Court Opinion

ID: 4419485
Source: CourtListenerOpinion
Date Created: 2019-07-24 13:46:43.946099+00
Date Added: 2024-06-11T12:33:07.327994
License: Public Domain

THE STATE OF SOUTH CAROLINA
            In The Supreme Court

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

            Appeal from Richland County
        L. Casey Manning, Circuit Court Judge

                Opinion No. 27902
      Heard March 5, 2019 – Filed July 24, 2019

                    REVERSED

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.

1
  "Any endorsement, provision, or rider attached to or included in any policy of
insurance which purports or seeks to limit or reduce the coverage afforded by the
provisions required by this section is void."
2
 The notice and cooperation provision at issue in this case is located under the
"Business Auto Conditions" section and states:
      2. Duties In The Event Of Accident, Claim, Suit Or Loss
      We have no duty to provide coverage under this policy unless there
      has been full compliance with the following duties:
      a. In the event of "accident", claim, "suit" or "loss", you must give
         us or our authorized representative prompt notice of the
         "accident" or "loss."
                               *      *     *
      b. Additionally, you and any other involved "insured" must:
                               *      *     *
      ꞏ (2) Immediately send us copies of any request, demand, order,
         notice, summons or legal paper received concerning the claim or
         "suit".
       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

3
Will. v. Gov't Employees Ins. Co. (GEICO), 409 S.C. 586, 762 S.E.2d 705
(2014).
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. See S.C. Code Ann. 56-11-
10, et seq (repealed and recodified in section 38-77-10 (1976)). This legislation
brought South Carolina in line with the growing trend towards compulsory insurance
by requiring every motorist to obtain liability insurance in order to provide
protection to those injured by the negligence of another. Faizan v. Grain Dealers
Mut. Ins. Co., 118 S.E.2d 303, 311 (N.C. 1961) (noting that many states have
compulsory insurance laws); Shores v. Weaver, 315 S.C. 347, 354, 433 S.E.2d 913,
916 (Ct. App. 1993) (discussing the transition from voluntary to mandatory
insurance). With the adoption of mandatory insurance, the question arose whether
an insurer could still rely on the notice clause to defeat statutorily required coverage.
The court of appeals addressed this issue in Shores, holding an insurer must pay the
minimum limits required by law even if it could prove substantial prejudice.

        In Shores, an innocent passenger in the insured's vehicle was severely injured
in an accident. Id. at 349, 433 S.E.2d at 913. Shortly thereafter, the driver's insurance
company was notified of the claim and assigned it to a local adjuster. The
passenger’s lawyer attempted to contact the adjuster, offering to settle for the
policy's mandatory minimum limit of $15,000. The adjuster refused and three years
later, the passenger sued the insured, who failed to forward the pleadings to his
carrier. Id. at 349, 433 S.E.2d at 914. Approximately two more years passed and
following the insured’s default and a damages hearing, the court entered judgment
for $250,000. Shores, the plaintiff, filed a declaratory judgment action seeking to
recover the insured's policy limits, and the insurer moved for summary judgment
based on the insured's failure to comply with the notice provision. Id. After
discussing the shift from voluntary to mandatory insurance, the court held, "[I]n
accordance with the public purpose of protecting innocent third parties through
mandatory insurance, [the insured's] violation of a provision of the policy providing
this mandatory minimal coverage did not defeat or void that coverage." Id. at 355,
433 S.E.2d at 917. The court's rationale was grounded on the fact that the legislature
mandated minimum limits coverage to protect innocent third parties. Id. at 356, 433
S.E.2d at 917. In essence, a contrary holding would have permitted an insurer to
deny the very coverage that the General Assembly mandated that all motorists
obtain, effectively nullifying the legislature's efforts to safeguard the public. Id. at
355, 433 S.E.2d at 917. Accordingly, after Shores, an insurer could no longer rely
on a policy's notice clause to deny mandatory minimum limits coverage to an injured
third party, regardless of prejudice. However, Shores left unanswered whether an
insurer would be required to pay more than minimum limits when the policy at issue
contained liability limits above the mandatory minimum.

      The court of appeals addressed this precise question in United Services
Automobile Association v. Markosky, 340 S.C. 223, 530 S.E.2d 660 (Ct. App. 2000).
There, Markosky’s bicycle collided with a motor vehicle driven by Frazier. Id. at
224, 530 S.E.2d at 661. Markosky sued Frazier, who failed to notify her insurance
carrier, State Farm. Eventually, a default judgment was entered against Frazier, and
the parties agreed that Markosky’s damages were at least $65,000. The policy limits
under Frazier's State Farm policy were $50,000 per person, and $100,000 per
accident. Id. at 225, 530 S.E.2d at 661. Pursuant to Shores, State Farm paid the
mandatory minimum limit—$15,000—but refused to pay more, citing Frazier's
failure to comply with the notice provision. Thereafter, Markosky's UIM carrier,
USAA, paid the remaining $50,000 and sought a judicial declaration that State Farm
reimburse USAA the additional $35,000 that State Farm should have paid. Id. at
225, 530 S.E.2d at 662. The court of appeals agreed with State Farm, holding that
the notice-prejudice rule still controlled when policies in excess of the mandatory
minimum limits were involved. Accordingly, an insurer could continue to rely on its
notice clause to defend against coverage above the mandatory minimum if it proved
substantial prejudice.

