May 16th, 2017
By, Mark A. Boyle, Esq.
Under the law of South Carolina, a tort action for an insurer’s bad faith refusal to pay benefits does not extend to third parties who are not insureds under the policy. Kleckley v. Nw. Nat. Cas. Co., 526 S.E.2d 218, 219 (S.C. 2000). The South Carolina Supreme Court has not yet addressed whether a party who is not a named insured, but is an additional insured, is entitled to proceed in bad faith against an insurer which fails to honor its obligations under the insurance contract. In UFP Eastern Division, Inc. vs. Selective Insurance Company of South Carolina, 2017 WL499083 (SDSC 2017) the Court held that South Carolina law does permit an additional insured to bring a claim for bad faith. In so doing the Court noted:
“The South Carolina Court of Appeals addressed an additional insured’s bad faith claim in BMW of N. Am.,LLC v. Complete Auto Recon Services, Inc., 731 S.E.2d 902, 907 (S.C. Ct. App. 2012). The Court of Appeals held that defendant Colony Insurance Company was entitled to summary judgment on the bad faith claim brought by BMW, an additional insured under a policy issued by defendant, because the subject matter of the claim was not covered by the insurance agreement. There is no suggestion that BMW lacked standing to bring a bad faith claim against Colony Insurance at all. 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. The many cases Selective cites to support its position are inapposite because they concern claims 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.”
Certainly, the ability of an additional insured to bring a bad faith claim should represent a powerful legal deterrent to insurers shirking their obligation to defend additional insureds under South Carolina Law.
By, Alex Brockmeyer, Esq.
“Mend the hold.” The phrase originates from wrestling parlance where it meant “to get a better grip (hold) on your opponent.” Harbor Ins. Co. v. Continental Bank Corp., 922 F. 2d 357, 362 (7th Cir. 1990). The first appearance of the phrase in a judicial opinion occurred in a case where the Supreme Court held a party in a contract suit could not justify its nonperformance with a defense it did not raise prior to the commencement of litigation:
[w]here a party gives a reason for his conduct and decision touching any thing involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is not permitted thus to mend his hold. He is estopped from doing it by a settled principle of law.
Railway Co. v. McCarthy, 96 U.S. 258, 267-68 (1877). Estoppel and waiver form the underlying basis for this doctrine, which at its most basic level precludes a party from changing its defense to performance of a contract in the middle of litigation. E.g. Baquero v. Lancet Indem. Risk Retention Group, Inc., 2013 WL 5237740, *6 (S.D. Fla. Sept. 17, 2013) (citing Harbor Ins. Co. v. Continental Bank Corp., 922 F. 2d 357, 362-65 (7th Cir. 1990)).
The “mend the hold” doctrine is particularly suited for insurance disputes where an insurer changes its reason for denying a claim. Id. In fact, some commentators have observed that courts have expressed a willingness to apply the “mend the hold” doctrine out of “an intolerance for insurers to adjust legal positions like chameleons adjust their color.” Michael Laurato, Mending the Hold in Florida: Getting a Better Grip on an Old Insurance Doctrine, 4 FLA. A&M U. L. REV. 73, 74 (2009) (citing Eugene R. Anderson & Nadia V. Holober, Preventing Inconsistencies in Litigation With a Spotlight on Insurance Coverage Litigation: The Doctrines of Judicial Estoppel, Equitable Estoppel, Quasi-Estoppel, Collateral Estoppel, “Mend the Hold,” “Fraud on the Court,” and Judicial and Evidentiary Admissions, 4 CONN. INS. L.J. 589, 692 (1997-98)).
Application of the doctrine has yielded two approaches. Robert Stikoff, “Mend the Hold” and Erie: Why an Obscure Contracts Doctrine Should Control in Federal Diversity Cases, 65 U. CHI. L. REV. 1059, 1059-60 (1998). The minority approach precludes a party from changing its position during litigation from its pre-suit position absent a good faith justification for the change in position. Id. at 1062-71. The majority approach limits the nonperforming party’s defenses in litigation to those provided pre-suit at the time it refused to perform. Id.
Florida follows a version of the majority approach. To apply the “mend the hold” doctrine in Florida, it appears that a party to contract must prove: (1) the insured detrimentally relied on the insurer’s conduct; and (2) the insurer had sufficient information at the time of its initial denial to have waived the additional defense it seeks to assert during litigation. Trovillion Const. & Development, Inc. v. Mid-Continent Cas. Co., 2014 WL 201678, *9 (M.D. Fla. Jan. 17, 2014); Square at Key Biscayne Condo. Ass’n, Inc. v. Scottsdale Ins. Co., 2014 WL 11946882, *4 (S.D. Fla. Dec. 15, 2014); Baquero, 2013 WL 5237740 at *6 Principal Life Ins. Co. v. Alvarez, 2011 WL 4102327, *6-7 (S.D. Fla. Sept. 14, 2011). Application of this doctrine also appears to be limited to instances where an insurer seeks a forfeiture of the policy as opposed to invoking a policy exclusion. Square at Key Biscayne, 2014 WL 11946882 at *4. The conclusion reached by these courts stems from Florida’s intermediate appellate courts utilizing estoppel and waiver principles in determining whether to permit insurers to engage in the very conduct prohibited by the “mend the hold doctrine.” See Salcedo v. Asociacion Cubana, Inc., 368 So. 2d 1337, 1339 (Fla. 3d DCA 1979) (citing McCarthy, 96 U.S. at 268); see also American States Ins. Co. v. McGuire, 510 So. 2d 1227 (Fla. 1st DCA 1987); Six L’s Packing Co., Inc. v. Fla. Farm Bureau Mut. Ins. Co., 268 So. 2d 560 (Fla. 4th DCA 1972).
As such, it appears the “mend the hold” doctrine has limited applicability. One such area where the doctrine seems particularly applicable is where an insurer attempts to invoke a condition precedent—such as a proof of loss or prompt notice of a loss—during litigation after not raising the issue pre-suit. Allstate Floridian Ins. Co. v. Farmer, 104 So. 3d 1242, 1246-50 (Fla. 5th DCA 2012). Failure to comply with a condition precedent results in a forfeiture of the policy. Id. at 1249-50. An insurer will certainly be able to raise these conditional defenses pre-suit and would know of an insured’s failure to comply with any condition precedent set forth in the policy. Finally, the insured’s detrimental reliance on its insurer’s failure to raise the condition precedent is easy: the insured relies on the insurer’s failure to raise the condition precedent pre-suit in determining its ability to file suit.