opening/response brief of plaintiffs · pdf fileliberty mutual fire insurance company;...

CASE NOS. 12-2256(L); 12-2350XAP

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

LIBERTY MUTUAL FIRE INSURANCE COMPANY; EMPLOYERS INSURANCE OF WAUSAU, a mutual company,

Plaintiffs – Appellees/Cross Appellants,

v.

JT WALKER INDUSTRIES, INC., f/k/a Metal Industries, Inc.; MI WINDOWS & DOORS, INC., f/k/a MI Home Products, Inc., f/k/a Metal Industries Inc. of California,

Defendants – Appellants/Cross Appellees

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA

CHARLESTON DIVISION

OPENING/RESPONSE BRIEF OF PLAINTIFFS-APPELLEES/CROSS APPELLANTS

LIBERTY MUTUAL FIRE INSURANCE COMPANY; EMPLOYERS INSURANCE OF WAUSAU, a mutual company

C. Mitchell Brown [email protected] William C. Wood, Jr. [email protected] NELSON MULLINS RILEY & SCARBOROUGH LLP 1320 Main Street/17th Floor Post Office Box 11070 (29211-1070) Columbia, SC 29201 (803) 799-2000

Morgan S. Templeton [email protected] WALL TEMPLETON & HALDRUP, PA 145 King Street, Suite 302 Charleston, SC 29402 (843) 329-9501 J. Mark Langdon [email protected] ELMORE AND WALL 1001 Wade Avenue, Suite 423 Raleigh, NC 27605 (919) 865-9500

Counsel for Plaintiffs – Appellees/Cross Appellants

Appeal: 12-2256 Doc: 39 Filed: 04/04/2013 Pg: 1 of 84

ii

TABLE OF CONTENTS

TABLE OF AUTHORITIES ................................................................................... iv

JURISDICTIONAL STATEMENT .......................................................................... 1

STATEMENT OF THE ISSUES............................................................................... 2

STATEMENT OF THE CASE .................................................................................. 3

STATEMENT OF THE FACTS ............................................................................... 8

SUMMARY OF THE ARGUMENT ...................................................................... 21

ARGUMENT ........................................................................................................... 23

I. The District Court Properly Granted Judgment as a Matter of Law. ............ 23

A. Liberty Did Not Waive the Causation/Damages Argument. ............... 24

B. The Court Properly Disregarded Other Alleged Bad Faith Conduct. .............................................................................................. 27

C. MI Provided No Evidence of Injury Caused by Liberty. ..................... 30

1. The Settlement Amounts Alone Do Not Prove Damages ......... 31

2. MI Is Not Entitled to a “Rebuttable Presumption” that the Settlement Amounts Are Equal to Its Damages ................. 33

3. There Is No Other Evidence Of Damages Suffered by MI....... 38

4. MI Is Not Entitled to an Award of Nominal Damages............. 39

5. MI Is Not Entitled to Attorneys Fees as Damages ................... 41

II. The Amended Final Judgment May Be Sustained on Alternative Grounds in Addition to MI’s Failure to Prove Damages. ............................. 43

A. The “Implied Covenant” Cannot Supersede the Explicit Contractual Provisions of the Policies. .............................................. 43


iii

B. The District Court Employed the Wrong Legal Standard Given the Policy Language Permitting Liberty to Settle Claims at Its Discretion. ........................................................................................... 47

III. The Settlement Amounts Were Properly Included in the Award of Contract Damages to Liberty and that Award Should Include Prejudgment Interest and Costs. .................................................................... 50

A. Inclusion of the Settlement Amounts in the Award of Contract Damages Was Appropriate. ................................................................ 50

B. The District Court Should Have Awarded Prejudgment Interest and Costs to Liberty on the Breach of Contract Claim. ...................... 52

1. The District Court Should Have Awarded Prejudgment Interest. .................................................................................... 53

2. The District Court Also Abused Its Discretion By Denying Costs to Liberty. ........................................................ 57

IV. The Tyger River Instruction to the Jury Was Erroneous and Prejudicial. ..................................................................................................... 57

V. The Jury’s Award of Punitive Damages Was Unconstitutional and Otherwise Invalid. .......................................................................................... 61

VI. The District Court Did Not Err in Excluding Other Evidence at Trial. ........ 65

CONCLUSION ........................................................................................................ 68

REQUEST FOR ORAL ARGUMENT ................................................................... 70


iv

TABLE OF AUTHORITIES

Cases

Adams v. G.J. Creel and Sons, Inc., 465 S.E.2d 84 (1995) ..................................... 44

Aken v. Plains Elec. Generation & Transmission Coop., 49 P.3d 662 (N.M. 2002) ...................................................................................... 64

ALM Surgical Equip., Inc. v. Kirschner Med. Corp., No. 6:89-1622-3, 1990 WL 123966 (D.S.C. Apr. 25, 1990) ............................................................ 26

Am. Cas. Co. v. Howard, 187 F.2d 322 (4th Cir. 1951) .......................................... 60

Am. Home Assur. Co. v. Hermann’s Warehouse Corp., 563 A.2d 444 (N.J. 1988) .............................................................................. 46, 47

Am. Prot. Ins.Co. v. Airborne, Inc., 476 F. Supp. 2d 985 (N.D. Ill. 2007) ............. 45

Andrews v. Central Surety Ins. Co., 271 F. Supp. 814 (D.S.C. 1967) ..................... 41

Babb v. Rothrock, 426 S.E.2d 789 (1993) ........................................................ 53, 54

Belk v. Wal-Mart Stores, Inc., 106 F.3d 389 (4th Cir. 1997) .................................. 26

BMW of N. Am. v. Gore, 517 U.S. 559 (1996) ........................................................ 63

Brandt v. Gooding, 630 S.E.2d 259 (S.C. 2006) ..................................................... 35

Buchanan Home and Auto Supply Co. v. Firestone Tire and Rubber Co., 544 F. Supp. 242 (D.S.C. 1981) ........................................................................... 52

Champion v. Whatley, 311 S.E.2d 404 (S.C. Ct. App. 1984) .................................. 37

Cock-n-Bull Steakhouse, Inc. v. Generali Ins. Co., 466 S.E.2d 727 (S.C. 1996) ........................................................................... 26, 32

Davis v. Carpenter, 270 S.E.2d 810 (Ga. Ct. App. 1980), rev’d on other grounds, 274 S.E.2d 567 (Ga. 1981) ............................................ 56

Doe v. S.C. Med. Malpractice Liab. Joint Underwriting Assoc., 557 S.E.2d 670 (S.C. 2001) .................................................................................. 44

Eadie v. Krause, 671 S.E.2d 389 (S.C. Ct. App. 2008) ........................................... 35

Ewell v. Daggs, 108 U.S. 143 (1883) ...................................................................... 52

Fresh v. Entm’t U.S.A., Inc., 340 F. Supp. 2d 851 (W.D. Tenn. 2003) ................... 64

GTR Rental, LLC v. DalCanton, 547 F. Supp. 2d 510 (D.S.C. 2008) ..................... 62

Guzman v. Bevona, No. 92 CIV. 1500 RPP, 1996 WL 374144 (S.D.N.Y. July 3, 1996) ........................................................................................ 64


v

Harris Teeter, Inc. v. Moore & Van Allen, PLLC, 701 S.E.2d 742 (S.C. 2010) ..... 35

Hartford Acc. & Indem. Co. v. U.S. Natural Res., Inc., 897 F. Supp 466 (D. Oregon 1995) ...................................................................... 45

Harvey v. Strickland, 566 S.E.2d 529 (S.C. 2002) .................................................. 41

Hinson v. A.T. Sistare Constr. Co., 113 S.E.2d 341 (S.C. 1960) ............................ 41

Holland v. Big River Minerals Corp., 181 F.3d 597(4th Cir. 1999) ................ 34, 51

Howard v. State Farm Mut. Auto Ins. Co., 450 S.E.2d 582 (S.C. 1994) ................. 37

Huffines Co., LLC v. Lockhart, 617 S.E.2d 125 (S.C. Ct. App. 2005) .................... 37

Jackson v. Bi-Lo Stores, Inc., 437 S.E.2d 168 (S.C. Ct. App. 1993) ...................... 52

Jacobs v. Am. Mut. Fire Ins. Co. of Charleston, 340 S.E.2d 142 (S.C. 1986) ........ 52

Kendrick v. Broadcast Media Group LLC, No. 2:02CV1034-N, 2006 WL 2709846 (M.D. Ala. Sept. 20, 2006) .................................................... 64

Kuznik v. Bees Ferry Assoc., 538 S.E.2d 15 (S.C. Ct. App. 2000) ......................... 62

Lengel v. Tom Jenkins Realty, Inc., 334 S.E.2d 834 (S.C. Ct. App. 1985) ............. 62

Martin v. Cavalier Hotel Corp., 48 F.3d 1343 (4th Cir. 1995) ............................... 23

Moll v. Levitt & Sons of Puerto Rico, Inc., 583 F.2d 565 (1st Cir. 1978) ............... 26

Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 169 P.3d 1 (Wash. 2007) ............................................................................... 34, 35

Nationwide Mut. Ins. Co. v. Pub. Serv. Co. of N.C., 435 S.E.2d 561 (N.C. Ct. App. 1993) ............................................................................................ 46

New Hampshire Ins. Co. v. Ridout Roofing Co., 68 Cal. App. 4th 495 (Cal. Ct. App. 1998) ............................................................................................. 46

Nichols v. State Farm Auto. Ins. Co., 306 S.E.2d 616 (S.C. 1983) ............ 28, 29, 42

Ocean Winds Council of Co-Owners v. Auto-Owners Ins. Co., 241 F.Supp.2d 572 (D.S.C. 2002) ........................................................................ 28

Orion Ins. Co. v. Gen. Elec. Co., 493 N.Y.S.2d 397 (N.Y. Sup. Ct. 1985), aff’d, 509 N.Y.S.2d 778 (N.Y. App. Div. 1986) .................................................. 45

Peterson v. West Am. Ins. Co., 518 S.E.2d 608 (S.C. Ct. App. 1999) ..................... 34

Precision Instr. Mfg. Co. v. Automotive Maint. Mach. Co., 324 U.S. 806 (1945) .. 52

Price v. City of Charlotte, 93 F.3d 1241 (4th Cir. 1996) ......................................... 26


vi

Primoff v. Warfield, No. 11-1988, 2012 U.S. App. LEXIS 21215 (4th Cir. Oct. 11, 2012) ........................................................................................ 26

