Neumayer v. Phila. Indem. Ins. Co.

• Decision Date: 24 July 2019
• Docket Number: Opinion No. 27902,Appellate Case No. 2016-001710
• Citation: 831 S.E.2d 406,427 S.C. 261
• Parties: Andrew P. NEUMAYER, Respondent, v. PHILADELPHIA INDEMNITY INSURANCE COMPANY, Primary Colors Child Care Center, Jocelyn Knox DeMartelare, and Asia N. Partman, Defendants, Of Whom Philadelphia Indemnity Insurance Company is the Appellant.
• Court: South Carolina Supreme Court

427 S.C. 261

831 S.E.2d 406

Andrew P. NEUMAYER, Respondent,

v.PHILADELPHIA INDEMNITY INSURANCE COMPANY, Primary Colors Child Care Center, Jocelyn Knox DeMartelare, and Asia N. Partman, Defendants,Of Whom Philadelphia Indemnity Insurance Company is the Appellant.

Appellate Case No. 2016-001710

Opinion No. 27902

Supreme Court of South Carolina.

Heard March 5, 2019

Filed July 24, 2019

Phillip E. Reeves, of Gallivan, White & Boyd, PA, of Greenville, Curtis W. Dowling and Matthew G. Gerrald, both of Barnes, Alford, Stork & Johnson, LLP, of Columbia, for Appellant.

Blake A. Hewitt, of Bluestein Thompson Sullivan LLC, and Gerald Eugene Reardon, both of Columbia, for Respondent.

JUSTICE HEARN :

In this case, we decide whether notice clauses in automobile insurance policies are rendered meaningless by Section 38-77-142(C) of the South Carolina Code (2015)¹ . The trial court found the clause in this policy² void and accordingly required the insurance company to pay the full default judgment entered against its insured. The insurer appealed, and we now reverse.

FACTS

On January 25, 2013, a bus driven by Defendant Asia Partman struck Respondent Andrew Neumayer while he was a pedestrian in Cayce, South Carolina. EMS transported Neumayer to Lexington Medical Center where he was diagnosed with a ruptured spleen, broken left ribs, left humerus fracture, left pneumothorax, and a punctured lung. After eight days in the hospital and medical costs of approximately $122,000, Neumayer was released.

Partman worked for Defendant Primary Colors Child Care Center, and in November of 2013, Neumayer filed a lawsuit against both defendants, alleging negligence against Partman and Primary Colors. The defendants did not answer or respond in any fashion, and after a default judgment was entered, the court held a damages hearing, where it awarded Neumayer $622,500.

Over eighteen months after the entry of default, Philadelphia Indemnity Insurance Co. (Philadelphia), Primary Colors' insurance carrier, received notice that its insured was involved in a lawsuit that culminated in a default judgment. While the record is unclear as to why it took eighteen months to notify Philadelphia, it ultimately received notice when Neumayer's counsel faxed documents seeking to collect $622,500. Philadelphia declined to pay that amount, instead asserting its indemnification obligation was limited to $25,000 because South Carolina jurisprudence requires an insurer to pay only the minimum limits when it is substantially prejudiced by its insured's failure to provide notice of a lawsuit. Further, Philadelphia contended the failure to receive notice of the underlying lawsuit prevented an opportunity to investigate and defend.

Thereafter, Neumayer filed this declaratory judgment action asking the court to require Philadelphia to pay the judgment in full. Philadelphia answered and asserted a counterclaim against Neumayer and cross-claims against officials at Primary Colors, arguing that its indemnity obligation was limited to $25,000. Both parties moved for summary judgment, and after a hearing, the court found in favor of Neumayer. The circuit court framed the issue as "whether or not Philadelphia can properly reduce the available coverage to the statutory minimum through a cooperation provision in the Policy." Relying on section 38-77-142(C), the court held an insured's breach of a notice clause cannot reduce the amount of available coverage. Further, the court cited to this Court's decision in Williams , where we held a family step-down provision was void under section 38-77-142(C) because it purported to reduce coverage from the policy's liability limits to the minimum amounts prescribed in section 38-77-140.³ Philadelphia appealed to the court of appeals, and we certified the case pursuant to Rule 204(b), SCACR.

ISSUE

Did the circuit court err in finding section 38-77-142(C) invalidated the notice and cooperation clause in a policy providing higher limits than statutorily required?

STANDARD OF REVIEW

When cross motions for summary judgment are filed, the issue is decided as a matter of law. Wiegand v. U.S. Auto. Ass'n , 391 S.C. 159, 163, 705 S.E.2d 432, 434 (2011). When reviewing an insurance policy, the general rules of contract construction apply. B.L.G. Enterprises, Inc. v. First Fin. Ins. Co. , 334 S.C. 529, 535, 514 S.E.2d 327, 330 (1999). An insurer may impose conditions on a policy provided they do not contravene public policy or violate a provision of law. Williams , 409 S.C. at 598, 762 S.E.2d at 712. Further, the interpretation of a statute is a question of law, which we review de novo. Town of Summerville v. City of N. Charleston , 378 S.C. 107, 110, 662 S.E.2d 40, 41 (2008).