       Shortly before Markosky, the General Assembly again significantly reformed
this State's automobile insurance laws, adding section 38-77-142, which became
effective in 1999.4 Relevant to our discussion today are subsections (B) and (C) of
section 38-77-142. Subsection (B) provides, inter alia,

        If an insurer has actual notice of a motion for judgment or complaint
        having been served on an insured, the mere failure of the insured to turn
        the motion or complaint over to the insurer may not be a defense to the
        insurer, nor void the endorsement or provision, nor in any way relieve
        the insurer of its obligations to the insured, provided the insured
        otherwise cooperates and in no way prejudices the insurer.

Section 38-77-142(C) provides, "Any endorsement, provision, or rider attached to
or included in any policy of insurance which purports or seeks to limit or reduce the
coverage afforded by the provisions required by this section is void."

      This Court has previously considered both sections, first addressing
subsection (B) in Cowan v. Allstate Insurance Company5 and later discussing
subsection (C) in Williams. In Cowan, Allstate issued a policy providing liability
coverage for its insured. 357 S.C. at 627, 594 S.E.2d at 276. Thereafter, a permissive

4
  Markosky did not address this statute, as the accident in question occurred
approximately five years before the statute's effective date.
5
    357 S.C. 625, 594 S.E.2d 275 (2004).
user of the vehicle was involved in an accident with two other people, who then sued
the insured and obtained a default judgment. In addition to failing to answer, the
insured never notified Allstate, who knew about a potential claim only through a
letter of representation it received from plaintiffs’ counsel. Id. Indeed, Allstate never
received notice of a lawsuit filed against its insured until the plaintiffs sought to
recover their judgment a month after the entry of default. Allstate refused to pay,
and the plaintiffs filed suit seeking payment. Both parties filed motions for summary
judgment, and the trial court found in favor of Allstate. Id. at 628, 594 S.E.2d at 276.

        The court of appeals affirmed, holding section 38-77-142(B) modified Shores
and permitted Allstate to rely on its notice clause as a defense because it did not have
actual notice of the lawsuit pursuant to the statute. Cowan v. Allstate Ins. Co., 351
S.C. 626, 631-32, 571 S.E.2d 715, 718 (Ct. App. 2002) rev'd, 357 S.C. 625, 594
S.E.2d 275 (2004). The court reasoned that by stating in subsection (B) that an
insurer who has actual notice of a suit cannot enforce a notice clause, the General
Assembly must have intended the reverse proposition to be true so that an insurer
without notice could rely on its notice clause as a defense to deny a claim brought
by a third party. However, this Court reversed, holding that subsection (B) did not
alter the Shores framework and relieve insurers of their obligation to pay a judgment
up to the mandatory minimum limits, regardless of prejudice.

       Recently, in Williams, this Court addressed section 38-77-142(C), holding
that subsection invalidated a family step-down provision because it purported to
reduce the amount of coverage from the policy limit to the mandatory minimum
limits. 409 S.C. at 603, 762 S.E.2d at 714. There, Edward and Annie Murry were
killed after a train collided with their vehicle. Id. at 591, 762 S.E.2d at 708. The
Murry's were married, and both were named insureds under a GEICO policy with
limits of $100,000 per person, not to exceed $300,000 per occurrence. Id. However,
the policy also included a step-down provision, which reduced coverage to the
mandatory minimum limits for injured family members. Id. at 592, 762 S.E.2d at
708. Both personal representatives filed a declaratory judgment seeking to determine
the amount of coverage available, and the trial court ruled in favor of GEICO,
finding the policy unambiguous and stating the step-down provision did not violate
public policy or section 38-77-142(C). Id. at 593, 762 S.E.2d at 709.

       This Court reversed, holding the step-down provision void under section 38-
77-142(C) because it reduced the amount of coverage available under the policy. Id.
at 608, 762 S.E.2d at 717. We acknowledged a split of authority in other jurisdictions
concerning the viability of step-down provisions but agreed with those courts that
found the provisions violated public policy. We agreed with the Supreme Court of
Kentucky, which, in invalidating a similar provision, refused to embrace the
antiquated argument that such provisions were designed to deter potential collusion
between family members. Id. at 605, 762 S.E.2d at 715 (citing Lewis v. West
American Ins. Co., 927 S.W.2d 829 (Ky. 1996)). Quoting Lewis, this Court stated,
"To uphold the family [step-down] exclusion would result in perpetuating socially
destructive inequities." Williams, 409 S.C. at 605, 762 S.E.2d at 715.