Princess Cruises, Inc. v. Gen. Elec. Co., 143 F.3d 828 (4th Cir. 1998) .................. 23

Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133 (2000) ......................... 23

Safeco Ins. Co. of Am. v. Butler, 823 P.2d 499 (Wash. 1992) ................................. 34

Sandel v. Cousins, 221 S.E.2d 111 (S.C. 1975) ....................................................... 41

Shuster v. South Broward Hosp. Dist. Physicians’ Prof. Liab. Ins. Trust, 591 So. 2d 174 (Fla. 1992) ................................................................................... 44

Simms v. Mutual Benefit Ins. Co., 137 Fed. App’x 594 (4th Cir. 2005) ................. 66

Smith-Hunter Constr. Co. v. Hopson, 616 S.E.2d 419 (S.C. 2005) ........................ 55

State Farm v. Campbell, 538 U.S. 408 (2003) ................................................. 63, 64

State v. Allen, 634 S.E.2d 653 (S.C. 2006) .............................................................. 47

Stevens v. Allen, 536 S.E.2d 663 (S.C. 2000) ................................................... 39, 40

Tadlock v. Maryland Cas. Co., 473 S.E.2d 52 (S.C. 1996) .............................. 27, 28

Teague v. Bakker, 35 F.3d 978 (4th Cir. 1994) ....................................................... 57

Thomas v. Mineta, 310 F. Supp. 2d 198 (D.D.C. 2004) .......................................... 26

Tolbert v. Queens College, 242 F.3d 58 (2d Cir. 2001) .......................................... 25

Tyger River Pine Co. v. Maryland Cas. Co., 170 S.E. 346 (S.C. 1933) .. 2, 6, 22, 30, 49, 57, 58, 59, 60, 61, 69

United Capitol Ins. Co. v. Bartolotta’s Fireworks Co., 546 N.W.2d 198 (Wisc. Ct. App. 1996) ........................................................................................... 46

Varnadore v. Nationwide Mut. Ins. Co., 345 S.E.2d 711 (S.C. 1986) ............. 32, 37

Wachovia Bank, N.A. v. Coffey, 698 S.E.2d 244 (S.C. Ct. App. 2010) ................... 52

WB Music Corp. v. Rykodisc, Inc., No. CIV.A.94-2902, 1995 WL 631690 (E.D. Pa. Oct. 26, 1995) ....................................................................................... 64

Statutes

2005 S.C. Acts 27 .................................................................................................... 12

2005 S.C. Acts 32 .................................................................................................... 12

28 U.S.C. § 1291 ........................................................................................................ 1

28 U.S.C. § 1332(a) ................................................................................................... 1


vii

Fed. R. Civ. P. 54(d)(1) ............................................................................................ 57

S.C. Code Ann. § 15-33-135 ............................................................................. 24, 62

S.C. Code Ann. § 34-31-20(A) ................................................................................ 53

S.C. Code Ann. § 38-2-10 ........................................................................................ 65

S.C. Rule 50(a) ............................................................................................ 24, 25, 26

Other Authorities

Hubbard & Felix, The South Carolina Law of Torts 595 ........................................ 62


1

JURISDICTIONAL STATEMENT

This Court has appellate jurisdiction pursuant to 28 U.S.C. § 1291 because

this is an appeal from the Amended Final Judgment entered by the United States

District Court for the District of South Carolina on October 8, 2012. See Joint

Appendix (“JA”) 2388.

The District Court had subject matter jurisdiction over this action pursuant to

28 U.S.C. § 1332(a). The amount in controversy exceeds $75,000, exclusive of

interest and costs, and the parties involved are citizens of different states. JA121-

22.


2

STATEMENT OF THE ISSUES

I. Whether the District Court properly granted Liberty’s motion for judgment as a matter of law on MI’s bad faith counterclaim because MI did not prove that it was injured by Liberty’s defense and settlement of multiple lawsuits against MI.

II. Whether the Amended Final Judgment should be sustained on other grounds

in addition to MI’s failure to prove damages, because: (a) Liberty did not deny coverage, refuse to defend or indemnify against claims, delay or withhold policy benefits in order to extract concessions, or spurn reasonable offers to settle claims; (b) the applicable policies specifically provided that Liberty had the right to settle the claims “at our discretion;” (c) Liberty’s decisions to settle were consistent with the recommendations of underlying defense counsel, who believed the settlements to be reasonable under the circumstances; and (d) Liberty’s aggressive defense of the claims resulted in lower settlement amounts and other benefits to MI that were enumerated by the District Court.

III. Whether it was appropriate to include the settlement amounts paid by

Liberty in the damages awarded to Liberty for MI’s breach of contract, and whether that award should have included prejudgment interest and costs.

IV. In the event that the Court does not sustain the Amended Final Judgment,

whether the District Court’s jury instruction based on Tyger River Pine Co. v. Maryland Cas. Co., 170 S.E. 346 (S.C. 1933), despite fundamental differences between that case and the facts and policy language presented here, was erroneous and prejudicial to Liberty.

V. In the event that the Court does not sustain the Amended Final Judgment,

whether the case should be remanded for consideration of Liberty’s motion to alter or amend the initial judgment regarding punitive damages.

VI. In the event that the case is remanded, whether the District Court properly

excluded certain evidence, including evidence of claims outside of South Carolina.


3

STATEMENT OF THE CASE

Unlike any other reported case of insurer bad faith in South Carolina, the

appellee insurers in this case, Employers Insurance of Wausau and Liberty Mutual

Fire Insurance Company (collectively, “Liberty”), did not deny coverage, refuse to

defend or indemnify against claims, delay or withhold policy benefits in order to

extract concessions, or spurn reasonable offers to settle claims. To the contrary,

Liberty aggressively defended and ultimately settled multiple lawsuits against its

insureds, appellants JT Walker Industries, Inc. and MI Windows & Doors, Inc.

(collectively “MI”), in which the underlying plaintiffs had alleged that windows

made by MI and installed at five large condominium projects in South Carolina

were defective and had caused substantial water damage to those properties over

time.

Liberty settled each of the underlying claims within the $500,000 deductible

limits of the relevant insurance policies. Liberty then was forced to sue MI for

breach of contract because MI refused to reimburse Liberty for the deductible

amounts that MI was obligated to pay under each of the policies. JA2346; see also

JA1656-58, 1743-46, 1827-30, 1881-82, 1951-52, 2023-24. MI retaliated by

alleging that Liberty acted in bad faith by settling the lawsuits rather than taking

them to trial:

Q: Why did MI Windows file a counterclaim against Liberty Mutual?


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A: Well, they filed suit against us, and we honestly felt that they acted in bad faith by settling out the cases against our wishes.

JA1326 (emphasis added).

Notwithstanding MI’s stated reason for its counterclaim, the District Court

ruled early in this proceeding that the language of each of the relevant insurance

policies was clear and unambiguous and “gave Liberty Mutual a duty and right to

control the defense and settlement” of the underlying actions, including “the

authority to control settlement decisions at its discretion.” JA165-167. At the

same time, the District Court ruled that “Liberty Mutual could be liable for bad

faith if there was no reasonable basis to support its settlement decisions.” JA2354

(emphasis added); see also JA174 (“an insurer acts in bad faith when there is no

reasonable basis to support the insurer’s decision”). Nevertheless, the District

Court allowed MI’s bad faith counterclaim against Liberty to go to the jury despite:

(a) the fact that no South Carolina court has ever held that an insurer could be

liable for bad faith for settling a claim within policy limits; and (b) undisputed

evidence of the reasonable bases for Liberty’s settlement decisions under the

circumstances, including the uncontradicted testimony of experienced South

Carolina attorneys retained to defend the underlying claims.1

1 Even MI’s insurance expert, Charles Miller, did not dispute that underlying defense counsel recommended settlement in each of the cases and believed that the amount of the actual settlement in each case was reasonable. JA1151-52. Instead,


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After a week-long trial, the jury returned a verdict in favor of Liberty on its

breach of contract claim and awarded damages in the amount of $894,416.01

(JA2215), which included the full amount of the settlements in each of the five

underlying cases.2 The jury also awarded MI breach of contract damages in the

amount of $18,290 based on allegedly excessive claims handling fees charged by

Liberty.3 Despite finding that Liberty had performed its obligations under the

policies and awarding breach of contract damages to Liberty, the jury also awarded

he criticized counsel for recommending settlement and concluding that the settlement amount was reasonable “by looking at just the case in front of him.” Id. Mr. Miller conceded that by “mounting an aggressive defense” on behalf of MI, defense counsel was successful in “bringing down these damages, these settlement offers” to the point where they could be resolved within policy limits, and he stated that “I thought that was very good.” JA1153. 2 MI claims that, although it refused to reimburse Liberty for any of the settlements, it did reimburse Liberty for “every penny” of the defense costs that were within the deductible of the Policies. See MI Brief at 16. However, MI’s contention is belied by the settlement payments reported in its Brief at 50, Liberty’s portion of which totals only $757,300, yet the amount of contract damages (to which MI had stipulated at trial) was $894,416.01. 3 In its “Statement of the Case,” MI contends that “Liberty had arbitrarily opened 26 claims files” relating to the underlying litigation. Liberty had explained that there were two separate lawsuits at each of the condominium projects as well as cross-claims among the defendants at each of the projects, and that certain of the claims asserted implicated more than one Policy. JA625, 861. The District Court concluded that although it had “adopted an interpretation favoring MI Windows,” because the Policies were “ambiguous” on the subject of claims handling fees, “Liberty Mutual’s interpretation is in no sense ‘unreasonable.’” JA2363-64.


6

MI compensatory damages of $684,416.014 and punitive damages of $12,500,000

on its bad faith counterclaim. JA2215-16, 2219.

The District Court subsequently granted Liberty’s motion for judgment as a

matter of law with respect to the award of compensatory and punitive damages on

MI’s bad faith claim. JA2345-2376. The District Court concluded that “a

reasonable jury would not have a legally sufficient evidentiary basis to find that MI

Windows suffered damages as a result of any bad faith by Liberty Mutual” and that

because “MI Windows has not proven actual or consequential damages resulting

from any bad faith on the part of Liberty, the award of punitive damages cannot

stand.” JA2365-66.

