For The Fourth · PDF fileV. Liberty’s Arguments Regarding the Amount of the Punitive...

RECORD NOS. 12-2256(L); 12-2350XAP

THE LEX GROUP 1108 East Main Street Suite 1400 Richmond, VA 23219 (804) 644-4419 (800) 856-4419 Fax: (804) 644-3660 www.thelexgroup.com

In The

United States Court of Appeals For The Fourth Circuit

LIBERTY MUTUAL FIRE INSURANCE COMPANY;

EMPLOYERS INSURANCE OF WAUSAU, a mutual company,

Plaintiffs – Appellees/Cross-Apellants,

v.

JT WALKER INDUSTRIES, INC., f/k/a Metal Industries, Inc.;

MI WINDOWS & DOORS, INC., f/k/a MI Home Products., Inc., f/k/a Metal Industries Inc. of California,

Defendants – Appellants/Cross-Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA

AT CHARLESTON

REPLY BRIEF OF APPELLANTS/CROSS-APPELLEES

R. Hugh Lumpkin William K. Davis Meghan C. Moore Alan M. Ruley W. Allen Bonner BELL, DAVIS & PITT, P.A. VER PLOEG & LUMPKIN, P.A. 100 North Cherry Street, Suite 600 100 Southeast Second Street, 30th Floor Winston-Salem, North Carolina 27101 Miami, Florida 33131 (336) 722-3700 (305) 577-3996 Counsel for Appellants/Cross-Appellees Counsel for Appellants/Cross-Appellees

Appeal: 12-2256 Doc: 43 Filed: 05/28/2013 Pg: 1 of 80

i

TABLE OF CONTENTS

Page TABLE OF AUTHORITIES ..................................................................................... iv RESPONSE/REPLY TO LIBERTY’S STATEMENT OF THE FACTS ................... 1 SUMMARY OF THE ARGUMENT ........................................................................ 7 ARGUMENT ............................................................................................................. 8

I. The District Court’s Order Granting JNOV was Error and Must

be Reversed ........................................................................................... 8

A. Liberty waived the damages arguments, first raised in its Motion for JNOV ........................................................................ 8

B. The jury was permitted to consider Liberty’s decision to

settle as evidence of bad faith ................................................... 11

C. The evidence supported the jury’s verdict awarding damages to MI ........................................................................... 15

1. MI offered sufficient proof of causation ........................ 15 2. The burden rests with Liberty to show that its

wrongful settlements did not prevent a superior outcome ........................................................................... 17

3. Though not raised by Liberty at trial, MI

nonetheless presented evidence that it could have secured a better outcome than the settlements negotiated by Liberty ...................................................... 24

4. MI was at the least entitled to nominal damages,

which support an award of punitive damages ................ 25

5. The District Court erred in failing to award MI attorneys’ fees as damages ............................................. 27


ii

II. The Amended Final Judgment Cannot Be Sustained on Alternate Grounds Properly Rejected by the District Court ............... 32

A. Under South Carolina Law, Liberty Must Exercise Its

Discretion Fairly and in Good Faith ......................................... 32

B. The District Court Employed the Correct Legal Standard in Allowing the Jury to Determine Whether Liberty Had a Reasonable Basis for Its Settlement Decisions ...................... 39 1. Abuse of Discretion is Not the Legal Standard for

Breach of the Implied Covenant of Good Faith and Fair Dealing Under South Carolina Law, and Liberty Mutual Waived Any Argument to the Contrary .......................................................................... 39

2. The District Court properly recognized that the

reasonableness of Liberty’s settlement decisions was a question of fact for the jury and held that the evidence supported the jury’s determination that Liberty acted in bad faith ................................................ 39

III. Liberty May Not Recover Damages that Derive from its

Unlawful Conduct, nor May it Recover Prejudgment Interest and Costs ............................................................................................. 46 A. The District Court erred by allowing Liberty to recover

as contract damages funds it paid in bad faith .......................... 46 B. The District Court Properly Declined to Award

Prejudgment Interest ................................................................. 47

1. The District Court Applied the Correct Legal Standard .......................................................................... 48

2. Liberty’s claims were not for a sum certain ................... 49 3. The Wausau “Reimbursement Endorsement” ................ 50


iii

4. The Liberty “Policy Premium Adjustment Endorsement” ................................................................. 50

5. Liberty may not recover prejudgment interest on

sums derived from its bad faith conduct ......................... 52 C. The District Court Properly Declined to Award Costs ............. 53

IV. The District Court’s Tyger River Instruction Was Proper .................. 54

A. Liberty cannot demonstrate that the District Court’s Tyger River instruction was erroneous ..................................... 54

B. Tyger River principles extend beyond failure to pay or

settle a claim .............................................................................. 55

C. This Court should reject Liberty’s piecemeal challenges to the District Court’s bad faith instructions ............................. 56

D. Howard, the sole case cited by Liberty, supports the

District Court’s instructions ...................................................... 59 V. Liberty’s Arguments Regarding the Amount of the Punitive

Damages Award Must be Decided by the District Court in the First Instance ....................................................................................... 60

VI. The District Court erred in excluding certain evidence at trial ........... 63

CONCLUSION ........................................................................................................ 64 CERTIFICATE OF COMPLIANCE CERTIFICATE OF FILING AND SERVICE


iv

TABLE OF AUTHORITIES

Page CASES Adams v. G.J. Creel and Sons, Inc., 465 S.E.2d 84 (S.C. 1995) ............................................................................. 36 Allen v. Zurich, 667 F.2d 1162 (4th Cir. 1982) ........................................................... 15, 16, 24 Amer. Cas. Co. of Reading Pa. v. Howard, 187 F.2d 322 (4th Cir. 1951) ............................................................. 40, 59, 60 Amer. Home Assur. Co., Inc. v. Hermann’s Warehouse Corp., 563 A.2d 444 (N.J. 1989) .............................................................................. 37 American Protection Ins. Co. v. Airborne, Inc., 476 F. Supp. 2d 985 (D. Mass. 2007) ................................................................ 36 Andrews v. Central Surety Insurance Company, 271 F. Supp. 814 (D.S.C. 1967) .................................................................... 29 Bainbridge v. Turner, 311 F.3d 1104 (11th Cir. 2002) ..................................................................... 62 Biocore, Inc. v. Khosrowshahi, 80 F. App’x 619 (10th Cir. 2003) .................................................................. 62 Brown v. All Amer. Life and Cas. Co., 247 S.E.2d 812 (S.C. 1978) ........................................................................... 12 Brown v. Theos, 550 S.E.2d 304 (S.C. 2001) ........................................................................... 22 Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of Health & Human Res., 532 U.S. 598 (2001)....................................................................................... 53


v

Butler Contracting, Inc. v. Court Street, LLC, 631 S.E.2d 252 (S.C. 2006) ........................................................................... 49 Carolina Bank & Trust v. St. Paul Fire and Mar. Co., 310 S.E.2d 163 (S.C. Ct. App. 1983) ............................................................ 13 Centronics v. Genicom Corp., 562 A.2d 187 (N.H. 1989) ............................................................................. 34 Cherry v. Champion Int’l Corp., 186 F.3d 442 (4th Cir. 1999) ......................................................................... 54 City of Hobbs v. Hartford Fire Ins. Co., 162 F.3d 576 (10th Cir. 1998) ....................................................................... 21 Collins Holding Corp. v. Wausau Underwriters Ins., Co., 204 Fed. App’x 208 (4th Cir. 2006) .............................................................. 46 Cont’l Ins. Co. v. Paschal, 842 F.2d 1289, 1988 WL 21676 (4th Cir. 1988) ..................................... 15-16 Coral Gables, Inc. v. Palmetto Brick Company, 191 S.E. 337 (S.C. 1937), ............................................................................. 18 Cox v. CSX Intermodal, Inc., 732 So. 2d 1092 (Fla. 1st DCA 1999) ........................................................... 37 Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437 (1987)....................................................................................... 53 Crossley v. State Farm Mut. Auto. Ins. Co., 415 S.E.2d 393 (S.C. 1992) ........................................................................... 57 Crossman Cmtys. of N.C., Inc. v. Harlesville Mut. Ins. Co., 717 S.E.2d 589 (S.C. 2011) ............................................................................. 6 Crossroads Cogeneration Corp. v. Orange & Rockland Utilities, Inc., 159 F.3d 129 (3d Cir. 1998) .......................................................................... 62


vi

DeChant v. Monarch Life Ins. Co., 547 N.W.2d 592 (Wis. 1996) ........................................................................ 30 Deese v. State Farm Mut. Auto. Ins. Co., 838 P.2d 1265 (Ariz. 1992) ............................................................... 14, 15, 23 Doe v. S.C. Med. Malpractice Ass’n, 557 S.E.2d 670 (S.C. 2001) ............................................................... 34, 35, 36 Donahue v. City of Boston, 304 F.3d 110 (1st Cir. 2002) .......................................................................... 62 Dotson v. Pfizer, Inc., 558 F.3d 284 (4th Cir. 2009) ......................................................................... 45 Duncan v. Provident Mut. Life Ins. Co. of Philadelphia, 427 S.E.2d 657 (1993) ................................................................................... 28 Ellerbrook v. City of Lubbock, Tex., 465 F. App’x 324 (5th Cir. 2012) ............................................................ 61-62 Fabri v. The Hartford, 69 Fed. App’x 187 (4th Cir. 2003) ................................................................ 40 Fullerton Aircraft Sales & Rentals, Inc. v. Beech Aircraft Corp., 842 F.2d 717 (4th Cir. 1988) ......................................................................... 61 Gallick v. Baltimore & Ohio Railroad Company, 372 U.S. 108 (1963)....................................................................................... 45 Goetz v. Windsor Cent. Sch. Dist., 698 F.2d 606 (2d Cir. 1983) .......................................................................... 62 Gruenberg v. Aetna Insur. Co., 510 P.2d 1032 (Cal. 1973) ............................................................................. 29 Hartford Acc. and Indem. Co. v. U.S. Natural Res., Inc., 897 F. Supp. 466 (D. Or. 1995) ..................................................................... 37


vii

Hegler v. Gulf Ins. Co., 243 S.E.2d 443 (S.C. 1978) ..................................................................... 11, 28 Hinson v. A.T. Sistare Construction Co., 113 S.E.2d 341 (S.C. 1960) ........................................................................... 26 Hitachi Credit America Corp. v. Signet Bank, 166 F.3d 614 (4th Cir. 1999) ......................................................................... 47 Howard v. State Farm Mut. Auto. Co., 450 S.E.2d 582 (S.C. 1994) ..................................................................... 13, 40 In re Belding, 589 S.E.2d 197 (S.C. 2003) ........................................................................... 23 Int’l Brotherhood of Teamsters v. United States, 431 U.S. 324 (1977)....................................................................................... 22 Int’l Ground Transp. v. Mayor and City Council of Ocean City, Md., 475 F.3d 214 (4th Cir. 2007) ......................................................................... 26 Jackson v. Bi-Lo Stores, Inc., 437 S.E.2d 168 (S.C. Ct. App. 1993) ...................................................... 52, 53 Jacobs v. Am. Mut. Fire Ins. Co. of Charleston, 340 S.E.2d 142 (S.C. 1986) ........................................................................... 48 Jarrell v. Ford Motor Co., 327 F.2d 233 (4th Cir. 1964) ......................................................................... 45 Jefferson v. Allstate Ins. Co., 673 F. Supp. 1401 (D.S.C. 1987) .................................................................. 55 L.J. v. Wilbon, 633 F.3d 297 (4th Cir. 2011) ......................................................................... 48 Mattison v. Dallas Carrier Corp., 947 F.2d 95 (4th Cir. 1991) ............................................................................. 1


viii

Mays v. Pioneer Lumber Corp., 502 F.2d 106 (4th Cir. 1974) ........................................................................... 1 McCall v. Batson, 329 S.E.2d 741 (S.C. 1985) ........................................................................... 26 Mitchell v. Fortis Ins. Co., 686 S.E.2d 176 (S.C. 2009) ............................................................... 55, 63, 64 Mixson v. American Loyalty Ins. Co., 562 S.E.2d 659 (S.C. Ct. App. 2002) ............................................................ 40 Myers v. State Farm Mut. Auto. Ins. Co., 950 F. Supp. 148 (D.S.C. 1997) .................................................................... 19 N.H. Ins. Co. v. Ridout Roofing Co., 68 Cal. App. 4th 495 (Cal. Ct. App. 1998) .................................................... 37 Nationwide Mut. Ins. Co. v. Pub. Serv. Co. of N.C., 435 S.E.2d 561 (N.C. App. 1993) ................................................................. 36 Nichols v. State Farm Mut. Auto. Ins. Co., 306 S.E.2d 616 (S.C. 1983) ....................................................................passim O’Bright v. John’s Towing Serv., Inc., 9 Fed. App’x 228 (4th Cir. 2001) .................................................................. 54 Ocean Winds Council of Co-Owners, Inc. v. Auto Owners Ins. Co., 241 F. Supp. 2d 572 (D.S.C. 2002) ............................................................... 33 Olympic S.S. Co., Inc. v. Centennial Ins. Co., 811 P.2d 673 (Wash. 1991) ........................................................................... 28 Oregal v. Hassana, 57 F.3d 1077 (9th Cir. 1995) ........................................................................... 8 Orion Ins. Co. Ltd. v. Gen. Elec. Co., 493 N.Y.S.2d 397 (N.Y. Sup. Ct. 1985), aff’d, 509 N.Y.S.2d 778 (N.Y. App. Div. 1986) ..................................................... 37


ix

Pacific Employers Ins. Co. v. P.B. Hoidale Co., Inc., 796 F. Supp. 1428 (D. Kan. 1992) .............................................. 19, 20, 21, 23 Peterson v. Tyson Foods, Inc., 983 F.2d 1057 (4th Cir. 1993) ....................................................................... 61 Powell v. Prudential Prop. & Cas. Ins. Co., 584 So. 2d 12 (Fla. 3d DCA 1991), rev. denied, 598 So. 2d 77 (Fla. 1992) .................................................................. 20, 21, 22 Precision Instrument Manufacturing Company v. Automotive Maintenance Machinery Co., 324 U.S. 806 (1945)....................................................................................... 53 Rawlings v. Apodaca, 726 P.2d 565 (Ariz. 1986) ....................................................................... 14, 15 Roberts v. Roberts, 370 S.E.2d 881 (S.C. Ct. App. 1988), aff’d as modified, 384 S.E.2d 719 (S.C. 1989) ........................................................................... 22 Robertsen v. State Farm Mut. Auto. Ins. Co., 464 F. Supp. 876 (D.S.C. 1979) .................................................................... 11 Roehl Transportation Inc. v. Liberty Mutual Ins. Co., 2010 WI 49, 325 Wis. 2d 56, 784 N.W.2d 542 (2010) ................................. 38 Shuster v. S. Broward Hosp. Dist. Physicians’ Prof’l Liab. Ins. Trust, 591 So. 2d 174 (Fla. 1992) ............................................................................ 36 Skinner & Ruddock, Inc. v. London Guarantee and Accident Company, 124 S.E.2d 179 (S.C. 1962) ........................................................................... 18 Sloan Construction Co., Inc. v. Central Nat. Ins. of Omaha, 236 S.E.2d 818 (S.C. 1977) ............................................................................. 6 Smith v. Maryland Cas. Co., 742 F.2d 167 (4th Cir. 1984) ............................................................... 1, 13, 40


