Court holds duty to pay not triggered where liability insured not liable to a 3rd party

S.C. Appellate Court Holds Insurer’s Duty to Pay Not Triggered Where Insured as to Liability Coverage Not Liable to a Third Party

On August 1, 2012, the South Carolina Court of Appeals affirmed the decision of the trial court, holding that BMW was an insured only as to liability coverage, not comprehensive coverage, and therefore was not afforded coverage where it was not liable to a third party due to the damage caused to the vehicles.

In BMW of North America, LLC v. Complete Auto Recon Services, Inc. and Colony Insurance Co., BMW of North America entered into a service agreement with Complete Auto Recon Services (CARS) that stated CARS would provide washing and maintenance services on a fleet of BMW vehicles used at a BMW test track. One of CARS’s employees left the windows to six BMW vehicles open during a severe rainstorm, resulting in property damage totaling $601,720.

Colony Insurance Co. had issued a Garage Insurance Policy to CARS under which CARS was the only named insured. The policy included both liability and garage keepers coverage. Under liability, the coverage included “all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ to which [the insurance applied] caused by an ‘accident’ and resulting from ‘garage operations’ other than the ownership, maintenance or use of covered ‘autos'” and “all sums an ‘insured’ legally must pay as damages because of ‘bodily injury’ or ‘property damage’ to which [the insurance applied] caused by an ‘accident’ and resulting from ‘garage operations’ involving the ownership, maintenance or use of ‘covered autos.'” Within the garage keepers coverage, the policy provided for two different types of coverage labeled “comprehensive” and “collision.” Generally, the garage keepers coverage provided:

[The insurer will] pay all sums the “insured” legally must pay as damages for “loss” to a “customer’s auto” or “customer’s auto” equipment  left in the “insured’s” care while the “insured” is attending, servicing, repairing, parking or storing it in your “garage operations” under:

a.         Comprehensive Coverage From Any Cause Except:

(1)        The “customer’s auto’s” collision with another object; or

(2)        The “customer’s auto’s” overturn . . .

c.         Collision Coverage Caused By:

(1)        The “customer’s auto’s” collision with another object; or

(2)        The “customer’s auto’s” overturn.

The Policy also included an endorsement naming BMW as an additional insured;

Under LIABILITY COVERAGE WHO IS AN INSURED is changed to include [BMW], but only for liability arising out of the ownership, maintenance and use of that part of the described premises which is leased to [CARS].

The endorsement did not mention any other types of coverage, nor did the Policy include any further endorsements with respect to BMW.

BMW filed a claim for the damage to the six vehicles with Colony. Colony investigated and declined to make payment. BMW sent two subsequent letters requesting Colony pay the claim, citing reprimands issued to two CARS employees and sufficient notice of the severe storms. Colony again denied BMW’s claim. BMW then filed suit against CARS and Colony. As to Colony, BMW alleged breach of an insurance contract and bad faith refusal to pay. Colony counterclaimed asking the court to enter a declaratory judgment stating Colony owed no duty to BMW with regard to the damaged vehicles.

Colony moved for summary judgment arguing it owed no duty to BMW because BMW’s coverage under the policy was limited to third party liability coverage, and BMW was not liable to a third party for the damage to the vehicles. BMW responded arguing that (1) because BMW was listed as an additional insured in the policy and the policy included comprehensive coverage, Colony owed a duty to BMW; (2) the policy language was ambiguous and should be interpreted in favor of coverage; (3) an interpretation that BMW was only afforded liability coverage under the policy would render it meaningless as to BMW; and (4) even without a breach of the policy, Colony could still be liable for a bad faith claim. The trial court granted Colony’s motion for summary judgment.