In the same Order and Opinion, the District Court denied Liberty’s motion

for a new trial based on improper jury instructions, concluding that its Tyger River

instruction5 on MI’s bad faith counterclaim “was a correct statement of law that

was applicable to the facts in this case.” JA2350. The District Court also: (a)

conditionally denied Liberty’s motion for a new trial, refusing to find that “the

jury’s verdict as to Liberty’s liability for bad faith is against the clear weight of the

4 The compensatory damages awarded by the jury on MI’s bad faith claim are equal to the total breach of contract damages awarded to Liberty, minus the amount paid by Liberty toward settlement ($210,000) at one of the five construction projects known as the Marais site. 5 See Tyger River Pine Co. v. Maryland Cas. Co., 170 S.E. 346 (S.C. 1933).


7

evidence, or result[s] in a miscarriage of justice” (JA2366-67); (b) concluded that it

need not address Liberty’s motion for elimination or reduction of the punitive

damages because “the award of punitive damages cannot stand in the absence of

actual or consequential damages” (JA2367); (c) granted in part MI’s motion for

judgment as a matter of law, reducing the amount of contract damages awarded to

Liberty based on the Court’s conclusion that Liberty “did not prove its entitlement”

to reimbursement of $210,000 that it paid toward the $500,000 settlement at the

Marais site (JA2368-71); and (d) denied MI’s motion for attorneys fees (JA2373-

74). The District Court also subsequently denied Liberty’s motion for prejudgment

interest and motions by both parties seeking costs. JA2380-87.

Both parties have appealed from the Amended Final Judgment entered on

October 1, 2012. MI submitted its opening brief on January 16, 2012 (“MI Brief”).


8

STATEMENT OF THE FACTS

The Insurance Obtained by MI

MI has been making window and door products for more than 60 years,

during which it has developed a sophisticated insurance program, including general

liability, umbrella and excess coverage. MI Brief at 12. As part of that overall

program, MI obtained six annual commercial general liability policies from Liberty

for the period from May 1997 through July 1, 2003 (“Policies”), each with a limit

of $1,000,000 per occurrence and an aggregate limit of $2,000,000 applicable to

the products-completed operations hazard. JA1613, 1698, 1780, 1851, 1923,

1994.6

The Policies specifically provide that Liberty has “a duty and a right to

defend” MI against suits seeking damages because of property damage, and that

Liberty “may at our discretion, investigate any occurrence and settle any claim or

suit that may result.” JA1616, 1701, 1783, 1898, 1969, 2044. The Policies also

specifically require MI “to cooperate with us in the investigation or settlement of

the claim or the defense against the ‘suit,’” and expressly prohibit MI from

“assum[ing] any obligation, or incur[ring] any expense” without Liberty’s consent.

6 In the negotiation and renewal of those Policies, MI was represented by an experienced insurance broker, Bart Stone, who was very knowledgeable about the various alternative insuring arrangements available in the marketplace. JA439-440, 504-06. MI also employed full-time, experienced insurance and risk managers who were knowledgeable about the other insurance alternatives available to MI. JA439-440.


9

JA1628, 1713, 1795, 1911, 1982, 2055. In addition, each of the Policies was

modified through a series of endorsements, including an endorsement pursuant to

which MI agreed “to reimburse Liberty Mutual for the first $500,000 per

occurrence spent on defense and indemnity costs.” JA2346; see also JA1656-59,

1743-46, 1827-30, 1881-82, 1951-52, 2023-24.7 Thus, under the insurance

arrangement negotiated between these sophisticated parties, Liberty had a duty to

defend MI, and the right to settle any claim against MI at Liberty’s discretion,8 but

7 The amount of the deductible typically is chosen by the insured and its broker and affects the amount of the premium paid for the policy. JA452. As the District Court noted, “[w]hen a policyholder purchases a high-deductible policy, and thereby pays a lower premium, it is taking a chance that the liability it incurs due to property damage in the course of that policy year will be lower than its deductible and that there will be no contribution from the insurer.” JA205. Defendants and their broker were well aware that other insuring options existed, including self-insured retentions, that would have permitted Defendants to control the defense and settlement decisions within the retention. JA452-53; 504-06. In fact, for periods subsequent to the Liberty Policy periods, MI obtained other insurance from Zurich North America Insurance (“Zurich”) that required MI to pay “first-dollar” defense and indemnity costs (through at least $250,000), but allowed MI to retain control over settlement decisions. JA1333-34. 8 In the “Statement of Facts” in its Brief, MI contends that Special Service Instructions (“SSIs”) accompanying the Policies “provided MI certain rights, including a say in reserves set on anticipated losses, as well as settlements over a minimal threshold.” MI Brief at 13 (emphasis added). However, the District Court specifically determined that the SSIs “do not contradict Liberty Mutual’s settlement authority.” JA168. After considering the policy language and the SSIs, the District Court concluded that “based on the plain language of the contract, MI Windows does not have the right to approve settlement decisions” and “Liberty Mutual has the right to control settlement decisions under the Policies.” JA169.


10

MI was obligated to reimburse Liberty for the first $500,000 in defense and

indemnity payments per occurrence.

The Product Defect Claims Asserted Against MI

Beginning in 2002, the homeowners associations and individual

homeowners at five large condominium developments in South Carolina filed

separate lawsuits against MI, alleging that defective products made by MI had

leaked, causing substantial water damage to the properties. The five homeowners

association suits were:

1) Avian Forest Homeowners Association v. MI Windows & Doors, Inc., et al., CA No. 02-CP-22-0687, Horry County, South Carolina (“Avian Forest”); 2) Tilghman Shores Homeowners Association v. MI Windows, et al., CA No. 03-CP-26-4021, Horry County, South Carolina (“Tilghman Shores”); 3) Riverwalk at Arrowhead Country Club Properly Owners’ Association, Inc. v. MI Home Products, et al., CA No. 03-CP-26-7 169, Horry County, South Carolina, (“Riverwalk”); 4) Magnolia North Homeowners Association v. MI Windows, et al., CA No. 05-CP--26-0044, Horry County, South Carolina (“Magnolia North”); and 5) Marais Properly Owners’ Association v. MI Windows, et al., CA No. 05-CP-10-1140, Charleston County, South Carolina (“Marais”).9

9 Each homeowners’ association lawsuit was accompanied by a separate class action filed by individual condominium owners to pursue their respective loss of use claims, also based on allegations of property damage caused by defective MI products. JA625, 861. With the exception of Avian Forest, which was dismissed


11

Condominium construction defect cases generally involve multiple defendants,

including the developer, architect, general contractor, subcontractors and suppliers.

JA623-24, 762-63. Given the number of parties and the nature of the claims,

construction defect cases are extremely complicated and can “last for years” absent

settlement. Id.

Liberty’s Defense of the Underlying Claims

Liberty retained experienced South Carolina defense counsel to defend MI

against each of the lawsuits. Finley Clarke, who represented MI in four of the five

underlying actions (the exception being Magnolia North where he previously had

represented another defendant), has practiced law in South Carolina for more than

40 years and has represented defendants in construction defect litigation for more

than 15 years. JA618-19, 623. MI was consulted and approved the retention of

Mr. Clarke. JA552. Scott Taylor, who represented MI in Magnolia North, was

retained initially by Paul Gary, MI’s outside national counsel. JA758. Mr. Taylor

has represented defendants in construction defect litigation in South Carolina for

more than ten years. JA757. In addition, MI separately retained Mr. Gary, who

was admitted pro hac vice in each of the underlying actions. JA463-64, 616-17.

with prejudice (JA1236), each class action suit was dismissed as part of the settlement of the underlying claims. JA649, 697-98, 1235-36.


12

Underlying defense counsel in each case prepared and presented

comprehensive reports for Liberty, MI and Mr. Gary, reviewing in detail the

relevant facts of each case. JA622, 759, 767-68. As set forth more fully below,

underlying defense counsel consistently reported that in each of the underlying

cases: (a) experts retained by the underlying plaintiffs (as well as other experts

retained by co-defendants) had testified or were prepared to testify that defects in

the MI windows caused substantial water damage at the condominium projects

over time; (b) conflicting expert reports, among other things, effectively precluded

summary judgment; (c) trial would last for weeks; (d) MI’s chances of winning at

trial were no better than 50-50; and (e) a loss at trial presented the risk that MI

would be held jointly and severally liable under South Carolina law for millions of

dollars in damages.10 The damages being sought by the plaintiffs in the underlying

cases were enormous, totaling over $50 million.

MI’s Contention that the Cases Should Be Tried

In its “Statement of Facts” and throughout its Brief, MI contends that

Liberty unreasonably “decided to settle the cases over MI’s objections,

10 The South Carolina Legislature amended the law regarding joint and several liability by 2005 S.C. Acts 27 and 32, but the new law did not apply to any of the condominium construction projects at issue here, all of which were substantially complete before the July 1, 2005 date set forth in the statute.


13

notwithstanding the lack of defects,”11 and suggests that it would have prevailed at

trial because “MI’s products were not defective.” See, e.g., MI Brief at 16.12 MI

states that it “wanted to defend its products and avoid becoming a target defendant

in future cases by resisting through trial the claimed existence of defects in its

products.” MI Brief at 14.13 However, even Mr. Gary conceded that “there was a

potential you could lose” at trial (JA1242), and that MI faced the risk of a

substantial adverse jury verdict (well in excess of $1,000,000) in each of the

underlying actions. JA1247-51. In fact, Mr. Gary had notified one or more of

MI’s excess insurers that MI was facing potential exposure in excess of $1 million

in each of the underlying cases. JA617.

11 MI ignores the fact that Mr. Gary repeatedly suggested that defense counsel retained by Liberty Mutual should “make a point of reviewing early settlement options and alternatives to traditional litigation.” JA650; 676-77. 12 See also MI Brief at 19 (“lack of proof of product defect or resulting property damage”); 21 (“MI accepted minimal responsibility despite absence of a product defect”); 27 (Liberty decided “to settle each of those [underlying] cases with MI’s money, even absent evidence of a flaw in MI’s products”); 59 (Liberty “unreasonably settle[d] product defect cases where there are no defects”). 13 Underlying defense counsel testified that in a condominium construction defect case, “generally everybody who has had anything to do with the project gets sued. The developer gets sued, the general contractor gets sued, all of the subcontractors get sued, suppliers like MI Windows get sued.” JA624. MI offered no evidence that a successful defense at one condominium project would preclude it from being sued at another. Such is speculation by MI.


