Larry O. Nichols v. State Farm Mutual Automobile Insurance Company

Supreme Court of South Carolina, Case No. 21979, decided August 24, 1983 (Paul M. Moore, Acting Associate Justice, for the Court; Lewis, C. J., and Ness, Gregory and Harwell, JJ., concurring). Counsel of record were Henry Summeratt, Jr. (as the reporter prints the name), for the appellant insurer, and Ronald A. Maxwell of Johnson, Johnson, Maxwell, Whittle & Snelgrove for the respondent policyholder; the South Carolina Trial Lawyers Association and the South Carolina Defense Trial Attorneys each appeared as amicus curiae through counsel. The complete opinion appears below, transcribed from the official reporter via the Caselaw Access Project (case.law), Harvard Law School’s open archive of published U.S. case law. What was removed: the reporter’s head matter — the docket number, the repeated case caption, the parallel-citation line, the counsel-of-record and amicus counsel blocks, and the filing-date line — summarized in this line instead. Every repair made to the remaining text, in full: four scan misreadings restored (“Resondent’s” to “Respondent’s”, “vaild” to “valid”, “j ury” to “jury”, “cannot.be” to “cannot be”); and the scan’s mixed curly and straight quotation marks and apostrophes normalized to straight marks. Left exactly as printed: the opinion cites the attorney’s-fees statute two different ways one digit apart — ”§ 39-9-320” in the public-policy discussion and ”§ 38-9-320(1)” in the holding that vacates the fee award. We did not correct either one. No word of the Court’s has been changed, condensed, reordered, or paraphrased.

The full opinion

Paul M. Moore, Acting Associate Justice:

This is a tort action for bad faith refusal to pay first party benefits under an insurance policy. The jury awarded Nichols (Respondent) ten thousand ($10,000.00) dollars actual damages and ten thousand ($10,000.00) dollars punitive damages. We affirm.

Respondent’s 1969 Chevrolet Corvette automobile was stolen from a parking lot. When the car was recovered it had sustained substantial damage to the exterior and to its high performance engine. The car was insured against theft loss through appellant State Farm (Insurer). Respondent filed claims for reimbursement of repair costs with his insurance carrier and Insurer refused to pay the full claim. Respondent then brought suit alleging two causes of action; the first for breach of contract and the second for bad faith refusal to pay first party benefits. Respondent further alleged that actions of the Insurer caused delays in having the car repaired for over seven (7) months. A jury returned verdicts in favor of Respondent on both causes of action.

Insurer moved to have the verdict reformed. Reasoning that actual damages were the same under both causes of action, and that Respondent was not entitled to double recovery of his actual damages, the trial judge struck the damages under the first cause of action and sustained the jury’s verdict as to the second. Insurer appeals alleging several grounds of error.

The first issue raised is whether this State should recognize an action for bad faith in an insurer’s handling of a claim for first party benefits. This cause of action was first recognized in Gruenberg v. Aetna Insurance Co., 9 Cal. (3d) 566, 108 Cal. Rptr. 480, 510 P. (2d) 1032 (1973) and has since been adopted in over twenty-five states.

The Gruenberg decision is premised on an implied covenant of good faith and fair dealing that neither party will do anything to impair the other’s rights to receive benefits under the contract. Breach of this duty by an insurer’s bad faith refusal to settle the claims of its insured renders the insurer liable in tort for all consequential damages; actual damages are not limited by the contract. See also, Robertsen v. State Farm, 464 F. Supp. 876, 879 (D.C.S.C. 1979); and Trimper v. Nationwide Ins. Co., 540 F. Supp. 1188 (D.C.S.C. 1982).

While we have never ruled on this precise question, we held in Tyger River Pine Co. v. Maryland Casualty Co., 170 S. C. 286, 170 S. E. 346 (1933) 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. Miles v. State Farm Mutual Ins. Co., 238 S. C. 374, 120 S. E. (2d) 217 (1961). 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.

The public policy reasons for recognizing this cause of action are plentiful. The insurance business is affected with a public interest. Hinds v. United Ins. Co. of America, 248 S. C. 285, 149 S. E. (2d) 771 (1966). An insured ordinarily possesses no bargaining power and no means of protecting himself from the kind of treatment of which Respondent complained. “An insured does not contract to obtain any kind of commercial advantage or leverage but only to protect himself against the spectre of accidental [or unavoidable] loss.” Trimper v. Nationwide Ins. Co., 540 F. Supp. 1188, 1193 (D.C.S.C. 1982.)

Absent the threat of a tort action, the insurance company can, with complete impunity, deny any claim they wish, whether valid or not. During the ensuing period of litigation following such a denial, the insurance company has the benefit of profiting on the use of the insured’s money. Heretofore, the only compensation a successful insured could expect through litigation was the belated payment of his claim and the possibility of recovering attorney fees up to two thousand five hundred ($2,500.00) dollars. See, S. C. Code Ann. § 39-9-320 (1976).

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 in a tort action. Actual damages are not limited by the contract. Further, if he can demonstrate the insurer’s actions were willful or in reckless disregard of the insured’s rights, he can recover punitive damages.