x

Smith v. Northwest Fin. Acceptance, Inc., 129 F.3d 1408 (10th Cir. 1997) ....................................................................... 9 Smith-Hunter Constr. Co. v. Hopson, 616 S.E.2d 419 (S.C. 2005) ........................................................................... 48 State Auto. Ins. Co. of Columbus, Ohio v. Rowland, 427 S.W.2d 30 (Tenn. 1968) ......................................................................... 20 State Farm Fire & Cas. Co. v. Barton, 897 F.2d 729 (4th Cir. 1990) ............................................................... 1, 13, 40 Stevens v. Allen, 536 S.E.2d 663 (S.C. 2000) ..................................................................... 26, 27 Storrer v. Paul Revere Life Ins. Co., 220 Fed. App’x 567 (9th Cir. 2007) .............................................................. 62 Structural Rubber Products Co. v. Park Rubber Co., 749 F.2d 707 (Fed. Cir. 1984) ....................................................................... 61 Supermarket of Marlinton, Inc. v. Meadow Gold Dairies, Inc., 71 F.3d 119 (4th Cir. 1995) ........................................................................... 63 Tadlock Painting Co. v. Maryland Cas. Co., 473 S.E.2d 52 (S.C. 1996) ......................................................................passim Tadlock Painting Co. v. Maryland Cas. Co., 97 F.3d 1449, 1996 WL 532745 (4th Cir. 1996) ..................................... 58, 64 Tannerfors v. Amer. Fid. Fire Ins. Co, 397 F. Supp. 141 (D.N.J. 1975) ............................................................... 20, 21 Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994) ........................................................................... 53 Temple v. Mut. of Omaha Ins. Co., 4:11-CV-00128-RBH, 2013 WL 314750 (D.S.C. Jan. 28, 2013) ........... 31, 57


xi

The City of Myrtle Beach v. United Nat. Ins. Co., 739 F. Supp. 2d 876 (D.S.C. 2010) ............................................................... 40 TMA Fund, Inc. v. Biever, 520 F.2d 639 (3d Cir. 1975) .......................................................................... 62 Travelers Int’l v. Trans World Airlines, Inc., 41 F.3d 1570 (2d Cir. 1994) .......................................................................... 34 Trimper v. Nationwide Ins. Co., 540 F. Supp. 1188 (D.S.C. 1982) .................................................................. 55 Trustees of Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890 (3d Cir. 1987) .......................................................................... 30 Tyger River Pine Co. v. Maryland Casualty Co., 170 S.E. 346 (S.C. 1933) ........................................................................passim United Capitol Ins. Co. v. Barolotta’s Fireworks Co., 546 N.W.2d 198 (Wis. Ct. App. 1996) .......................................................... 38 United States v. Hedgepeth, 418 F.3d 411 (4th Cir. 2005) ......................................................................... 48 Univ. Med. Associates of Med. Univ. of S.C. v. UnumProvident Corp., 335 F. Supp. 2d 702 (D.S.C. 2004) ............................................................... 64 Varnadore v. Nationwide Mut. Ins. Co., 345 S.E.2d 711 (S.C. 1986) ........................................................................... 40 Wachovia Bank, N.A. v. Coffey, 698 S.E.2d 244 (S.C. Ct. App. 2010) ...................................................... 52, 53 Wagener v. SBC Pension Benefit Plan-Non Bargained Program, 407 F.3d 395 (D.C. Cir. 2005) ....................................................................... 62


xii

Walker Mfg. Co. v. Dickerson, Inc., 560 F.2d 1184 (4th Cir. 1977) ....................................................................... 61 Ward v. Dixie Nat. Life Ins. Co., 257 Fed. App’x 620 (4th Cir. 2007) .............................................................. 61 Williams v. Reidman, 529 S.E.2d 28 (S.C. Ct. App. 2000) ................................................................... 36 Young v. Amer. Cas. Co. of Reading, PA, 416 F.2d 906 (2d Cir. 1969), cert. denied, 396 U.S. 1029 (1970) .................................................................................... 20 STATUTES 42 U.S.C. § 1988 ...................................................................................................... 54 S.C. Code Ann. § 34-31-20(A) ................................................................................ 48 S.C. Code Ann. § 38-59-20 ................................................................................ 11, 12 S.C. Code Ann. § 38-59-40 ................................................................................ 11, 31 RULES Fed. R. Civ. P. 50 ..............................................................................................passim Fed. R. Civ. P. 50(a) ................................................................................................... 8 Fed. R. Civ. P. 50(b) ............................................................................................ 9, 10 Fed. R. Civ. P. 54(d)(1) ............................................................................................ 53 S.C. R. Prof’l Conduct 1.2 ....................................................................................... 23 OTHER AUTHORITY Anastopoulo, Bad Faith in South Carolina Insurance Contracts from Tyger River Pine Co. v. Maryland Cas. Co. to Mitchell v. Fortis Ins. Co., S.C. LAW, July 2010 ............................................... 31, 55


1

RESPONSE/REPLY TO LIBERTY’S STATEMENT OF THE FACTS1

Liberty’s statement of facts simply reprises the positions rejected by the jury

and in large part by the District Court below and fails to acknowledge

overwhelming evidence favoring MI on each position. The law is clear: Rule 50

does not permit the court to weigh evidence or to substitute its opinion of the

evidence for that of the jury. Mattison v. Dallas Carrier Corp., 947 F.2d 95, 107-8

(4th Cir. 1991); Mays v. Pioneer Lumber Corp., 502 F.2d 106, 109 (4th Cir. 1974);

Smith v. Md. Cas. Co., 742 F.2d 167, 170 (4th Cir. 1984) (citing Tyger River Pine

Co. v. Maryland Casualty Co., 170 S.E. 346, 348 (S.C. 1933). As both Liberty and

MI presented sufficient evidence upon which the jury could and did find that

Liberty acted unreasonably and caused MI harm, the verdict must be upheld.

The standard for reviewing a JNOV motion requires the court to construe the

facts in the light most favorable to the non-movant – here, MI. State Farm Fire

and Casualty Company v. Barton, 897 F.2d 729, 731 (4th Cir. 1990). Under

Barton, Liberty’s selective evidence of alleged good faith is irrelevant. The entire

record must be examined and all reasonable inferences taken in favor of MI. See

also Mays, 502 F.2d at 108-09.

1 References to MI’s Initial Brief shall be IB ____; Liberty’s Brief as AB___; this Brief as RB____.


2

Contrary to Liberty’s focus on its decision to settle over MI’s objections –

five times – South Carolina law holds that in reviewing an insurer’s conduct, even

an arguably right conclusion does not insulate an insurer from the manner in which

it arrived at its conclusions. Simply stated, the ends do not justify the means, and if

the means employed violate the covenant of good faith and fair dealing, an insurer

is liable in damages for its willful conduct, including punitive damages.

Liberty’s Statement of Facts focuses on defense counsel reports touted by

Liberty as dispositive evidence that it acted reasonably. The flaw discerned by the

jury in this reasoning is that Liberty itself gave scant weight to these reports, yet

professed falsely at trial that the reports, particularly of Mr. Clarke, justified its

behavior and decisions.

First, while Liberty’s claim notes contained some of Clarke’s assessments,

and his letters on Liberty-scripted forms (JA 707) which evaluated risks of

litigation and outcomes were in evidence, Liberty performed its own evaluations.

The evidence of these evaluations surfaced in Liberty’s reserve studies and

calculations captained by Liberty’s Julien Savoie, who studied the entire file

quarterly (called “QCM” or “Quality Claim Management”) (JA 563-64; 802-04).

His evaluations, augmented by discussions to which MI was not privy, reflected an

outright rejection of the excuses offered at trial by Liberty for what it did and did

not do. Although Mr. Clarke offered his opinions on joint and several liability, the


3

plaintiffs’ evidence, the jury venires, exposures, and large verdicts obtained against

the developers, Liberty’s reserves remained both small and quiescent. JA 831; 840;

1132-33; 1299-1302; 1505-06; 2185; 2195. Thus, the jury could have concluded

based on Liberty’s own evaluations, which rejected its trial positions, that there

was no basis to determine the settlements were reasonable, particularly as MI was

itself paying the costs of defense and was willing to prove its products were not

defective.

Second, MI was justifiably fearful that Liberty would settle the cases without

regard to MI’s legitimate interests. As Liberty’s Customer Service Manager

(Schaaf) admitted, he received a call from Darlene Moffatt, MI’s Risk Manager,

seeking to obtain a resolution to the conflict of interest. JA 468. Schaaf then

elevated the discussion to management in Liberty’s Duluth, Georgia office –

Messrs. Kievet, Holt, and Underwood. JA 469. None called Ms. Moffatt or spoke

with a single person at MI. JA 1144-1207. Instead, Liberty “roundtabled” the issue

internally (JA 266-67; 5310-32; 1207), determining after consultation with its

Boston office to offer a single option – release Liberty from any obligation on the

Avian Forest claim (and all others which might require Liberty to pay, one can

surmise) (JA 549-550; 1309-10), thus also insulating any excess insurer and

Liberty’s reinsurers from exposure. Liberty brandishes this brutal “offer” as


4

evidence favoring its conduct (AB p. 14); it does not, simply because other options

existed, discussed at trial (and one internally by Liberty but never offered) which

would have protected both MI and Liberty. JA 557-58; 830; 1113; 1207. These

are some of the cards not shown by Liberty in the “poker game” (JA 483)

described to the jury by Mr. Schaaf.2

Third, Liberty claims that MI selected Mr. Clarke as defense counsel. It did

not; Liberty did, from its panel list (JA 963) on Avian Forest, and MI simply

agreed to his assignment to three of the four remaining cases due to his then-

familiarity with the facts. Liberty never disclosed to MI that Mr. Clarke had a 40-

year relationship with Liberty which included representing Liberty itself. JA 705-

06. This conflict of interest manifested in both Clarke’s and Liberty’s behavior,

including its almost exclusive reliance at trial on Clarke’s reports, which Clarke

conceded were on a form fashioned by Liberty. JA 707. The adjuster notes

confirmed meetings and discussions between Liberty and Clarke to which MI was

not invited. The conflict became painfully obvious when Liberty called MI’s

attorney, Clarke, to testify against MI. During his testimony, Clarke stated for the

first time that there was a 50/50 chance of a defense verdict in Avian Forest, (JA

698-99) though his pretrial report offered no such opinion. The relationship with

defense counsel, his demeanor and credibility (including the credibility of his 2 The jury also considered that, in the one case (Heritage) where MI’s products were appraised by a South Carolina jury, MI was exonerated. JA 942.


5

reports) were weighed by the jury and found not to afford a reasonable basis to

insulate Liberty Mutual from the consequences of its conduct.

Fourth, Liberty cared little for MI’s interests, instead consciously ignoring

them to protect its own. JA 1495-96. Liberty claimed at trial that it never

considered MI’s financial interest in its deductibles (JA 863), but it should have, as

MI’s expert testified.3 Not once in the claim notes is a single mention made of any

of the interests of MI, conceded by Liberty’s expert to be legitimate and requiring

consideration. JA 1478-78. Under South Carolina law, where as here there is a

conflict of interest, an insurer must subjugate its interests to those of the insured.

Liberty itself admitted that it had to at minimum treat the interests of MI with equal

regard to its own (JA 594; 915) – yet it simply ignored them altogether, advancing

its own financial interests at MI’s expense. Liberty’s actions were particularly

grievous given its reservation of rights to deny MI coverage for any judgment,

unless comprised of consequential damages caused by MI’s products, something

Liberty’s claim notes repeatedly confirm did not exist. JA 1023. Thus, Liberty

settled cases with MI’s money to avoid any risk that its likely denial of coverage

might be tested by its insured. This again saved Liberty money at MI’s expense.

3 Moreover, this claim was not credible. Langro admitted the amount of the deductible was apparent on the declarations page for all policies. Schaaf actually assisted in underwriting the 02-03 policy. And, Liberty somehow avoided the brink of the deductible five times, even manipulating the allocation on Marais to avoid what it claimed not to know.


6

Fifth, the evidence was unrebutted that it would have cost less to take the

cases to trial than the amounts paid in settlement by Liberty. See IB p. 50. Indeed,

while Liberty claims there was no evidence to support MI’s damages, it ironically

sets forth these very numbers in its factual statement. AB pp. 14-18.

Sixth, Liberty violated the law in its manipulation of defense costs and

indemnity allocations in order to avoid exposure above MI’s deductible. While MI

tendered each case to Liberty, Liberty without MI’s participation also tendered

each case to MI’s later primary carrier, Zurich. JA 586. While Liberty could

allocate to time on the risk for indemnity (JA 904) under Crossman,4 as to the

Marais case it did so improperly, and to reduce its exposure to MI. Liberty also

allocated defense costs (JA 598-99) without MI’s consent and contrary to Sloan5

and its progeny, simply to avoid even under its misallocation of indemnity in

Marais, any possibility it might have to pay from its “working layer.” This

allocation was described by Liberty in its claims notes as “favorable” to Liberty.

There was no mention of the cost to MI.

4 Crossman Cmtys. of N.C., Inc. v. Harlesville Mut. Ins. Co., 717 S.E.2d 589 (S.C. 2011). 5 Sloan Construction Co., Inc. v. Central Nat. Ins. of Omaha, 236 S.E.2d 818 (S.C. 1977).


7

These examples, even absent the excluded motive evidence - which would

have explained Liberty’s conduct completely – sufficiently animate the jury’s

verdict as properly rejecting Liberty’s claim that it had a reasonable basis to do

what it did to MI.

