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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., UTICA MUTUAL INSURANCE COMPANY, and HULL & COMPANY, INC., Defendants.

          ORDER

          DAVID C. NORTON UNITED STATES DISTRICT JUDGE.

         This matter comes before the court on declaratory judgment action (2:13-cv-03035-DCN) defendant and bad faith action (2:14-cv-03272-DCN) plaintiff George Giannaras as Guardian for Emmanuel Kehagias’s ("Kehagias") motion for partial summary judgment, ECF No. 155, and declaratory judgment action plaintiff and bad faith action defendant Founders Insurance Company’s ("Founders") motion for summary judgment, ECF No. 159. For the reasons set forth below, the court denies Kehagias’s motion and grants Founders’s motion.

         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 broker. 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.

         Kehagias filed a partial motion for summary judgment in the declaratory judgment action on October 14, 2015. ECF No. 155, at 2-3.[10] Founders also filed a motion for summary judgment in the declaratory judgment action on October 14, 2015. ECF No. 159.[11] On October 22, 2014, Founders dismissed the appeal, Ex. 54, and a final judgment was entered on November 25, 2014, Ex. 55.

         Founders asks this court to declare that it is not required to indemnify the Ruths because they breached their duty to provide notice of the underlying claim and to forward the legal documents from the underlying suit. Founders alternatively asks that, should the court find that it must indemnify the Ruths, the court declare that the amount of coverage is limited to $105, 000.00. The Ruths and Kehagias (hereafter collectively "Kehagias") filed a joint response in opposition to the motion on November 12, 2015. ECF No. 180. Founders filed a joint response in support of various motions on December 1, 2015. ECF No. 193. Founders and Utica (referred to collectively in this order as "Founders") filed a joint response in opposition to Kehagias’s motion for summary judgment on November 12, 2015.[12] The motions have been fully briefed and are ripe for the court’s review.

         II. STANDARD

         A. Summary Judgment

         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 to overcome summary judgment. 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., 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.

         B. Contract Construction

         Under South Carolina law, "‘[i]nsurance policies are subject to the general rules of contract construction.’" USAA Property & Cas. Ins. Co. v. Clegg, 661 S.E.2d 791, 797 (S.C. 2008) (quoting B.L.G. Enters., Inc. v. First Fin. Ins. Co., 514 S.E.2d 327, 330 (S.C. 1999)). "‘Courts must enforce, not write, contracts of insurance, and their language must be given its plain, ordinary and popular meaning.’" Id. (quoting Sloan Constr. Co. v. Centr. Nat’l Ins. Co. of Omaha, 236 S.E.2d 818, 819 (S.C. 1977)). "‘When a contract is unambiguous, clear, and explicit, it must be construed according to the terms the parties have used.’" Id. (quoting B.L.G. Enters., Inc., 514 S.E.2d at 330). However, "‘[a]mbiguous or conflicting terms in an insurance policy must be construed liberally in favor of the insured and strictly against the insurer.’" Id. (quoting Diamond State Ins. Co. v. Homestead Indus., Inc., 456 S.E.2d 912, 915 (S.C. 1995)); see also Edens v. S.C. Farm Bureau Mut. Ins. Co., 308 S.E.2d 670, 671 (S.C.1983) ("Where language used in an insurance contract is ambiguous, or where it is capable of two reasonable interpretations, that construction which is most favorable to the insured will be adopted.").

         "An insurer’s obligation under a policy of insurance is defined by the terms of the policy itself and cannot be enlarged by judicial construction." Penn. Nat’l Mut. Cas. Ins. Co. v. Lewis, 105 F.Supp. 3d 573, 583 (D.S.C. 2015), aff’d sub nom. 2016 WL 3033203, at *1 (4th Cir. May 27, 2016) (citing S.C. Ins. Co. v. White, 390 S.E.2d 471, 474 (S.C. Ct. App. 1990)). "A policy clause extending coverage must be liberally construed in favor of coverage, while insurance policy exclusions are construed most strongly against the insurance company, which also bears the burden of establishing the exclusion’s applicability." Id. (citing M & M Corp. of S.C. v. Auto-Owners Ins. Co., 701 S.E.2d 33, 35 (2010); Owners Ins. Co. v. Clayton, 614 S.E.2d 611, 614 (2005)). "However, if the intention of the parties is clear, courts have no authority to torture the meaning of policy language to extend coverage that was never intended by the parties." S.C. Farm Bureau Mut. Ins. Co. v. Wilson, 544 S.E.2d 848, 850 (S.C. Ct. App. 2001).

         III. DISCUSSION

         Founders argues that the court should grant its motion for summary judgment and declare as a matter of law that it is not required to indemnify the Ruths because they breached their obligations under the Policy to provide notice, which substantially prejudiced Founders. Alternatively, Founders argues that the court should declare that even if it is required to indemnify the Ruths, the policy limits are $105, 000.00. In his partial motion for summary judgment, Kehagias makes the following arguments: (1) Founders has failed to establish prejudice as a matter of law and therefore cannot avoid coverage for insufficient notice; (2) the assignment to Kehagias is valid; (3) the Ruths acted reasonably, in good faith, and were not negligent as a matter of law; and (4) Kehagias’s request for attorney’s fees is not unconstitutional as a matter of law.[13] The court will address the parties’ arguments in turn.

         A. Notice

         Founders first argues that because the Ruths breached their duty under the policy to notify Founders of the claim and to send the legal documents to Founders, causing Founders substantial prejudice, it is not required to provide coverage under the Policy. Founders’s Mot. for Summ. J. 11. In response, Kehagias first argues that the Ruths did provide notice to Dumez. ECF No. 180, 3-4. Kehagias alternatively contends that even if the Ruths breached their duty under the Policy to provide Founders notice, Founders cannot establish substantial prejudice as a matter of law. Id. at 4-10.

