Brown v. South Carolina Ins. Co.

• Decision Date: 22 March 1984
• Docket Number: No. 0342,0342
• Citation: 324 S.E.2d 641,284 S.C. 47
• Court: South Carolina Court of Appeals
• Parties: Joseph Lee BROWN, Appellant, v. SOUTH CAROLINA INSURANCE COMPANY, Respondent. . Heard

Page 641

324 S.E.2d 641

284 S.C. 47

Joseph Lee BROWN, Appellant, v. SOUTH CAROLINA INSURANCE COMPANY, Respondent.

No. 0342.

Court of Appeals of South Carolina.

Heard March 22, 1984.

Decided Dec. 18, 1984.

Lee S. Bowers, Estill, for appellant.

W. Ray Berry, of Berry & Berry, Columbia, for respondent.

BELL, Judge:

This is a dispute over the existence of third party liability insurance coverage for an automobile owned by Joseph Lee Brown. Brown alleges he was covered by the South Carolina Insurance Company at the time he had an accident with the automobile. The Insurance Company maintains there was no coverage, as Brown's policy had been cancelled for nonpayment of premium.

Brown's complaint alleges three causes of action: (1) breach of contract for failure to pay or defend a third party claim against Brown; (2) negligence in failing to determine coverage or adjust a third party claim against Brown; and (3) bad faith refusal to pay a third party claim in willful and conscious disregard of Brown's rights under the policy. Brown seeks actual and punitive damages.

The Insurance Company answered the first cause of action denying liability. It demurred to the second and third causes of action for failure to state a claim. From an order of the circuit court sustaining the demurrers, Brown appeals. We affirm as to the second cause of action and reverse as to the third.

This case raises questions about the interrelation between contract and tort theories of liability when an insurance company refuses to pay a third party liability claim.

The well pleaded allegations of the complaint set forth the following material facts. In October 1980, the Insurance Company issued a policy insuring Brown's Lincoln automobile against third party liability. The policy required the Insurance Company to defend third party claims for personal injury or property damage caused by the operation of the covered automobile. It was also required to indemnify the insured for sums he became legally obligated to pay to a third party as damages up to the amount of the policy limits.

On December 26, 1980, while the policy was in full force and effect, Brown was involved in an accident with one Kenneth Atkins. Atkins sued Brown for injuries caused by the accident. Brown reported the accident to the Insurance Company and submitted the suit papers to it for defense of Atkins's claim.

Initially the Insurance Company undertook to adjust the claim. Its adjuster prepared an accident report, obtained a release from Atkins, and wrote a draft for $2061.36 to settle the claim. Before the claim was settled, however, the Insurance Company notified Brown the policy had been cancelled on December 22, 1980, for nonpayment of premium. It then refused to pay Atkins's claim or to defend the suit. Brown also alleges the Insurance Company accepted payment of a premium after the purported date of cancellation. In addition, he says the Company notified the South Carolina Department of Highways and Public Transportation he was not insured on the date of the accident. As a result, Brown was forced to defend the Atkins suit at his own expense. Moreover, the Highway Department suspended his operator's license causing him to lose income.

I.

Brown claims these alleged acts of the Insurance Company give rise to a cause of action for negligence. The circuit court concluded the alleged wrongful acts of the Insurance Company were violations of obligations arising solely from the contract of insurance. It held Brown's conclusory allegations of negligence could not convert a mere breach of contract into a tort. Therefore, it sustained the demurrer to the second cause of action.

Brown asserts this holding was in error. He argues the existence of a breach of contract does not preclude him from stating a cause of action in negligence. He contends the circuit court overlooked the fundamental point that "actions in tort often have their beginning in contractual matters." St. Charles Mercantile Co. v. Armour & Co., 156 S.C. 397, 407, 153 S.E. 473, 477 (1930). For example, although the relationship of physician and patient may arise from contract, the physician is under a duty to exercise due care in diagnosing and treating the patient and his failure to do so will give rise to an action for negligence. Brown claims the relationship of insurer to insured presents an analogous situation.