14

Moreover, when MI disagreed with Liberty over the settlement of the Avian

Forest claim, and wanted to take the case to trial, Liberty offered MI the

opportunity to withdraw its claim for coverage under the Policies and proceed to

trial, thereby assuming the risk that trials might result in verdicts far greater than

the amounts for which the cases could be (and in Liberty’s judgment, should be)

settled. JA550-53. MI not only refused (JA1310); it then used Liberty’s offer as

further “evidence” of its purported “bad faith” in dealing with MI. JA556-57,

1539.

The Decision to Settle Each Underlying Claim

Liberty’s claims handlers evaluated each claim on the merits -- the strengths

and weaknesses and the risk presented -- and made the decision to settle on that

basis, without regard to the deductible amounts. JA537-38, 558-560, 863-64. In

making its settlement decisions, Liberty reviewed and relied upon detailed reports

prepared by underlying defense counsel in each of the cases (JA873-75):

(a). Avian Forest

Although Mr. Clarke rated Avian Forest as the strongest of the cases for the

defense (JA660), he was confident that the case could not be resolved on summary

judgment (JA658-59), believed MI’s chances of prevailing at trial were no better

than 50-50 (JA698-99), and had estimated MI’s potential exposure at $3 million to

$7 million. JA658, 660-61. At least three different sets of experts were prepared


15

to “point the finger” at MI, creating “an issue as to the quality of the windows.”

JA656-57, 2073. Mr. Clarke had estimated that additional defense costs between

February 2007 and trial would be over $96,000 (JA664), and he recommended that

“a settlement for at least defense costs and some additional sum based upon the

risk of litigation should be considered.” JA664, 2077. Avian Forest was settled

for $72,300. JA881. Mr. Clarke stated that this was “a reasonable settlement in

view of the exposure and the settlement kept you from having to spend and prepare

for trial.” JA699-700. The developer in Avian Forest did not settle, went to trial,

and ultimately was subject to a damages verdict of $2.2 million. JA771.

(b). Tilghman Shores

The plaintiffs in Tilghman Shores had alleged that MI’s windows were

leaking, did not comply with applicable building codes, and did not meet MI’s own

specifications. JA690-91, 1471-72, 2093-94. Mr. Clarke reported that there was

“no possibility” of a successful motion for summary judgment (JA2100) and only a

50-50 chance of winning at trial. JA696-97. He estimated the potential exposure

for MI at $6 million and believed that it would take between $300,000 and

$500,000 in order for MI to settle the case. JA692, 2099, 2102.

Mr. Clarke also advised that a jury verdict likely would range between $0

and $2 million in actual damages if a separate verdict form could be obtained, but

otherwise potentially would be far more substantial, and he could not predict


16

whether a jury would award punitive damages or how much it might award.

JA696-97, 2118. Mr. Clarke also estimated the future cost of defense to be at least

$65,000. JA2119. Ultimately, the case was settled at mediation for $75,000,

which Mr. Clarke stated was “much lower than we ever dreamed we could settle

the case for,” a result that was achieved “because we put up such a vigorous

defense.” JA693.

(c). Riverwalk

The plaintiffs in Riverwalk claimed that the MI windows were defective and

failed to meet applicable building codes and water test ratings. JA678-680. Mr.

Clarke had expressed concern that the MI windows used in 9 of the buildings

would not meet code. JA683-84, 2086, 2089. He was certain that the case would

not be resolved on summary judgment and estimated that MI Windows had a 50-50

chance of prevailing at trial, presenting the risk of joint and several liability for

damages ranging up to $11 million. JA685-87. Mr. Clarke believed that the

developer in Riverwalk, Heritage, was likely to suffer an adverse jury verdict in the

range of $7.5 to $10 million. JA687. He also estimated that it would cost

approximately $125,000 in legal fees between March 2, 2007 and the end of any

trial. JA684, 2089-90. Mr. Clarke testified that Riverwalk and Magnolia North

were settled together for a total of $400,000, a figure which he believed to be

reasonable. JA688-89.


17

(d). Magnolia North

The Magnolia North litigation against MI spanned a four year period before

it was settled. JA671-72. During that period, there had been a $2.2 million verdict

against the developer in the Avian Forest litigation, which was the same developer

as Magnolia North. JA771, 2125. There had also been a $4.3 million verdict in

litigation involving another condominium project by the same developer. JA771-

72, 2125-26. Defense counsel (Mr. Taylor) was concerned that the only

defendants remaining at trial would be the developer and MI, each facing the

prospect of joint and several liability. JA772-74, 2134.

Underlying plaintiffs’ experts had presented evidence that the MI windows

were defective, did not meet test ratings or applicable codes, and were unsuitable

for a coastal building. JA776-77. Mr. Taylor was certain that conflicting reports

among the experts precluded summary judgment and the case would go to trial

absent settlement. Id. Damages estimates were in excess of $10 million in the

homeowners association suit, plus another $3.8 million in loss-of-use claims by

individual condominium owners. JA774, 2153. Mr. Taylor estimated the chances

of prevailing at trial to be “at best” 50-50 if Heritage (the developer) was a co-

defendant, and he had “no expectation” that Heritage would settle. JA779-780.

He estimated that defense costs through trial would be at least $192,000. JA781.


18

Magnolia North settled, together with Riverwalk, for a total of $400,000. JA688-

89.

(e). Marais

At Marais, MI not only had provided window and door products that were

alleged to be defective, but also had an employee and distributor at the site

providing directions for their installation. JA636-38. Multiple witnesses,

including “five of the best experts in the Southeast,” were prepared to testify that

MI’s products were defective, and Mr. Clarke had concluded that there was no

possibility that MI could prevail on summary judgment. JA640, 741. Even MI

conceded that the Marais litigation was the most dangerous of the cases against it

(JA710-11), and believed that the case should be settled. JA912, 1226.

The damages being sought by underlying plaintiffs in Marais exceeded $20

million, and the mediator had stated that it would take at least $7.5 to $10 million

to settle. JA643-44. Mr. Clarke “strongly recommend[ed] that MI try to settle this

case globally.” JA645-46. Ultimately Marais settled for $500,000, which was the

lowest amount at which the plaintiffs’ attorney was authorized to settle the claims

against MI. JA648-49, 752-53. Mr. Clarke testified that the Marais settlement

was reasonable given “all of the evidence against MI and the magnitude of the


19

damages which was in the range of $20 million.” JA699.14 Settlements among the

defendants in the Marais case totaled over $12 million. JA752.

The Testimony of MI’s Witnesses Regarding Underlying Defense Counsel

After evaluating the strengths and weaknesses of each case in detail,

underlying defense counsel recommended consideration of settlement rather than

running the risk of a jury trial with the potential for millions of dollars in damages.

JA664, 2077 (Avian Forest); JA644-45 (Marais); JA691-93, 2102 (Tilghman

Shores); JA415, 2158-59 (Magnolia North); JA688-89 (Riverwalk). As set forth

above, underlying defense counsel believed the amount of the settlement in each

case to be reasonable under the circumstances presented.15

MI and Mr. Gary received the same reports that Liberty did from underlying

defense counsel and never expressed dissatisfaction with defense counsel. JA619,

621. To the contrary, MI has never “suggest[ed] that Mr. Clarke did anything but

his very best” in defending the underlying cases. See MI Response in Opposition

14 Mr. Clarke estimated that legal fees and expenses from November 2007 through trial alone would exceed $290,000. JA641. 15 MI argues that the District Court “acknowledged” that “there was evidence that the plaintiffs in the underlying cases ‘might’ have walked away from their claims, and that therefore MI ‘might’ not have been required to pay anything.” MI Brief at 49. What the District Court actually said was that “although Paul Gary…testified that he had seen plaintiffs ‘walk away from [such] claims,’…the evidence does not establish any reasonable likelihood that the plaintiffs in the five underlying cases would have summarily dismissed their claims against MI Windows” and that MI “did not introduce evidence showing that any of the cases could have successfully been settled for a lower amount.” JA2360-61.


20

to Liberty Motion for Judgment as a Matter of Law, filed Apr. 11, 2102 [Docket

Entry (“DE”) 319] at 7. MI’s own expert did not dispute that underlying defense

counsel in each case: (a) recommended settlement rather than risk substantial

financial exposure in a jury trial (JA1151-52); (b) mounted an aggressive defense,

which resulted in lower settlement amounts; or (c) believed the settlements to be

reasonable. JA1152. Instead, MI’s industry expert faulted underlying defense

counsel for making the settlement recommendations and finding the settlements

reasonable “based on just looking at just the case in front of him.” JA1152.

However, Mr. Gary believed that his ability to evaluate the suits brought

against MI was superior to underlying defense counsel’s ability to do so, and he

confirmed that the essence of MI’s bad faith claim is that Liberty failed to defer to

his opinion that the cases should be tried rather than settled:

Q: So, isn’t that really what it boils down to, that it is your view that your opinion was superior to that of Mr. Clarke’s and therefore Liberty Mutual should have discounted Mr. Clarke’s opinion and relied on yours? A. I think they should have listened to mine, but yes, ultimately relied upon it.

JA1224.


21

SUMMARY OF THE ARGUMENT

The District Court properly granted Liberty’s post-trial motion for judgment

as a matter of law with respect to MI’s bad faith counterclaim because MI did not

prove that it was injured by any alleged bad faith conduct of Liberty. MI’s

contention that Liberty somehow waived its right to argue that MI could prove

neither causation nor damages simply ignores the plain language of Liberty’s Rule

50(a) motion at trial, as well as applicable case law. The settlement amounts alone

cannot constitute proof of MI’s bad faith damages when: (a) MI had specifically

agreed in the Policies that Liberty had the right to settle claims at its discretion; (b)

each of the settlements was within policy limits; (c) underlying defense counsel

had concluded that the settlement amounts were reasonable; and (d) MI failed to

show that trial to verdict would have resulted in expenditures lower than the

settlements. MI provided no other evidence of injury resulting from Liberty’s

settlement decisions, and there is no basis for MI’s request for presumed or

nominal damages or attorney fees as damages.

The District Court’s decision granting Liberty’s motion for judgment as a

matter of law also may be sustained on alternative grounds. The “implied

covenant” of good faith cannot supersede the plain language of the Policies, which

in this case expressly authorized Liberty to settle claims “at our discretion.” The

District Court stated that “Liberty Mutual could be liable for bad faith if there was


22

no reasonable basis to support its settlement decisions.” The record provides

ample evidence of the reasonable bases for Liberty’s settlement decisions, and the

District Court recited the various benefits to MI that resulted from the settlements.

MI failed to reimburse Liberty as promised in the Policies, and the jury so

concluded. Liberty should be awarded prejudgment interest and costs on the

breach of contract damages in order to be made whole for MI’s breach.