SUMMARY OF THE ARGUMENT

The District Court overstepped its authority, substituting its judgment for the

jury’s when the evidence presented at trial, viewed in MI’s favor as it must be,

supported the jury’s verdict. The District Court erred in setting aside the damages

awarded to MI because Liberty waived the arguments that it now makes on appeal,

and the evidence was sufficient to show bad faith claims handling by Liberty.

Moreover, the evidence supported the damages awarded to MI. MI showed

causation, and any burden to show a superior outcome via trial was Liberty’s. The

evidence nonetheless showed that MI could have secured a better outcome by

trying the cases rather than settling, and in any event MI was entitled at a minimum

to nominal damages, which supported the punitive damages award, as well as

attorneys’ fees.

The Amended Final Judgment cannot be sustained on the alternate grounds

now urged by Liberty on appeal, as Liberty was still bound by the covenant of

good faith and fair dealing regardless of the policy language, and the District Court


8

used the correct standard in allowing the jury to decide if Liberty had a reasonable

basis for its settlement decisions.

Moreover, Liberty may not recover damages that were the result of its bad

faith conduct, and the District Court correctly declined to award prejudgment

interest and costs. The District Court’s Tyger River instruction was correct, and

Liberty’s arguments on appeal regarding punitive damages must be decided by the

District Court in the first instance. Finally, in the event that a new trial is ordered,

MI should be allowed to present evidence of motive that was improperly excluded

by the District Court.

ARGUMENT

I. The District Court’s Order Granting JNOV was Error and Must be Reversed

A. Liberty waived the damages arguments, first raised in its Motion

for JNOV.

Rule 50 contemplates that cases should be decided on the merits of the

parties’ evidence. Only if a party has been given the opportunity but failed to

present evidence on an element of her claim should a judgment as a matter of law

be entered. See Fed. R. Civ. P. 50, Advisory Comment (1991). The failure by the

court to provide such an opportunity to the non-movant is reversible error. Oregal

v. Hassana, 57 F.3d 1077 (9th Cir. 1995). Accordingly, Rule 50(a) requires fair

notice, and the moving party must “specify … the law and facts” that entitle it to


9

judgment so that the opposing party may have an opportunity to cure any defect.

Fed. R. Civ. P. 50. See also Smith v. Northwest Fin. Acceptance, Inc., 129 F.3d

1408, 1415 (10th Cir. 1997). Failing this, the moving party cannot assert

additional facts and law as part of a Rule 50(b) motion, because doing so deprives

the non-movant of the opportunity to respond and (if necessary) cure. Id.

Liberty did not present evidence or argument at trial that it should prevail

because the damages claimed by MI for bad faith were uncertain.6 And, Liberty

did not make this argument in its motion for directed verdict:

Fourth. Damages as to bad faith. The only damages that have been presented are the settlements themselves. Those dollars have not been paid by the defendant and are still owed to the plaintiff. Those damages cannot be the form of bad faith cause of action because they have not incurred any damages that was caused by the action of the plaintiff. Even relying on Tadlock, there is still a causative element required under the Tadlock decision.

JA 1429-30.7

Liberty’s Rule 50(b) argument, however, was something quite different:

[E]ven assuming arguendo that Plaintiffs acted in bad faith in settling the underlying actions, MI Windows cannot demonstrate that it was injured as a result of those actions unless it can prove that the defense costs and damages it would have paid in taking the cases through trial would have been less

6 Nor did it present such evidence to the District Court prior to trial, as recognized in the March 31, 2010 Order. JA 177. 7 Liberty’s argument was simply that MI should not be allowed to claim $894,416.61 as damages when it had yet to ‘incur’ those damages by paying them.


10

than the settlement amounts to which [Liberty] agreed. Clearly, such an exercise in conjecture and speculation is insufficient to support the damages awarded to MI Windows on its bad faith claim. Given the reimbursement obligations under the policies, MI Windows simply cannot prove any damages resulting from the Plaintiff’s alleged bad faith with the requisite certainty required under South Carolina law.

JA 2299-2300.

Liberty would read the first passage above as “sufficiently precise to afford

the opposing party … the opportunity to properly respond” to the argument

contained in the second. If the first is interpreted so broadly, however, the notion

of what constitutes sufficient notice under Rule 50 (and due process) is less a

functional test with constitutional dimensions than a perfunctory guessing game.

Liberty’s Rule 50(b) motion speaks for itself, and does not suggest, to avoid a

waiver, that MI failed to carry its burden by not offering evidence that the

settlement amounts exceeded the cost of litigating the cases to dismissal or verdict,

(JA 2297-98)8, or should be set-off against “the value of resolving … millions of

dollars in potential liability” (JA 2360). Fidelity to the principles behind Rule 50

compels the Order be reversed.

8 Both MI (through Paul Gary) and Liberty (through defense counsel reports and the pricing established in its reserves) provided evidence of the potential cost of taking Riverwalk, Avian, and Marais to verdict at less than the respective settlement Liberty negotiated for those cases. IB p. 50; JA 664; 684; 781; 2083-2090. Moreover, Liberty’s reserves reflected the insurer’s expected payouts for indemnity. JA 831; 840; 1132-33; 1299-1302; 1505-06; 2185; 2195.


11

B. The jury was permitted to consider Liberty’s decision to settle as evidence of bad faith.

South Carolina has a long-recognized public policy of protecting the

interests of policyholders from unreasonable conduct by their insurers, based on

the fiduciary relationship that exists between them. Robertsen v. State Farm Mut.

Auto. Ins. Co., 464 F. Supp. 876, 883 (D.S.C. 1979) (“[B]oth the South Carolina

Supreme Court and the South Carolina Legislature have repeatedly evinced a

liberal attitude in the protection and promotion of the rights of individuals against

insurance companies.”). See also Tyger River, 170 S.E. 346 (S.C. 1933); S.C.

Code Ann. § 38-59-20 (prohibiting unfair trade practices by insurance companies);

S.C. Code Ann. § 38-59-40 (providing for attorneys’ fees where an insurer acts in

bad faith towards its insured); Hegler v. Gulf Ins. Co., 243 S.E.2d 443 (S.C. 1978)

(awarding fees against insurer who sues insured for a declaration of no coverage

when coverage exists). Insurers control almost all major litigation decisions once a

policyholder is sued, and the success or failure of the insured’s business can hinge

on its insurer’s good faith handling of third-party lawsuits. Accordingly, the tort of

bad faith provides a remedy to insureds like MI who have suffered harm due to an

insurer’s unreasonable and bad faith handling of their defense.

The South Carolina Supreme Court articulated this point three decades ago:

an insurer can be liable for “bad faith or unreasonable action … in processing a

claim” under an insurance policy. Nichols v. State Farm Auto Ins. Co., 306 S.E.2d


12

616, 619 (S.C. 1983). It reiterated this holding in Tadlock Painting Co. v.

Maryland Cas. Co., 473 S.E.2d 52 (S.C. 1996), finding that an insured may bring

an action against an insurer for its bad faith handling of third party claims – even in

the absence of an express breach of contract by the insurer or evidence that the

settlements negotiated were driven higher by the insurer’s bad faith. Id. at 55.

Accordingly, in the third-party context, a claim for bad faith is not limited to

“unreasonable conduct that produces unreasonably high settlement amounts”, as

the District Court ruled. JA 2357. Bad faith instead reaches all unreasonable

conduct so long as that conduct is injurious to the insured. Tadlock, supra.

(affirming bad faith award where insurer’s unreasonable claims handling caused

the insured to lose thousands of dollars of business).

During trial, MI showed that Liberty provided misleading information with

respect to the underlying litigation – by, for example, relying then on Mr. Clarke’s

reports as the contemporaneous justification for settling, while privately voicing

skepticism of his representation (JA 961-965; 970-71) and setting internal

“valuations” of settlements (in the form of reserves) far below what Liberty told

the jury at trial were fair settlements. JA 831; 840; 1132-33; 1299-1302; 1505-06;

2185; 2195. Cf. S.C. Code Ann. § 38-59-20; Brown v. All Amer. Life and Cas.

Co., 247 S.E.2d 812 (S.C. 1978) (an insurer has a duty “to speak the truth as to the

terms and coverage of the policy”).


13

MI also showed that Liberty was motivated by its own desire to avoid

paying defense costs (by settling the cases within their deductibles) and that its

purported justification for settling (protecting the interests of MI) was false. JA

1184-85; 1470-75. Cf. State Farm Fire and Cas. Co. v. Barton, supra, 897 F.2d at

732 (“Sufficient evidence was presented for the jury to find that appellant decided

to deny appellee’s claim so as to earn a profit at the insured’s expense, used its

investigation to support that denial, and then filed a declaratory judgment action to

gain ‘tactical advantages.’”).9

MI further showed that Liberty knowingly rejected compromise positions

that would have better protected MI’s interests than the course actually taken by

Liberty. JA 830-33; 966-68. See Carolina Bank & Trust v. St. Paul Fire and Mar.

Co., 310 S.E.2d 163, 165 (S.C. Ct. App. 1983) (recognizing insurer’s duty of good

faith and fair dealing applies to the performance of all obligations undertaken for

the insured); Howard v. State Farm Mut. Auto. Co., 450 S.E.2d 582 (S.C. 1994)

(reasonableness of insurer’s conduct is judged by the circumstances known to the

insurer at the time of its decision). See also RB pp. 2-7. This record is sufficient

to permit the jury to find that, but for Liberty’s bad faith claims handling, the

settlements obligating MI to pay almost a million dollars rather than exonerate its

products would not have occurred. 9 See also Tyger River, 170 S.E. at 346; Smith v. Maryland Cas. Co., 742 F.2d 167, 169 (4th Cir. 1984).


14

Liberty advances a narrow reading of Nichols and Tadlock that neither

opinion supports. Liberty wishes that South Carolina law would limit bad faith

claims handling to only those instances where an insurer “delayed its coverage

determination or withheld some benefit under the policy in order to try to extract

concession from the insured” (AB p. 27).10 A nearly identical argument, however,

was rejected in Tadlock’s principal authority, Deese v. State Farm Mut. Auto. Ins.

Co., 838 P.2d 1265 (Ariz. 1992), which the South Carolina Supreme Court cited at

length. In Deese, the Arizona Supreme Court reiterated that bad faith is not limited

“to the unfounded refusal or delay in payment of a valid claim.” Id. at 1269 (citing

Rawlings v. Apodaca, 726 P.2d 565, 573 (Ariz. 1986)). “The insured also is

entitled to receive the additional security of knowing that she will be dealt with

fairly and in good faith.” Id. See also Tadlock, 473 S.E. at 54. Accordingly,

“[t]he implied covenant is breached, whether the carrier pays the claim or not,

when its conduct damages the very security which the insured sought to gain by

10 Moreover, MI would prevail even under this flawed interpretation of South Carolina law. MI was entitled to the policy “benefit” of a defense in which its interests trumped Liberty’s. Instead it received a defense, privately disparaged by Liberty (JA 961-65; 970-71), which the insurer manipulated in order to avoid exposure above MI’s deductible. JA 831; 840; 962-65; 1132-33; 1299-1302; 1505-06; 2185; 2195. By settling, Liberty also avoided the choice and expense of denying coverage or honoring its indemnity obligations. This is sufficient evidence upon which the jury could conclude that Liberty “withheld a benefit” in order to “extract a concession” from MI.


15

insurance [in the first place].” Deese, 838 P.2d at 1269 (citing Rawlings v.

Apodaca, 726 P.2d at 573).

In Nichols, the insurer argued that its decision to exercise its contractual

right to non-renew its insured’s policy could not be the basis for a finding of bad

faith. Nichols, 306 S.E.2d at 620. Though neither a “delayed coverage

determination” nor “the withholding of a benefit under the policy”, the Supreme

Court ruled that a suit for bad faith could lie on the insurer’s non-renewal:

“[W]hether the company had the right to renew the policy was not in issue; rather,

the issue was whether the non-renewal showed bad faith.” Id.

Here, the evidence presented to the jury was sufficient to prove that Liberty

acted in bad faith in its handling of MI’s defense in the underlying actions.

Consequently, the jury verdict finding bad faith should be left undisturbed.

C. The evidence supported the jury’s verdict awarding damages to MI.

1. MI offered sufficient proof of causation

In reviewing a jury’s verdict under Rule 50, a court must construe the

evidence and all reasonable inferences in favor of the non-movant. A judgment

notwithstanding the verdict “is controlled by a standard so stringent that its

exercise is but rarely appropriate.” Allen v. Zurich, 667 F.2d 1162, 1164 (4th Cir.

1982). “To grant such a judgment notwithstanding a contrary jury verdict, the

evidence must be so overwhelming as to preclude any other finding.” Cont’l Ins.


16

Co. v. Paschal, 842 F.2d 1289, 1988 WL 21676 at *3 (4th Cir. 1988)

(unpublished) (citing Allen, 667 F.2d at 1164). If evidence is susceptible to

multiple inferences, one favorable to MI and the other to Liberty, the inference

supporting the jury’s verdict must be accepted as true. Allen, 667 F.2d at 1164.

At trial, MI presented evidence that the settlement offers should never have

been made by Liberty in Avian Forest, Riverwalk, Tilghman, and Magnolia North

(and should have been less in Marais) based on the facts then known to Liberty.

The settlements nonetheless became force of law upon Liberty’s acceptance, and

immediately deprived MI of rights and imposed upon it obligations. The rights

lost were valuable, as the right to defend oneself in law is a right to continue to

investigate your adversary’s position, chip away at its theories through discovery

and motions, choose a jury, present evidence, and obtain exoneration of one’s

product and company. The right to defend can be severed by discretionary act only

upon reasonable facts, legal analysis and investigation viewed through the prism of

the covenant of good faith, something the jury found wanting here. For MI,

defense rights were lost to foster Liberty’s interests, and indemnity obligations that

should have been zero were incurred.

The jury found that on November 1, 2007, the day Avian Forest settled,

MI’s right to a defense was worth more than the $72,300 settlement paid by

Liberty, notwithstanding that the settlement would end MI’s gossamer exposure to


17

greater liability. The defense was so valuable that MI was willing to (and did)

assume responsibility for the defense to avoid paying a dollar of indemnity. JA

704-705; 1310-1312. Liberty settled anyway. Thus, MI not only lost its

contractual defense rights – it lost its right to an assurance that money it paid in

settlement was buying something of value: The right to pay off real liability, as

opposed to lining the pockets of prospectors.

