In South Carolina, Insurers Owe Fees for Losing a First Party DJ? – It’s Un-American!

December 6, 2022

Bottom Line, Up-Front

A recent South Carolina federal district court ruling interprets South Carolina law in a new and potentially dangerous way – by allowing for an award of attorney’s fees against a property insurer in a first-party dispute that it properly raised via a Declaratory Judgment action. By extending already questionable case law in the third-party context into the first-party arena, this new decision stifles an insurer’s valid legal right to seek judicial review of a legitimate coverage dispute, by needlessly raising the stakes to include attorney’s fees for the policyholder. The allure of attorney’s fees for prevailing on first-party coverage disputes is typically reserved for hyper-aggressive policyholder jurisdictions like Florida, whose attorney’s fees statute is the bane of many an insurer’s existence. Will this new decision turn South Carolina into Florida? – Only time will tell.

The American Rule and Hegler

Under the American Rule, which prevails in most States across the Country, a party cannot recover its attorney’s fees in a breach of contract or declaratory judgment action, unless a statutory or contractual provision explicitly authorizes it. In South Carolina, this is not the case. In South Carolina, if an insurer commences and loses a declaratory judgment action to determine coverage, then even in the absence of extra-contractual allegations, that insurer may be liable for the insured’s reasonable attorney’s fees.

South Carolina first abrogated the American Rule in 1978, via its Supreme Court’s decision in Hegler v. Gulf Insurance Co. Id., 243 S.E.2d 443 .There, the Court held that if an insurer commences and loses a declaratory judgment action against its insured to determine whether the parties’ liability insurance policy entitles the insured to defense or indemnity, then the insured is entitled to its incurred attorney’s fees. Id. Since then, South Carolina courts have repeatedly upheld this decision. Indeed, they have even extended Hegler to other declaratory judgment matters, such as those involving UIM coverage. Thus, the “rule” in South Carolina, as it pertains to third-party coverage matters, is that if an insurer commences and loses a declaratory judgment action to determine coverage, the insurer may be liable for the insured’s incurred attorney’s fees, irrespective of whether extra-contractual allegations are pled. But what about first-party coverage matters?

First-Party Coverage Matters

The recent decision of United Prop. & Cas. Ins. v. Couture appears to have answered that. Id., 2:19-cv-01856-DCN, 2022 WL 11274543, at *3 ). There, the insurer commenced a declaratory judgment action to determine whether its homeowner’s policy entitled the insured to coverage for the insured’s property damage claim. The U.S. District Court of South Carolina did not determine whether such coverage existed. However, it ruled that “if [Couture] prevails in defending against the declaratory judgment action,” Couture “may still recover attorney’s fees under Hegler,” despite the absence of any extra-contractual allegation. See Id., 2022 WL 11274543, at *4, n.2. Accordingly, in South Carolina if an insurer commences and loses a declaratory judgment action involving either first or third-party coverage, the insurer may be liable for the insured’s incurred attorney’s fees, irrespective extra-contractual allegations.

Conclusion

The reasoning of Couture, much like Hegler, is questionable. No South Carolina statute or insurance contractual provision permits an insurer to recover attorney’s fees in a declaratory judgment coverage action. Nonetheless, the “Hegler Rule” exists. Since Hegler, no South Carolina State Court has extended Hegler’s ruling to first-party matters, and federal courts sitting in diversity are required to follow state court holdings. Nevertheless, the South Carolina Federal Court has issued the Couture decision. Further, in doing so, it failed to square its decision with its holding in Warren Mechanical, issued just four years ago, wherein the same Federal Court held that Hegler did not apply to matters involving judicial declarations and material misrepresentations—which were also present in Couture.  For now, it appears that if South Carolina law applies to an insurance contract and the insurer commences and loses a declaratory judgment action to determine either (i) the duties of defense and/or indemnity, or (ii) whether the insured is entitled to first party insurance coverage, then that insurer may be liable for the insured’s attorney’s fees, even in the absence of extra-contractual allegations. Accordingly, in South Carolina, insurers should carefully assess whether to pursue a declaratory judgment action involving first- or third-party coverage.

For any further questions, please contact T. Nicholas Goanos.