Hodges v. State Farm Mut. Auto. Ins. Co.

• Court: U.S. District Court — District of South Carolina
• Writing for the Court: Claude M. Scarborough, Jr., Columbia, S. C., for defendant
• Citation: Hodges v. State Farm Mut. Auto. Ins. Co., 488 F.Supp. 1057 (D. S.C. 1980)
• Decision Date: 07 March 1980
• Docket Number: 78-1212-6.,Civ. A. No. 78-1210-6
• Parties: Carolyn B. HODGES, as Assignee of William S. Fanning and Birobal Corporation, Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant. Ray C. HODGES, as Assignee of William S. Fanning and Birobal Corporation, Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.

488 F. Supp. 1057

Carolyn B. HODGES, as Assignee of William S. Fanning and Birobal Corporation, Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.

Ray C. HODGES, as Assignee of William S. Fanning and Birobal Corporation, Plaintiffs, v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Defendant.

Civ. A. Nos. 78-1210-6, 78-1212-6.

United States District Court, D. South Carolina, Charleston Division.

March 7, 1980.

Michael T. Cole, Andrew Kenneth Epting, Jr., Charleston, S. C., for plaintiffs.

Claude M. Scarborough, Jr., Columbia, S. C., for defendant.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

HEMPHILL, Chief Judge.

Before this court are cross motions for summary judgment in two companion cases which seek to recover, inter alia, $200,000.00 in damages from an insurer as indemnification for a pair of default judgments rendered in state court, allegedly as a result of the insurer's failure to defend and/or timely settle. Plaintiffs in these actions are the assignors of the insureds, William S. Fanning and Birobal Corporation, and were also the plaintiffs in the state court actions. This unusual twist wherein plaintiffs occupy the shoes of their former adversaries, was precipitated by a collision between a Birobal Corporation motor vehicle, driven by Fanning, and a pedestrian, Ray C. Hodges, on June 27, 1975, in Charleston, South Carolina. Plaintiffs filed suit and obtained default judgments for $200,000.00 in two state court actions when Fanning's insurer, State Farm, failed to timely file an Answer to the Complaints. In settlement of that claim, Fanning and Birobal assigned to plaintiffs their causes of action in tort and contract against State Farm for failure to defend and/or failure to timely settle, which entitles plaintiffs to recovery in excess of the policy limits if negligence or bad faith is proven.

As discovery has been completed, this court has before it all essential evidence, in the form of affidavits, depositions, documents, the transcript of the hearing to set aside the default judgment, and the orders of the trial court and the Supreme Court of South Carolina upholding the default judgment. From the materials presented to this court, it is evident that the following facts are not in dispute.

Fanning was driving along Carterette Avenue in Charleston on the night of June 27, 1975 following a friendly gathering at a local lounge at which Fanning admits he had consumed eight to ten beers.¹ An eyewitness reported that the car was traveling at 45 miles per hour in a 15 mile per hour zone when he suddenly veered across the center of the street and up onto the grass on the opposite side of the street from his proper lane.² Hodges was standing a few feet from the road, in his own yard, when he was struck by Fanning. The impact knocked Hodges out of his shoes and through the air about thirty feet.³ Hodges suffered a fractured femur, lacerations and abrasions. Fanning was observed to be weaving back and forth after the accident and smelled strongly of alcoholic spirits.⁴

State Farm began its investigation of the accident soon thereafter. Fanning was difficult to locate, resulting in State Farm sending to him a reservation of rights letter informing him that coverage could later be denied for failure to cooperate with the insurer.⁵ The investigation soon revealed the less than optimal legal consequences of their insured's conduct, and inspired State Farm to reserve the entire policy limit of $15,000 for possible payment in settlement of a claim which could easily result in punitive damages.⁶

Due to a conflict in the testimony of the attorney for the Hodges at that time, Thomas Dewey Wise, and that of State Farm's agents, it cannot be determined for purposes of this motion whether, and to what extent, settlement negotiations were heard. However Wise did write State Farm that he had heard the policy coverage was for minimum limits and that he would proceed to file suit immediately since the policy limits would not be sufficient.⁷ Wise later stated that he did not begin to evaluate the case for settlement purposes until the default case went to the Supreme Court.⁸ Plaintiffs, in their depositions, confirm that no thought was given to settlement during the early stages of the lawsuit due to the minimal amount which the insurance company could be expected to contribute.⁹ Subsequently, on July 9, 1975, less than two weeks after the accident, Hodges filed his action for personal damages and his wife filed suit for loss of consortium.

