[A]n insured must employ counsel to defend — in the first instance in the damage action and in the second in the declaratory judgment action to force the insurer to provide the defense. In both, the counsel fees are incurred because of the insurer’s disclaimer of any obligation to defend.
Here is Part II of our blog series regarding Jessco, Inc. v. Builders Mutual Insurance Co.
You can read Part I here, which details a recent opinion of the United States Court of Appeals for the Fourth Circuit that addresses a multitude of issues presented in litigation involving commercial general liability policies – the “your work” exclusion, late notice, and the duty to indemnify.
On May 3, 2012, in Jessco, Inc. v. Builders Mutual Insurance Co., upon remand by the Fourth Circuit, the United States District Court for the District of South Carolina amended its previous Judgment and deducted $10,000.00 from the total amount previously awarded, $78,695.20, finding Jessco, Inc. (“Jessco”) was entitled to a judgment in the amount of $68,695.20 plus post-judgment interest. In the same order, upon Jessco’s Amended Motion for Award of Fees and Costs After Remand, addressing an issue of first impression, the court held that Builders Mutual Insurance Co. (“BMIC”) was obligated to pay Jessco’s attorney’s fees and costs incurred on appeal.
Citing Hegler v. Gulf Insurance Co., 270 S.C. 548, 550-51, 243 S.E.2d 443, 443 (1978), the court noted South Carolina courts have found an insured may be entitled to reasonable attorney fees and costs incurred in successfully defending a declaratory judgment action brought by the insurer in an effort to relieve itself of coverage under an insurance policy, reasoning that:
If the insurer can force [the insured] into a declaratory judgment proceeding and, even though it loses in such action, compel him to bear the expense of such litigation, the insured is actually no better off financially than if he had never had the contract right mentioned above.
(Alteration and emphasis in original). However, whether an insured is also entitled to recover attorney fees and costs incurred on appeal when (1) the insurer appeals the trial court’s ruling for the insured in a declaratory judgment action, and (2) the appellate court affirms the lower court’s judgment with regard to the insurer’s duty to defend, had never been addressed by the South Carolina courts.
In support of its motion for attorney fees and costs, Jessco argued that whether the fees and costs arose in the context of a declaratory judgment action or in its appeal makes no difference; because in either case, the insured is doing nothing more than attempting to protect its contractual right to a defense. Thus, Jessco argued, the rationale in Hegler for providing relief to an insured that is “forced” into a declaratory judgment action and wins should apply equally when the insured is forced to defend its rights in the appeal of that action and wins. In opposition, BMIC argued the reversal by the Fourth Circuit as to BMIC’s duty to indemnify Jessco for the re-grading allowance necessitated a finding in favor of BMIC on Jessco’s motion. The court rejected BMIC’s argument, noting that South Carolina courts have established the duty to defend is separate and distinct from the duty to indemnify, and Jessco’s motion sought payment for fees and costs as damages suffered by Jessco for BMIC’s breach of its duty to defend, not its duty to indemnify. See USAA Prop. & Cas. Ins. Co. v. Clegg, 377 S.C. 643, 654, 661 S.E.2d 791 (2008) (quoting Sloan Constr. Co. v. Cent. Nat’l Ins. Co. of Omaha, 269 S.C. 183, 186-87, 236 S.E.2d 818 (1977)).
BMIC also argued there was “simply no legal authority” supporting an award of appellate fees and costs. However, BMIC failed to produce any authority demonstrating that Hegler did not apply to support such an award. In response, Jessco acknowledged that the motion presented a novel legal issue, but argued there was no logical reason why Hegler did not apply to fees and costs incurred on appeal. The court agreed with Jessco’s reasoning, finding as follows:
When BMIC appealed the declaratory judgment action, it was still seeking to avoid its obligation to defend, just as it sought to avoid its’ duty to defend at the trial level. Thus, 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. Hegler held that an insured is entitled to recover attorney’s fees and costs following a successful defense of a declaratory judgment action. See Hegler, 270 S.C. at 548 (emphasis added). The holding in Hegler necessarily encompasses fees and costs incurred at the appellate level of that action. The appellate expenses, like the trial level expenses, are damages arising directly out of the insurer’s breach of its duty to defend. Therefore, the Court finds that Jessco is entitled to recover reasonable attorney fees and costs of defending this action on appeal from BMIC, just as it was at the trial level. See Hegler, 270 S.C. at 551 (“After all, the insurer had contracted to defend the insured, and it failed to do so. It guessed wrong as to its duty, and should be compelled to bear the consequences thereof.”).
The court also found that Rule 222, SCACR did not prohibit an award pursuant to Hegler, and further, did not divest the court of authority to make such an award:
Sections (a) and (b) of Rule 222 state: “When an appeal is affirmed or reversed in part or is vacated, costs shall be allowed only as ordered by the appellate court.” “In addition, the party shall be entitled to recover an attorney’s fee in an amount which shall be set by order of the Supreme Court.” Rule 222(b). However, the Rule “`does not preempt an award of attorney’s fees to which one is otherwise entitled.'” Muller v. Myrtle Beach Golf & Yacht Club, 313 S.C. 412, 416, 438 S.E.2d 248 (1993) (citing McDowell v. S.C.D.S.S., 304 S.C. 539, 543, 405 S.E.2d 830 (1991)). Thus, the Court may grant an award pursuant to Hegler because the authority pursuant to Hegler and the authority vested in the court of appeals pursuant to Rule 222 are not mutually exclusive.
Noting that, upon remand, the district court had jurisdiction to enforce the judgment and take any actions consistent with the Fourth Circuit’s ruling, and the Hegler rule did not limit the collection of attorney fees to a specific court or level of courts, the court found it could properly award appellate attorney fees and costs to an insured as damages flowing from an insurer’s breach of its duty to defend. Accordingly, the court granted Jessco’s Motion for Award of Fees and Costs After Remand.