         A plaintiff’s duty to provide notice of a suit is a covenant under the Policy. Episcopal Church in S.C, v. Church Ins. Co. of Vermont, 53 F.Supp. 3d 816, 828 (D.S.C. 2014). "As a general rule, breach of an insurance policy’s notice clause automatically relieves the insurer of its obligations under the contract, including the payment of proceeds due, and the duty to defend and to indemnify the insured." Wright v. UNUM Life Ins. Co., No. 2:99-2394-23, 2001 WL 34907077, at *2 (D.S.C. Aug. 31, 2001). "Where a question exists as to the failure of an insured to comply with the notice requirements contained in a liability insurance contract, the burden of proof rests with the insurer." Vt. Mut. Ins. Co. v. Singleton, 446 S.E.2d 417, 421 (S.C. 1994) (citing Squires v. Nat’l Grange Mut. Ins. Co., 145 S.E.2d 673 (S.C. 1965); Pharr v. Canal Ins. Co., 104 S.E.2d 394 (S.C. 1958)). "‘No rule of law is more firmly established in this jurisdiction than that one suing on a policy of insurance, where the notice required by the policy is not timely given, cannot recover . . . .’" Prior v. S.C. Med. Malpractice Liab. Ins. Joint Underwriting Ass’n, 407 S.E.2d 655, 657 (S.C. Ct. App. 1991) (quoting Lee v. Metro. Life Ins. Co., 186 S.E. 376, 381 (S.C. 1936)) (emphasis added).

         "The purpose of a notification requirement is to allow for investigation of the facts and to assist the insurer in preparing a defense." Vt. Mut. Ins. Co., 446 S.E.2d at 421 (citing Washington v. Nat’l Serv. Fire Ins. Co., 168 S.E.2d 90 (1969)). Although the failure of an insured to comply with a notice requirement may bar recovery by the insured, Squires, 145 S.E.2d at 677, "[w]here the rights of innocent parties are jeopardized by a failure of the insured to comply with the notice requirements of an insurance policy, the insurer must show substantial prejudice to the insurer’s rights" before recovery is barred. Vt. Mut. Ins. Co., 446 S.E.2d at 421.

         The General Liability ("GL") portion of the Policy states that the Ruths have the following duties in the event of an occurrence, offense, claim, or suit: "You must see to it that we are notified as soon as practicable of an ‘occurrence’ or an offense which may result in a claim." ECF No. 168 Ex. B (emphasis added). The Policy further states that "[i]f a claim is made or ‘suit’ is brought against an insured, you must . . . notify us as soon as practicable. You must see to it that we receive written notice of the claim or ‘suit’ as soon as practicable. You and any other involved insured must . . . immediately send us copies of any demands, notices, summonses, or legal papers received in connection with the claim or ‘suit’ . . . ." Id. (emphasis added). The Liquor Liability ("LL") portion of the Policy is even more specific and states that the insured must "[n]otify us by telephone at 888-676-4342 within seventy-two (72) hours; and provide written notice to us at 1645 East Birchwood Avenue, Des Plaines, Illinois 60018 within seventy-two (72) hours." Id. Ex. C. The LL portion of the Policy further states that "[y]ou and any other involved ‘insured’ must . . . [p]rovide us copies of any demands, notices, summonses, or legal papers received in connection with the claim or ‘suit’ within seventy-two (72) hours." Id.[14]

         Kehagias now contends that Jane Ruth gave the suit papers to Dumez shortly after being served. ECF No. 179, Ex. 2, Ruth Aff. ¶ 30. Notably, Judge Nicholson denied Founders’s motion to set aside the entry of default, concluding that the Ruths’ "inability to recall whether they returned the Complaint over to the local agent does not rise to the level of good cause" sufficient to grant the motion. ECF No. 155 Ex. 10. In her deposition, Ms. Ruth testified that she notified Dumez when she received the November 21, 2012 letter from the Anastopoulo Law Firm and faxed the letter to her. ECF No. 157 Ex. 4, Ms. Ruth Dep. 40:17-25. Dumez testified that she sent the letter to Melanie Yount ("Yount") at Hull. Dumez Dep. 39:25-403. On January 4, 2013, Dumez sent Yount an email to follow up because she had not heard anything, and on January 9, 2013, Yount responded that she could not find anything in the file. Id. at 40:8-13; 45:3-8.

         Ms. Ruth was served with the suit papers on January 8, 2013 and now claims that she gave Dumez the suit papers that day. ECF No. 179 Ex. 2, Ms. Ruth Aff. ¶ 30. However, during her deposition, Ms. Ruth testified:

Question: When you first sent the fax in to Miss Dumez did you have a follow-up phone call to talk about it?
Answer: May have. I’m not sure. I don’t remember.
Question: And then you said the next communication you had with Miss Dumez about what you called the Manny case was not until May?
Answer: Correct.
Question: And in the interim period in January you personally were served with a summons and complaint regarding Manny’s injury case?
Answer: Yes. . . .
Question: When you were served did you physically turn over that summons and complaint or sent it or provide it to anyone else?
Answer: The only way I can answer that question is evidently I did not. I thought I had, but I must not have because in further following conversations with [Dumez] she said she never received anything from me.

ECF No. 157 Ex. 4, Ms. Ruth Dep. 42:5-43:3.

         Similarly, Dumez testified:

Question: In between January 9th, 2013 and May 14th, 2013 did you receive any other communications from anyone about the incident that Attorney ...

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