When Fanning was served, he immediately turned the papers over to attorney Malcolm Crosland, Esquire, asking him to look them over and deliver them to State Farm.¹⁰ However, Fanning denies he ever hired Crosland as his attorney¹¹. Crosland contacted State Farm which sent William Almers to pick the papers up from Crosland and deliver them to J. W. Cabaniss, Esquire, the attorney for State Farm.¹² The trial judge found that Cabaniss prepared Answers in each of the cases and forwarded these to Mr. Crosland under letter dated July 17, 1975. Cabaniss then departed on vacation on July 25, 1975 and did not return to his office until August 7, 1975. Crosland received the Answers in the next few days, reviewed them and signed the papers. Crosland states he then asked his secretary to return the papers to Cabaniss as he had been requested to do. According to Crosland's affidavit, "Mrs. Bates had an illness in her family and missed several days from work." Crosland discovered the Answers had not been returned on July 31, 1975. He personally carried them over to Mr. Cabaniss' law offices. The Default Order was properly taken on July 30, 1975 and on August 1, 1975, Cabaniss moved the court to reopen the proceedings.

At the August 8th hearing on the motion, Crosland and Cabaniss presented affidavits, and orally recited Fanning's version that Hodges had walked into the side of his car, although they were unable to present an affidavit from Fanning due to his failure to cooperate. On September 13, 1975, South Carolina Circuit Judge Clarence Singletary issued his order which found an absence of excusable neglect on the part of Fanning's attorneys and that no meritorious defenses existed to plaintiffs' causes of action. About this time State Farm, tendered its policy limits to plaintiffs but was refused. Judge Singletary's order upholding the default was appealed to the South Carolina Supreme Court which affirmed the trial court's finding as to inexcusable neglect without reaching the issue of meritorious defenses. Hodges v. Fanning and Birobal Corporation, 266 S.C. 517, 224 S.E.2d 713 (1976).

The case was remanded to Judge Singletary who referred the damage issue to a Master in Equity. Cabaniss appeared before the Master, on behalf of defendants, but his participation was limited to cross examination of plaintiffs' witnesses.¹³ The Master recommended an award of $175,000, actual and punitive damages to Ray Hodges, and $25,000 to his wife. Judge Singletary adopted the recommendation and ordered such an award on July 25, 1977. When settlement negotiations failed with State Farm, plaintiffs took the assignments of Fanning and Birobal's causes of action on which these two cases are based.

Defendant's motion for summary judgment is based in part upon several defenses which would defeat plaintiffs' recovery in total without a trial on the merits. Since a decision in favor of defendant on any of these defenses would render all other questions moot, consideration will be given to these issues first.

Plaintiffs' third cause of action alleges defendant breached an implied contractual covenant, existing between it and plaintiffs' assignors, by failing to properly defend them. Defendants urge that Fanning's failure to cooperate with the investigation and hearing of the lawsuit breached the contract of insurance and discharged defendant from the duty to defend. Specifically, defendant submits that the failure of Crosland to return or file the Answer, the failure of Fanning to submit or return the affidavit for use in the hearing on the motion to set aside the default, and various other unspecified instances of failure to cooperate, constitute a prevention or hindrance by the insured under the contract.

In South Carolina the failure of the insured to comply with the obligations of the contract will release the insurer from liability. Tucker v. State Farm Mutual Insurance Company, 232 S.C. 615, 103 S.E.2d 272 (1958); Pharr v. Canal Insurance Co., 233 S.C. 266, 104 S.E.2d 394 (1958); Crook v. State Farm Mutual Automobile Insurance Company, 231 S.C. 257, 98 S.E.2d 427 (1957). But avoidance of coverage will only be allowed where the insurer has shown that the failure to cooperate prejudiced the insurer's defense of the case. Squires v. National Grange Mutual Ins. Co., 247 S.C. 58, 145 S.E.2d 673; Pharr v. Canal Insurance Co., supra.

The contract in this case made Fanning's cooperation a term of the policy, thus the question presented is whether State Farm can prove prejudice. This court thinks not.

Under the contract of insurance the insurer is obligated "to defend, with attorneys selected by and compensated by the company, any suit against the insured alleging such bodily injury . . . but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient."¹⁴ Because of the large sums of money involved, and to insure the orderly and proper disbursement of the funds, the courts have construed such clauses as granting the insurer the exclusive control of the litigation, to the point of requiring the insured to surrender all control over his own defense. Allstate Ins. Co. v. Wilson, 259 S.C. 586, 193 S.E.2d 527 (1972); American Cas. Co. v. Timmons, 352 F.2d 563, 569 (6th Cir. 1965); Duke v. Hoch, 468 F.2d 973, 978 (1972), motion den. 475 F.2d 761 (5th Cir. 1973); Appleman, 7C Insurance Law and Practice § 4681 (1979). The right to control...