Twin City Fire v. Ben Arnold-Sunbelt Beverage

• Decision Date: 26 July 2004
• Docket Number: No. C/A 3:01-4769-17.,C/A 3:01-4769-17.
• Citation: 336 F.Supp.2d 610
• Court: U.S. District Court — District of South Carolina
• Parties: TWIN CITY FIRE INSURANCE COMPANY, and Hartford Casualty Insurance Company, Plaintiffs, v. BEN ARNOLD-SUNBELT BEVERAGE COMPANY OF SOUTH CAROLINA, LP, Sunbelt Beverage Company, LLC, Harvey Belson, and William Tovell, Defendants.

Page 610

336 F.Supp.2d 610

TWIN CITY FIRE INSURANCE COMPANY, and Hartford Casualty Insurance Company, Plaintiffs, v. BEN ARNOLD-SUNBELT BEVERAGE COMPANY OF SOUTH CAROLINA, LP, Sunbelt Beverage Company, LLC, Harvey Belson, and William Tovell, Defendants.

No. C/A 3:01-4769-17.

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

July 26, 2004.

Curtis L. Ott, Turner Padget Graham and Laney, Gary S. Parsons, Warren T. Savage, Bailey and Dixon, Columbia, SC, for Plaintiffs.

Eric S. Bland, Eric S. Bland and Associates, William E. Hopkins, Jr., McCutchen Blanton Rhodes and Johnson, Joshua L. Mallin, Dennis T. D'Antonio, Marc T. Wietzke, Weg and Myers, Columbia, SC, for Defendants.

MEMORANDUM OPINION ON MOTIONS FOR FOR SUMMARY JUDGMENT

JOSEPH F. ANDERSON, JR., District Judge.

The pivotal issue presented in this declaratory judgment action is whether an insurance company forfeits its right to control civil litigation when it attempts to defend its insured under a reservation of rights notice. The case comes before the court on cross motions for summary judgment. The plaintiffs, Twin City Fire Insurance Company and Hartford Casualty Insurance Company (hereinafter "the insurers"),¹ seek a declaratory judgment with respect to their obligation to defend and indemnify the defendants, Ben Arnold-Sunbelt Beverage Company of South Carolina, LP, Sunbelt Beverage Company, LLC, Harvey Belson, and William Tovell in two underlying civil actions filed in South Carolina state court. The state suits were filed by two female Ben Arnold-Sunbelt employees, Joyce Anglin and Ellen White. Both Anglin and White sought to recover damages for sexual harassment allegedly inflicted on them by Belson, who was Ben Arnold-Sunbelt's President and CEO. Claims were also asserted against Ben Arnold, Sunbelt Beverage, and William Tovell for Belson's alleged misconduct.²

In the action now before this court, the plaintiffs seek a determination that they are not liable to defendants for all legal fees, costs, and settlement amounts arising out of the Anglin and White lawsuits. For the reasons that follow, the court has determined that no genuine issue of material fact exists as to the claims for defense costs and indemnification by Ben Arnold, Sunbelt, and Tovell. The court will grant the insurers' motions for summary judgment as to these claims.

As to Belson's claims for defense costs and indemnification, the court will grant, in part, Belson's motion for summary judgment, having determined that there is no genuine issue of material fact regarding the purely legal question of whether Belson was entitled to a separate defense attorney. The issue of the reasonableness of the attorney's fees incurred by Belson is in dispute and for that reason, the court will proceed to trial on this factual issue only.

The parties have agreed that South Carolina law controls this action. The Supreme Court of South Carolina has not directly addressed the legal issues raised in this case. "In applying state law in diversity cases, [a] federal court ... must apply the law that it conscientiously believes would have been applied in the state court system." 19 Charles A. Wright, Arthur R. Miller, Edward H. Cooper, FED. PRACTICE & PROC. § 4507 (2d ed.1996). "This principle embraces a wide variety of legal authorities, including the Restatements of Law developed under the auspices of the American Law Institute, scholarly treatises, law review articles and commentaries, judicial decisions from other jurisdictions whose doctrinal approach to legal matters is substantially the same as that of the forum state, the majority rule on the point in issue as reflected in a canvas of the prevailing law on the point throughout the country, and developing trends in the relevant field of substantive laws." Id.