In awarding damages, the jury recognized that Liberty’s settlements both

deprived MI of a defense based upon facts and evidence that did not justify the

bargain and imposed on MI money obligations in circumstances where MI’s actual

liability was unlikely at best. Accordingly, MI has offered sufficient evidence of

causation, and the jury’s damages award should be affirmed.

2. The burden rests with Liberty to show that its wrongful settlements did not prevent a superior outcome

At trial, MI presented evidence that Liberty should not have settled Avian

Forest, Riverwalk, Tilghman, and Magnolia North based on the information

available to Liberty at the time those agreements were reached. The financial

obligations that were imposed on MI by virtue of these settlements totaled an

amount certain – $684,416.01. As the District Court previously found (JA 177),

this evidence is sufficient for a jury to determine, with reasonable certitude, the

value of the rights lost and financial obligations imposed by Liberty’s bad faith.


18

South Carolina courts have long recognized contractual obligations as

damages in other contexts. In Skinner & Ruddock, Inc. v. London Guarantee and

Accident Company, 124 S.E.2d 179 (S.C. 1962), the South Carolina Supreme

Court considered whether a broker who issued an insurance policy endorsement

without authority could be held liable to the policyholder. The Court ruled in the

affirmative: “where an agent makes a contract in the name of his principal without

authority … the agent may be held liable on such contract.” Id. at 180. Similarly,

in Coral Gables, Inc. v. Palmetto Brick Company, 191 S.E. 337 (S.C. 1937), the

Supreme Court held that where an agent enters a “contract for the payment of

money” in the name of a principal, but without the principal’s authority, the agent

shall be liable for “the sum stipulated.” Id. at 341. Both cases suggest that, to the

extent Liberty wrongfully entered into the underlying settlement agreements, it is

liable to MI for obligations those agreements created.

By contrast, both Liberty and the District Court posit that the inquiry must

go further – that even if Liberty’s settlements were the wrong bargain, struck at the

wrong time, MI nonetheless had the burden of showing that it would have garnered

a better outcome by further litigation. AB pp. 31-33; JA 2360. Though not an

issue raised by Liberty at trial – or one it even suggested until after the jury’s


19

verdict was returned, supra11 – well-established principles of law confirm why this

inquiry, if relevant at all, is Liberty’s burden to raise and prove.

As argued in MI’s opening brief, Liberty’s settlements brought a premature

end to MI’s defense; any uncertainty as to what would have happened had the

defense continued is an uncertainty caused by Liberty. Courts faced with

analogous facts have uniformly ruled that insurers may not use the uncertainty

caused by their own bad faith as a shield from liability: “[A]n insurer is not

allowed to shield itself from [bad faith] liability by using an uncertainty of its own

making as a defense.” Pacific Employers Ins. Co. v. P.B. Hoidale Co., Inc., 796 F.

Supp. 1428 (D. Kan. 1992). This issue most commonly arises where an insurer has

an affirmative duty to initiate settlement discussions and fails to do so, resulting in

an excess judgment against its assured.12 In such cases, courts have consistently

placed the burden of proving what would have happened had the insurer acted in

11 To the extent Liberty asserts that MI has waived the argument on whether it or Liberty has the burden of proof of what might have happened absent Liberty’s settlements, Liberty’s position is meritless. MI argued at trial that it satisfied its burden by presenting sufficient evidence of its damages (JA 2360-61) – to argue that it had no additional burden because the burden to prove a reduction in damages was Liberty’s, is to argue the other side of the same coin. Moreover, given Liberty’s skimpy oral Rule 50 motion, supra, I.C.1., it is hardly surprising that MI did not elaborate on an argument that Liberty, in all fairness, did not make. 12 In South Carolina, an insurer has an affirmative duty to initiate settlement negotiations in cases where the insured’s liability is clear and damages are likely to exceed policy limits. Myers v. State Farm Mut. Auto. Ins. Co., 950 F. Supp. 148, 150-51 (D.S.C. 1997).


20

good faith on the most efficient cost-avoider, the insurer. See Young v. Amer. Cas.

Co. of Reading, PA, 416 F.2d 906, 911 (2d Cir. 1969), cert. denied, 396 U.S. 1029

(1970) (insurer is liable for an excess judgment unless it “demonstrates that there

was no realistic possibility of settlement within policy limits … [and] that the

insured would not have contributed to whatever settlement figure above that sum

might have been available”); Tannerfors v. Amer. Fid. Fire Ins. Co, 397 F. Supp.

141, 159 (D.N.J. 1975) (same); Powell v. Prudential Prop. & Cas. Ins. Co., 584

So. 2d 12 (Fla. 3d DCA 1991), rev. denied, 598 So. 2d 77 (Fla. 1992) (same); cf.

Pacific Employers Ins. Co., 796 F. Supp. at 1433 (insurer was liable for excess

verdict where its failure to make a settlement offer precluded insured from

showing that a policy limits offer would have been accepted); State Auto. Ins. Co.

of Columbus, Ohio v. Rowland, 427 S.W.2d 30, 36 (Tenn. 1968) (insured need not

show that settlement was possible where insurer should have but failed to initiate

settlement discussions).

Moreover, an insured need not prove that the third-party claimant would

have accepted a settlement for less than the excess judgment, had the insurer

offered one. Young, 416 F. 2d at 911. Nor must the insured prove the amount it

would have had to contribute towards settlement from its own funds were a policy-

limits offer insufficient. Id. Rather, the burden of proof rests solely on the insurer

committing the wrong to demonstrate that its conduct did not prejudice the insured.


21

Powell, 584 So. 2d at 14 (insurer must show that “there was no realistic

possibility” of reaching a settlement to avoid liability for the full amount of an

excess judgment). “To use any other measure of damages would allow insurers to

‘profit from their own wrongs.” City of Hobbs v. Hartford Fire Ins. Co., 162 F.3d

576, 584 (10th Cir. 1998).

The policy reasons supporting this presumption are manifest, and they are as

applicable to this case as to cases where an insurer in bad faith fails to initiate

settlement negotiations. First, the insurer controls the circumstances giving rise to

the uncertainty of what might have happened had it not acted in bad faith, and thus

the insurer, not the insured, is in the best position to “eliminate [] this uncertainty.”

Pacific Employers Ins. Co., 796 F. Supp. at 1433. Conversely, placing the burden

on the insured would make it responsible for avoiding an uncertainty that it did not

cause. Second, because the insurer controls the right to settle under the insurance

contract, an unreasonable settlement position is essentially a “gamble” with the

insured’s money. Id. The insurer, having “contractually restricted the independent

negotiating power of its insured,” should therefore bear the risk of its gamble.

Tannerfors v. Amer. Fid. Fire Ins. Co, 397 F. Supp. 141, 159 (D.N.J. 1975);

Pacific Employers Ins. Co., 796 F. Supp. at 1433. Third, the law of bad faith is

normative, and its application should be instructed by the policy goals of ensuring

that insurers deal honestly and fairly with their policyholders and do not exploit


22

their circumstances for corporate gain. Accordingly, where an insurer has acted in

bad faith, “[a]ny question about the possible outcome [had it acted in good

faith] … should be resolved in favor of the insured.” Powell, 584 So. 2d at 14.13

Rather than looking to the law of bad faith and the principles it embraces,

Liberty suggests that the Court should be guided by malpractice law. Unlike bad

faith, proof of legal malpractice requires proof that a plaintiff’s underlying claim

would have succeeded. Brown v. Theos, 550 S.E.2d 304, 306 (S.C. 2001) (plaintiff

must show that he “most probably would have been successful” in the underlying

“action notwithstanding the attorney’s negligence”). No such requirement exists in

South Carolina’s bad faith jurisprudence. Compare Tadlock, 473 S.E.2d at 54 and

Nichols, 306 S.E.2d at 620 with Brown, 550 S.E.2d at 306 (“Attorneys will not be

liable where, notwithstanding the attorney’s negligence, the client had no

meritorious defense to the suit in the first place.”).

Furthermore, unlike legal malpractice, which is based on principles of

negligence, the tort of bad faith arises from the captive nature of the

insured/insurer relationship and the implied covenant of good faith and fair

13 A fourth policy consideration arises from the insurer’s likely superior access to the information related to an insured’s options in lieu of settlement, which arises from an insurer’s control of the defense. Under traditional common law principles, “the party having … control of the evidence, relating to an issue, has the burden of evidence to it.” Roberts v. Roberts, 370 S.E.2d 881, 884 (S.C. Ct. App. 1988), aff’d as modified, 384 S.E.2d 719 (S.C. 1989). See also Int’l Brotherhood of Teamsters v. U.S., 431 U.S. 324, 359, n. 45 (1977).


23

dealing. These foundations are fundamentally different, and principles of good

faith and fair dealing entitle the insured to more than reasonable competence in

reaching a given result. They entitle it “to receive the additional security of

knowing that [it] will be dealt with fairly and in good faith” regardless of what

becomes of the underlying case. Tadlock, 473 S.E.2d at 54 (citing Deese, 838 P.2d

at 1269). The law of legal malpractice contains no parallel obligations.

Last, unlike insurance carriers, lawyers do not have the “right and duty” to

control a defense and to make unilateral settlement decisions. See Rule 1.2 of the

South Carolina Rules of Professional Conduct. Consequently, if the situation

presented here arose in the context of a lawyer’s misconduct, the issue would not

be whether the attorney’s decision was “reasonable” or “for the right amount” – it

would be the length of her suspension and the amount of her fine. In re Belding,

589 S.E.2d 197, 201-02 (S.C. 2003).

Permitting an insurer to use the uncertainty it creates as a defense to bad

faith liability incentivizes the very misconduct that the tort of bad faith is meant to

avoid. Pacific Employers Ins. Co., 796 F. Supp. at 1433. As the party best able to

avoid injury to the insured, sound principles of law instruct that the Liberty, not

MI, should bear the burden of proving that a better result could not have

been achieved for MI. This burden of proof allocates the risk squarely where it

belongs – on the insurer who has acted in bad faith.


24

3. Though not raised by Liberty at trial, MI nonetheless presented evidence that it could have secured a better outcome than the settlements negotiated by Liberty

The record contains sufficient evidence upon which a jury could have

concluded that MI, had Liberty not prematurely settled, would have obtained a

better result through continued litigation. Paul Gary testified that possible

outcomes of continued litigation included “nuisance value” settlements, “walk-a-

ways” by some or all of the plaintiffs, or vindication of MI’s product at trial. JA

1223. Other evidence that better results could have been obtained included

Liberty’s reserves – collectively worth less than the actual settlements – testimony

from Liberty’s adjustors that the cases against MI were winnable, testimony that

the cost of bringing the cases to trial was less than the settlements,14 and evidence

that MI’s product had been exonerated by a jury in Heritage. JA 831; 840; 1132-

33; 1299-1302; 1505-06; 2185; 2195. In accordance with Rule 50, all reasonable

inference from this evidence must be construed in MI’s favor, and these inferences

are sufficient to show that a better result could have been obtained but-for

Liberty’s bad faith settlements. See Allen, 667 F.2d at 1164.

Liberty mistakenly argues that the evidence of Liberty’s reserves should be

added to defense counsel’s defense cost estimates to demonstrate the 14 Liberty acknowledges that defense cost estimates through trial in Tilghman Shores ($65,000), Riverwalk ($125,000) and Magnolia North ($192,000) were less than the amounts Liberty paid in settlement; Tilghman was settled for $75,000 and Riverwalk and Magnolia were collectively settled for $400,000. See AB p. 16-17.


25

reasonableness of its settlement decisions. See AB p. 39. If the jury believed that

MI would have succeeded on the merits in the underlying cases, then it was

entitled to infer, based on defense counsel’s estimates, that MI would have paid

less to litigate the cases to verdict than what Liberty agreed to pay in settlement.15

Id. (all reasonable inferences should be construed in favor of the non-movant under

Rule 50). Likewise, based on Liberty’s reserves – which Liberty attested

represented Liberty’s internal estimates of MI’s potential liability (JA 831; 840;

1132-33; 1299-1302; 1505-06; 2185; 2195) – the jury could have inferred that

Liberty should have settled for the amounts reflected in Liberty’s reserves rather

than the higher amounts that Liberty actually paid.16 Id. Construing either set of

evidence in MI’s favor presents sufficient grounds upon which the jury could have

found that Liberty’s settlements were “unreasonably high.” JA 2287.

4. MI was at the least entitled to nominal damages, which support an award of punitive damages

Liberty does not disagree that when a party is entitled to recover nominal

damages, judgment as a matter of law may not be entered against that party for

15 In other words, if Liberty paid $684,416.01 to settle Avian Forest, Riverwalk, Tilghman, and Magnolia North, and the cost of bringing them to defense verdict was only $478,250.000, Liberty’s settlements were “unreasonably high” by $206,166.01. See IB at p. 50. 16 Liberty’s reserves for Avian Forest, Riverwalk, Tilghman, and Magnolia North totaled $425,000 (see IB at p. 50), such that Liberty’s settlements were $259,416.01 higher than Liberty’s internal assessment of their settlement worth.


26

failing to prove actual damages, and under South Carolina law, an award of

nominal damages supports an award of punitive damages. See, e.g., Int’l Ground

Transp. v. Mayor and City Council of Ocean City, Md., 475 F.3d 214, 222, n. 5;

Stevens v. Allen, 536 S.E.2d 663, 665, n. 5 (S.C. 2000); Hinson v. A.T. Sistare

Construction Co., 113 S.E.2d 341, 345 (S.C. 1960), rev’d on other grounds by

McCall v. Batson, 329 S.E.2d 741 (S.C. 1985). Rather, Liberty argues that the

cases cited by MI demonstrate that judgment as a matter of law was appropriate on

both the issue of damages and liability. The only case relied upon for this

proposition by Liberty, however, is Stevens v. Allen, supra, a case that Liberty

misreads.

In Stevens, a wrongful death action, the jury found the plaintiff 50%

negligent and the defendants 50% negligent, but awarded the plaintiff “zero

damages.” 536 S.E.2d at 663. The Court of Appeals held that the jury’s failure to

award any damages was inconsistent with its assessment of liability, and the matter

should have been resubmitted to the jury with instructions to either assess a

definite dollar amount in damages for the plaintiff, or find in favor of the

defendant. The Supreme Court affirmed, but noted that upon resubmission, the

trial court should instruct the jury, if requested, that it must either find in the

defendants’ favor or award the plaintiff at least some nominal amount of damages.

The Court reaffirmed that “every violation of a legal right imports damage and


27

authorizes the maintenance of an action and recovery of at least nominal damages,

regardless of whether any actual damage has been sustained.” Id. at 665, n. 5.

