Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage

Citation433 F.3d 365
Decision Date27 December 2005
Docket NumberNo. 04-2048.,04-2048.
PartiesTWIN CITY FIRE INSURANCE COMPANY; Hartford Casualty Insurance Company, Plaintiffs-Appellees, v. BEN ARNOLD-SUNBELT BEVERAGE COMPANY OF SOUTH CAROLINA, LP; Sunbelt Beverage Company, LLC; Harvey Belson; William Tovell, Defendants-Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)

William Elvin Hopkins, Jr., McCutchen, Blanton, Johnson & Barnette, L.L.P., Columbia, South Carolina, for Appellants. Gary S. Parsons, Bailey & Dixon, Raleigh, North Carolina, for Appellees.

ON BRIEF:

T. English McCutchen, III, McCutchen, Blanton, Johnson & Barnette L.L.P., Columbia, South Carolina; Dennis T. D'Antonio, Joshua L. Mallin, Weg & Myers, P.C., New York, New York, for Appellants. Warren T. Savage, Bailey & Dixon, Raleigh, North Carolina, for Appellees.

Before LUTTIG, Circuit Judge, HAMILTON, Senior Circuit Judge, and JAMES C. DEVER III, United States District Judge for the Eastern District of North Carolina, sitting by designation.

Affirmed by published opinion. Judge DEVER wrote the opinion, in which Judge LUTTIG and Senior Judge HAMILTON joined.

OPINION

DEVER, District Judge.

When a party with insurance coverage is sued, the insured notifies the insurance company of the suit. The insurance company, in turn, typically chooses, retains, and pays private to represent the insured as to all claims. If the suit involves some claims that are covered under the insurance policy and some claims that are not covered, the insurance company typically will send a reservation of rights letter to the insured stating what claims the insurance company believes are covered and what claims it believes are not covered. In this case, we examine whether, under South Carolina law, such a reservation of rights letter automatically triggers a conflict of interest entitling the insured to reject counsel tendered by the insurance company and instead to choose and retain its own counsel and to have the insurance company pay for that counsel.

South Carolina law does not address this issue. The district court (predicting South Carolina law) concluded that a reservation of rights letter contesting coverage of certain claims but not other claims does not automatically trigger a conflict of interest entitling the insured to choose its own counsel and have the insurance company pay counsel fees. Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., 336 F.Supp.2d 610, 621 (D.S.C.2004). Because we agree with the district court's conclusion, we affirm.

I.

In June 2000, Joyce Anglin sued Ben Arnold-Sunbelt Beverage Company of South Carolina, L.P. ("Ben Arnold"), Ben Arnold's President and Chief Executive Officer ("CEO") William Tovell, and Ben Arnold's former President and CEO Harvey Belson. Ben Arnold is a wholesale beverage distributor in South Carolina. In July 2000, Ellen White sued these same parties as well as Sunbelt Beverage Company, L.L.C. ("Sunbelt"), Ben Arnold's parent company (referred to collectively as "appellants" or "defendants"). Both cases involved South Carolina tort claims based primarily on Belson's alleged sexual harassment of Anglin and White while employed by Ben Arnold. Specifically, Anglin asserted claims against (1) Belson for intentional infliction of emotional distress, false imprisonment, assault and battery, civil conspiracy, and defamation, (2) Tovell for intentional infliction of emotional distress and civil conspiracy, and (3) Ben Arnold for intentional infliction of emotional distress, negligence, false imprisonment, defamation, negligent hiring, retention, and supervision, and wrongful discharge. JA 340-41. White made similar claims against Belson, Ben Arnold, and Sunbelt. JA 341-42.

Ben Arnold purchased general commercial liability policies from Twin City Fire Insurance Company ("Twin City") and from Hartford Casualty Insurance Company ("Hartford Casualty") (collectively "insurance companies" or "appellees"). See JA 44. The policies covered claims for "personal injury" up to $1 million. JA 354. Under the terms of the policies, "personal injury" was defined to include claims for defamation and false imprisonment. Claims for defamation and false imprisonment were alleged in both the Anglin and White actions. The policies, however, did not cover the remaining claims in Anglin or White. Twin City Fire Ins. Co., 336 F.Supp.2d at 613.

Ben Arnold had consulted outside counsel concerning the allegations involving Anglin and White fourteen months before Anglin and White filed suit. See JA 463-65, 470-72. Only after Anglin and White filed suit did Ben Arnold notify the insurance companies of the Anglin and White actions. JA 390.