Insurer next argues that even if a tort action exists, the only reasonable inference from the evidence is that the insurance company did not act in bad faith. We have reviewed the record and find that sufficient conflicting evidence was presented to create a jury issue. We therefore rule that the trial judge properly denied Insurer’s direct verdict motion.

Next, Insurer asserts the trial judge erred in failing to require Respondent to elect between his tort and contract causes of action. This exception is without merit. In Respondent’s suit for breach of contract he must only show that his claim is valid. In the tort action, Respondent must show bad faith or unreasonable conduct. Therefore, the jury could have found for Respondent on the contract and in favor of the Insurer in tort. Where a jury finds in favor of plaintiff on both causes of action as here, the verdict then must be reformed as plaintiffs may only recover once for their actual damages. The trial judge acted properly in presenting both causes of action to the jury and in striking the damages portion of the contract cause of action.

Insurer next argues the trial judge abused his discretion in ordering the parties to proceed to trial, despite the pendency of an appeal from an order overruling Insurer’s demurrer to the tort action.

First, S. C. Code Ann. § 18-9-220 (1976) gives the trial judge discretion to order the parties to proceed to trial if he finds it will serve the ends of justice. Second, the trial judge was justified in overruling the demurrer based on this court’s ruling in Vaden v. College Heights Subdivision, 261 S. C. 509, 201 S. E. (2d) 113 (1973) (holding that questions of novel impression should not be decided on demurrer) and Baldwin v. Sanders, 266 S. C. 394, 223 S. E. (2d) 602 (1976) (following Vaden and additionally holding that a complaint is sufficient if it states any cause of action or when the plaintiff is entitled to any relief whatever).

Additionally, if the judge had not ordered the parties to proceed on the tort action, the contract action could still have been tried. To obtain the statutory attorney’s fees, Respondent would have to prove bad faith or refusal to pay without reasonable cause, the same set of facts required for the tort action. By ordering the parties to proceed to trial on all causes of action, the trial judge avoided the administrative waste of a second trial and the possibility of two appeals involving the same parties and the same facts. This was a proper exercise of discretion under § 18-9-220.

Next, Insurer alleges the trial judge erred in failing to charge the jury that “if the action of a party was within its legal rights, such action cannot be a legal wrong, and cannot be the basis of an action for damages.”

Insurer states in their brief that this charge “related to the entire matter of bad faith, but had particular reference to [respondent’s] claim that [Insurer] committed bad faith by notifying the [respondent’s] homeowners insurance company, State Farm Fire and Casualty Insurance Company, that [respondent] had a possible claim pending for theft coverage under his automobile policy.” Insurer then argues that State Farm Fire and Casualty Insurance Company was within its legal rights in failing to renew Respondent’s policy. However, whether the company had the right to renew the policy was not in issue; rather, the issue was whether the non-renewal showed bad faith. This exception is overruled.

Insurer next argues the trial judge erred in instructing the jury that an insured can recover in a “bad faith” cause of action for negligence of the insurer in handling the claim. Under our view of the bad faith cause of action, above stated, the jury is entitled to consider negligence on the issue of unreasonable refusal to pay benefits. See generally, Tyger River Pine Co., supra; and Robertsen, supra.

Next, appellant contends the trial judge erred in failing to strike punitive damages. This exception is contingent on the disposition of the first exception. Since we have chosen to recognize the tort cause of action, this exception is accordingly overruled.

Finally, Insurer argues the trial judge erred in awarding attorneys’ fees under S. C. Code Ann. § 38-9-320(1) (1976). This section provides:

“In the event of a claim… which is covered by a policy of insurance… and the refusal of the insurer… to pay such claim … and a finding on suit of such contract made by the trial judge … that such refusal was without reasonable cause or in bad faith, the insurer… shall be liable to pay … attorneys’ fees.” (Emphasis added.)

We hold that this provision applies only to a breach of contract cause of action and is therefore inapplicable to a tort action. Since the contract action was, in effect, vacated, the award of attorneys’ fees should have been vacated with it and we so hold.

The verdict of the lower court is affirmed with the exception that the award of attorneys’ fees is vacated.

Lewis, C. J., and Ness, Gregory and Harwell, JJ., concur.

What it decided

Larry Nichols’ 1969 Corvette was stolen from a parking lot and came back with substantial damage to the exterior and to its high-performance engine. State Farm “refused to pay the full claim,” and — as Nichols alleged and the jury accepted — the insurer’s actions “caused delays in having the car repaired for over seven (7) months.” He sued on two theories, breach of contract and bad faith refusal to pay first-party benefits, and won both. The jury returned $10,000 actual and $10,000 punitive.

The Supreme Court of South Carolina used the case to answer a question it had never answered: does this state recognize a tort action for an insurer’s bad-faith handling of a first-party claim — your own insurer, your own policy, your own money? It held yes, in one paragraph that is still the operative statement of the rule:

“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 in a tort action. Actual damages are not limited by the contract. Further, if he can demonstrate the insurer’s actions were willful or in reckless disregard of the insured’s rights, he can recover punitive damages.”

Three parts of the court’s reasoning carry weight beyond the holding.

