S.C. Supreme Court upholds decision on notice and cooperation clauses
The Supreme Court of South Carolina's ruling wasn’t surprising, but the trial court’s decision, which it reversed, was.
The Supreme Court of South Carolina, reversing a trial court’s decision, has ruled that notice and cooperation clauses in automobile insurance policies are valid and enforceable notwithstanding a 1999 change to South Carolina statutory law.
The case
A bus driven by Asia Partman allegedly struck Andrew Neumayer while he was a pedestrian in Cayce, South Carolina. Neumayer was transported to Lexington Medical Center, where he was diagnosed with a ruptured spleen, broken left ribs, left humerus fracture, left pneumothorax, and a punctured lung.
After eight days in the hospital and medical costs of approximately $122,000, Neumayer was released.
Neumayer sued both Asia Partman, who worked for Primary Colors Child Care Center, and Primary Colors for negligence. The defendants did not answer or respond in any fashion, and, after a default judgment was entered, the court held a damages hearing, where it awarded Neumayer $622,500.
More than 18 months after the entry of default, Philadelphia Indemnity Insurance Co., Primary Colors’ insurance carrier, received notice of the default judgment.
Philadelphia declined to pay the amount of the default judgment, $622,500, instead asserting its indemnification obligation was limited to $25,000 because South Carolina law required an insurer to pay only the minimum limits when it was substantially prejudiced by its insured’s failure to provide notice of a lawsuit. Philadelphia also contended that the failure to receive notice of Neumayer’s lawsuit prevented it from investigating and defending.
Thereafter, Neumayer filed a declaratory judgment action seeking an order requiring Philadelphia to pay the judgment in full.
The trial court found in favor of Neumayer, citing that an insured’s breach of a notice clause could not reduce the amount of available coverage.
The dispute reached the Supreme Court of South Carolina.
There, Philadelphia contended that the trial court’s decision, if upheld, would render obsolete all notice clauses in insurance policies, thereby effecting a sea change in South Carolina insurance law.
Conversely, Neumayer rejected this assertion, arguing that Section 38-77-142(C) in the law barred these clauses.
Section 38-77-142(C) of the South Carolina Code provides:
Any endorsement, provision, or rider attached to or included in any policy of insurance which purports or seeks to limit or reduce the coverage afforded by the provisions required by this section is void.
The South Carolina Supreme Court’s decision
The court reversed, holding that the trial court erred in finding that Section 38-77-142(C) invalidated the notice and cooperation clause in the Philadelphia insurance policy.
In its decision, the court said that it was “convinced” that, in enacting Section 38-77-142(C) in 1999, the South Carolina legislature “did not intend to eviscerate settled law concerning notice clauses.” The court added that these policy conditions balanced the insurer’s “important interests in receiving notice of a lawsuit and an injured person’s right to recover against a negligent motorist.”
The court added that the “driving force” behind the notice-prejudice rule in South Carolina (providing that an insurer had the burden to show that it was substantially prejudiced by the failure of its insured to comply with a policy’s notice and cooperation provisions) was that there was “no sound reason . . . to permit a mere technical noncompliance to deprive an innocent third party of benefits to which [the third party] would otherwise be entitled.”
The court added that if the legislature had intended to categorically prohibit the enforcement of notice clauses in all policies, it would have done so. Accordingly, it held, Section 38-77-142(C) did not abolish notice and cooperation clauses in insurance contracts.
Therefore, the court concluded, insurers could continue to invoke notice clauses to deny coverage above the statutory limits, provided the insurers could prove that they were substantially prejudiced by their insured’s failure to comply with the provision. Here, because Philadelphia did not receive notice until over 18 months after the entry of the default judgment, substantial prejudice existed “as a matter of law,” the court ruled.
The case is Neumayer v. Philadelphia Indemnity Ins. Co., No. 27902 (S.C. July 24, 2019).
Editor’s Note: The Supreme Court of South Carolina straightened things out for insurers the other day when it upheld the enforceability of notice and cooperation clauses in automobile insurance policies. Its ruling wasn’t surprising, but the trial court’s decision, which it reversed, certainly was. The insurance company involved in the case pointed out to the state’s top court that the trial court’s decision, if affirmed, would render obsolete all notice and cooperation clauses in insurance policies, thereby effecting a sea change in South Carolina insurance law.
This piece originally published on law.com.
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