Kleckley v. Northwestern Nat. Cas. Co.

• Decision Date: 17 February 1998
• Docket Number: No. 2794.,2794.
• Court: South Carolina Court of Appeals
• Parties: Rosalind KLECKLEY, Appellant, v. NORTHWESTERN NATIONAL CASUALTY COMPANY, Respondent.

330 S.C. 277

498 S.E.2d 669

Rosalind KLECKLEY, Appellant, v. NORTHWESTERN NATIONAL CASUALTY COMPANY, Respondent.

No. 2794.

Court of Appeals of South Carolina.

Submitted February 3, 1998.

Decided February 17, 1998.

Rehearing Denied April 23, 1998.

Clyde A. Eltzroth, Jr., of Peters, Murdaugh, Parker, Eltzroth & Detrick, Hampton, for Appellant.

Bert G. Utsey, III, of Sinkler & Boyd, Charleston, for Respondent.

ANDERSON, Judge:

This is a third-party action on an insurance policy. Rosalind Kleckley appeals the circuit court's dismissal of her cause of action against Northwestern National Casualty Company for bad faith failure to pay a claim. The court ruled Kleckley did not have standing to sue. We affirm.¹

FACTUAL/PROCEDURAL BACKGROUND

On October 29, 1993, Kleckley allegedly sustained injuries in a fall while on the premises of W.W. Services, Inc., d/b/a Hardee's of Ridgeland. Northwestern insured the premises with a policy that covered up to $5,000 in medical expenses per person for injury caused by accident, regardless of fault. Kleckley requested information on coverage from Northwestern in 1993 and 1994. Northwestern informed her of the medical coverage in December of 1995, but denied her coverage in March of 1996 because the policy required bills to be incurred and reported within one year of the date of the incident.

Kleckley brought this action against Northwestern for (1) payment of medical expenses; (2) violation of the South Carolina Claims Practices Act, S.C.Code Ann. §§ 38-59-10 to -50 (1989 & Supp.1997); and (3) bad faith refusal to pay benefits Kleckley alleged she was due under the policy of insurance Northwestern issued to W.W. Services, Inc., d/b/a Hardee's of Ridgeland. Northwestern moved under Rule 12(b)(6), SCRCP to dismiss Kleckley's second and third causes of action, violation of the Claims Practices Act and bad faith, alleging Kleckley failed to state a cause of action. At the hearing on the motion, Kleckley conceded she did not have a right to pursue an action under the Claims Practices Act. The circuit court granted Northwestern's motion and dismissed the second and third causes of action. The court held Kleckley did not have a right to assert a claim for bad faith against Northwestern because she was not a party to the policy of insurance. Kleckley appeals the trial court's dismissal of her third cause of action for bad faith.

ISSUE

Did the circuit court err in dismissing Kleckley's third-party claim for bad faith refusal to pay benefits on the basis she had no standing to sue?

LAW/ANALYSIS

Kleckley argues the circuit court erred in dismissing her third cause of action for bad faith refusal to pay benefits on the basis she had no standing to sue, asserting the tort action for bad faith has been expanded to include third parties under these circumstances. We disagree.

A tort action for an insurer's bad faith refusal to pay first-party benefits was first recognized by the South Carolina Supreme Court in Nichols v. State Farm Mutual Automobile Insurance Co., 279 S.C. 336, 306 S.E.2d 616 (1983):

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.

Id. at 340, 306 S.E.2d at 619 (emphasis added). Thus, Nichols allowed first-party claims by the "insured" for bad faith in processing claims for benefits due under a "mutually binding contract of insurance." Since then, the courts have repeatedly denied third-party actions for bad faith refusal to pay benefits. In Cook v. Mack's Transfer & Storage, 291 S.C. 84, 352 S.E.2d 296 (Ct.App.1986), Cook, an injured employee, brought suit against his employer and the employer's workers' compensation carrier for bad faith refusal to pay benefits for his workers' compensation claim. We held an action for bad faith under Nichols would not lie because the South Carolina Workers' Compensation Act provides the exclusive remedy for settling claims coming within the terms of the Act, and the Act contains a specific provision governing instances in which the employer and employee cannot reach an agreement on compensation. We also ruled the bad faith claim was unavailable to Cook because he was a third party to the insurance contract:

Cook also fails to come within the scope of Nichols because he is a third party to the insurance contract in question, the contract between Mack's [the employer] and the Guaranty Company [the workers' compensation carrier]. Nichols provides an additional remedy to the insured, not to third parties. In those cases where our courts have sustained the bad faith cause of action, the plaintiff was the insured himself. See, e.g., Carter v. American Mutual Fire Insurance Co., 279 S.C. 367, 307 S.E.2d 225 (1983)