Thus, 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.³ Having carefully analyzed the question, the court concludes that South Carolina would not adopt such a rule. The court believes 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. This court is not prepared to conclude that the South Carolina Supreme Court would engage in such a presumption.

FACTS

Ben Arnold is a wholesale wine, spirits, and non-alcoholic beverage distributor in South Carolina. Ben Arnold purchased from the insurers two general commercial liability policies that covered claims for "personal injury" up to $1 million in the aggregate. 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 did not cover claims for sex discrimination, assault and battery, civil conspiracy, or intentional infliction of emotional distress. Such claims were also asserted in the Anglin and White actions.

Ben Arnold timely notified the insurers of the lawsuits, and the insurers hired local counsel, Robert A. McKenzie of the firm of McDonald, McKenzie, Rubin, Miller & Lybrand, to defend the claims. McKenzie, a Columbia attorney, is a well-qualified and well-respected member of the South Carolina bar. Because only two of several claims asserted in the state actions were covered by the policies, the insurers decided to defend the suits under a reservation of rights. The insurers notified Ben Arnold that they were proceeding under a reservation of rights in two letters, both dated December 19, 2000.

Ben Arnold responded by rejecting McKenzie's representation and effectively ousting the insurers from the cases. Ben Arnold claimed McKenzie was automatically disqualified from representing it because he would be operating under either an actual or potential conflict of interest. The conflict of interest, according to Ben Arnold, arose solely because some of the claims were covered by the insurance policies while others were not.⁴ Ben Arnold contended that since the insurers selected McKenzie and would be paying his fees, McKenzie would necessarily favor the insurance companies over the insured, and therefore would devote his energies toward a successful resolution of the covered claims, with no concern for the non-covered claims. Ben Arnold insisted that this conflict of interest entitled it to select its own lawyer, at the insurers' expense, to defend against all claims.

The insurers agreed that Ben Arnold had the right to select independent counsel to defend the non-covered claims. However, the insurers warned Ben Arnold that, under the terms of the policies, Ben Arnold would be responsible for the cost of the independent representation. Ben Arnold disagreed, insisting it had the right to choose its own lawyer to defend all claims and to be reimbursed for all reasonable fees and costs incurred.

In an effort to work out a solution, the insurers proposed having McKenzie defend the covered claims in conjunction with independent counsel selected by Ben Arnold, who would defend the non-covered claims. The independent counsel would be paid by the insurers. In other words, the insurers proposed sharing control of the litigation, subject to certain conditions.⁵ Ben Arnold refused.

Instead, Ben Arnold retained its own lawyers, proceeded with the litigation on its own,⁶ left the insurers out in the cold, settled the cases, then demanded reimbursement for all attorney's fees, costs, and settlement payments. The legal fees alone exceeded $1.5 million,⁷ and the settlements totaled $830,000.⁸ The insurers brought this action while one of the state suits was still pending, asking this court to declare that they had no duty to pay. Ben Arnold counterclaimed for defense costs⁹ and indemnification. Both sides have now moved for summary judgment.

Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admission on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). It is well established that summary judgment should be granted "only when it is clear that there is no dispute concerning either the facts of the controversy or the inferences to be drawn from those facts." Pulliam Inv. Co. v. Cameo Props., 810 F.2d 1282, 1286 (4th Cir.1987) (citation omitted).

DISCUSSION

1. The Claims By and Against Ben Arnold, Sunbelt, and Tovell

A. The Duty to Defend

i. Per Se Disqualification

It is at this point that the court must separate and discuss individually the claims by and against Ben Arnold, Sunbelt, and Tovell (hereinafter for ease of reference referred to collectively as "Ben Arnold") and those of Belson.¹⁰ The position of Ben Arnold is succinctly set forth in its brief as follows:

[B]ecause plaintiffs reserved their rights as it related to indemnification coverage for most of the causes of action and agreed to accept liability for indemnification with respect to two of the causes of action, a conflict of interest was created whereby defendants were entitled to retain counsel of their choosing with the reasonable fees for said counsel to be paid by plaintiffs.

Defendants' Memorandum dated April 4, 2003, at 4-5.

In advancing this argument, Ben Arnold seeks to have this court adopt a per se disqualification rule requiring the immediate disqualification of counsel selected by an insurance carrier any time the carrier purports to defend a civil action under a reservation of rights. Both parties agree that the Supreme Court of South Carolina has never squarely...