Stevens, then, is entirely in accord with South Carolina law and MI’s argument --

the jury found that Liberty acted in bad faith in its handling of one or more of MI’s

claims, and awarded substantial damages to MI as a result. JA 2216. Even in the

absence of such damages, however, Liberty violated a legal right of MI according

to the jury, entitling MI to recover at least nominal damages, Stevens, 536 S.E.2d at

665, n. 5.17

5. The District Court erred in failing to award MI attorneys’ fees as damages

South Carolina follows the bedrock principle that the policyholder should be

made whole by recovering the complete consequential damages caused by the

insurer’s wrongful behavior. Nichols v. State Farm Mut. Auto. Ins. Co., 306

S.E.2d 616 (S.C. 1983) (an insurer’s bad faith renders it liable in tort for all

consequential damages suffered by its insured). Here, MI incurred fees as a

consequence of Liberty’s unreasonable actions. As Nichols explained, a remedy

that merely provides a belated award of policy benefits is insufficient; rather the

insurer should be held to task for all the insured’s damages flowing from its 17 Liberty’s only other contention on this point is that MI did not raise the argument below. Given the District Court’s ruling in its March 30, 2010, summary judgment opinion, (JA 162-179 at 177) and Liberty’s failure to preserve an argument on the amount of damage, MI had no reason to make the argument sooner.


28

behavior. Id. at 619. “Nichols promotes this State’s long held philosophy

that those in the insurance industry who fail to deal in good faith should be

penalized. . . .” Duncan v. Provident Mut. Life Ins. Co. of Philadelphia, 427

S.E.2d 657, 659 (1993). See also, Hegler v. Gulf Ins. Co., 243 S.E.2d 443 (S.C.

1978) (recognizing the need to compensate the insured by award of attorney’s

fees).

The South Carolina Supreme Court is not alone; many states agree, rejecting

technical arguments in favor of adherence to a clear principle – one contained in

both Nichols and Hegler – that where an insured must litigate to achieve the results

it contracted with the insurer to obtain, the insured should recover the fees incurred

in the process:

When an insured purchases a contract of insurance, it seeks protection from expenses arising from litigation, not ‘vexatious, time-consuming, expensive litigation with his insurer.’ Whether the insured must defend a suit filed by third parties, appear in a declaratory action, or as in this case, file a suit for damages to obtain the benefit of its insurance contract is irrelevant. In every case, the conduct of the insurer imposes upon the insured the cost of compelling the insurer to honor its commitment and, thus, is equally burdensome to the insured.

Olympic S.S. Co., Inc. v. Centennial Ins. Co., 811 P.2d 673, 681 (Wash. 1991)

(emphasis added and internal citations omitted) (finding that the insured was

entitled to recover attorney’s fees). MI was undoubtedly forced to litigate its action

against Liberty to protect its own interests given Liberty’s clear failure to have

done so; a fact punctuated by the jury’s verdict.


29

Liberty argues that Andrews v. Central Surety Insurance Company, 271 F.

Supp. 814 (D.S.C. 1967), prohibits an award of attorneys’ fees incurred in

prosecuting a bad faith action under South Carolina law. Andrews, however, is no

longer an accurate reflection of contemporary jurisprudence in South Carolina.

Nichols, 279 S.C. at 340 (first recognizing an action in tort for bad faith in the

handling of a claim for insurance benefits). Instead, under Andrews, despite

acknowledging the insurer’s wrongful conduct, damages were limited to the

judgments entered against the insured, interest and costs. Andrews, 271 F. Supp. at

821. South Carolina law has evolved far beyond Andrews’ limited compensation.

Although Liberty itself cites to many cases from other jurisdictions, it faults

MI for relying in part on California law. AB pp. 41-42. The Supreme Court of

South Carolina has not heeded Liberty’s concerns, itself relying upon and adopting

principles of bad faith insurance law from the state of California in recognizing the

tort of insurance bad faith long after Andrews.18 See Nichols, 306 S.E.2d at 618

(citing Gruenberg v. Aetna Insur. Co., 510 P.2d 1032 (Cal. 1973)). In adopting

reasoning from Gruenberg, the Court acknowledged that, just as California law has

held, where an insurer has impaired the insured’s rights to receive benefits under

the insurance contract, this breach “renders the insurer liable in tort for all

18 The Nichols court found out of state authority persuasive, recognizing that over “twenty-five states” in addition to California have adopted principles of tortious bad faith. Nichols, 306 S.E.2d at 618.


30

consequential damages. . . .” Id. (emphasis supplied). Under California law,

attorneys’ fees are recoverable in bad faith actions brought by an insured under the

same reasoning adopted by Nichols – an insured who has been harmed by an

insurer’s improper conduct should recover all of her damages, including the fees

and costs incurred in establishing that bad faith finding – a proposition that the

South Carolina Supreme Court recognized is wholly consistent with venerable bad

faith principles first espoused in Tyger River. Id. at 618-19 (citing Tyger River,

170 S.E. 346 (S.C. 1933)).19

Liberty further claims that Nichols lends MI little support because it vacated

the trial court’s award of attorney’s fees. AB p. 42. Nichols simply found that,

where an award in a contract action is vacated to prohibit a double recovery, the

award of attorney’s fees made on the basis of the contract action should also be

vacated. Nichols, 306 S.E.2d at 619. While Nichols did not decide whether

attorney’s fees should be considered a portion of “all” of the insured’s

consequential damages flowing from bad faith conduct, Nichols did recognize that

such fees would have been properly awarded as part of the insured’s breach of

contract action had it survived. Id. at 620. Here, MI successfully litigated its claim

for both bad faith and breach of contract against Liberty. Whether grounded in

19 California is not alone in this regard; many states hold similarly. See, e.g., DeChant v. Monarch Life Ins. Co., 547 N.W.2d 592 (Wis. 1996); Trustees of Univ. of Pa. v. Lexington Ins. Co., 815 F.2d 890 (3d Cir. 1987) (Pennsylvania law).


31

statute or considered consequential tort damages, MI was harmed by its insurer’s

actions and has offered multiple grounds which compel an award of its attorneys’

fees in its favor.20

Liberty claims it must win, because there is no South Carolina law

permitting a fee award under similar facts. AB p. 42. Liberty forgets that bad faith

is a judicially created doctrine in South Carolina, “refined with every related

opinion of the Court.” Anastopoulo, Bad Faith in South Carolina Insurance

Contracts from Tyger River Pine Co. v. Maryland Cas. Co. to Mitchell v. Fortis

Ins. Co., S.C. LAW, July 2010, at 18. How an insurer handles and treats its

insureds’ claims can now give rise to bad faith as surely as an outright claim

denial. See, e.g., Temple v. Mut. of Omaha Ins. Co., 4:11-CV-00128-RBH, 2013

WL 314750 (D.S.C. 2013) (recognizing that South Carolina bad faith law is no

longer strictly limited to cases where there is a refusal by an insurance company to

cover an individual or to pay a claim). Thus, where, as here, an insurer harms its

insured by failing to provide a defense that is adequate or complete by

unreasonably settling cases which should have been defended, and refusing by

settling within the deductible to indemnify its insured, the insurer should pay for

all the harm it causes. MI has been damaged by Liberty’s actions and, in order to

20 See IB p. 53-56; S.C. Code Ann. § 38-59-40 (Liberty’s decision to settle rather than defend four of the five cases constitutes a “refusal to defend without reasonable cause.” MI was thus entitled to its attorney’s fees).


32

be made whole, should be compensated for the fees and costs it incurred in

prosecuting this action.

II. The Amended Final Judgment Cannot Be Sustained on Alternate Grounds Properly Rejected by the District Court

Liberty argues that the Amended Final Judgment should be sustained even if

the jury could have reasonably concluded from the evidence that MI suffered

damages as a result of Liberty’s decisions to settle one or more of the underlying

cases for unreasonably high amounts. As grounds, Liberty asserts that (1) because

the Policies expressly provided Liberty the right to settle claims “at our discretion,”

it was not bound by the implied covenant of good faith and fair dealing; and (2) the

District Court applied the wrong legal standard by allowing the jury to consider

whether Liberty put its own interests ahead of MI’s21 and to reject Liberty’s

evidence that it had a reasonable basis for its settlement decisions. Liberty’s

arguments fail under South Carolina law.

A. Under South Carolina Law, Liberty Must Exercise Its Discretion Fairly and in Good Faith.

The South Carolina Supreme Court has directly addressed the interaction

between the express terms of an insurance contract and the implied covenant of

good faith and fair dealing and held that the latter is independent from and in

21 We discuss the propriety of the District Court’s Tyger River instruction in Section IV, infra.


33

addition to the terms of the insurance policy.22 Tadlock, 473 S.E.2d at 54-55.

Tadlock held that an insurance company could be liable for consequential damages

suffered because of its bad faith handling of third party claims, and that breach of

an express contractual provision is not a prerequisite to bringing a tort action for

breach of the implied covenant of good faith and fair dealing. Id. at 55.23

Moreover, it confirmed that under South Carolina law, insurers owe a duty of good

faith and fair dealing in the performance of all obligations undertaken for their

insureds, id. at 53, and that under the implied covenant, a party should refrain from

doing anything that will impair the other’s rights to receive benefits under the

contract. Id. (citing Nichols, 306 S.E.2d at 618).

The policies provide that Liberty “may, at our discretion, investigate any

‘occurrence’ and settle any claim or ‘suit’ that may result.” JA 1616, 1645, 1701,

1728, 1783, 1810, 1898, 1969, 2044. The District Court recognized:

This premise was never in dispute. The jury instructions as a whole unambiguously state that Liberty Mutual had the contractual right to control settlement decisions and could be liable for bad faith only if it exercised this right unreasonably. However, although the terms of the insurance contract allowed Liberty Mutual to substitute its judgment

22 Liberty’s reference to a “conflict” between contract terms and the implied covenant of good faith and fair dealing is a misnomer. Liberty’s policies nowhere state that it can act in bad faith or deal unfairly with its insured in defending and settling claims. 23 Liberty does not suggest that its own proposed jury instructions requested a different standard; nor could it. See, e.g., Ocean Winds Council of Co-Owners, Inc. v. Auto Owners Ins. Co., 241 F. Supp. 2d 572, 577 (D.S.C. 2002).


34

for that of MI Windows in making settlement decisions, the contract did not permit Liberty Mutual to put its interests above those of MI Windows. The distinction may sometimes be subtle, but it is a distinction that exists under South Carolina law. If Liberty Mutual reasonably believed that it was in MI Windows’ best interest to settle the lawsuits for an amount within the deductible, there was no bad faith regardless of whether MI Windows agreed with the decision. However, if Liberty Mutual’s decision was made to further its own interest at the expense of MI Windows’ interests, there was bad faith.

JA 2348-49. Consistent with South Carolina law, the District Court properly

determined that Liberty’s right to settle claims was not unfettered, but limited by

the implied covenant of good faith and fair dealing. Id.

This limitation on an insurer’s discretionary authority is an important one, as

Justice Souter explained while on the New Hampshire Supreme Court:

[U]nder an agreement that appears by word or silence to invest one party with a degree of discretion in performance sufficient to deprive another party of a substantial proportion of the agreement’s value, the parties’ intent to be bound by an enforceable contract raises an implied obligation of good faith to observe reasonable limits in exercising that discretion, consistent with the parties’ purpose or purposes in contracting.

Centronics v. Genicom Corp., 562 A.2d 187, 193 (N.H. 1989). See also Travelers

Int’l v. Trans World Airlines, Inc., 41 F.3d 1570, 1575 (2d Cir. 1994).

Liberty’s reliance on Doe v. S.C. Med. Malpractice Ass’n, 557 S.E.2d 670

(S.C. 2001) is misplaced. Doe recognized that the implied covenant of good faith

and fair dealing applies when the insurance policy expressly gives the insurer even

broader authority to settle. In Doe, unlike here, the insurance contract contained a


35

“deems expedient” clause, giving the insurer, JUA, the right to settle any claim or

suit, even if groundless, false, or fraudulent, “as may be deemed expedient by

[JUA].” Doe noted that the dictionary defines “expedient” as “1 useful for

effecting a desired result; suited to the circumstances or the occasion;

advantageous; convenient[.] 2 based on or offering what is of use or advantage

rather than what is right or just, guided by self-interest, . . .”. Id. at 675. Despite

the JUA’s broad authority to settle even frivolous claims, arguably “guided by self-

interest,” Doe recognized that the JUA had a duty to act reasonably. Id. (the “law

imposes upon JUA a duty to settle within policy limits when settlement is

reasonable”).

Doe made clear “that every contract requires the good faith performance of

its provisions,” id., but ultimately held that “[b]ecause Doe has not shown that

JUA’s decision was made in bad faith, we reverse the trial court’s determination

that JUA breached the covenant of good faith and fair dealing.” Id. at 676.24 Thus,

contrary to Liberty’s assertion, Doe demonstrates that under South Carolina law,

insurers must abide the covenant of good faith and fair dealing when making

decisions to settle third party claims, whether their policies merely give them the 24 Because the main thrust of Doe’s action was equitable in nature, the factual findings of the trial court were not binding on review. Accordingly, the South Carolina Supreme Court, reviewing the facts anew, cited to JUA’s reliance on a trained health care professional’s eye-witness testimony that Doe was negligent and found that JUA’s decisions to settle and charge a portion of the settlement to Doe’s policy were reasonable.


36

‘discretion’ to settle or the broader power to settle as they “deem expedient.” Id. at

675 (“We hold that such decisions are subject to the covenant of good faith and fair

dealing, and that in order to prevail, the party challenging these decisions must

show bad faith on the part of the insurer.”).

The other cases cited by Liberty are inapposite,25 as only two apply South

Carolina law26 and most evaluate conduct under broadly interpreted “deems

expedient” clauses. See, e.g., Shuster v. S. Broward Hosp. Dist. Physicians’ Prof’l

Liab. Ins. Trust, 591 So. 2d 174, 177 (Fla. 1992) (applying Florida law,

interpreting power granted under “deems expedient” clause as broad in light of

25 Liberty cites to cases applying the law of other states and having significant factual differences. See, e.g., American Protection Ins. Co. v. Airborne, Inc., 476 F. Supp. 2d 985 (2007) (applying Illinois law and finding that insured’s argument that insurer paid $1.85 million, which included $850,000 of the insurer’s own funds, to settle rather than try a case in order to save itself $150,000 was insufficient evidence of bad faith); Nationwide Mut. Ins. Co. v. Pub. Serv. Co. of N.C., 435 S.E.2d 561, 564-65 (N.C. App. 1993) (applying North Carolina law and finding insufficient evidence of bad faith given the insured’s concessions that the insurer had the right to settle under the policy and the settlement was reasonable). 26 The first, Adams v. G.J. Creel and Sons, Inc., 465 S.E.2d 84 (S.C. 1995), is inapposite, as it arises out of a franchise agreement and not an insurance contract. Under South Carolina law, a tort action for breach of the implied covenant of good faith and fair dealing will only lie in the insurance context. See Williams v. Reidman, 529 S.E.2d 28, 36 (S.C. Ct. App. 2000). It is in this context that the covenant may be breached even when the contract is not. See Tadlock, 473 S.E.2d 52 (S.C. 1996).