If the Court vacates the Amended Final Judgment and orders a new trial, the

Court should direct the District Court to correct its erroneous and prejudicial jury

instructions based on the South Carolina Supreme Court’s decision in Tyger River

Pine Co. v. Maryland Cas. Co., 170 S.E. 346 (S.C. 1933), which is inapplicable to

the facts in this case. Further, if the Court vacates the Amended Final Judgment, it

should remand the case to the District Court for consideration of Liberty’s motion

to eliminate or reduce the punitive damages award. Finally, although MI argues

that if a new trial is ordered, this Court should correct “the District Court’s

erroneous evidentiary rulings,” the District Court properly excluded certain

evidence concerning underwriting of the Policies and handling of other claims not

at issue here because that “evidence” lacked any probative value.


23

ARGUMENT

I. The District Court Properly Granted Judgment as a Matter of Law.

MI asks this Court to vacate the District Court’s decision granting Liberty’s

post-trial motion for judgment as a matter of law, reinstate the compensatory and

punitive damages awarded by the jury on MI’s bad faith claim, and add attorney’s

fees “in order to make MI whole.” MI Brief at 31. The appellate court reviews de

novo the grant or denial of a motion for judgment as a matter of law. Princess

Cruises, Inc. v. Gen. Elec. Co., 143 F.3d 828, 831 (4th Cir. 1998).

A court should render judgment as a matter of law when “a party has been

fully heard on an issue and there is no legally sufficient evidentiary basis for a

reasonable jury to find for that party on that issue.” Reeves v. Sanderson Plumbing

Prods., Inc., 530 U.S. 133, 149 (2000). In making that determination, the court

“should review all of the evidence in the record” and should “give credence to the

evidence favoring the nonmovant, as well as that ‘evidence supporting the moving

party that is uncontradicted and unimpeached, at least to the extent that that

evidence comes from disinterested witnesses.’” Id. at 150, 151. The evidence

supporting the jury verdict must be “of such quality and weight that reasonable and

fair-minded men in the exercise of impartial judgment could reasonably return a

verdict for the non-moving party.” Martin v. Cavalier Hotel Corp., 48 F.3d 1343,

1350 (4th Cir. 1995). Finally, South Carolina requires that evidence supporting an


24

award of punitive damages must be “clear and convincing.” S.C. Code Ann. § 15-

33-135 (Supp. 2003).

A. Liberty Did Not Waive the Causation/Damages Argument.

MI first fundamentally mischaracterizes Liberty’s motion for judgment as a

matter of law at the outset. Specifically, MI contends that “in its oral Rule 50(a)

motion” Liberty did not argue that “it had a right to set-off the defense costs that

MI would have incurred had the underlying cases not settled against MI’s claimed

bad faith damages” and, therefore, failed to preserve “its challenge to MI’s bad

faith damages.” MI Brief at 35, 37. However, Liberty’s post-trial motion is not

predicated upon any right of “set-off,” but rather is the same argument that Liberty

made in its Rule 50(a) motion at trial, as well as at every other stage of this case --

that MI failed to prove an essential element of its bad faith claim, i.e., that it had

suffered damages resulting from Liberty’s alleged bad faith.

MI alleged in its counterclaim that it “was damaged (i) in amounts as

demanded by [Liberty] in paragraph 2(c) of the ad damnum clause of its First

Amended Complaint,” i.e., the reimbursement amounts. JA150. Liberty

specifically denied that allegation and “demand[ed] strict proof thereof.” JA156.

Liberty then raised the lack of causation and damages argument again in pretrial

motions. JA176 (“Liberty Mutual also argues that it is entitled to summary

judgment with regard to MI Windows’ bad faith claim because MI Windows


25

cannot prove any damages caused by its alleged bad faith.”). Liberty raised the

argument again on directed verdict at the conclusion of MI’s evidence:

Fourth. Damages as to bad faith. The only damages that have been presented are the settlements themselves. Those dollars have not been paid by the defendant and are still owed to the plaintiff. Those damages cannot be the form of the bad faith cause of action because they [MI] have not incurred any damage that was caused by the action of the plaintiff. Even relying on Tadlock, there is still a causative element required under the Tadlock decision.

JA1429-30 (emphasis added).

MI contends that Liberty’s oral Rule 50(a) motion was “limited and

specific,” raised only the non-payment issue, and did not include an argument that

“it had a right to set-off.” MI Brief at 34-35. This is incorrect. As set forth above,

Liberty argued specifically that MI had “not incurred any damage that was caused

by the action of the plaintiff.” Further, Liberty pointed out that all MI had done

was to assert the “settlements themselves” as the “damages” and that such was

insufficient. MI cites Tolbert v. Queens College, 242 F.3d 58, 76 (2d Cir. 2001)

for the proposition that a motion for judgment as a matter of law “must at least

identify the specific element that the defendant contends is insufficiently

supported.” MI Brief at 33. The elements of a bad faith claim in South Carolina

are: (a) the existence of a contract of insurance between the plaintiff and the

defendant; (b) pursuant to which the insurer refuses to provide benefits; (c)

resulting from the insurer’s unreasonable action in breach of an implied covenant


26

of good faith; and (d) causing damage to the insured. See Cock-n-Bull Steakhouse,

Inc. v. Generali Ins. Co., 466 S.E.2d 727, 730 (S.C. 1996). Liberty’s Rule 50(a)

motion clearly identified the element upon which MI had failed to provide

sufficient evidence -- damages caused by the alleged bad faith conduct of Liberty.

The District Court properly concluded that Liberty had sufficiently

preserved its argument on causation and damages. JA2358-59. Waiver would

apply only if Liberty had “completely failed to question the sufficiency of the

evidence supporting compensatory damages” on its motion for directed verdict.

See, e.g., Price v. City of Charlotte, 93 F.3d 1241 (4th Cir. 1996); Primoff v.

Warfield, No. 11-1988, 2012 U.S. App. LEXIS 21215 (4th Cir. Oct. 11, 2012).

Even the cases cited by MI found a waiver only where the moving party

completely failed to raise an issue in its motion for directed verdict. See, e.g., Moll

v. Levitt & Sons of Puerto Rico, Inc., 583 F.2d 565 (1st Cir. 1978) (defendant

“never moved on insufficiency grounds, or raised the issue at all”); Belk v. Wal-

Mart Stores, Inc., 106 F.3d 389 (4th Cir. 1997) (a party’s “complete failure to

move for judgment as a matter of law, barring plain error, generally forecloses

appellate review of the sufficiency of the evidence”); Thomas v. Mineta, 310 F.

Supp. 2d 198 (D.D.C. 2004) (defendant never argued lack of “evidence sufficient

to demonstrate a causal connection”); ALM Surgical Equip., Inc. v. Kirschner Med.

Corp., No. 6:89-1622-3, 1990 WL 123966 (D.S.C. Apr. 25, 1990) (defendant did


27

not move for directed verdict on the issue of damages). The record supports the

District Court’s determination that Liberty’s motion was “sufficient to preserve the

issue” for its renewed motion for judgment as a matter of law. JA2358-59.

B. The Court Properly Disregarded Other Alleged Bad Faith Conduct.

MI next argues that the District Court erred by disregarding “the details of

Liberty’s processing of MI’s claims,” and focusing its examination of Liberty’s

alleged bad faith solely “on whether Liberty chose to settle for amounts that were

unreasonably high.” MI Brief at 38-39. As an initial matter, MI has made it

abundantly clear that the basis for its bad faith claim was Liberty’s decision to

settle the claims against MI’s wishes. When asked why MI filed the bad faith

claim against Liberty, MI’s corporate representative said that Liberty “acted in bad

faith by settling out the claims against our wishes.” JA1326. MI’s outside national

counsel, Mr. Gary, confirmed that the bad faith claim, at its essence, is based on

Liberty’s decision to follow the advice of underlying defense counsel and settle the

claims rather than to rely upon the advice of Mr. Gary and go to trial. JA1224.

In any event, the cases upon which MI relies to support its bad faith

“processing” argument are simply inapplicable to the circumstances here. In each

of the cases upon which MI relies, the insurer accused of bad faith delayed its

coverage determination or withheld some benefit under the policy in order to try to

extract concessions from the insured. In Tadlock v. Maryland Cas. Co., 473


28

S.E.2d 52 (S.C. 1996), the insurer delayed its coverage determination while

insisting that the insured agree to application of a separate deductible to each of

ninety cars damaged by errant spray paint.16 In contrast, Liberty not only defended

and settled the claims tendered by MI, it also agreed that only one deductible

would apply with respect to each of underlying claims (JA170), despite the District

Court’s conclusion that it was entitled to assess a separate deductible under each

policy triggered at each site. JA205.

In Nichols v. State Farm Auto. Ins. Co., 306 S.E.2d 616 (S.C. 1983), the

insurer’s delays in determining coverage after the insured’s car was stolen and

damaged led to a seven-month delay in having the car repaired.17 Noting that an

individual insured “ordinarily possesses no bargaining power and no means of

16 In fact, in Tadlock Painting Co. v. Maryland Cas. Co., 1996 U.S. App. LEXIS 24747 (4th Cir. 1996), the Fourth Circuit vacated the district court’s award of punitive damages on the bad faith claim that was the subject of the South Carolina Supreme Court’s decision cited by MI. The Fourth Circuit determined that there was “no evidence in the record that could lead a reasonable juror to conclude” that, in its handling of Tadlock’s claim, the insurer had “willfully, wantonly, or recklessly breached the implied covenant of good faith and faith dealing” or acted in a manner “that a person of ordinary reason and prudence would then have been conscious of it as an invasion of the plaintiff’s rights.” 1996 U.S. App. LEXIS at *10-11. 17 Like Tadlock and Nichols, the insured in Ocean Winds Council of Co-Owners v. Auto-Owners Ins. Co., 241 F.Supp.2d 572 (D.S.C. 2002), cited by MI in its Brief at 38, n.9, also alleged that the insurer took several actions in processing the claims that were designed simply to delay coverage under the policies. Here, there is not even an allegation, much less evidence, that Liberty delayed in providing coverage under the policies.