DISCUSSION

Philadelphia contends the circuit court's decision, if upheld, would render obsolete all notice clauses in insurance policies, provisions that have been prevalent since the inception of automobile liability insurance, thereby effecting a sea change in South Carolina insurance law. Conversely, Neumayer rejects this assertion, arguing that section 38-77-142(C) bars these clauses. We agree with Philadelphia.

In order to fully address the issue and clarify any ostensible inconsistencies in South Carolina appellate jurisprudence in this area, we examine the purpose of notice clauses and trace their history in this state. Nearly every insurance policy contains a provision requiring the insured to timely notify its insurer when a lawsuit is filed against the insured. Common sense dictates that the insurer must have notice of a claim or lawsuit in order to properly investigate and defend against it, and these clauses ensure that the insurer receives notice by imposing this obligation on the insured. Factory Mut. Liab. Ins. Co. of Am. v. Kennedy , 256 S.C. 376, 381, 182 S.E.2d 727, 729 (1971). Despite their apparent straightforward purpose, litigation involving notice and cooperation clauses has ensued for over a century. As early as 1907, this Court discussed a notice clause, holding that the insured's duty to "send the summons immediately to the insur[ance] company, means that these things should be done with reasonable promptness under the circumstances ...." Edgefield Mfg. Co. v. Maryland Cas. Co. , 78 S.C. 73, 81, 58 S.E. 969, 971 (1907). Subsequent cases considered the effect of these clauses. See, e.g. , Walker v. New Amsterdam Cas. Co. , 157 S.C. 381, 154 S.E. 221, 222 (1930) (discussing a policy that required the insured "give immediate written notice of any accident, and like notice of any claim or suit resulting therefrom, together with every summons or other process" to the insurer); Brown v. State Farm Mut. Auto. Liab. Ins. Co. , 233 S.C. 376, 380, 104 S.E.2d 673, 674 (1958) (assuming, without deciding, that the insurance policy's notice clause was a condition precedent to coverage but finding the issue of whether the insurer waived that provision is a jury question).

Courts eventually recognized the potential inequities in permitting an insurer to avoid coverage to an innocent third party merely because the at-fault party—the insured—did not inform its insurer of a lawsuit. Accordingly, many jurisdictions, including South Carolina, judicially adopted a notice-prejudice rule, whereby the insurer had the burden to show that it was substantially prejudiced by the failure of its insured to comply with the notice and cooperation provisions. Vermont Mut. Ins. Co. v. Singleton By & Through Singleton , 316 S.C. 5, 12, 446 S.E.2d 417, 421 (1994) ("Where the rights of innocent parties are jeopardized by a failure of the insured to comply with the notice requirements of an insurance policy, the insurer must show substantial prejudice to the insurer's rights."); Factory Mutual , 256 S.C. at 381, 182 S.E.2d at 729–30 ("[W]e think the sound rule to be that, in an action affecting the rights of innocent third parties under an automobile liability insurance policy, the noncompliance by the insured with policy provisions as to notice and forwarding suit papers will not bar recovery, unless the insurer shows that the failure to give such notice has resulted in substantial prejudice to its rights."); Squires v. Nat'l Grange Mut. Ins. Co. , 247 S.C. 58, 67, 145 S.E.2d 673, 677 (1965) (placing the burden of proof on the insurer to demonstrate substantial prejudice). This rule prevented an insurer from relying on an immaterial breach by its own insured as a defense to paying an injured third party. Throughout the latter part of the twentieth century, the notice-prejudice rule continued to gain support, and it is now clearly the majority rule. Century Sur. Co. v. Hipner, LLC , 377 P.3d 784, 788 (Wyo. 2016) ("A vast majority of jurisdictions now follow the modern trend and have adopted the notice-prejudice rule.").

This Court continued to require a showing of substantial prejudice even as our General Assembly extensively amended the laws governing automobile insurance. Prior to 1974, South Carolina motorists were not required to procure liability insurance before registering and operating a vehicle. S.C. Code Ann. §§ 46-135 through 46-138.2 (1962). Instead, the legislature only mandated insurance for those who incurred too many traffic violation points on their record or who caused an accident. Id. During this period of "voluntary insurance," we continued to adhere to the majority view that insurers could not escape liability to an innocent party when its insured failed to comply with a notice clause unless the insurer proved it was substantially prejudiced by the failure to receive timely notice. Factory Mutual , 256 S.C. at 381, 182 S.E.2d at 729–30 (applying the substantial prejudice requirement where the General Assembly sought to protect injured motorists, "short of compulsory insurance, by the enactment of financial responsibility and uninsured motorist statutes").

However, in 1974, the General Assembly reformed our automobile insurance laws by passing the Automobile Reparation Reform Act....