South Carolina Decision on Allocation of Defense Costs Creates a Trap for the Responsive Insurer

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A recent decision by the U.S. District Court in South Carolina confirms the state’s position as an outlier when it comes to whether an insurer that has a duty to defend can require other insurers to contribute to defense costs. The July 22, 2014, decision in Auto-Owners Insurance Company v. Travelers Casualty and Surety Company provides that no right of contribution exists under South Carolina law. The first insurer to acknowledge a duty to defend risks having to pay 100% of the defense costs, while other insurers with a similar duty to defend could pay nothing.

The scenario in the Auto-Owners case is common in construction defect, environmental, and toxic tort claims involving property damage or bodily injury that occurs over several years and during multiple policy periods.

The Auto-Owners decision is the most recent in a line of federal court decisions applying the South Carolina Supreme Court’s 1977 holding in Sloan Construction Company v. Central National Insurance Company. In Sloan Construction, the court held that where two insurance companies insure the identical risk and both insurers have a duty to defend, neither insurer could require the other to contribute to the cost of defending the insured. The Supreme Court concluded that “the duty to defend is personal to both insurers” and that neither insurer was entitled to “divide the duty.”

The effect of the Auto-Owners decision and those before it can be problematic. An insurer that promptly steps forward to defend before other insurers who have a similar duty to defend would be responsible for 100% of the defense costs with no ability to obtain contribution. This would allow an insurer who takes a wait and see position to pay no defense costs, at the expense of the more diligent insurer.

South Carolina is very much in the minority in its approach to allocation of defense costs. The majority view is that defense costs can be allocated among triggered insurers on a pro rata basis. Even states that adopt a “joint and several” approach to allocation recognize that a triggered insurer can seek contribution from other triggered insurers. What makes South Carolina’s approach even more unusual is that its Supreme Court has held that the duty to indemnify must be allocated on a pro rata basis across all insurers whose policies are triggered. Yet, under the recent case law, the same rule does not apply to the duty to defend.

The issue decided in Auto-Owners is currently before the Fourth Circuit Court of Appeals in another case. The Fourth Circuit’s interpretation of Sloan Construction in that case will shed light on whether South Carolina will continue to be an outlier on this vexing issue.

Topics:  Auto Insurance, Duty to Defend, Insurers, Litigation Fees & Costs

Published In: Civil Procedure Updates, General Business Updates, Insurance Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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