53 F. Supp. 3d 816
D.S.C.2014Background
- TEC-SC (The Episcopal Church in South Carolina) was sued in state court by the breakaway Diocese seeking declarations and injunctive relief over use of real, personal, and intellectual property; CIC-VT (Church Insurance Co. of Vermont) issued a commercial liability policy covering "Advertising Injury" and had the "right and duty to defend."
- TEC-SC tendered defense to CIC-VT in August 2013; CIC-VT denied coverage and refused to defend, then later (after this court ordered a duty to defend) provided a defense under a reservation of rights and a reservation letter.
- TEC-SC sued CIC-VT in federal court (diversity) asserting breach of contract, bad faith, and seeking declaratory relief about CIC-VT’s duties and rights (including selection of counsel, reimbursement of defense costs, and ongoing bad faith).
- Earlier summary judgment: this Court previously held CIC-VT has a duty to defend and granted breach-of-contract summary judgment for TEC-SC, but denied summary judgment on bad-faith.
- TEC-SC’s supplemental claims seek declarations that CIC-VT cannot select defense counsel (because it breached), must reimburse all reasonable defense costs (including pre-tender and costs for counterclaims), and that CIC-VT has engaged in ongoing bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Right to select counsel | CIC‑SC: Policy’s Commercial Liability section omits counsel-selection language; CIC‑VT waived/forfeited any right by refusing to defend; replacing current counsel would cause prejudice and conflicts exist. | CIC‑VT: Right to defend implies right to control defense and choose counsel; reservation of rights doesn’t remove that right; plaintiff rejected CIC‑VT’s offered counsel. | Court: Although policy does not explicitly state counsel selection, right to defend implies right to control defense; but because CIC‑VT unjustifiably refused to defend, it forfeited the right to control/select counsel — TEC‑SC may keep its chosen counsel. |
| Duty to reimburse costs for prosecuting counterclaims | TEC‑SC: Counterclaims are inextricably intertwined with defense; all related costs are part of defense and must be covered. | CIC‑VT: Will pay only defense costs for covered claims; costs clearly attributable solely to counterclaims are not covered; ripeness concerns re: invoices. | Court: Material facts unresolved — record lacks TEC‑SC’s counterclaims and evidence of intertwining; summary judgment denied on this issue. |
| Duty to reimburse pre‑tender defense costs | TEC‑SC: Duty to defend arises when suit is filed; insurer who breached cannot avoid pre‑tender costs absent insurer prejudice. | CIC‑VT: Notice conditions and "no payments" clause mean insurer need not reimburse pre‑tender costs; late notice can bar recovery. | Court: Under South Carolina law duty to defend arises at filing; absent showing of substantial prejudice by insurer, insurer liable for reasonable defense costs incurred before and after tender. |
| Bad faith claim | TEC‑SC: Requests declaration of ongoing bad faith based on CIC‑VT’s actions. | CIC‑VT: (Responded generally; contested liability and defenses) | Court: TEC‑SC failed to present arguments or facts demonstrating no genuine dispute on bad‑faith; summary judgment denied. |
Key Cases Cited
- Allstate Ins. Co. v. Wilson, 259 S.C. 586, 193 S.E.2d 527 (S.C. 1972) (an insurer with a contractual right and duty to defend may control the defense until coverage is resolved)
- Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co., 433 F.3d 365 (4th Cir. 2005) (federal court predicting South Carolina law on insurer defense obligations and reservation‑of‑rights defenses)
- BellSouth Telecommunications, Inc. v. Church & Tower of Fla., Inc., 930 So.2d 668 (Fla. Dist. Ct. App. 2006) (insurer who wrongfully refused to defend forfeited right to later control the defense)
- Sherwood Brands, Inc. v. Hartford Acc. & Indem. Co., 347 Md. 32, 698 A.2d 1078 (Md. 1997) (insurer who would have refused defense on coverage grounds cannot use late notice to avoid reimbursing pre‑tender defense costs absent prejudice)
- Royal Ins. Co. of Am. v. Kirksville Coll. of Osteopathic Med., 304 F.3d 804 (8th Cir. 2002) (when insurer refuses to defend, it loses right to control litigation)