37

dictionary definition of expedient as “guided by self interest”)27; Orion Ins. Co.

Ltd. v. Gen. Elec. Co., 493 N.Y.S.2d 397, 401 (N.Y. Sup. Ct. 1985), aff’d, 509

N.Y.S.2d 778 (N.Y. App. Div. 1986) (applying New York law interpreting

authority to settle under “deems expedient” clause, and finding that insured

presented insufficient proof of bad faith); Hartford Acc. and Indem. Co. v. U.S.

Natural Res., Inc., 897 F. Supp. 466, 474 (D. Or. 1995) (applying “deems

expedient” clause under Oregon law and concluding that insured presented

insufficient evidence that the amount Hartford paid was unreasonable); Amer.

Home Assur. Co., Inc. v. Hermann’s Warehouse Corp., 563 A.2d 444 (N.J. 1989)

(interpreting “deems expedient” clause under New Jersey law as broad grant of

authority and finding no bad faith where insurer paid 235% more of its own money

than the insured’s deductible).

Moreover, the only case cited by Liberty that interprets a discretionary

clause as vesting the insurer with nearly unbridled authority is inapposite legally

and factually. See N.H. Ins. Co. v. Ridout Roofing Co., 68 Cal. App. 4th 495 (Cal.

Ct. App. 1998) (applying California law in a case in which the insured did not

plead breach of the implied covenant of good faith and the insurer did not elevate

27 In contrast, under Florida law, when a contract confers decision-making power on one party through a discretionary clause, the resulting discretion is subject to an obligation that it be exercised in good faith. See, e.g., Cox v. CSX Intermodal, Inc., 732 So. 2d 1092, 1097-98 (Fla. 1st DCA 1999).


38

its interests above the insured’s, but rather collectively paid settlements well in

excess of the deductibles to settle claims against the insured).

Though Liberty Mutual cites to one other case in which the “at your

discretion” language was at issue, United Capitol Ins. Co. v. Barolotta’s Fireworks

Co., 546 N.W.2d 198 (Wis. Ct. App. 1996), that case applied the duty of good faith

in accordance with the policy’s discretionary language (as interpreted under

Wisconsin law) and simply held that the insured failed to present sufficient proof

that United Capitol had acted in bad faith. The Wisconsin Supreme Court later

cited to Barolotta’s Fireworks in support of its decision in Roehl Transportation

Inc. v. Liberty Mutual Ins. Co., 2010 WI 49, 325 Wis. 2d 56, 784 N.W.2d 542

(2010), a case also involving Liberty that better resembles the case before this

Court. Roehl recognized that an insurer may be liable for the tort of bad faith when

its actions expose the insured to liability for sums within the deductible. Id. at 554-

555 (concluding that sufficient credible evidence supported the jury’s finding that

Liberty committed bad faith in settling a claim within Roehl’s $500,000

deductible).


39

B. The District Court Employed the Correct Legal Standard in Allowing the Jury to Determine Whether Liberty Had a Reasonable Basis for Its Settlement Decisions. 1. Abuse of Discretion is Not the Legal Standard for Breach of

the Implied Covenant of Good Faith and Fair Dealing Under South Carolina Law, and Liberty Mutual Waived Any Argument to the Contrary

Liberty failed to timely argue for an abuse of discretion legal standard. The

argument is thus waived.

The District Court instructed the jury that:

Bad faith is a knowing failure on the part of an insurer to exercise an honest and informed judgment in processing a claim. An insurer acts in bad faith where there is no reasonable basis to support its decision. If a policyholder can demonstrate bad faith or unreasonable action on the part of an insurer in processing a claim under an insurance contract, the policyholder can recover any damages that were caused by this bad faith or unreasonable action.

JA 2210. Liberty did not object to the Court’s reasonableness instruction nor

complain about the absence of an instruction concerning whether Liberty abused

its discretion. Thus, Liberty’s assertion that the District Court employed the wrong

legal standard should be rejected as waived, and inconsistent with applicable law.

2. The District Court properly recognized that the reasonableness of Liberty’s settlement decisions was a question of fact for the jury and held that the evidence supported the jury’s determination that Liberty acted in bad faith

Liberty’s argument that an insurer cannot be found to have acted in bad faith

as a matter of law, so long as it offers evidence that its decision to settle was


40

reasonable, confuses sufficiency of evidence with credibility. Both sides presented

evidence on the reasonableness of Liberty’s conduct and settlements; and having

heard the evidence, the jury was free to believe or disbelieve Liberty.

Under South Carolina law, the standard for determining whether an insurer

acted in bad faith is whether or not it acted reasonably given the particular facts

and circumstances of the claim. See, e.g., Tyger River, supra.28 If the evidence

raises a question of reasonableness, the question is one for the jury to decide.

Varnadore v. Nationwide Mut. Ins. Co., 345 S.E.2d 711 (S.C. 1986); Mixson v.

American Loyalty Ins. Co., 562 S.E.2d 659, 662 (S.C. Ct. App. 2002); Smith v. Md.

Cas. Co., 742 F.2d at 170.29 The issue is not, as Liberty states, ‘whether the

insurer is able to offer a reasonable explanation for its conduct’ – it is whether the

explanation given is both reasonable and credible. This is a question that under

South Carolina law only the jury can decide. Here, the jury properly rejected

Liberty’s evidence.

28 See also Amer. Cas. Co. of Reading Pa. v. Howard, 187 F.2d 322 (4th Cir. (S.C.) 1951); Tadlock, 473 S.E.2d at 52; Nichols, 306 S.E.2d at (S.C. 1983) (superseded by ERISA statute); Mixson, 562 S.E.2d at 662. 29 See also Fabri v. The Hartford, 69 Fed. App’x 187, 189-90 (4th Cir. (S.C.) 2003); Howard v. State Farm Mut. Auto. Ins. Co., 450 S.E.2d 582, 451-52 (S.C. 1994); The City of Myrtle Beach v. United Nat. Ins. Co., 739 F. Supp. 2d 876, 886-87 (D.S.C. 2010); State Farm Fire & Cas. Co. v. Barton, 897 F.2d 729, 731 (4th Cir. 1990) (applying South Carolina law).


41

Liberty advanced three reasons for why it was reasonable to settle these

cases for the amounts paid: 1) substantial damages possible, 2) joint and several

liability (though coupled with little evidence of product defect), and 3) neither a

South Carolina jury nor a presiding Judge could be trusted to parse fact from

fiction, or honor the need for an itemized verdict. JA 559; 788-89; 1200. All of

these excuses were considered by the jury and found to be just that – excuses rather

than reasons. First, while the damages sought were big, those numbers included

roofs, paint, parking lots, HVAC, electrical – in other words, many things having

nothing to MI’s product. JA 702. Second, joint and several liability is only

available if the accused is liable proximately for the harm caused. JA 1216-1217.

If there is no defect, then there is no joint and several liability. Similarly, if harm

can be apportioned, joint and several liability applies only to the apportioned

damage. JA 1037. While Liberty mused that a judge might not allow an itemized

verdict, it never once sought such a verdict. JA 788-89. Moreover, in the one case

where MI went to trial on a contribution claim by the developer, MI was

exonerated. JA 942-43.

None of Liberty’s excuses resonated, save in contrast to the truth. Liberty’s

own reserve calculations and assessment of MI’s true exposure on all the claims

proved as much. JA 1004-05 (reserves should accurately reflect exposure); JA

1029 (same); JA 1028-29 (same). Thus, though multiple times Liberty bragged


42

that these were “cost of defense” settlements (JA 937), and that it would be silly to

not settle for such “nominal” amounts (JA 959), its own valuations of the cases

were even lower that what they settled for, and nowhere near the multi-million

dollar demands Liberty told the jury were justified to protect MI from itself. IB p.

50. Liberty even suggested at trial that its financial interest in saving defense costs

made the settlements “reasonable.” JA 835. The projected defense costs,

however, were less than the settlements. See IB pp. 16, 18. Moreover, MI was

willing to pay defense costs to exonerate its products. JA 1269-70. Liberty knew

this, as MI attempted to assume control of and responsibility for the defense of

Avian Forest, but Liberty refused, absent a policy release that would have left MI

without insurance for future claims. JA 1310.

Liberty crowed that it never considered MI’s deductible in deciding how to

defend the cases,30 but the jury found such testimony as silly as it sounds. Indeed,

recouping the deductibles was the precise reason Liberty filed this lawsuit.

The District Court recognized that “if Liberty Mutual were to put its own

interests ahead of those of MI Windows,” the deductible provisions of the Policies

would provide Liberty with “incentive to promptly settle any case that could

possibly be settled for less than $500,000 – regardless of whether the case were

frivolous or the demand excessive – in order to avoid even the smallest chance that

30 JA 1017-18.


43

a verdict at trial might reach the layer of insurance.’” JA 2349-50. Liberty claims

that Charles Miller says this “did not happen here,” but cites to testimony that

supports the opposite conclusion:

Q Isn’t it true, Mr. Miller, if they [Liberty] were so biased towards settlement early on, then they would have just paid the money to settle the case very early on; for instance [at] Marais would just go ahead and pay the $500,000?

A. No. Because I think their goal was to make sure that whatever they spent was less than the policy limit. And they were going to have to do some work to convince the plaintiffs – usually this is the way these things work – to get down below the policy limits before they could settle.

JA 1153. In other words, Liberty had to mount a defense before there would be the

possibility of settling Marais at or below policy limits. Liberty initially mounted a

defense at MI’s expense and was able to drive down the settlements, as Miller

acknowledged. Despite this, Liberty paid twice as much as Mr. Clarke, who was

responsible for defending the case, believed the Marais Plaintiffs would accept to

settle. JA 646. Liberty did not point to a single document offering less.

Further, the evidence was undisputed that Liberty never considered that

settling product defect lawsuits for which no defect existed might damage MI’s

reputation and make it a target for future litigation based on the same non-existent

defects. JA 821. That these things were important was obvious to Liberty from

the beginning: not only were Ms. Moffatt and Mr. Gary vocal; as soon as Avian

Forest was settled on a per-window basis, the plaintiffs in the other four cases


44

began tendering per-window settlement demands with the same figures that were

used in Avian Forest. JA 1206-1207. Multiplied by tens of thousands of windows,

the potential harm posed by improper settlements was extraordinary.

All parties agreed that the plaintiffs’ damage figures were based on

extrapolation from very, very few tested window units, which at trial would

present a problem of proof for the plaintiffs. JA 775; 1195.31 These were, as the

evidence proved, cases which were not only defensible, but which needed to be

resisted because MI had done nothing wrong. Yet even Liberty’s own expert,

Peter Hildebrand, testified that he was unaware of any evidence that indicated that

Liberty considered damage to MI’s product reputation in deciding to settle the

underlying cases. JA 1495-1501.

In the end, not even Liberty believed that the evidence in the underlying

suits yielded proof of a real product defect.32 The testimony and evidence at trial

included admissions from Liberty employees, including Messers. Langro and

Savoie, in which they characterized the lawsuits against MI as a “b.s. damages

claim,” (JA 1112); commenting, “[b]ased on the facts we presently have, the

31 JA 934-35 [Langro]: “[T]he plaintiff’s own expert cannot point to a single defect in the windows that isn’t installation related. The expert cannot identify windows-related damages either.” 32 In Marais, while there was no evidence of a product defect, there was evidence that MI’s technician was aware that certain windows were being installed incorrectly.


45

insured [MI] should be dismissed from the action” (JA 939; 1042), and,”[t]he

amount of damages attributable to the insured’s windows is virtually non-existent.”

JA 941; and JA 1042. Liberty’s appointed defense counsel even acknowledged

that one suit against MI amounted to “legalized extortion.” JA 732. Liberty’s

admissions also included remarks describing the cases as good cases to take to

trial – “this case might be the one to try,” etc. – and that viable defenses to joint-

and-several liability existed – positions that were shared by MI’s national defense

counsel, Paul Gary, who had decades of experience defending window defect

cases, and who strongly advocated for a trial to vindicate MI and its products. JA

895, 1037-38, 1199, 1204, 1223.

With such consequences at stake, Liberty was required to look out for MI’s

interests and protect it from harm. Liberty chose instead to protect itself. The

evidence was plainly sufficient for the jury to credit MI’s evidence and not

Liberty’s. “When there is substantial evidence as here to support the verdict, even

if the reviewing court might draw a different inference, the verdict should not be

set aside.” Jarrell v. Ford Motor Co., 327 F.2d 233, 234-35 (4th Cir. 1964) (citing

Gallick v. Baltimore & Ohio Railroad Company, 372 U.S. 108, 115 (1963)).33 MI

presented substantial evidence that Liberty’s decisions to settle the underlying suits

were unreasonable and in bad faith. This evidence directly rebutted Liberty’s

33 See also Dotson v. Pfizer, Inc., 558 F.3d 284, 292 (4th Cir. 2009).


46

protestations of reasonableness and good faith and was properly submitted to the

jury for decision. Since the jury’s determinations are supported by sufficient

competent evidence, the verdict must be upheld.

III. Liberty May Not Recover Damages that Derive from its Unlawful Conduct, nor May it Recover Prejudgment Interest and Costs Liberty argues that the settlement amounts were properly included in the

award of contract damages to Liberty and that, in addition, Liberty should recover

prejudgment interest and costs. AB pp. 50-57. Liberty is mistaken.