29

protecting himself” from an unreasonable denial of coverage, while the “insurance

company has the benefit of profiting on the use of the insured’s money” following

such a denial of coverage, the court concluded that the tort remedy of bad faith

served to protect the insured from an insurer’s ability to deny coverage “with

complete impunity.” 306 S.E.2d at 619. In contrast to the facts in Nichols: (a) the

relevant Policies were modified by multiple endorsements to which the parties

agreed (including the reimbursement endorsement); (b) Liberty did not delay or

withhold coverage under the policies; and (c) it was MI that had the benefit of

using Liberty’s money following MI’s refusal to reimburse Liberty as required

under the Policies.

Finally, to the extent that MI seeks to recover bad faith damages in the form

of allegedly excessive claims handling fees, the District Court properly concluded

that: (a) such damages would constitute improper double recovery because the jury

already had awarded the amount of those fees as contract damages;18 and (b) MI

could not demonstrate that Liberty had acted in bad faith with respect to the fees

because Liberty’s interpretation of the fee provisions of the policy “is in no sense

‘unreasonable.’” JA2363-64.19

18 JA2363; see also Nichols, 306 S.E.2d at 619 (plaintiffs “may only recover once for their actual damages,” and cannot recover the same damages in contract and tort). 19 Liberty also argued in its Motion for Judgment as a matter of law that “there is


30

C. MI Provided No Evidence of Injury Caused by Liberty.

The District Court granted Liberty’s motion for judgment as a matter of law

based on its determination that “[w]ithout knowing what it would have cost to

resolve the case absent the bad faith settlement” by Liberty, “a reasonable jury

would not have a legally sufficient basis to find that MI Windows suffered

damages as a result of any bad faith by Liberty Mutual” in entering into the

settlements. JA2359, 2365. In reaching that conclusion, the District Court

highlighted the differences between this case and Tyger River:

In Tyger River, the insurer unreasonably refused a settlement for less than the policy limits. As a result, the case went to trial and resulted in a verdict that exceeded policy limits. In this situation, the measure of damages is clear and definite; any amount over the policy limits a policyholder is forced to pay is proximately caused by the insurer’s bad faith in refusing a lower settlement. But in a situation where the bad faith consists of settling for an unreasonable amount [but still within policy limits], it is not generally obvious what would have happened if the insurer had not settled.

JA2359. Nevertheless, a party seeking to recover bad faith damages must show

that the damages were caused by the bad faith conduct of which it complains -- in

this case, the decision by Liberty to settle the underlying claims against MI’s

wishes -- and MI failed to present evidence sufficient for a reasonable jury to

determine that it suffered any injury as a result of those settlements.

no basis in the evidence for the contract damages awarded to MI.” JA2350. Although the District Court determined that MI’s response to that motion “does not address this argument” (id.), it denied Liberty’s motion with respect to the contract damages. JA2353.


31

1. The Settlement Amounts Alone Do Not Prove Damages

MI acknowledges that “the existence, causation and amount of damages

cannot be left to conjecture, guess or speculation.” MI Brief at 39-40. MI then

contends that it “met its burden of proof on damages” with respect to the bad faith

counterclaim simply by proving the amount of the settlements entered into by

Liberty -- “because the [settlement] amounts should not in good faith have been

incurred.” MI Brief at 39-48. However, the District Court correctly concluded

that the settlement amounts themselves cannot constitute the bad faith damages.

Among other things:

(a) the settlements “had the value of resolving cases against MI Windows in which it was facing millions of dollars in potential liability;” (b) absent the settlements in each of the cases, MI “would have had to resolve them in some other way;” (c) MI would have “very likely had to spend significant amounts of money at trial to prove that there were no defects;” (d) defense costs “could have approached or even exceeded the settlement amounts;” and (e) “if MI lost one or more of the cases, which is at least possible, it could have faced far greater liability” than the amount of the settlements.

JA2360. Liberty contends that the benefits of the settlements as enumerated by the

District Court preclude any showing that “there was no reasonable basis to support

its settlement decisions” (JA2354) and should have ended the inquiry with respect


32

to MI’s bad faith counterclaim. See Varnadore v. Nationwide Mut. Ins. Co., 345

S.E.2d 711, 713-14 (S.C. 1986) (to establish bad faith, “the plaintiff must prove

that there was no reasonable basis to support the decision of the insurance

company. . . .”); Cock-n-Bull, 466 S.E.2d at 730 (bad faith standard requires the

court to “determine whether there existed a reasonable basis” for the insurer’s

decision).

MI next attempts to blame the District Court for its failure to provide other

evidence of its bad faith damages, insinuating that the District Court’s March 30,

2010 decision on summary judgment misled it into believing that no evidence

beyond the amount of the allegedly excessive settlements amounts was necessary

to support its bad faith damages.20 MI contends that when it granted Liberty’s

post-trial motion for judgment as a matter of law, the District Court “[w]ithout any

prior warning…receded from” its prior decision on summary judgment. MI Brief

at 41. Liberty had argued that it was entitled to summary judgment on MI’s bad

faith counterclaim “because MI Windows cannot prove any damages caused by its

20 This position is belied by the opening statement of MI’s counsel:

You’re going to probably hear during this trial that Liberty Mutual did a great job settling, for instance, the Avian Forest case because it settled for the cost of the defense. Let me just tell you that what that means is that they could have gotten a defense verdict, exonerated the product, and protected the reputation of MI Windows for the same price.

Tr. 43. MI never provided the evidence to support that argument.


33

alleged bad faith.” JA176. In denying Liberty’s motion, the District Court stated

only that MI had “provided sufficient evidence of damages for its bad faith claim

to continue.” JA177. In any event, the District Court’s denial of summary

judgment was an interlocutory, non-appealable order that merely allowed the bad

faith claim to go forward. It did not bind the District Court with respect to any

decision on the merits of MI’s bad faith claim once the Court had heard all of the

evidence presented by MI on that issue. That trial counsel for MI knew this is

apparent from MI’s opening statement.

2. MI Is Not Entitled to a “Rebuttable Presumption” that the Settlement Amounts Are Equal to Its Damages

MI next argues that it was entitled to “a rebuttable presumption” that the

settlement amounts constituted its bad faith damages and that this presumption

shifted the burden to Liberty to prove that the presumed damages “could have been

avoided or reduced.” MI Brief at 44. As a preliminary matter, MI never made this

argument to the District Court, either in opposition to Liberty’s post-trial motion

for judgment or anywhere else at trial. In response to Liberty’s argument that “MI

could not recover damages for Liberty’s settlements unless MI also showed that a

trial on the merits would have cost less,” MI argued only that: (a) Liberty had

misstated “MI’s burden and operative law” (JA2361); (b) Liberty had waived the

argument (JA2358); and (c) MI had met its burden “by presenting evidence that

[Liberty] spent MI’s money to settle product defect claims when there were no


34

defects,” so the settlements had no “value to MI.” JA2360. The Court should not

consider MI’s new “rebuttable presumption” argument for the first time on appeal.

Holland v. Big River Minerals Corp., 181 F.3d 597, 605 (4th Cir. 1999).

MI cites only cases from the State of Washington to support its “rebuttable

presumption” argument with respect to its bad faith damages. MI Brief at 44-45.

However, the parties have stipulated that South Carolina law governs all issues in

this case. JA162, n.1. South Carolina law imposes the burden of proof squarely on

the plaintiff as to all elements, including proof of damages, in an insurance bad

faith action:

To establish a bad faith claim against an insurance company, the plaintiff must show: (1) the existence of a mutually binding contract of insurance between plaintiff and defendant; (2) an insurer's refusal to provide benefits due under the contract; (3) resulting from the insurer's bad faith or unreasonable action and breach of an implied covenant of good faith and fair dealing arising out of the contract; and (4) causing damage to the insured.

Peterson v. West Am. Ins. Co., 518 S.E.2d 608, 614 (S.C. Ct. App. 1999)

(emphasis added).

In addition, the Washington cases, Safeco Ins. Co. of Am. v. Butler, 823 P.2d

499 (Wash. 1992) and Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc.21,

21 It is unclear if Washington would even apply its cases in the context here in any event. In Mut. of Enumclaw Ins. Co. v. Dan Paulson Constr., Inc., 169 P.3d 1 (Wash. 2007), the insurer agreed to defend its insured in an arbitration under a reservation of rights -- and then subpoenaed the arbitrator shortly before the arbitration began, seeking information “to resolve its coverage dispute” with the


35

169 P.3d 1 (Wash. 2007), are based on the incorrect assumption, not accepted in

South Carolina, that there is some practical impossibility of proof with regard to

proximately caused damages that justifies burden shifting. Proof of damages in

this particular bad faith context, however, would be fundamentally no different

than proving damages in, for example, a legal malpractice action.

In a legal malpractice case, there are four basic elements of proof that

precisely correspond with one another: “ [I]n order to prevail in a cause of action

for legal malpractice, the plaintiff must prove: (1) the existence of an attorney-

client relationship; (2) a breach of duty by the attorney; (3) damage to the client;

and (4) proximate cause of the client's damages by the breach.” Harris Teeter,

Inc. v. Moore & Van Allen, PLLC, 701 S.E.2d 742, 745 (S.C. 2010). As to

damages, the plaintiff bears the burden of burden of proof and, by a “trial within a

trial” must show a probability of success had the attorney not breached his or her

duty and thus that a different, more favorable outcome, would have occurred but

for the malfeasance. See Eadie v. Krause, 671 S.E.2d 389, 392-93 (S.C. Ct. App.

2008); see also Brandt v. Gooding, 630 S.E.2d 259, 263 (S.C. 2006) (holding that

insured. Id. at 4. Here, Liberty did not dispute coverage; it defended and settled the claims. The court in Enumclaw limited the rebuttable presumption to bad faith involving the duty to defend and expressed no opinion as to whether its holding would apply to “a factual situation in which the insurer fully and satisfactorily discharges its duty to defend,” as Liberty did here. Id. at 13.


36

plaintiff failed to prove damages due to alleged malpractice and evidence in fact

showed plaintiff benefited from attorney’s actions).

In this case, MI failed to show how they could have achieved some better

result. MI first suggests the implausible notion that MI would have been

exonerated in each case because the opposing party would simply walk away. This

notion should be summarily rejected. Alternatively, MI speculates that all of the

juries in each case would have reached a verdict in favor of MI on liability. MI

offered no proof, expert or otherwise, to support such a conclusion. Tellingly,

when offered the actual opportunity to take one of the cases to trial and show that

MI would be found not liable at a cost less than the $500,000.00 policy deductible,

MI refused to assume the risk of an excess verdict in the Avian Forest matter – the

case that trial counsel rated as the strongest of the cases for the defense (JA660).