Coverage

On appeal, BMW argued the policy showed CARS was paying premiums for comprehensive coverage under the garage keepers coverage, which was separate and distinct from any liability premiums CARS paid, and BMW was an additional insured to that coverage. BMW further contended that the policy was ambiguous as to the comprehensive coverage. The court disagreed, finding that under the unambiguous language of the policy, BMW was only an insured for purposes of liability coverage:

We find the trial court did not err in determining BMW was not afforded coverage under the Policy as to the Vehicles. BMW is not a named insured on the Policy itself. As a result, the Policy as a whole does not initially cover BMW as an insured. However, BMW is added to the Policy by way of an endorsement to the Policy. This endorsement, however, which is the only way BMW under the policy could be an insured, provides only liability coverage. Importantly, the endorsement makes no mention of comprehensive coverage. Additionally, the endorsement specifically provides, “The provisions of the Coverage Form apply unless modified by the endorsement.” Thus, because “WHO IS AN INSURED” as to the comprehensive coverage was not modified by the endorsement, the original form applies, meaning only CARS, the named insured, is entitled to that coverage. Therefore, according to the plain language of the Policy, BMW is only an insured as to liability.

Accordingly, the court found that, in order for Colony’s duty to pay BMW as an insured to be triggered, BMW must have first been liable to a third party for the damage to the vehicles:

Because BMW is only an insured as to liability coverage under the Policy, for Colony’s duty to pay BMW as an insured to be triggered, BMW must have first been liable to some third party. See Trancik v. USAA Ins. Co., 354 S.C. 549, 554, 581 S.E.2d 858, 861 (Ct. App. 2003) (stating liability insurance contracts are generally contracts “whereby the insurer . . . agrees to pay the insured . . . the amount of any damages the insured may become legally liable to pay to a third party”); see also Black’s Law Dictionary 997 (9th ed. 2009) (defining liability as “[t]he quality or state of being legally obligated or accountable; legal responsibility to another”). BMW failed to present any evidence tending to show it was in any way liable to a third party due to the damage caused to the Vehicles. Further, in BMW’s response to Colony’s request for admissions, BMW admitted no one had filed suit against it regarding damage to the Vehicles.

Thus, the court found the trial court did not err in determining the policy did not afford BMW coverage with respect to the damaged vehicles.

Bad Faith

BMW also argued the trial court erred in granting Colony’s summary judgment motion as to the bad faith claim because BMW was an additional insured under the Policy and by ignoring BMW’s correspondence, refusing to provide explanations as to the denial of coverage, and refusing to acknowledge CARS’ liability, Colony acted in bad faith in processing and denying BMW’s claim. In response, Colony argued that because no coverage existed as to the claim BMW made, Colony could not have acted in bad faith in refusing to pay BMW. The court agreed with Colony, likening the case presented to situation in Myrick v. Prime Insurance Syndicate, Inc., 395 F.3d 485 (4th Cir. 2005):

As previously discussed, with respect to the Vehicles, the Policy did not afford BMW coverage for this claim. The Fourth Circuit, in Myrick v. Prime Ins. Syndicate, Inc., 395 F.3d 485 (4th Cir. 2005), while interpreting South Carolina insurance law, determined a similar situation to the present case provided reasonable grounds for the insurer to deny coverage. In Myrick, the insured sought to insure three pieces of equipment from loss. Just weeks after the policy became effective, a fire destroyed one of the pieces of equipment the insured sought to have covered under the policy. After the insured made a claim on the destroyed equipment, the insurer correctly determined although the policy at issue did provide property coverage for one machine of the type destroyed, it did not provide such coverage for the specific machine that burned. As a result, the court held that although the parties admitted a contract existed between them, the insurer’s refusal to pay benefits was reasonable because the subject matter of the claim allegedly triggering payment did not actually fall within coverage.

The present case bears comparison to Myrick. Just as destruction of the machine in Myrick could never trigger coverage as to the insured because it was not covered in the policy, so too could there never be coverage under the Policy where, as here, BMW did not face any sort of liability to third parties. As a result, just as was the case with the insurer in Myrick, we find Colony had reasonable grounds upon which to not only contest, but also refuse BMW’s claim.

(Internal citations omitted). The Court of Appeals further noted the Myrick court also determined that the insurer adequately investigated the insured’s claim; however, in the case presented, BMW’s argument regarding bad faith claims processing was not preserved. The court of appeals therefore found the trial court did not err in granting Colony summary judgment on BMW’s bad faith claim.