A. The District Court erred by allowing Liberty to recover as contract damages funds it paid in bad faith.

Liberty’s only arguments in favor of allowing it to recover as contract

damages amounts that it paid in bad faith are that (1) identical settlements cannot

simultaneously form the basis for an award of damages to Liberty based on MI’s

breach of the policies, and an award to MI based on Liberty’s bad faith, and (2) MI

did not make this argument below. AB p. 50.34

The response to the first point is simple: MI is not arguing that the

settlements should simultaneously form the basis for an award of damages to both

Liberty and MI. Rather, MI is arguing that the settlements may not form the basis

for an award of damages to Liberty because those settlements were the result of 34 Liberty must concede, as MI argued to the trial court, that its actions amount to an anticipatory breach, since bad faith can be no less. Collins Holding Corp. v. Wausau Underwriters Ins., Co., 204 Fed. App’x 208, 210 (4th Cir. 2006) (unpublished).


47

Liberty’s bad faith handling of the claims, as the jury so found. JA 2216. Because

MI is contractually bound to reimburse Liberty only for payments that were

properly incurred under the policies, Liberty may not recover as damages the

settlement payments improperly incurred. The District Court recognized this

principle in its decision to reduce the award of damages to Liberty by the

$210,000.00 spent on the Marais settlement, stating that “it would be anomalous if

an insurer could cause a policyholder to incur a contractual reimbursement

obligation by spending money in ways that were not contemplated by the

contract.” JA 2370 (emphasis in original).

Regarding the second point, Liberty asserts that MI did not argue below

“what it now presents to this Court – that the settlements other than Marais were

made in bad faith….” AB p. 51. To the contrary, that is precisely what MI argued

to the Court below, and the jury so found; Liberty acted in bad faith in its handling

of one or more of the claims of MI. JA 2216.

B. The District Court Properly Declined to Award Prejudgment Interest.

Liberty next argues that the District Court erred by denying its motion for

prejudgment interest. IB pp. 53-56. Liberty again is mistaken. State law governs

an award of prejudgment interest in a diversity action. See Hitachi Credit America

Corp. v. Signet Bank, 166 F.3d 614, 633 (4th Cir. 1999). The decision on whether


48

to award prejudgment interest lies in the discretion of the court. See Jacobs v. Am.

Mut. Fire Ins. Co. of Charleston, 340 S.E.2d 142, 143 (S.C. 1986).

A district court abuses its discretion only where it “has acted arbitrarily or

irrationally[,] has failed to consider judicially recognized factors constraining its

exercise of discretion, or when it has relied on erroneous factual or legal premises.”

L.J. v. Wilbon, 633 F.3d 297, 304 (4th Cir. 2011), quoting United States v.

Hedgepeth, 418 F.3d 411, 419 (4th Cir. 2005) (internal citations and quotations

omitted). The District Court did none of these, and accordingly its decision on

prejudgment interest should be affirmed.

1. The District Court Applied the Correct Legal Standard

Liberty neither argues that the District Court acted arbitrarily or irrationally,

nor that it failed to consider recognized factors constraining the exercise of its

discretion. Instead, Liberty argues that the District Court applied the wrong legal

standard in denying its motion for prejudgment interest. AB p. 54.

Contrary to Liberty’s argument, the District Court clearly applied the correct

legal standard, (JA 2383-84) found in § 34-31-20(A). Prejudgment interest is

permitted “if the sum is certain or capable of being reduced to certainty.” Smith-

Hunter Constr. Co. v. Hopson, 616 S.E.2d 419, 421 (S.C. 2005). Stated another

way, prejudgment interest is allowed on a claim of liquidated damages; the sum is

certain or capable of being reduced to certainty based on a mathematical


49

calculation previously agreed to by the parties. Butler Contracting, Inc. v. Court

Street, LLC, 631 S.E.2d 252, 258 (S.C. 2006). Prejudgment interest is not allowed

on an unliquidated claim in the absence of an agreement or statute. The fact that

the amount due is disputed by the opposing party does not render the claim

unliquidated for the purposes of an award of prejudgment interest. Id.

2. Liberty’s claims were not for a sum certain

A review of Liberty’s claims, as well as the policy provisions upon which

Liberty relies, makes it plain that the measure of recovery here was not for a sum

certain or capable of being reduced to certainty by a previously agreed to

mathematical calculation. In Liberty’s First Amended Complaint, JA 121-135,

Liberty’s Second Cause of Action was for breach of contract. Liberty alleged that

the defendants agreed that they would reimburse the plaintiffs for (1) loss, and

(2) allocated loss adjustment expense advancements paid on behalf of them by the

plaintiffs within the applicable deductible or reimbursement limit. JA 131.

Liberty further alleged that the defendants had breached that agreement, and

that Liberty had suffered and would continue to suffer damage in the form of

(1) actual damages, (2) attorneys’ fees, (3) costs, (4) interest, and (5) “other costs”

as a result of the breach, as set forth in a Statement of Account attached as Exhibit

A, and that the amount of damages that should be paid was “not less than

$851,443.53.” The Statement attached as Exhibit A, however, totals $913,760.87.


50

JA 131; 135. Accordingly, Liberty itself was unable to apply any mathematical

calculation or fixed measure of recovery to come up with a consistent number, nor

did it supply the components of the various numbers that it came up with.

3. The Wausau “Reimbursement Endorsement”

The first three policies (for 1997-1998, 1998-1999 and 1999-2000) upon

which Liberty relies in seeking prejudgment interest are Wausau policies. Each

contains a four-page “Reimbursement Endorsement.” JA 1656-59; 1743-46; 1827-

30. All are impenetrable. For example, “Reimbursable Expenses” are defined to

mean the sum of “damages” (a term which is not defined in the endorsements or in

the definitions section of the policy), and “Allocated Claim Expenses.” See, e.g.,

JA 1658. Neither allocated nor unallocated Claim Expenses are simply defined

and appear open ended to include sums “incurred by us” though subject to no

formula or limitation. Moreover, none of the Wausau Reimbursement

Endorsements are signed by anyone from the defendants. JA 1659; 1746; 1830.

4. The Liberty “Policy Premium Adjustment Endorsement”

The 2000-2001, 2001-2002 and 2002-2003 policies are Liberty policies. JA

1851-1922; 1923-1994; 1995-2064. Rather than a four-page “Reimbursement

Endorsement,” each Liberty policy contains a two-page “Policy Premium

Adjustment Endorsement” (“PPAE”). JA 1881-1882; 1951-52; 2023-24.

Remarkably, that Endorsement is even less clear than the Wausau Reimbursement


51

Endorsement. Under the PPAE, the parties agree to an “adjusted premium,” which

is defined to be the sum of the “deductible expense” and the “discounted premiums

for nondeductible insurance.” E.g., JA 1881. The definitions appear to be

gibberish, and while requiring reference to Deductible Liability Insurance

Endorsements, the Liberty policies do not contain those endorsements,” see, e.g.,

JA 1853, 1924, and 1998 (Schedules of Forms and Endorsements for each policy).

Moreover, the “applicable percentage shown in Item 4 of the Schedule” is not a

percentage at all, but rather a set deductible claim handling expense of $625.00 per

claim in the first two Liberty policies, JA 1882 and 1952, and, depending on the

type of claim, $967.00, $625.00 or $50.00 per claim in the final Liberty policy, JA

2024.

Section C of the PPAE provides that “[a] computation of the adjusted

premium based upon the audited premiums and exposures and ‘deductible amounts

incurred’ [supposedly contained in the non-existent Deductible Liability Insurance

Endorsement] as of six months after termination of the policy shall be made by the

company as soon as practical thereafter.” A further computation of the “adjusted

premium” is to be made eighteen months after termination of the policy, and then

“further computations shall be made at intervals of twelve months subject to a

similar procedure until the ‘named insured’ and the company agree that such a

computation be final.” JA 1882.


52

At the risk of stating the obvious, the Liberty endorsement itself proves the

point – there is no fixed mathematical calculation or measure agreed to by the

parties. The endorsement itself is inherently contradictory, and the computation of

the adjusted premium is not final until the company and the named insured agree

on a final computation, an agreement which of course would be completely

unnecessary were the adjustment a simple mathematical calculation. Given the

inscrutable nature of the policy provisions upon which Liberty relies and Liberty’s

own uncertainty regarding the amounts, the District Court correctly found that:

(1) the amount due to Liberty was not capable of being readily ascertained at the

time the claim arose, JA 2384; and (2) at a minimum, the District Court did not

abuse its discretion. Accordingly, the decision to not award prejudgment interest

should be affirmed.

5. Liberty may not recover prejudgment interest on sums derived from its bad faith conduct

Alternatively, it was Liberty’s bad faith conduct in the handling of the

underlying cases that resulted in the contractual obligations (deductible

reimbursements) upon which Liberty now seeks prejudgment interest. Under

South Carolina law, a party may not recover damages, including prejudgment

interest, derived from its own unlawful conduct. Wachovia Bank, N.A. v. Coffey,

698 S.E.2d 244, 248 (S.C. Ct. App. 2010), citing Jackson v. Bi-Lo Stores, Inc., 437

S.E.2d 168, 170-71 (S.C. Ct. App. 1993). This rule applies to actions in law and


53

equity, and whether the “cause of action is in contract or in tort.” Wachovia Bank,

698 S.E.2d at 248; Jackson, 437 S.E.2d at 170-71.35

C. The District Court Properly Declined to Award Costs.

Though Liberty claims that the District Court abused its discretion in

denying Liberty’s motion for costs, AB at p. 57, Liberty does not argue that the

District Court (1) acted arbitrarily, (2) failed to consider the relevant factors, or

(3) based its decision on erroneous legal or factual premises. For these reasons

alone, Liberty’s argument should be rejected.

Moreover, the law plainly supports the District Court. Under Rule 54(d)(1),

F.R.C.P., costs “should be allowed to the prevailing party.” A “prevailing party” is

“a party in whose favor a judgment is rendered” or “one who has been awarded

some relief by the court.” Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep’t of

Health & Human Res., 532 U.S. 598, 603, 121 S. Ct. 1835, 149 L. Ed. 2d 855

(2001) (quotation and alteration omitted). “[T]he rule gives a presumption in favor

of an award of costs to the prevailing party.” Teague v. Bakker, 35 F.3d 978, 996

(4th Cir. 1994). A District Court also has discretion to award or deny costs to the

prevailing party. See Crawford Fitting Co. v. J.T. Gibbons, Inc., 482 U.S. 437,

441-42, 107 S. Ct. 2494, 96 L. Ed. 2d 385 (1987), superseded on other grounds by

35 Alternatively, the District Court was correct in denying prejudgment interest due to Liberty’s unclean hands. See Wachovia Bank, 698 S.E.2d at 247-48; see also Precision Instrument Manufacturing Company v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814, 815 (1945).


54

statute, 42 U.S.C. § 1988. A court “must justify its decision to deny costs by

articulating some good reason for doing so.” Cherry v. Champion Int’l Corp., 186

F.3d 442, 446 (4th Cir. 1999) (quotation and citations omitted).

The District Court properly exercised its discretion here, and articulated

numerous good reasons for its decision to deny costs, including (1) the closeness

and difficulty of the issues decided, and (2) the jury’s finding that both parties

breached their duties to one another (both prevailed). JA 2386, 87. Accordingly,

there was no abuse of discretion, and the decision to deny costs should be

affirmed.36

IV. The District Court’s Tyger River Instruction Was Proper

A. Liberty cannot demonstrate that the District Court’s Tyger River instruction was erroneous.

To prevail with respect to its claim, Liberty was required to demonstrate that

the District Court’s jury instructions, taken in their entirety, failed to adequately

state the controlling legal principles and misled the jury. See O’Bright v. John’s

Towing Serv., Inc., 9 Fed. App’x 228, 231 (4th Cir. 2001). This Court reviews the

application of the District Court’s jury instructions for abuse of discretion. Id.

Liberty cannot show that the District Court’s Tyger River instruction either failed

to adequately state South Carolina bad faith law or misled the jury. 36 Obviously, should this Court reverse and order the verdict in favor of MI be reinstated in whole or in part, or if Liberty as it should be denied affirmative relief, both this issue and that of prejudgment interest would become moot.


55

B. Tyger River principles extend beyond failure to pay or settle a claim.

Liberty attempts to confine the principles of Tyger River to cases in which

an insurer unreasonably refuses to settle and exposes its insured to an excess

judgment.37 South Carolina courts have repeatedly recognized, however, that bad

faith under Tyger River has developed far beyond a refusal to settle a third-party

claim.38 See Jefferson v. Allstate Ins. Co., 673 F. Supp. 1401, 1402-03 (D.S.C.

1987) (recognizing that Tyger River imposes a duty upon an insurer to act

reasonably and in good faith in defending an action and that since it was decided,

the doctrine has been expanded beyond the refusal to settle context to include even

the general actions and manner in which an insurance company processes and

handles a claim); Trimper v. Nationwide Ins. Co., 540 F. Supp. 1188, 1192-93

(D.S.C. 1982) (discussing the evolution of Tyger River from its original form and

predicting its application to first-party claims); Mitchell v. Fortis Ins. Co., 385 S.C.

570, 580, 686 S.E.2d 176, 181 (2009) (in which the South Carolina Supreme Court

applied tortious bad faith to an action for improper policy rescission).

37 Liberty also reargues much of its section II argument. Thus, we incorporate our response to same at section II herein. 38 See, e.g., Anastopoulo, Bad Faith in South Carolina Insurance Contracts from Tyger River Pine Co. v. Maryland Cas. Co. to Mitchell v. Fortis Ins. Co., S.C. LAW, July 2010, at 18, 23 (discussing the evolution of bad faith in South Carolina).


56

C. This Court should reject Liberty’s piecemeal challenges to the District Court’s bad faith instructions.

Though this Court must assess the adequacy of the instructions in toto,

Liberty challenges two portions of the jury instructions in isolation. Liberty

initially takes umbrage with the first sentence of the court’s Tyger River

instruction, which Liberty claims must be read literally to apply only in cases

where the insured is exposed to an excess judgment:

If an insurer assumes the defense of its policyholder in a liability case where the policyholder may potentially be exposed to liability above and beyond the policy limits, the insurer has the duty to settle the case if it is the reasonable thing to do.

AB p. 57.39 As Liberty settled the cases brought against MI (albeit improperly), it

observes that “there was no possibility that the settlement decisions by Liberty

would subject MI to liability beyond the policy limits.” Id. at p. 58. Liberty’s

argument misses the mark. The fact that Liberty assumed MI’s defense and settled

within policy limits does not answer the question of whether “it [was] the

reasonable thing to do.”

Bad faith jurisprudence is not confined to the insured’s potential exposure to

excess liability; it includes whether the actions of the insurer in settling, refusing to

settle, defending, refusing to defend, or in processing a claim under the policy were

reasonable. 39 Here, Liberty assumed MI’s defense in cases it argued exposed MI to excess liability.