; Wilson v. Insurance Co. of North America, 281 S.C. 76, 313 S.E.2d 640 (Ct.App.1984); Brown v. South Carolina Insurance Co., supra [284 S.C. 47, 324 S.E.2d 641 (Ct.App.1984)]. On the other hand, our courts have refused to recognize a Nichols claim by third parties. See, e.g., Carter v. American Mutual Fire Ins. Co., 279 S.C. 368, 307 S.E.2d 227 (1983); Swinton v. Chubb & Son, Inc., 283 S.C. 11, 320 S.E.2d 495 (Ct.App.1984); cf., Kennedy v. Henderson, 289 S.C. 393, 346 S.E.2d 526 (1986) (no cause of action for negligent failure to pay third party claim against surety bond).

Id. at 90, 352 S.E.2d at 300 (emphasis added).

In Carter v. American Mutual Fire Insurance Co., 279 S.C. 368, 307 S.E.2d 227 (1983), a fire partially destroyed the home of Diane Carter and her husband, Richard E. Carter. The insurer refused to compensate Mr. Carter, the named insured, for the loss. Mr. and Mrs. Carter thereafter instituted separate actions against the insurer. The trial judge ruled Diane Carter's claim for bad faith refusal to pay benefits was not allowed because she was not the named insured. Our Supreme Court agreed, holding a Nichols cause of action for bad faith refusal to pay benefits does not extend to a person who is not the named insured:

Although this Court recently recognized a cause of action for bad faith refusal to pay first party benefits due under an insurance contract, Richard E. Carter v. American Mutual Fire Insurance Company, 307 S.E.2d 225, filed contemporaneously with this opinion; Nichols v. State Farm Mutual Automobile Insurance Company, 306 S.E.2d 616, (1983), this cause of action does not extend to a person who is not a party to or a named insured under the insurance contract and who possesses a mere contingent interest, such as an inchoate dower interest, in the property insured.

Id. at 370, 307 S.E.2d at 227. Although the court did not allow Diane Carter to pursue a third-party bad faith claim since she was not the named insured, in the companion case brought by her husband, Richard E. Carter, the court allowed the claim, stating, "We held [in Nichols ] that if an insured can demonstrate bad faith or unreasonable refusal by an insurer to pay first party benefits due under an insurance contract, he can recover compensatory damages not limited to the face amount of the contract." Carter v. American Mut. Fire Ins. Co., 279 S.C. 367, 368, 307 S.E.2d 225, 226 (1983).

In Swinton v. Chubb & Son, Inc., 283 S.C. 11, 320 S.E.2d 495 (Ct.App.1984), we held that a third party could not assert a claim for bad faith against an alleged tortfeasor's motor vehicle liability insurer.

In Ateyeh v. Volkswagen of Florence, Inc., 288 S.C. 101, 341 S.E.2d 378 (1986), the South Carolina Supreme Court recognized a narrow exception to the "mutually binding insurance contract" element required by Nichols. In Ateyeh, a widow brought an action against her spouse's employer and health insurance carrier for bad faith refusal to pay benefits. The trial judge ruled the bad faith claim was not available to the wife because she was not a party to the insurance contract and therefore lacked capacity to sue. The Supreme Court stated:

The trial judge sustained the demurrer on the cause of action for bad faith failure to pay insurance benefits on the basis of our decision in Carter v. American Mutual Fire Insurance Company, 279 S.C. 367 [368], 307 S.E.2d 227 (1983). In that case, we held that a party who possesses a mere contingent interest in the policy could not maintain a Nichols cause of action. By virtue of the necessaries doctrine, Ateyeh stands in a derivative policyholder position, and her interest in enforcement of the policy is not merely contingent. The demurrer should have been overruled.

Id. at 103, 341 S.E.2d at 380 (footnote omitted).

Kleckley argues that Ateyeh, taken in consideration with another Supreme Court case, Barker v. Sauls, 289 S.C. 121, 345 S.E.2d 244 (1986), allows a third party to sue for bad faith failure to pay benefits. In Barker, a company discovered that it did not have a workers' compensation policy after an employee of the company was injured and the company tried to file a claim. The employee sued the employer's insurance agent for (1) negligence and (2) fraud. The trial judge sustained demurrers on both actions on the basis the employee did not have the capacity to sue because he was not a party to the contract between his employer and the insurance agent. The Supreme Court overruled the trial court's demurrer as to the negligence cause of action, stating: "A tort-feasor may be subjected to tort liability for injury to a third party arising out of the tort-feasor's contractual relationship with another, despite the absence of privity between the tort-feasor and the third party." Id. at 122, 345 S.E.2d at 244 (citing Terlinde v. Neely, 275 S.C. 395, 271 S.E.2d 768 (1980)). The tortfeasor's liability exists independently of contract, and...