Around October 12, 2000, the insurance companies orally informed Ben Arnold that they would assume responsibility for defending all defendants and all claims in both actions. JA 342. On December 19, 2000, the insurance companies confirmed in writing that they would undertake the defense, but added that they were doing so under a reservation of rights, and informed Ben Arnold that Robert McKenzie, an attorney in private practice in Columbia, South Carolina, had been retained to represent the defendants in these actions. JA 351-60. The insurance companies' letter included a reservation of rights and explained that the insurance companies believed that the defamation and false imprisonment claims were covered under the policies, but that the other claims were not. Id. Nevertheless, the insurance companies agreed to pay McKenzie to defend the defendants against all claims alleged in both cases. Id.

On January 19, 2001, Ben Arnold informed the insurance companies that the defendants believed there was a conflict of interest inherent in the reservation of rights and that this conflict entitled the defendants to select their own counsel and to have the insurance companies pay the legal bills. JA 396-97. The defendants proceeded with counsel whom they had previously hired. On February 20, 2001, the insurance companies sent a proposal to the defendants that McKenzie and counsel selected by Ben Arnold share control of the litigation. JA 400-01. On May 4, 2001, the defendants rejected this proposal. JA 402. Thus, McKenzie never represented any of the defendants, and the defendants excluded the insurance companies and McKenzie from the White and Anglin litigation.

The White action settled in June 2002 for $315,000 (JA 453), and the Anglin action settled in September 2002 for $515,000 (JA 189). According to the insurance companies, the defendants also incurred legal fees of $1.4 million. Appellees' Br. 29.

In December 2001, the insurance companies filed a declaratory judgment action seeking a declaration that they had no duty to indemnify the defendants in either action for various reasons, including that they were absolved of any duty to defend or indemnify because the defendants breached their contractual duty to cooperate and because the insurance companies suffered material prejudice from that breach. Defendants counterclaimed and sought a declaratory judgment that the insurance companies had a duty to defend and to indemnify in both cases. Essentially, the defendants contended that the insurance companies had to pay the legal bills and the cost of the settlement. Each side moved for summary judgment.

On May 25, 2004, the district court granted the insurance companies' motion for summary judgment concerning the claims for defense costs and indemnification by defendants Ben Arnold, Sunbelt, and Tovell. Twin City Fire Ins. Co., 336 F.Supp.2d at 612. As to Belson's claims for defense costs and indemnification, the court rejected Belson's indemnification claim. However, the court concluded that Belson was entitled to have the insurance companies pay for a separate defense attorney and that a trial was necessary to determine the reasonableness of Belson's attorney fees. Id. Thereafter, the parties settled the dispute about the amount of Belson's attorney fees. JA 306.

The defendants filed a timely notice of appeal. JA 338. We have jurisdiction under 28 U.S.C. 1291.

II.

We review a district court's grant of summary judgment de novo. See Private Mortgage Inv. Servs., Inc. v. Hotel & Club Assocs., Inc., 296 F.3d 308, 312 (4th Cir.2002). We have jurisdiction based on diversity, and South Carolina law governs. Accordingly, as to the disputed legal issue, we must determine how the Supreme Court of South Carolina would rule. Id. If the Supreme Court of South Carolina "has spoken neither directly nor indirectly on the particular issue before us, we are called upon to predict how that court would rule if presented with the issue." Id. In making that prediction, we may consider lower court opinions in South Carolina, the teachings of treatises, and "the practices of other states." Wade v. Danek Med., Inc., 182 F.3d 281, 286 (4th Cir.1999).

III.

The district court declared that the "principal question in this case is whether the Supreme Court of South Carolina would adopt a per se disqualification rule that would entitle an insured to select independent counsel at its insurer's expense any time the insurer attempts to defend a lawsuit under a reservation of rights." Twin City Fire Ins. Co., 336 F.Supp.2d at 612. The district court concluded that "South Carolina would reject a per se disqualification rule because it rests upon the presumption that whenever a lawyer is confronted with a potential conflict of interest, the lawyer will always compromise the interests of the client." Id. at 613. In reaching this conclusion, the district court noted that the Supreme Court of South Carolina had not directly addressed the principal legal question in this case. Id. at 612.

On appeal, the appellants contend that Hegler v. Gulf Insurance Co., 270 S.C. 548, 243 S.E.2d 443 (1978), controls this case. In Hegler, the court stated: "There is no material difference in legal effect between an outright...

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