation. Founders "escalated" the claim after learning of the severity of the injuries, opened a separate "coverage" file, and assigned adjustor Alberta Squalls ("Squalls") to investigate the late notice issue.

         On May 22, 2013, J.D. Smith ("Smith"), retained by Founders to represent the Ruths in the underlying action, filed a motion to set aside the default. On August 27, 2013, the Anastopoulo Law Firm sent an offer of compromise ("Offer") to Smith. Ex. 33. The letter included a demand "for payment of policy limits" and stated: "At 5:00 p.m. EDT on September 9, 2013, this offer will be withdrawn and we will obtain an excess judgment against your insured." Id. The offer did not include a specific amount and stated that "[i]f any condition is not met, or if any additional condition is imposed by [Founders], including but not limited to conditions of indemnification or the waiver of any rights or claims not specified herein, this offer of compromise will be withdrawn." Id. In response to the Offer, Smith sent Kehagias’s attorney an email inquiring about the specific amount demanded, stating: "I understand that this policy has limits of $50, 000 and want to make sure we are on the same page with the limits before I forward the demand to the carrier." Ex. 35. Kehagias’s attorney responded that he understood the policy limits to be $1, 005, 000.00 and was therefore demanding that amount. Id.

         On September 3, 2013, Squalls responded to the offer of compromise, rejecting the offer but providing a counteroffer of $50, 000.00. Ex. 40. On September 10, 2013, Kehagias’s attorney sent a notice of the withdrawal of the offer of compromise because no payment had been received. Ex. 42. On October 29, 2013, Squalls sent Kehagias’s attorney a second offer of compromise. Ex. 50. Squalls stated that "[b]ased on [Founders’s] re-examination of its Policy provisions as may apply to this claim, Founders has determined that the maximum available coverage which could potentially be afforded to its insureds" was $105, 000.00. Id. Kehagias’s attorney never responded to Founders’s second offer. Kehagias filed an opposition to the Ruths’ motion to set aside the entry of default on October 24, 2013, and the state court conducted a hearing on the motion on October 30, 2013. Founders filed the present declaratory judgment action on November 6, 2013.

         On January 17, 2014, Judge Nicholson denied the Ruths’ motion to set aside the entry of default in the underlying state court action. Ex. 45. Judge Newman held a damages hearing on March 19, 2014, and on April 29, 2014, entered a default judgment against the Ruths in the amount of $5, 000, 000.00. Ex. 55. At the Ruths’ request, Smith appealed Judge Newman’s default judgment on May 28, 2014. That same day, the Ruths executed an agreement with Kehagias under which Kehagias agreed not to execute the judgment against the Ruths, and the Ruths assigned their right to sue Founders and Hull for bad faith to Kehagias. Ex. 49.[8] On May 29, 2014, one day after the assignment, the Ruths’ personal counsel advised Founders that the Ruths no longer wished to appeal. Ex. 50. Kehagias, as the Ruths’ assignee, filed the bad faith action on August 14, 2014.[9] On August 20, 2014, the Ruths’ personal counsel directed Founders to dismiss the appeal. Ex. 52. Founders thereafter authorized Smith to dismiss the appeal in accordance with the Ruths’ request. Ex. 53.

         In the bad faith action, Kehagias, as the Ruths’ assignee, claims that: (1) Founders failed to properly investigate the claim and defend the Ruths, resulting in the entry of default against them in the underlying personal injury lawsuit; and (2) Founders acted in bad faith by failing to settle the underlying case for the policy limits and failing to otherwise act as a reasonable, prudent insurance company under the circumstances. On October 22, 2014, Founders dismissed the appeal, Ex. 54, and a final judgment was entered on November 25, 2014, Ex. 55.

         Founders filed the present motion for summary judgment on October 14, 2015. ECF No. 86. Founders contends that it is entitled to summary judgment on all of Kehagias’s claims because it does not have to provide coverage-as more fully discussed in the court’s order addressing Founders’s motion for summary judgment in the declaratory judgment action-and therefore cannot be liable for bad faith. Founders also argues that it never had the opportunity to settle the underlying case within the policy limits and had a reasonable basis to decline the settlement demand. Founders also seeks summary judgment as to the Kehagias’s request for punitive damages and Kehagias’s claim that Founders is liable for negligence per se. The Ruths and Kehagias (hereafter collectively "the Ruths") filed a joint response in opposition to the motion on November 12, 2015. ECF No. 117. Founders filed a joint response in support of various motions on December 1, 2015. ECF No. 123. Founders’s motion for summary judgment is now ripe for the court’s review.

         II. STANDARD

         Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "Rule 56(c) of the Federal Rules of Civil Procedure requires that the district court enter judgment against a party who, ‘after adequate time for discovery . . . fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.’" Stone v. Liberty Mut. Ins. Co., 105 F.3d 188, 190 (4th Cir. 1997) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). Any reasonable inferences are to be drawn in favor of the nonmoving party. See Webster v. U.S. Dep’t of Agric., 685 F.3d 411, 421 (4th Cir. 2012). However, to defeat summary judgment, the nonmoving party must identify an error of law or a genuine issue of disputed material fact. See Fed.R.Civ.P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986); see also Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir. 2003).

