George v. Empire Fire & Marine Ins. Co., 25278.

• Citation: 545 S.E.2d 500,344 S.C. 582
• Decision Date: 09 April 2001
• Docket Number: No. 25278.,25278.
• Parties: Ernest GEORGE, Personal Representative of the Estate of Kate George and Marvelyn Ernette George, Petitioner, v. EMPIRE FIRE AND MARINE INSURANCE COMPANY, W. Gene Whetsell, Personal Representative of the Estate of Angela Farmer, and John Shields Autos, Inc., Defendants, of whom W. Gene Whetsell, Personal Representative of the Estate of Angela Farmer, and John Shields Autos, Inc. are Petitioners, and Empire Fire and Marine Insurance Company is Respondent, v. Ken Rickel and Williams and Stazzone Insurance Agency, Third-Party Defendants.
• Court: United States State Supreme Court of South Carolina

344 S.C. 582

545 S.E.2d 500

Ernest GEORGE, Personal Representative of the Estate of Kate George and Marvelyn Ernette George, Petitioner, v. EMPIRE FIRE AND MARINE INSURANCE COMPANY, W. Gene Whetsell, Personal Representative of the Estate of Angela Farmer, and John Shields Autos, Inc., Defendants, of whom W. Gene Whetsell, Personal Representative of the Estate of Angela Farmer, and John Shields Autos, Inc. are Petitioners, and Empire Fire and Marine Insurance Company is Respondent, v. Ken Rickel and Williams and Stazzone Insurance Agency, Third-Party Defendants.

No. 25278.

Supreme Court of South Carolina.

Heard February 8, 2001.

Decided April 9, 2001.

Gedney M. Howe, III, and Alvin Hammer, both of Charleston, for petitioner Ernest George.

Gaines W. Smith, of Legare, Hare & Smith, of Charleston, for petitioner John Shields Autos, Inc.

Robert J. Wyndham, of Howe & Wyndham, of Charleston, for petitioner W. Gene Whetsell.

James E. Reeves, of Barnwell, Whaley, Patterson & Helms, and Thomas J. Wills, of Wills & Massalon, both of Charleston, for respondent Empire Fire & Marine Insurance Company.

Matthew Story, of Clawson & Staubes, of Charleston, for third-party defendants.

ON WRIT OF CERTIORARI TO THE COURT OF APPEALS

WALLER, Justice:

We granted a writ of certiorari to review the Court of Appeals' opinion in George v. Empire Fire and Marine Ins. Co., 336 S.C. 206, 519 S.E.2d 107 (Ct.App.1999). We reverse.

FACTS

Petitioner John Shields Autos, Inc. (Shields Auto), a used car dealership, loaned its customer, Angela Farmer, a car to use while hers was being repaired at the dealership. While driving the loaner vehicle on August 1, 1994, Angela had a head-on collision with another vehicle. Marvelyn George was driving the other car, in which her daughter, Kate, was a passenger. Angela, Marvelyn, and Kate were all killed as a result of the accident.

As personal representative for the estates of his wife and daughter, petitioner Ernest George brought this declaratory judgment action against Respondent Empire Fire and Marine Insurance Company (Empire), Angela's estate,¹ and Shields Auto. George sought declaration that Shields Auto's insurance policy with Empire covered Angela in the amount of $1 million or, alternatively, that the policy be reformed to provide $1 million in coverage.²

George and Empire filed cross motions for summary judgment, and the trial court granted summary judgment in favor of George. The trial court found that the policy provided $1 million coverage for Angela. In the alternative, the trial court decided that if the liability policy was limited to $15,000, then reformation based on mutual mistake was granted to provide $1 million in coverage.³

Empire appealed, and initially, the Court of Appeals affirmed on the basis of reformation. After granting rehearing, the panel then reversed summary judgment. The Court of Appeals held as a matter of law that the policy covered Angela only up to the statutory limits. Regarding the reformation issue, the Court of Appeals decided that there was an issue of fact on whether the policy was intended to cover customers in the amount of $1 million and remanded for further factual development. Petitioners appealed to this Court, and certiorari was granted on the reformation issue only.

ISSUE

Did the Court of Appeals err in finding that an issue of fact existed regarding the issue of reformation based on mutual mistake?

DISCUSSION

The Court of Appeals made two holdings pertinent to our analysis of the issue that is before us. First, the Court of Appeals held that, insofar as the insurance policies with Empire contained an invalid endorsement which excluded coverage for certain customers, "a court would reform such policies for the mandatory minimum coverage of 15/30/5, not the policy limits." George, 336 S.C. at 220-21, 519 S.E.2d at 114. Second, the Court of Appeals stated that there is an issue of fact on "whether Empire, through its agent Rickel, intended that the insurance policies afford Shields's customers coverage in the amount of $1,000,000." Id. at 223, 519 S.E.2d at 116. While we agree with the Court of Appeals as to the effect of invalidating the endorsement, we disagree that there is a genuine issue of material fact on whether the parties intended customer coverage.