       In light of this historical framework, we turn to the issue before us.
Philadelphia contends the circuit court erred by finding that section 38-77-142(C)
and our holding in Williams expanded Shores to require insurers to pay up to policy
limits, even if they are substantially prejudiced by their insured's failure to provide
notice of a lawsuit. Additionally, Philadelphia asserts the notice clause is a condition
precedent to coverage, and therefore, section 38-77-142(C) is not triggered.
Conversely, Neumayer argues the notice provision is not a condition precedent and
urges this Court to hold that the clause violates section 38-77-142(C). We note
Philadelphia never argued in its motion for summary judgment that the notice clause
was a condition precedent, and thus arguably advances a different argument on
appeal than that raised to the circuit court. See Stanley v. Atl. Title Ins. Co., 377 S.C.
405, 413, 661 S.E.2d 62, 66 (2008) (finding an issue unpreserved where the
argument on appeal differed than raised below). However, it is not necessary that we
find that notice provisions are conditions precedent to coverage because we agree
with Philadelphia that the clause at issue here does not violate section 38-77-142(C)
or Williams.

       We are convinced that in enacting section 38-77-142(C) in 1999, the General
Assembly did not intend to eviscerate settled law concerning notice clauses. These
policy conditions balance the insurer's important interests in receiving notice of a
lawsuit and an injured person's right to recover against a negligent motorist. The
driving force behind the notice-prejudice rule is that there is "no sound reason…to
permit a mere technical noncompliance to deprive an innocent third party of benefits
to which he would otherwise be entitled." Factory Mut. Liab. Ins. Co. of Am. v.
Kennedy, 256 S.C. 376, 381, 182 S.E.2d 727, 729 (1971). Rather than provide a
"technical escape-hatch" for the insurer to deny coverage, the notice-prejudice rule
balances both interests without a wholesale prohibition of these clauses. See State ex
rel. Div. of Admin., Office of Risk Mgmt. v. Nat'l Union Fire Ins. Co. of Louisiana,
56 So. 3d 1236, 1246 (La. Ct. App. 2011) ("The function of the notice requirements
is simply to prevent the insurer from being prejudiced, not to provide a technical
escape-hatch by which to deny coverage in the absence of prejudice nor to evade the
fundamental protective purpose of the insurance contract…."); B.L.G. Enterprises,
Inc. v. First Fin. Ins. Co., 334 S.C. 529, 535–36, 514 S.E.2d 327, 330 (1999)
("[I]nsurers have the right to limit their liability and to impose conditions on their
obligations provided they are not in contravention of public policy or a statutory
prohibition."). Further, these clauses are routinely found in insurance policies and
do not implicate the same public policy interests inherent in Williams. See Harris v.
Prudential Prop. & Cas. Ins. Co., 632 A.2d 1380, 1382 (Del. 1993) (holding an
insurer must pay the mandatory minimum limit but may rely on a cooperation clause
to defeat coverage in excess of that amount despite previously finding a household
exclusion—similar to the provision in Williams—void).

       Finally, the General Assembly presumably was aware of Shores when it
amended the insurance laws. We believe the inclusion of section 38-77-142(B)
demonstrates the legislature’s recognition of the role notice provisions play in
insurance contracts. Had the General Assembly intended to categorically prohibit
the enforcement of notice clauses in all policies, it would have done so. We therefore
refuse to read Section 38-77-142(C) to abolish notice and cooperation clauses in
insurance contracts.

                                  CONCLUSION
       We hold the circuit court erred in ruling that section 38-77-142(C) invalidates
the standard notice clause contained in this insurance policy. While Shores requires
an insurer to provide the statutorily-mandated minimum coverage, an insurer may
continue to invoke notice clauses to deny coverage above the statutory limits,
providing the insurer can prove that it was substantially prejudiced by its insured's
failure to comply with the provision.6 Accordingly, we reverse.

REVERSED.

BEATTY, C.J., KITTREDGE, FEW and JAMES, JJ., concur.

6
  We note that because it is undisputed that Philadelphia did not receive notice until
over eighteen months after the entry of the default judgment, substantial prejudice
exists as a matter of law. See Merit Ins. Co. v. Koza, 274 S.C. 362, 364, 264 S.E.2d
146, 147 (1980) ("Here, prejudice is clearly established by the fact that a default
judgment was entered against the insured.").