         Although the court must draw all justifiable inferences in favor of the nonmoving party, the nonmoving party must rely on more than conclusory allegations, mere speculation, the building of one inference upon another, or the mere existence of a scintilla of evidence. See Anderson, 477 U.S. at 252; Stone, 105 F.3d at 191. Rather, "a party opposing a properly supported motion for summary judgment . . . must ‘set forth specific facts showing that there is a genuine issue for trial.’" Bouchat, 346 F.3d at 522 (quoting Fed.R.Civ.P. 56(e) (2002) (amended 2010)). If the adverse party fails to provide evidence establishing that the factfinder could reasonably decide in his favor, then summary judgment shall be entered "regardless of ‘[a]ny proof or evidentiary requirements imposed by the substantive law.’" Id. (quoting Anderson, 477 U.S. at 248).

         "[A]t the summary judgment stage the judge’s function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Id. at 249. When the party moving for summary judgment does not bear the ultimate burden of persuasion at trial, it may discharge its burden by demonstrating to the court that there is an absence of evidence to support the non-moving party’s case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). The non-movant must then "make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial." Id. at 322.

         III. DISCUSSION

         In the bad faith action, Kehagias, as the Ruths’ assignee, asserts claims against Founders for: (1) breach of contract claim; (2) bad faith failure to settle within policy limits claim; (3) negligent handling, processing, and adjusting of the insurance matter; and (4) negligence per se on the basis that its agents were not licensed in South Carolina as required by law. Founders argues that it is entitled to summary judgment on all claims.

         A. Breach of Contract Claim

         Kehagias contends that Founders breached its contractual obligations to defend the Ruths and provide coverage under the Policy. To establish a claim for breach of contract, Kehagias must establish (1) the existence of a contract, (2) its breach, and (3) the damages caused by such breach. Branche Builders, Inc. v. Coggins, 686 S.E.2d 200, 202 (S.C. Ct. App. 2009). In South Carolina, the failure of the insured to comply with the obligations of the contract will release the insurer from liability. Shiftlet v. Allstate Ins. Co., 451 F.Supp.2d 763, 770 (D.S.C. 2006) (citing Hodges v. State Farm Mut. Auto. Ins. Co., 488 F.Supp. 1057, 1061 (D.S.C. 1980); Tucker v. State Farm Mut. Auto. Ins. Co., 103 S.E.2d 272 (S.C. 1958); Pharr v. Canal Ins. Co., 104 S.E.2d 394 (S.C. 1958); Crook v. State Farm Mut. Auto. Ins. Co., 98 S.E.2d 427 (1957)). However, "avoidance of coverage will only be allowed where the insurer has shown that the failure to cooperate prejudiced the insurer’s investigation of the case." Id. (citing Squires v. Nat’l Grange Mut. Ins. Co., 145 S.E.2d 673 (S.C. 1965); Pharr, 104 S.E.2d 394). For the reasons stated in the court’s order on Founders’s motion for summary judgment in the declaratory judgment action, Founders did not breach its duties to defend or indemnify because the Ruths failed to provide proper notice as required under the Policy, which substantially prejudiced Founders. Therefore, the court grants Founders’s motion for summary judgment as it pertains to Kehagias’s breach of contract claim.[10]

         B. Bad Faith Failure to Settle

         Founders next argues that it cannot be liable for bad faith because there is no coverage owed under the Policy. Founders’s Mot. ECF 87, at 9. Kehagias argues that his bad faith claim survives, even if there is no coverage for failure to provide notice. ECF No. 117, at 6. The exact basis of Kehagias’s bad faith claim is unclear, but it appears to the court that the claim is based on Founders’s failure to process the claim and failure to settle within Policy limits.

         Every contract contains an implied covenant of good faith and fair dealing that neither party will do anything that will injure the right of the other to receive the benefits of the agreement. Shiftlet, 451 F.Supp.2d at 771-72 (citing Nichols v. State Farm Mut. Auto. Ins. Co., 306 S.E.2d 616 (S.C. 1983)). An insured establishes that an insurer breaches this covenant of good faith if the following elements are met: (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. Id. (citing Bartlett v. Nationwide Mut. Ins. Co., 348 S.E.2d 530 (S.C. Ct. App. 1986); Nichols, 306 S.E.2d at 616). Under South Carolina law, an insured may recover damages for bad faith denial of coverage if he proves that there was no reasonable basis to support the insurer’s decision to deny benefits under a mutually binding insurance contract. Id. (citing Ocean Winds Council of Co-Owners, Inc. v. Auto-Owners Ins. Co., 241 F.Supp.2d 572, 576 (D.S.C. 2002)). However, "if there was an objectively reasonable ground for contesting an insurance claim, there is no bad faith in the denial of it." Id. (citing Mixson, Inc. v. Am. Loyalty Ins. Co., 562 S.E.2d 659 (S.C. Ct. App. 2002)). "Whether such an objectively reasonable basis for denial existed depends on the circumstances existing at the time of the denial." Id. (citing State Farm Fire & Cas. Co. v. Barton, 897 F.2d ...


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