It is the same duty as Tyger River, pointed inward. South Carolina had recognized since 1933 that an insurer controlling a third-party defense could be liable in tort for an unreasonable refusal to settle within policy limits. The court refused to treat first-party claims as a different animal: “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.” See Tyger River Pine Co. v. Maryland Casualty.

The reason is the imbalance. “An insured ordinarily possesses no bargaining power and no means of protecting himself from the kind of treatment of which Respondent complained.” And, bluntly: “Absent the threat of a tort action, the insurance company can, with complete impunity, deny any claim they wish, whether valid or not. During the ensuing period of litigation following such a denial, the insurance company has the benefit of profiting on the use of the insured’s money.”

Negligence is admissible on unreasonableness. The court approved a jury instruction that let the jury consider “negligence of the insurer in handling the claim,” holding that “the jury is entitled to consider negligence on the issue of unreasonable refusal to pay benefits.” Sloppy claim handling is evidence, not merely an excuse.

What it did NOT decide

• This is an automobile policy, not a homeowner’s policy. The insured item was a stolen Corvette and the coverage was theft loss under an auto policy. The rule the court announced is written broadly — “a claim under their mutually binding insurance contract” — and South Carolina courts have applied first-party bad faith to property claims since. But if you are reading this because of a roof or a fire, know that the facts here are vehicular. The value is in the rule, not in a factual match.
• It did not let a policyholder collect twice. The trial judge struck the actual damages under the contract count, and the Supreme Court approved: “plaintiffs may only recover once for their actual damages.” Winning both counts does not double the check.
• It took the statutory attorney’s fees away. This is the part policyholders should not skip. The court held that the fees statute “applies only to a breach of contract cause of action and is therefore inapplicable to a tort action,” and because the contract count had effectively been vacated, “the award of attorneys’ fees should have been vacated with it.” A tort bad-faith verdict, standing alone, did not carry statutory fees. Whether and how to plead both counts is a strategic decision for a lawyer, and this case is the reason it is not a trivial one.
• It did not define what conduct counts as bad faith. On the insurer’s argument that the evidence could not support a bad-faith finding, the court wrote only that “sufficient conflicting evidence was presented to create a jury issue.” It did not catalog what State Farm did wrong. There is no checklist in this opinion.
• It did not promise anyone a recovery. It affirmed one jury verdict on one record. Nothing here predicts an outcome in any other claim.
• The statute it cites has been renumbered and rewritten. The court described a fee remedy capped at $2,500 under the 1976 Code. That provision was recodified: the official history line on today’s statute reads “Former 1976 Code SECTION 38-9-320 … recodified as SECTION 38-59-40 by 1987 Act No. 155.” The modern version, S.C. Code Ann. § 38-59-40, requires a 90-day demand and allows reasonable attorney’s fees up to one-third of the judgment — and subsection (3) preserves the Tyger River doctrine by name. Do not quote the $2,500 figure as current law.
• The opinion prints that statute number two ways. ”§ 39-9-320” in one place, ”§ 38-9-320(1)” in another. We left both as printed rather than guess which is the reporter’s slip.

Why it matters to policyholders

Nichols is the door. Before it, a South Carolina policyholder whose own insurer sat on a valid claim had a contract suit and a small fee award; after it, unreasonable claim processing — not just refusal to pay, but the handling itself — became a tort, with consequential damages that “are not limited by the contract” and punitive damages available where the conduct was “willful or in reckless disregard of the insured’s rights.”

Notice what the facts actually were, because they look like a property claim: a covered loss, an insurer that “refused to pay the full claim,” and seven months of delay. Underpayment plus delay is the ordinary shape of a disputed roof, fire or water claim. That is the pattern the court decided was actionable, and it is why this 1983 auto case still matters to a homeowner in Charleston or Greenville.

What that means practically:

• The claim file is the case. Bad faith is proved with a timeline: when you reported, what the insurer asked for, when you sent it, what was inspected and by whom, what was paid, what was withheld, what reason was given in writing, and how long each step took. Build that record from day one, in writing, with dates. A South Carolina insurer also operates under statutory standards for improper claim practices — knowing what those standards require makes the gaps in a claim file visible.
• Preserve the demand. The modern fee statute runs on a 90-day demand, and Nichols is a reminder that the fee remedy travels with the contract claim. Getting that demand made properly and on time is legal work, not adjusting work.
• Do not let the bad-faith question distract from proving the loss. In this case the insured still had to establish a valid claim. A documented estimate, a supported extent of damage and a defensible price are what make an underpayment visible in the first place. Where the disagreement is genuinely about the amount, the policy’s appraisal clause may be the faster road — South Carolina takes those clauses seriously, as Harwell v. Home Mutual shows in a way no policyholder enjoys reading.
• Know who does what. A public adjuster documents the damage, prepares and supports the estimate, handles the post-loss paperwork, negotiates the amount and invokes appraisal. A bad-faith lawsuit — the tort Nichols created, the punitive damages it allows, and the pleading choices this opinion makes consequential — is attorney work. We build the record and refer the litigation out. More South Carolina authority is on our South Carolina hub.

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