JA550-53, 1310. Further, MI offered no evidence that the projected trial expenses

would have been less than estimated by trial counsel. MI also offered no evidence

that each case could have been settled for some lesser amount.

MI also contends that by placing the burden on MI to show what would have

happened absent the settlements, the District Court allowed Liberty to “take

advantage of the uncertainty created by [its] own wrongdoing.” MI Brief at 47.

Unlike the cases cited by MI, the settlements by Liberty did not preclude MI from

introducing damages evidence at trial.


37

In Champion v. Whatley, 311 S.E.2d 404 (S.C. Ct. App. 1984), a real estate

broker retained by the seller produced a contract that was contingent upon the

buyer obtaining financing. The seller then sold to another party, who refused to

allow an appraisal needed by the first buyer in order to obtain financing. Id. at

405. The court concluded that the seller’s conduct prevented the condition

contained in the first contract from being satisfied, and the seller could not benefit

from that conduct. Id. at 407. Huffines Co., LLC v. Lockhart, 617 S.E.2d 125

(S.C. Ct. App. 2005) similarly involved the issue of whether the seller’s conduct

prevented the buyer’s compliance with a condition precedent in a sales contract.

The decisions in those cases do not respond to the District Court’s conclusion that

“it is not generally obvious what would have happened if the insurer had not

settled.”

The analysis of the damages proof required illustrates a more fundamental

problem with MI’s argument and the District Court’s holding that the bad faith

claim, but for proof of damages, was supported by evidence. At the time it made

the decisions to settle – which is the only time that counts for assessing bad faith in

this instance22—Liberty had before it a reasonable basis for settling. Varnadore,

22 See Howard v. State Farm Mut. Auto Ins. Co., 450 S.E.2d 582, 584 (S.C. 1994) (“Whether an insurance company is liable for bad faith must be judged by the evidence before it at the time it denied the claim or if the insurance company did not specifically deny the claim by the evidence it had before it at the time the suit was filed.”)


38

345 S.E.2d at 713-14 (to establish bad faith, “the plaintiff must prove that there

was no reasonable basis to support the decision of the insurance company”). Two

experienced trial attorneys recommended settlement and presented unchallenged

estimates of further fees and expenses to take the matter to trial and likely exposure

to an adverse verdict (none better than 50%). There was no proof that this

recommendation or these estimates were unreasonable and, therefore, no grounds

for concluding that Liberty had no reasonable basis for settling the matters.

3. There Is No Other Evidence Of Damages Suffered by MI.

MI next argues that there was evidence in the record, other than just the

amount of the settlements, sufficient to support the jury’s award of compensatory

damages on MI’s bad faith claim and, therefore, the District Court erred in granting

Liberty’s motion for judgment as a matter of law on MI’s bad faith claim. Brief at

49-51.23 In addition to the fact that MI never raised this argument in opposing

Liberty’s motion for judgment as a matter of law before the District Court, the

“evidence” now cited by MI in support of this argument only serves to further

demonstrate that Liberty had reasonable bases for its settlement decisions.

MI argues that the reports prepared by underlying defense counsel regarding

each of the underlying cases provide “evidence of the amounts that would have

23 MI makes this argument after having objected successfully at trial to the introduction of evidence of its potential liability if the underlying cases had gone to trial -- in the form of MI’s responses to auditors’ letters. JA400-418.


39

been expended to take the cases to trial.” MI Brief at 49. MI then contends that

there was also “evidence of MI’s potential financial exposure, quantified by

Liberty’s own reserve calculations.” Id. The future defense costs24 and the reserve

amounts identified by MI in the table at page 50 of MI’s Brief total $1,269,310, but

the settlements entered into by Liberty total only $1,047,300. MI Brief at 50.

Thus, the table presented by MI shows that Liberty’s settlement decisions saved MI

more than $220,000 -- and no reasonable jury could have awarded compensatory

damages of $684,416.01 (to say nothing of punitive damages in the amount of

$12.5 million) based on that showing.

4. MI Is Not Entitled to an Award of Nominal Damages.

MI next argues that because “the jury found that Liberty acted in bad faith,

and this finding was affirmed by the District Court,” the District Court’s failure to

award even nominal damages for that violation by Liberty constitutes reversible

error. MI Brief at 51. Citing Stevens v. Allen, 536 S.E.2d 663 (S.C. 2000), MI

contends that any finding of liability on a bad faith claim must be accompanied by

at least nominal damages, and nominal damages are sufficient to support an award

of punitive damages under South Carolina law. MI Brief at 51-53. Aside from the

fact that MI never raised this argument in its response to Liberty’s motion for

judgment as a matter of law or sought a jury instruction regarding nominal

24 The defense costs set forth by MI are only estimated costs through trial, and do not include appellate fees and expenses.


40

damages before the District Court, the cases cited by MI demonstrate that

judgment as a matter of law was appropriate, not only on the issue of damages, but

also on the issue of liability, because MI failed to prove an essential element of its

claim -- that it suffered any damages caused by Liberty’s bad faith conduct.

Stevens is a wrongful death and survival action in which the jury found that

the decedent and the defendant were “each 50% negligent,” but awarded no

damages to the decedent’s family. 536 S.E.2d 663. The South Carolina Supreme

Court held that “a verdict assessing liability against the defendant but awarding the

plaintiff zero damages is inconsistent and contrary to South Carolina law,” because

if the plaintiff “has failed to prove damages proximately caused” by the

defendant’s conduct, then “the verdict should be for the defendant.” Id. at 666

(emphasis added). In this case, the District Court expressly stated that MI had the

burden to prove “that it was harmed by these settlements” in the underlying cases

(JA2353) and concluded after hearing all of the evidence presented by MI at trial

that no reasonable jury would have “a legally sufficient basis to find that MI

Windows suffered damages as a result of any bad faith by Liberty Mutual.”

JA2365. Under those circumstances, Stevens dictates that judgment as a matter of

law in favor of Liberty was required with respect to MI’s bad faith claim, not only

on the issue of damages, but also on the issue of liability.


41

The other cases cited by MI in support of its argument are inapposite.

Hinson v. A.T. Sistare Constr. Co., 113 S.E.2d 341 (S.C. 1960) and Sandel v.

Cousins, 221 S.E.2d 111 (S.C. 1975) involved trespass, an invasion of the property

owner’s legal rights for which “damages sufficient to sustain an action will be

presumed, even though such damages may be nominal.” 113 S.E.2d at 344.

Trespass, by its nature, many times could not be addressed but for the common

law’s development of nominal damages to accompany it. Trespass is nothing like

a bad faith case. Harvey v. Strickland, 566 S.E.2d 529 (S.C. 2002) involved the

failure to obtain consent for blood transfusion given to a Jehovah’s Witness patient

contrary to instructions in medical forms, and the Court there determined that “the

matter of damages was for the jury’s determination.” Unlike those cases, in which

the court concluded that the violation of the legal right “imports damages,” damage

caused by the conduct of the defendant is an element of the tort of bad faith,

without which there is no “violation of the legal right” of the insured.

5. MI Is Not Entitled to Attorneys Fees as Damages

MI next argues that is entitled to attorney’s fees as compensatory damages

for its bad faith claim. MI Brief at 53-57. MI concedes that Andrews v. Central

Surety Ins. Co., 271 F. Supp. 814 (D.S.C. 1967) held that, under South Carolina

law, “attorneys’ fees incurred in prosecuting a bad faith action are not recoverable

as damages.” MI Brief at 53, n.16. MI then argues that this court should look to


42

the law of California to decide this issue (MI Brief at 54-55), again ignoring the

fact that the parties stipulated that South Carolina law applies to all issues in this

case. JA162, n.1.

MI then argues that when the South Carolina Supreme Court stated in

Nichols v. State Farm, 306 S.E.2d 616 (S.C. 1983) that an insured may recover “all

consequential damages” caused by an insurer’s bad faith, it intended to include

attorneys’ fees as well. MI Brief at 53. In fact, the court in Nichols vacated the

trial court’s award of attorneys fees under § 38-9-320(1) (1976), holding that the

statutory provision is “inapplicable to a tort claim.” 306 S.E.2d at 620.

Nevertheless, MI argues that the current version of the same statute should apply to

award attorneys fees as compensatory damages for its bad faith claim against

Liberty. MI Brief at 56-57. But in this case, the statute is inapplicable on its face

because Liberty did not refuse or deny the claims -- it defended and settled them as

required under the Policies. In any event, as the District Court noted, there is no

reported case in South Carolina awarding attorneys fees as compensatory damages

in a bad faith claim against an insurer that did not deny coverage. JA2365.

MI attempts to avoid that inconvenient fact by arguing that the settlements

constituted a “refusal to defend” the claims. MI Brief at 57. In support of that

argument, MI cites a series of cases from other jurisdictions equating the provision

of “an inadequate defense” with the failure to defend. Id. at n.21. Again, MI


43

simply ignores the facts that: (a) Liberty retained experienced defense counsel in

the underlying cases; (b) MI acknowledged that defense counsel did their “very

best” to defend MI; and (c) MI’s own expert conceded that the “aggressive

defense” of the claims mounted by Liberty led to lower settlement demands from

the underlying plaintiffs. There was no “inadequate defense” provided here.

II. The Amended Final Judgment May Be Sustained on Alternative Grounds in Addition to MI’s Failure to Prove Damages.

The Amended Final Judgment may be sustained on other grounds in addition

to MI’s failure to prove damages. Despite all of its current arguments to the

contrary, MI’s bad faith claim against Liberty is based upon its disagreement with

Liberty’s decision to settle the underlying claims. Where the Policies expressly

provided Liberty the right to settle the claims “at our discretion,” the decision to

settle in the face of differing opinions between underlying defense counsel and Mr.

Gary cannot rise to the level of bad faith.

A. The “Implied Covenant” Cannot Supersede the Explicit Contractual Provisions of the Policies.

MI explicitly agreed in the Policies that Liberty would control the settlement

decisions, and the “implied covenant” of good faith and fair dealing, upon which

MI’s bad faith is based, cannot override the explicit terms of the agreement itself.