1. Reformation Due to Invalid Endorsement

The Empire policies contain an endorsement which excludes liability coverage for customers such as Angela. Although the parties agree that the exclusion is invalid under South Carolina law, they disagree as to the effect of removing the illegal exclusion from the policy. We agree with Empire, and the Court of Appeals, that the legal effect of invalidating the exclusion does not provide $1 million coverage for Angela. A full understanding of this issue necessitates a review of both the Empire policies and Shields Auto's previous liability policies with Nationwide Mutual Insurance Company (Nationwide).

From 1988 to 1992, Nationwide covered Shields Auto. For the first three policies (1988-89, 1989-90, 1990-91), Shields Auto had liability insurance in the amount of $1 million. The 1991-92 policy had a liability limit of $500,000. Significantly, in all the Nationwide policies, liability was not limited in any way for Shields Auto's customers.⁴ Empire began insuring Shields Auto in December 1992. For 1992-93, Shields Auto had a garage liability policy in the amount of $1 million. In this policy, however, liability for customers was limited.⁵ This limitation excluded customers as "insureds," with two exceptions. First, if the customer had no liability insurance of her own, then the policy would provide liability coverage up to the statutory minimum limits.⁶ Second, if the customer had liability insurance for less than the statutory minimum limits, the policy would provide liability coverage for the difference between the customer's coverage and the statutory minimum limits. The effect of the endorsement was to completely exclude liability coverage under the Empire policy for customers who had their own personal liability insurance in an amount equal to or greater than the statutory limits.

Shields Auto renewed its insurance with Empire for 1993-94. For this year, however, Empire provided Shields Auto with two policies—a primary and an excess policy. The primary policy covered "Garage Operations—`Auto' Only" in the amount of $15,000/30,000/5,000, and "Garage Operations— Other than `Auto' Only" in the amount of $1 million. The excess policy covered named insureds up to $1 million. As in the previous year, the 1993-94 policy contained an endorsement which limited liability coverage for certain customers and completely excluded coverage for other customers.⁷

The accident occurred on August 1, 1994, and Angela's personal auto liability policy provided coverage at the statutory limits. Because the endorsement did not provide coverage for Shields Auto customers if they had their own insurance coverage for at least the statutory limits, the Empire policy on its face excluded Angela from any coverage. However, since this endorsement excludes a class of permissive users, it violates South Carolina law. See Potomac Ins. Co. v. Allstate Ins. Co., 254 S.C. 107, 173 S.E.2d 653 (1970) ("insured" as defined by South Carolina statute includes permissive user; thus, endorsement which attempted to exclude customer who had accident while using loaned vehicle was held invalid). Indeed, throughout this lawsuit, Empire has conceded that the exclusion is invalid under the rule of Potomac.

Petitioners argue that when Shields Auto renewed its coverage with Empire for the 1993-94 term, all parties intended to provide Shields Auto with the same coverage as the 1992-93 policy. Petitioners further argue that although the 1992-93 policy contained the endorsement which excludes customers such as Angela, the legal effect of invalidating the endorsement is that Angela would be covered for the amount of the 1992-93 policy, i.e., $1 million.

Although we agree with petitioners that the evidence clearly shows the parties intended the same coverage in 1993-94 as in 1992-93, "legal reformation" of the policy only affords coverage for Angela in the amount of the statutory minimum limits. As the Court of Appeals correctly found, when endorsements such as these are invalidated, reformation of the policies is "for the mandatory minimum coverage of 15/30/5, not the policy limits." George, 336 S.C. at 220-21, 519 S.E.2d at 114; see also Potomac, 254 S.C. at 111, 173 S.E.2d at 655 ("Under the facts of this case, White, by virtue of the statutory law, was fully covered by Potomac's policy up to the statutory limits, despite the exclusionary endorsement inserted in Potomac's policy.") (emphasis added); Pennsylvania Nat. Mut. Casualty Ins. Co. v. Parker, 282 S.C. 546, 553-54, 320 S.E.2d 458, 462-63 (Ct.App.1984) (where the court found permissive user was insured despite exclusion in policy, the court held that user was "insured against loss from the liability imposed by law").

The reasoning of Potomac mandates this result. In Potomac, the Court found that an endorsement which excluded liability coverage for a customer, who was a permissive user driving a loaned vehicle, violated the provisions of the South Carolina Financial Responsibility Act. The Potomac Court noted that two sections of the statute are considered as though written into the liability policy. Potomac, 254 S.C. at 111, 173 S.E.2d at 655 (citing Pacific Ins. Co. of New York v. Fireman's Fund Ins. Co., 247 S.C. 282, 147 S.E.2d 273 (1966)). The first defines a permissive user as an insured. See S.C.Code Ann. § 38-77-30(7) (Supp.2000).⁸ The second requires minimum statutory liability limits in every automobile insurance policy. See S.C.Code Ann. § 38-77-140 (1989).⁹

Following the rationale of Potomac, when a liability policy contains an exclusion which conflicts with § 38-77-30(7), then the policy must be reformed as...