July 24, 2017
Recently, the United States District Court in South Carolina closed the door on removal of insurance bad faith actions where the in-house, non-diverse, claims adjuster is a co-defendant. In Aung v. GEICO, C.A. No.: 9:17-CV-856-PMD, 2017 WL 2416475 (S.C.D. June 5, 2017), the district court ruled on a motion to remand filed by the plaintiff. Briefly, plaintiff Aung was involved in a motor vehicle accident. Following settlement with the at-fault driver’s carrier, plaintiff made a claim for underinsured motorist (“UIM”) benefits on a policy she had purchased from GEICO. GEICO refused to pay UIM benefits, so plaintiff sued the at-fault driver in state court and GEICO assumed the defense. After extensive failed settlement negotiations, a jury returned a verdict in excess of $250,000 against the at-fault driver and in favor of the plaintiff. GEICO tendered the UIM policy limits of $50,000. Plaintiff then sued GEICO and its in-house adjuster in state court.
GEICO removed the action, alleging fraudulent joinder of the adjuster, a South Carolina resident whose citizenship would normally defeat federal diversity jurisdiction. Plaintiff filed a motion to remand because she and the adjuster were both South Carolinians. Because GEICO asserted fraudulent joinder as a defense to remand, GEICO and the adjuster bore the burden of proving that contention. Hartley v. CSX Transp., Inc.
The Court began its analysis noting the fraudulent joinder standard is “even more favorable to plaintiffs than the one for Rule 12(b)(6) motions.” In fact, a plaintiff need only have a “glimmer of hope” of recovery against a non-diverse defendant to defeat removal. Turning to the merits of the plaintiff’s claims, the court focused only on the plaintiff’s cause of action for negligence against the adjuster.
Citing Charleston Dry Cleaners & Laundry, Inc. v. Zurich Am. Ins. Co., GEICO argued the adjuster could not be liable for negligence. In Charleston Dry Cleaners, South Carolina’s Supreme Court held independent adjusters did not owe insureds a “general duty of due care” in their handling of first-party insurance claims. GEICO further argued that Charleston Dry Cleaners applied to in-house adjusters with equal force. In dissecting this argument, the district court looked at both state appellate decisions and prior, unpublished decisions within the District of South Carolina.
Following a thorough review of this precedent, the district court concluded the following:
These cases illuminate two points about South Carolina law: (1) generally, employees may be held personally liable for torts they committed in the scope of their employment, even if the employer is also liable by virtue of respondeat superior; and (2) no South Carolina case clearly carves out an exception to that rule for in-house insurance adjusters...
The district court then held the lack of a clear exception gave rise to the “glimmer of hope.” In response to GEICO’s continued insistence that Charleston Dry Cleaners applied to the in-house adjuster, the district court found that the South Carolina Supreme Court carefully tailored its holding to cover only independent adjusters. Refusing to extend Charleston Dry Cleaners beyond its clear holding, the district court reasoned “such a finding would also violate Hartley’s instruction to construe existing law in the plaintiff’s favor." Thus, the district court rejected GEICO’s view of Charleston Dry Cleaners. In short, GEICO failed to meet “the enormous burden” of showing fraudulent joinder.
Lastly, the district court cautiously denied plaintiff’s request for attorney’s fees. Citing three earlier unpublished district court opinions, which interpreted Charleston Dry Cleaners in a way favoring plaintiff’s position, the court noted “[t]hose decisions, if consulted, would have counseled against removal.” The district court chastised GEICO’s attempt to minimize those unpublished opinions, as GEICO cited “five … unpublished District Court decisions in their response brief.” Ultimately, the court decided “with some hesitation” not to award fees and costs.
For practitioners, this case demonstrates two clear trends about removing bad faith actions. First, fraudulent joinder will not support removal of a negligence action where the in-house adjuster is a party. Second, the district courts in South Carolina will likely sanction any future removal attempts on such a basis. Instead, insurers faced with such claims should challenge the existence of a duty in state court. Given the albeit-narrow holding of Charleston Dry Cleaners, South Carolina courts may well extend the holding to in-house adjusters. Cf., Benjamin v. Wal-mart Stores, Inc., 413 F.Supp.2d 652 (D.S.C. 2006)(“The employment contract does not subject [defendants] to the obligations and liabilities of the store owner.”)
Bruce Wallace practices with Nexsen Pruet’s business and consumer litigation group in Charleston. He represents a variety of banking and financial institutions in real estate litigation, commercial litigation, and mortgage foreclosures. He also represents insurers and corporate clients in bad faith and coverage issues, professional liability, business litigation (including disputes involving partnerships, limited liability companies, and closely held companies), and probate litigation matters (including trusts and estates).