‘Additional Insured’ can sue for bad faith

An additional insured under a commercial insurance policy can bring a bad faith claim against the carrier, a federal judge in Florence has ruled.

South Carolina case law has long made it clear that when it comes to bad-faith litigation, “named insureds” are allowed to file a lawsuit against an insurance carrier, while unnamed third parties are not.

But the state’s appellate courts have been far less clear about the ability of an “additional insured” to sue for bad faith.

Florence U.S. District Judge Richard Gergel read between the lines of past decisions to determine that yes, an “additional insured” can bring a bad faith claim.

Gergel’s Feb. 6 opinion in UFP Eastern Division, Inc. v. Selective Insurance Company of South Carolina noted the South Carolina Court of Appeals came close to tackling the question in a 2012 case. But the court never explicitly said additional insureds have standing to bring a bad-faith case against a carrier.

However, Gergel determined that because the appeals court based its decision in BMW of North America v. Complete Auto Reconstruction Services Inc.  on an unrelated issue, the standing question must not have mortally wounded the additional insured plaintiff’s case.

“Further, this court can discern no apparent reason why a party identified as an insured in the insurance contract should not be able to bring a bad faith claim regarding the handling of its claim for insurance benefits brought under the insurance contract,” Gergel said.

Attorneys who represent plaintiffs in bad faith litigation said Gergel’s opinion might block a common argument made by insurance carriers in bad-faith cases.

Ashley Twombley of Twenge & Twombley in Beaufort, who represents plaintiffs in bad faith cases, said carriers often argue that additional insureds reside in a legal “no man’s land” that makes them closer to unnamed third parties, who lack standing in bad-faith cases, than named insureds with standing.

“Here the court is clearly saying there is no ‘no man’s land,’” Twombley said. “Judge Gergel confirms that  additional insureds are far more akin to named insureds because those parties are included in the policy as named additional insureds.”

Leaky housing

Gergel’s ruling came in a dispute between a Michigan-based framing contractor that sued its insurers, alleging they had a duty to provide a legal defense in a number of homeowner lawsuits.

Universal Forest Products Eastern Division had been hired by Beazer Homes to handle the framing work for the development of 59 single- and multi-story residential buildings in Horry County. UFP used several subcontractors to help with the project, including VF Builders, which carries out the framing for 13 of the 59 buildings.

As part of the arrangement, UFP required the subcontractor to list UFP as an additional insured on its commercial general liability insurance policies with three insurers, one of which was Selective Insurance Company of South Carolina.

After the Park West project was completed, the Park West Horizontal Property Regine and the Park West Homeowners’ Association of Myrtle Beach Inc. claimed that shoddy framing had resulted in water intrusion that damaged several of the homes.

The owners filed a lawsuit against Beazer on Jan. 31, 2013, which prompted Beazer to file a third-party complaint against its subcontractors, including UFP.

UFP in turn filed claims against its subcontractors, including VF Builders. That case ultimately resulted in a $230,000 settlement to UFP, with Selective contributing $120,000 of that amount.

However, the settlement explicitly excluded UFP’s claims to insurance benefits from VF Builders’ insurers.

Disputed timing

UFP claims it sent its request for a legal defense and indemnification to Selective on Oct. 1, 2014. Selective has denied receiving UFP’s tender before April 29, 2015.

On April 17, 2015, UFP sued Selective, alleging the insurance company breached its duty of defense. The complaint also alleged Selective acted in bad faith.

Selective moved for summary judgment last March. In its motion, the insurance company argued it had met its obligation to defend UFP after receiving its request on April 29, 2015, and that UFP had not shown a defense should have been provided sooner. Selective also argued UFP failed to provide evidence supporting its claim for indemnity.

Gergel made quick work of the first two arguments put forward by Selective. The judge ruled there was a legitimate dispute about whether Selective received UFP’s Oct. 1, 2014 tender letter. He also held that Selective had not met its burden to show UFP has no provable damages.

But Selective’s most interesting argument in favor of summary judgment was that additional insured cannot bring a bad-faith claim.

Gergel ultimately rejected that argument as well.

Gergel said the cases cited by Selective allegedly supporting its position were not on point because they concerned claims brought by third-party tort victims suing tortfeasors’ liability providers for coverage of underlying tort claims, not additional insured tortfeasors suing their own insurers for breach of contract.

In short, named additional insureds aren’t the same as unnamed third-parties.

“The court therefore finds that a genuine dispute exist about whether Selective handled UFP’s claim in good faith,” Gergel said.

Boon to plaintiffs?

Now that Gergel has ruled on the question, additional insureds might find it easier to file bad faith claims against insurance carriers. But until the appellate courts weigh in, it’s unclear how much of a difference Gergel’s opinion will make.

James Bruorton of Rosen Hagood in Charleston, who represents UFP, said his clients were pleased with the ruling. But his clients still have a long way to go in pursuing their claims against Selective Insurance.

Gergel has scheduled jury selection in the case for March 7. The trial is expected to begin in early April.

“It’s certainly not final,” Bruorton said. “But it appears Judge Gergel is going to allow us to make the case to a jury that an additional insured should be allowed to bring a bad faith claim against a carrier if it is not meeting its obligations under the policy, even though they are not a named insured.”

Andrew F Lindemann of Davidson & Lindemann in Columbia, who is representing Selective Insurance, did not respond to requests for comment.

The 13-page opinion is UFP Eastern Division, Inc. v. Selective Insurance Company of South Carolina (Lawyers Weekly No. 002-049-17) An opinion digest is available at sclawyersweekly.com.

Follow Jeff Jeffrey on Twitter @SCLWJeffrey