To state a cause of action for negligence the plaintiff must allege facts which demonstrate the concurrence of three essential elements: (1) a duty of care owed by the defendant; (2) a breach of that duty by negligent act or omission; and (3) damage proximately resulting therefrom. Bullard v. Ehrhardt, 324 S.E.2d 61 (S.C.1984); Wannamaker v. Traywick, 136 S.C. 21, 134 S.E. 234 (1926); Gunter v. Graniteville Mfg. Co., 15 S.C. 443 (1881); Jordan v. Jordan, 220 Va. 160, 257 S.E.2d 761 (1979). Brown's difficulty lies with the first and second of these elements. He alleges the Insurance Company breached a duty of care owed to him (1) to determine coverage existed, by bringing a declaratory judgment action if necessary, and (2) to adjust a third party claim. ¹

Negligent conduct becomes actionable only when it violates some specific legal duty owed to the plaintiff. Hill v. Broad River Power Co., 151 S.C. 280, 148 S.E. 870 (1929); LeLievre v. Gould, [1893] 1 Q.B. 491, 497 (Lord Esher, M.R.); Shubitz v. Consolidated Edison Co. of New York, 59 Misc.2d 732, 301 N.Y.S.2d 926 (Sup.Ct.1969). In circumstances where the law imposes a duty to act, a failure to act may constitute negligence. Montgomery v. National Convoy & Trucking Co., 186 S.C. 167, 195 S.E. 247 (1938). The common law, however, is slow to impose affirmative duties in the absence of agreement. If the duty owed arises merely from agreement of the parties, breach of the duty is not negligence. The general rule was stated with clarity in Kelly v. Metropolitan Railway Co. [1895] 1 Q.B. 944, 947:

[I]f the cause of complaint be for an act of omission or nonfeasance which without proof of a contract to do what has been left undone would not give rise to any cause of action (because no duty apart from contract to do what is complained of exists), then the action is founded upon contract and not upon tort. If, on the other hand, the relation of the plaintiff and the defendants be such that a duty arises from that relationship, irrespective of contract, to take due care, and the defendants are negligent, the action is one of tort....

(A.L. Smith, L.J.).

Our Supreme Court has repeatedly approved this principle. In Meddin v. Southern Railway-Carolina Division, 218 S.C. 155, 165, 62 S.E.2d 109, 112 (1950), the Court stated the law as follows:

... [I]f the cause of action is predicated on the alleged breach, or even negligent breach, of a contract between the parties, an action in tort will not lie. On the other hand, where the contract creates a certain relationship between the parties, and certain duties arise by operation of law, irrespective of the contract, because of this relationship, then the breach of such duties warrants an action in tort.

Accord Collopy v. Citizens Bank of Darlington, 223 S.C. 493, 77 S.E.2d 215 (1953); Dixon v. Texas Co., 222 S.C. 385, 72 S.E.2d 897 (1952); Green v. Industrial Life & Health Ins. Co., 199 S.C. 262, 18 S.E.2d 873 (1942); Felder v. Great American Ins. Co. 260 F.Supp. 575 (D.S.C.1966) (applying South Carolina law). In other words, if the defendant's neglect results only in nonperformance of the contract and he is under no duty to act apart from the contract, he is not liable in negligence, but in contract.

In his second cause of action, Brown has alleged no more than failure to perform a duty imposed by contract. Absent a contract with Brown, the Insurance Company had no obligation to adjust, settle, or pay Atkins's claim against Brown. In itself, mere failure to complete the adjustment, even if willful or careless, did not breach a legal duty existing apart from the contract. While the Company's conduct of undertaking to settle the claim or accepting late payment of Brown's premium may be significant in proving a contract existed between the parties, that conduct standing alone is not an independent source of liability. If a contract existed, the mere failure to adjust Atkins's claim constitutes nothing more than nonperformance of a contractual obligation. It may give rise to an action for breach of contract, but it does not constitute actionable negligence. ²

Similarly, the law placed no duty on the Insurance Company to forego a good faith claim that the policy had been cancelled prior to the accident. As long as the Company denied coverage in good faith and with a reasonable basis in fact and law, it had no extracontractual duty to determine the existence of coverage, by bringing a declaratory judgment action or otherwise. If accepted as the law, Brown's theory that the Company's failure to ascertain its obligations under the contract constituted negligence would convert every action for breach of promise into a tort suit.

Because the Insurance Company had no duty to act apart from the contract, the circuit judge correctly sustained the demurrer to the negligence cause of action.

II.

Brown's third cause of action alleges a bad faith refusal to pay Atkins's claim in willful and conscious disregard of Brown's rights under the policy. The circuit judge also sustained the demurrer to this cause of action.

During the pendency of this appeal, the Supreme Court decided Nichols v. State Farm Mutual Automobile Ins. Co., 279 S.C. 336, 306 S.E.2d 616 (1983). Brown contends Nichols controls this case. The Insurance Company argues Nichols is distinguishable.

In Nichols, the Supreme Court held that if an insured can demonstrate bad faith or unreasonable refusal by an insurer to pay first party benefits due under a mutually binding insurance contract, he can recover damages not limited to the face amount of...