57

[W]e held in Tyger River . . . that an insurer’s unreasonable refusal to settle within policy limits subjects the insurer to tort liability. We have held also that unreasonable refusal on the insurer’s part to accept an offer of compromise settlement will render it liable in tort to the insured for the amount of the judgment against the insured in excess of policy limits. The cause of action we consider today and that which is commonly known as the ‘Tyger River Doctrine’, are merely two different aspects of the same duty.

* * * We hold today that if an insured can demonstrate bad faith or unreasonable action by the insurer in processing a claim under their mutually binding insurance contract, he can recover consequential damages. . . .

Nichols v. State Farm Mut. Auto. Ins. Co., 306 S.E.2d 616, 618-19 (S.C. 1983)

(emphasis supplied). “[T]he cornerstone inquiry of a bad faith case is still whether

the insurer’s conduct was unreasonable. . . .” Temple v. Mut. of Omaha Ins. Co.,

4:11-CV-00128-RBH, 2013 WL 314750, at n.7 (D.S.C. Jan. 28, 2013) (citing

Crossley v. State Farm Mut. Auto. Ins. Co., 307 S.C. 354, 360, 415 S.E.2d 393,

397 (1992)).

The District Court’s instructions to the jury were made in fealty to this long-

standing inquiry of reasonableness:

An insurer defending a policyholder has a duty to protect the interests of the policyholder, and the insurer could potentially breach this duty by unreasonably settling a case or by unreasonably refusing to settle. Because the Tyger River charge was a correct statement of law that was applicable to the facts of this case, there is no reason to order a new trial on this ground.

JA 2350 (emphasis supplied).


58

Liberty also challenges the second sentence of the District Court’s Tyger

River instruction as error, which states:

[I]f the interests of the insurer conflict with the interests of the policyholder during the insurer’s defense of the claim against the policyholder, the insurer must sacrifice its own interests in favor of those of the policyholder.

AB, p. 57. This Court has previously affirmed this instruction, finding that it fairly

represents the relevant principles governing a potential clash between the interests

of an insurer and those of the insured:

Maryland Casualty also contended that, in the absence of any proof of a conflict of interest, the District Court had erred when it told the jury that, when there is a conflict of interest between an insurer and an insured, the insured’s interest must take precedence.

* * * When an appellant objects to the jury instructions given at trial, we must determine whether the instructions construed as a whole, and in light of the whole record, adequately informed the jury of the controlling legal principles without misleading or confusing the jury to the prejudice of the objecting party. Under that standard, we find the District Court’s instructions concerning conflicts of interest unobjectionable.

Tadlock Painting Co. v. Maryland Cas. Co., 97 F.3d 1449, 1996 WL 532745 at *3

(4th Cir. 1996) (unpublished).

Liberty claims that because MI had a large deductible obligation unlike the

insured in Tyger River, Liberty could not be required to sacrifice its own interests

in favor of its insured. The District Court properly rejected this notion for sound

reasons:


59

[I]t is not difficult to see why a duty of good faith is also needed when an insurer decides to settle for an amount within the policyholder’s deductible. In this case, because of the $500,000 deductible, Liberty Mutual had the power to spend up to $500,000 of MI Windows’ money in defending and settling a case. If Liberty Mutual were to put its own interests ahead of those of MI Windows, it would have the incentive to promptly settle any case that could possibly be settled for less than $500,000—regardless of whether the case were frivolous or the settlement demand excessive—in order to avoid even the smallest chance that a verdict at trial might reach the layer of insurance coverage.

JA 2349-50. Recognizing the potential conflict between Liberty and MI, the

District Court neither acted arbitrary nor irrationally; rather it properly instructed

the jury on South Carolina law.

D. Howard, the sole case cited by Liberty, supports the District Court’s instructions.

Liberty admonishes the District Court for ignoring what it terms as a

limitation upon Tyger River found in this Court’s opinion in American Casualty

Co. v. Howard, 187 F.2d 322 (4th Cir. 1951). IB p. 60. A review of that opinion,

however, demonstrates otherwise. In Howard, despite a “deems expedient” clause

allowing the insurer to make settlement decisions on behalf of its insured, this

Court had to determine if the insurer’s settlement for less than full policy limits

was reasonable under the facts presented. Rather than limiting Tyger River,

Howard cited to the “reasonableness” requirement with approval (“We agree with

the District Court that . . . the law of South Carolina is controlling. The leading

case . . . is Tyger River . . . [holding] that the insurer owes to the insured a duty of


60

settling . . . if the settlement is the reasonable thing to do. . . .”), and to its

requirement that the insurer place the interests of its insured over its own in the

event of a conflict. Id. at 325-26. Accordingly, the District Court’s jury

instructions are fully in accord with this Court’s holding in Howard.

V. Liberty’s Arguments Regarding the Amount of the Punitive Damages Award Must be Decided by the District Court in the First Instance

In Section V. of its Brief, Liberty requests that, in the event the Amended

Final Judgment is reversed, this Court should render an advisory opinion on an

issue not decided by the District Court in the first instance—namely, the amount of

the punitive damages awarded by the jury. This Court should decline.

After trial, Liberty filed a motion to alter or amend the punitive damages

award. JA 2306. Instead of ruling on the merits of this motion, the District Court,

after granting Liberty’s motion for judgment as a matter of law, denied it “as

moot.” JA 2375. Accordingly, there is no ruling on the merits of this motion for

this Court to review at this time. Contrary to Liberty’s request, this Court should

not render an advisory opinion, but should allow the District Court, on remand, to

consider it in the first instance.


61

When an appeal results in a motion no longer being moot, the merits of such

motion should be decided by the District Court in the first instance.40 See Ward v.

Dixie Nat. Life Ins. Co., 257 Fed. App’x 620 (4th Cir. 2007) (unpublished)

(dismissing cross-appeal of motion that was previously denied as moot because

consideration by the appellate court would be premature); Peterson v. Tyson

Foods, Inc., 983 F.2d 1057 (4th Cir. 1993) (unpublished) (motion that was no

longer moot “should be heard first in the district court[.]”) The merits of a motion

that is denied as moot are not subsumed in the judgment, and when asked “to rule

on matters [raised in such motion] in the first instance, [an Appellate Court] must

decline to do [so].” Structural Rubber Products Co. v. Park Rubber Co., 749 F.2d

707, 718 (Fed. Cir. 1984); Fullerton Aircraft Sales & Rentals, Inc. v. Beech

Aircraft Corp., 842 F.2d 717, 723 (4th Cir. 1988) (leaving issue not ruled on by

district court to be addressed by district court in the first instance). Accordingly,

when a post-trial motion is no longer moot, it should be considered by the district

court on remand. See Ellerbrook v. City of Lubbock, Tex., 465 F. App’x 324, 338

40 This is consistent with the general rule that an appeals court ordinarily does not pass on questions not presented to or considered by the district court. Walker Mfg. Co. v. Dickerson, Inc., 560 F.2d 1184, n. 2 (4th Cir. 1977).


62

(5th Cir. 2012) (unpublished) (remanding motion for attorney’s fees and costs

previously denied as moot).41

In Storrer v. Paul Revere Life Ins. Co., the insured brought a bad faith claim

against the insurer. 220 Fed. App’x at 567-68 (9th Cir. 2007) (unpublished). The

district court granted summary judgment on the bad faith claim, which rendered

the insured’s claim for punitive damages moot. Id. On appeal, the summary

judgment ruling on the bad faith claim was reversed, which resulted in the punitive

damages claim no longer being moot. Id. Accordingly, the Ninth Circuit

remanded the punitive damages claim to be determined “in the first instance” by

the district court. Id. Similarly, a ruling reversing the judgment as a matter of law

in this case may result in Liberty’s punitive damages motion no longer being moot.

If Liberty’s motion is no longer moot, it should be decided by the District Court in

the first instance on remand, rather than this Court. Accordingly, this Court should

41 See also Wagener v. SBC Pension Benefit Plan-Non Bargained Program, 407 F.3d 395, 405 (D.C. Cir. 2005); Biocore, Inc. v. Khosrowshahi, 80 F. App’x 619, 631 (10th Cir. 2003) (unpublished); Bainbridge v. Turner, 311 F.3d 1104, 1116 fn 23 (11th Cir. 2002); Donahue v. City of Boston, 304 F.3d 110, 121 (1st Cir. 2002); Crossroads Cogeneration Corp. v. Orange & Rockland Utilities, Inc., 159 F.3d 129, 142 fn 9 (3d Cir. 1998); Goetz v. Windsor Cent. Sch. Dist., 698 F.2d 606, 610 (2d Cir. 1983); TMA Fund, Inc. v. Biever, 520 F.2d 639, 641 (3d Cir. 1975).


63

refrain from ruling on and should dismiss Liberty’s appeal regarding the punitive

damages claim.42

VI. The District Court erred in excluding certain evidence at trial

Liberty argues that the District Court properly excluded all “underwriting

evidence proffered by MI.” AB at p. 68. The District Court, however,

misinterpreted the law supporting its evidentiary rulings, and as such, this Court

should review these rulings de novo. Supermarket of Marlinton, Inc. v. Meadow

Gold Dairies, Inc., 71 F.3d 119, 126-27 (4th Cir. 1995). Here, the District Court

excluded evidence of Liberty’s financial interest and motive that revealed that

Liberty’s underwriters, at the time of underwriting, did not anticipate paying any

claims.43 The Court concluded that “[t]he focus of the bad faith claim under South

Carolina law is on the reasonableness of specific actions by the insurer, and

Defendants’ theory would impermissibly broaden the scope of this inquiry.” JA

1368-1369.

Evidence of an insurer’s financial motive and underwriting strategy,

however, is relevant to a determination of whether the insurer acted in bad faith.

See Mitchell, Jr. v. Fortis Ins. Co., 686 S.E.2d 176, 189 (S.C. 2009). Because an

42 Should this Court wish to review the merits of the issue, it was extensively briefed in the District Court. MI incorporates D.E. 318 by reference herein and MI respectfully requests leave to file a supplemental brief issue on this here. 43 MI proffered this excluded testimony; see JA 252-256; 1136-1138; 1407-1415.


64

insurer’s failure to “sacrifice its interests in favor of those of the [insured]”

constitutes an act of bad faith, Tyger River; Tadlock Painting Co. v. Md. Cas. Co.,

97 F.3d 1449, 1996 WL 532745 *2-3 (4th Cir. 1996) (unpublished), the jury must

consider competing financial interests (as evidenced through underwriting

decisions) or motive in its analysis of the reasonableness of the insurer’s actions.

In addition, evidence of self-serving financial interest, motive, and a pattern

of conduct demonstrates the requisite reprehensibility warranting an award of

punitive damages against the insurer. See Mitchell, 686 S.E.2d at 185-89 (S.C.

2009); Univ. Med. Associates of Med. Univ. of S.C. v. UnumProvident Corp., 335

F. Supp. 2d 702, 712 (D.S.C. 2004) (finding that motive evidence “is at least

relevant to defendant’s state of mind as willful, creating a jury question on punitive

damages.”).

The District Court committed prejudicial error when it excluded all

underwriting and motive evidence as this evidence is not only relevant, but vital to

the fact-finder’s bad faith analysis.

CONCLUSION

For the reasons set forth in this and MI’s Initial Brief, MI respectfully

requests that the compensatory damages award in its favor be reinstated. The

contract damages in favor of Liberty should be set aside thus rendering the issues

raised on cross-appeal by Liberty moot. Alternatively, the District Court’s Order


65

denying Liberty such relief should be affirmed in part. The District Court should

be instructed to, on remand, determine the amount of fees and costs to be awarded

MI, as well as the propriety of the amount of punitive damages awarded MI by the

jury.

Respectfully submitted, /s/ R. Hugh Lumpkin R. Hugh Lumpkin, FL State Bar No. 308196 Email: [email protected] Meghan C. Moore, FL State Bar No. 668958 Email: [email protected] W. Allen Bonner, FL State Bar No. 027508 Email: [email protected] Ver Ploeg & Lumpkin, P.A. 100 S.E. Second Street, 30th Floor Miami, Florida 33131 Telephone: 305-577-3996 /s/ Alan M. Ruley William K. Davis, N.C. State Bar No. 1117 Email: [email protected] Alan M. Ruley, N.C. State Bar No. 16407 Email: [email protected] Bell, Davis & Pitt, P.A. 100 N. Cherry Street, Suite 600 Winston-Salem, NC 27101 Telephone: 336-722-3700


CERTIFICATE OF COMPLIANCE

1. This brief complies with the type-volume limitation of the November 27, 2012 order because:

[ X ] this brief contains [16,468] words, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

[ ] this brief uses a monospaced typeface and contains [state the number of] lines of text, excluding the parts of the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of Fed. R. App. P.

32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because:

[ X ] this brief has been prepared in a proportionally spaced typeface using [Microsoft Word 2007] in [14pt Times New Roman]; or [ ] this brief has been prepared in a monospaced typeface using [state name and version of word processing program] with [state number of characters per inch and name of type style].

Dated: May 28, 2013 /s/ R. Hugh Lumpkin Counsel for Appellants/Cross-Appellees


CERTIFICATE OF FILING AND SERVICE

I hereby certify that on this 28th day of May, 2013, I caused this Reply Brief

of Appellants/Cross-Appellees to be filed electronically with the Clerk of the Court

using the CM/ECF System, which will send notice of such filing to the following

registered CM/ECF users:

Morgan S. Templeton WALL TEMPLETON & HALDRUP, PA 145 King Street, Suite 302 Post Office Box 1200 Charleston, South Carolina 29402 (843) 329-9500 John M. Langdon WALL TEMPLETON & HALDRUP, PA 1001 Wade Avenue, Suite 423 Raleigh, North Carolina 27605 (919) 865-9500 Charles M. Brown William C. Wood, Jr. NELSON MULLINS RILEY & SCARBOROUGH, LLP Post Office Box 11070 Columbia, South Carolina 29211 (803) 255-9595 Counsel for Appellees/Cross-Appellants

I further certify that on this 28th day of May, 2013, I caused the required

copies of the Reply Brief of Appellants/Cross-Appellees to be hand filed with the

Clerk of the Court.

/s/ R. Hugh Lumpkin Counsel for Appellants/Cross-Appellees


For The Fourth · PDF fileV. Liberty’s Arguments Regarding the Amount of the Punitive...

Documents

Transcript of For The Fourth · PDF fileV. Liberty’s Arguments Regarding the Amount of the Punitive...