Tuesday, May 8, 2012

South Carolina Court Awards Insured Declaratory Judgment Fees Through Appeal

In a matter involving an issue of first impression under South Carolina law, the United States District Court for the District of South Carolina, in its recent decision in Jessco, Inc. v. Builders Mutual Insurance Co., 2012 U.S. Dist. LEXIS 62114 (May 3, 2012), considered whether an insured is entitled to recover fees and costs after successfully litigating a declaratory judgment action on appeal.

The insured, Jessco, had sought a defense and indemnity in connection with an underlying construction defect case.  The insurer, BMIC, denied coverage on the basis that the alleged damages arose out of a breach of contract rather than an occurrence.  The district court held that BMIC had both a duty to defend and indemnify the insured in the underlying matter, and that the insured also was entitled to an award of fees and costs associated with its successful prosecution of the declaratory judgment action.  On appeal, the Fourth Circuit held that the lower court correctly determined that BMIC had a duty to defend and that Jessco was entitled to a recovery of fees and costs. The Fourth Circuit further held, however, that the lower court erred in concluding that BMIC had a duty to indemnify, as the alleged damages arose out of a breach of contract rather than an occurrence.

After the Fourth Circuit issued its decision, Jessco made a motion in the lower court for fees and costs associated with the appeal.  The district court observed that this was a matter of first impression in South Carolina.  It nevertheless found guidance from the South Carolina Supreme Court decision in Hegler v. Gulf Ins. Co., 243 S.E.2d 443 (S.C. 1978), the seminal decision on the issue in which the court held that when an insured is required to retain counsel to successfully force the insurer to provide coverage, the insured should be entitled to recover its fees and costs.  These damages necessarily flow from the insurer’s breach of contract.  Hegler, explained the district court, paved the way for decades of South Carolina case law consistently holding that insureds are entitled to recovery of fees and costs, regardless of whether they are the plaintiff or defendant in a declaratory judgment action.

Jessco argued that while Hegler involved a trial court decision, it should make no difference whether the insured is required to incur fees and costs at the trial or appellate level, since “the insured is doing no more than attempting to protect its contractual right to a defense.”   Thus, so long as the insured is “forced” to litigate its right to coverage, it should be entitled to recovery of its fees and costs.  BMIC, on the other hand, argued that even if this is the rule, Jessco should not be entitled to such a recovery under the circumstances, since the Fourth Circuit reversed on whether BMIC had a duty to indemnify. 

The lower court rejected BMIC’s argument, noting that BMIC’s appeal was on the duty to indemnify and the duty to defend.  As the court explained:

… after prevailing at the trial level, Jessco was forced into the appellate process by BMIC, thereby bearing the expense, just as it was forced to bring the initial declaratory action to protect and enforce its rights. Jessco prevailed at the trial level, and on appeal, the Fourth Circuit found BMIC had a duty to defend and affirmed this Court's judgment and damages award on that issue. The appellate expenses, like the trial level expenses, are damages arising directly out of the insurer's breach of its duty to defend.

The court therefore concluded that Hegler applied equally to appellate cases and trial court cases, and because Jessco was successful on the duty to defend before the Fourth Circuit, it was entitled to recovery of reasonable fees and costs associated with the appeal. 

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