Although the South Carolina Supreme Court has not directly addressed the conflict

between the explicit rights granted under the plain language of an insurance policy


44

and the implicit “duty of good faith and fair dealing” in this specific context, in

Doe v. S.C. Med. Malpractice Liab. Joint Underwriting Assoc., 557 S.E.2d 670,

674 (S.C. 2001), the court considered policy language stating that the insurer “shall

have the right to make such investigation and settlement of any claim or suit as

may be deemed expedient” by the insurer. Quoting extensively from a decision

issued by the Florida Supreme Court, the South Carolina Supreme Court clearly

indicated that it would refuse to rewrite that explicit provision of the policy based

upon the implied duty of good faith:

[t]he language of this provision is clear and the insured was put on notice that the agreement granted the insurer the exclusive authority to control settlement and to be guided by its own self-interest when settling the claim for amounts within the policy limits. The obvious intent behind placing this provision in the agreement was to grant the insurer the authority to decide whether to settle or defend the claim based on its own self-interest, and this authority includes settling for the nuisance value of the claim. Therefore, we interpret the provision as granting the insurer the discretion to settle cases for amounts within the policy limits, regardless of whether the claim is frivolous or not. . . We recognize that every contract requires the good faith performance of its provisions. However, the act of settling a claim either for nuisance value, or for an amount lower than the actual value of the suit, is not bad faith performance of the right to settle as one ‘deems expedient.’

Id. at 651(quoting Shuster v. South Broward Hosp. Dist. Physicians’ Prof. Liab.

Ins. Trust, 591 So. 2d 174, 176-77 (Fla. 1992)).25

25 See also Adams v. G.J. Creel and Sons, Inc., 465 S.E.2d 84, 85 (1995) (“There exists in every contract an implied covenant of good faith and fair dealing. However, there is no breach of an implied covenant of good faith where a party to


45

Numerous other courts confronted with similar policy language and

settlements by the insurer against the wishes of the insured have concluded that

such settlements cannot give rise to a claim of bad faith when they are expressly

authorized by the clear language of the policy:

[I]t is perfectly proper for the insurers to settle an action for a figure where GE’s [the insured] contribution in the form of the deductible is considerably larger than the insurer’s contribution. That is in fact what happened here. It would even be proper for the insurers to settle for a figure within the deductible, thus spending GE’s money without its consent and at no cost to themselves. While either of these results might seem to be burdensome to GE, particularly the latter, that is the contract which GE made with its insurers. There is no claim made by GE that it was not in an equal bargaining position, or that it was in some manner prevented from protecting itself in framing the terms of the contract.

Orion Ins. Co. v. Gen. Elec. Co., 493 N.Y.S.2d 397, 401 (N.Y. Sup. Ct. 1985),

aff’d, 509 N.Y.S.2d 778 (N.Y. App. Div. 1986) (emphasis added); see also Am.

Prot. Ins.Co. v. Airborne, Inc., 476 F. Supp. 2d 985, 989-90 (N.D. Ill. 2007)

(settlement, over insured’s objections, is proper under policy that contained a $1

million dollar deductible provision, provided settlement decision was not arbitrary,

capricious or inconsistent with reasonable expectations of parties); Hartford Acc.

& Indem. Co. v. U.S. Natural Res., Inc., 897 F. Supp 466, 473-74 (D. Oregon

1995) (covenant of good faith/fair dealing does not require insurer to obtain

a contract has done what provisions of the contract expressly gave him the right to do.”) (emphasis added) (citation omitted).


46

insured’s consent to settlement for settlement within insured’s deductible, if insurer

authorized to settle third-party claim under applicable policy); United Capitol Ins.

Co. v. Bartolotta’s Fireworks Co., 546 N.W.2d 198, 201-02 (Wisc. Ct. App. 1996)

(freedom of contract prevents court from engrafting consent requirement on

insurance policy specifically allowing insurer to settle third-party claims utilizing

the insured’s deductible without the insured’s consent); Nationwide Mut. Ins. Co.

v. Pub. Serv. Co. of N.C., 435 S.E.2d 561, 564-65 (N.C. Ct. App. 1993) (insurer’s

settlement of third-party claim without insured’s consent, for $1500 over insured’s

$100,000 deductible, did not give rise to bad faith action where applicable policy

gave insurer right to settle claims as it deemed appropriate); Am. Home Assur. Co.

v. Hermann’s Warehouse Corp., 563 A.2d 444, 448 (N.J. 1988) (“in the context of

an insurer settling a third-party claim with funds that include the insured’s

deductible [as allowed by the express policy language], the [insurer’s] claim for

reimbursement of the deductible cannot be defeated on the ground that the

settlement in the face of the insured's objection manifested bad faith”); and New

Hampshire Ins. Co. v. Ridout Roofing Co., 68 Cal. App. 4th 495, 506-07 (Cal. Ct.

App. 1998) (insurer was entitled to rely on the policy terms vesting in it the

discretion and power to settle claims, including using the insured’s deductible to do

so).


47

In short, Liberty simply cannot have violated any “implied duty of good

faith and fair dealing” by doing what MI expressly agreed it could do. See, e.g.,

American Home, 563 A.2d at 447 (N.J. 1989) (“where the insured has contracted

away the right to control settlement and has agreed, through a ‘deductible’ clause,

that the carrier’s funds are not at risk until the deductible amount has been

exhausted, there may be a conflict in the sense that the insured’s money may be

paid without the insured’s knowledge, approval, or permission. But that is exactly

what the contract calls for.”) (emphasis added).26

B. The District Court Employed the Wrong Legal Standard Given the Policy Language Permitting Liberty to Settle Claims at Its Discretion.

Because the policies explicitly gave Liberty the right to settle “at its

discretion,” the burden was on MI to demonstrate that Liberty abused that

discretion.27 In its own words, the District Court had ruled prior to trial “that

Liberty Mutual could be liable for bad faith if there was no reasonable basis to

26 The Court in American Home also noted that insurance arrangements “surely are negotiable in the commercial setting,” and there is “nothing before us to suggest that Hermann’s was foreclosed from obtaining coverage that would have included no deductible amount or coverage that would have given it the right to approve any settlement,” except that if the insured had “wished one or both of those forms of protection, it would have had to pay for such additional consideration.” 563 A.2d at 448. The same is true for MI here. 27 See, e.g., State v. Allen, 634 S.E.2d 653, 656 (S.C. 2006) (abuse of discretion arises where decision is “arbitrary and capricious” or the result of “whim or caprice”).


48

support its settlement decisions.” JA2355. The District Court specifically

acknowledged that “Liberty Mutual certainly ‘introduced evidence of numerous

reasonable bases’ supporting its decisions” to settle each of the underlying cases

(JA2358) and it enumerated the various benefits to MI of those settlements.

JA2360. In short, no reasonable jury examining the record could have found that

Liberty lacked any “reasonable basis” for its settlement decisions and entered into

the settlements based on whim or caprice. That should have ended the inquiry with

respect to MI’s claim that Liberty settled the cases in bad faith.

However, the District Court concluded that further inquiry was warranted

with respect to the bad faith claim because “if Liberty Mutual were to put its own

interests ahead of those of MI Windows,” the deductible provisions of the Policies

would provide Liberty with “incentive to promptly settle any case that could

possibly be settled for less than $500,000 -- regardless of whether the case were

frivolous or the settlement demand excessive -- in order to avoid even the smallest

chance that a verdict at trial might reach the layer of insurance.” JA2349-50. MI’s

own insurance expert, Charles Miller was asked about that very possibility, and

confirmed that it did not happen here:

Q: Isn’t it true, Mr. Miller, if they [Liberty] were so biased towards settlement early on, then they would have just paid the money to settle the case very early on; for instance [at] Marais would just go ahead and pay the $500,000?


49

A: No. Because I think their goal was to make sure that whatever they spent was less than the policy limit. And they were going to have to do some work to convince the plaintiffs -- usually this is the way these things work -- to get down below the policy limits before they could settle. Q: Well, and it’s also they wanted to do some work to mount an aggressive defense for the policyholder; is that correct, MI Windows in this case? A: That’s exactly what they did. In fact, there’s a notation in the file. I think Mr. Clarke said it. The result of bringing down these damages, these settlement offers, is because we have been mounting an aggressive defense. I thought that was very good.

JA1153.

To have acted in bad faith, there must have been “no reasonable basis” for

Liberty’s settlement decisions. Despite the overwhelming evidence of the

existence of reasonable bases for Liberty’s settlement decisions, the District Court

allowed the bad faith claim to go to the jury to determine the “reasonableness” of

the settlements. As set forth in Section IV, infra, the District Court then further

confused the issue by instructing the jury pursuant to Tyger River that Liberty was

obligated to “sacrifice its own interests in favor of those of the policyholder.”

That, however, is not the proper standard for determining whether Liberty acted in

bad faith in performing a contract that expressly gave it the right and duty to settle

claims “at our discretion.”


50

III. The Settlement Amounts Were Properly Included in the Award of Contract Damages to Liberty and that Award Should Include Prejudgment Interest and Costs.

MI also argues that the District Court erred by allowing Liberty to recover

contract damages that included the “bad faith” settlement amounts. MI Brief at 58-

61. Specifically, MI contends that “the jury determined that Liberty breached the

covenant of good faith and fair dealing in settling Tilghman, Avian, Magnolia and

Riverwalk”28 and, therefore, the amounts of those settlements “are not recoverable

from MI.” Id. at 59. The Court should reject MI’s arguments seeking to further

reduce the contract damages awarded to Liberty and should add prejudgment

interest and costs instead.

A. Inclusion of the Settlement Amounts in the Award of Contract Damages Was Appropriate.

MI’s argument seeking to further reduce Liberty’s breach of contract

damages should be rejected because: (a) MI failed to make that argument in its

motion for directed verdict at trial or in its post-trial motions before the District

Court; and (b) the identical settlements cannot simultaneously form the basis for an

award of damages to Liberty based on MI’s breach of the Policies and an award to

28 This definitive pronouncement by MI of exactly what the jury did is contradicted by MI’s earlier statement that “neither counsel nor any court knows what considerations factored into the jury reaching its verdict.” MI Brief at 41, n.10.


51

MI based on Liberty’s breach of an “implied covenant of good faith” in the very

same Policies.

At the close of Liberty’s case at trial, MI moved “for a directed verdict both

on plaintiffs’ claim as a whole and as to certain aspects of that claim,” arguing that

the evidence was not “sufficient or probative on the issue of whether MI Windows

has committed a breach.” JA1050 (emphasis added). Counsel for MI also

addressed the “two issues” related “to the Marais part of the claim” that formed the

basis for the District Court’s remittitur with respect to Liberty’s contract

damages.29 Nowhere did MI argue what it now presents to this Court -- that the

settlements other than Marais were made in bad faith and, therefore, the amounts

paid “are necessarily not recoverable from MI.” MI Brief at 60. Having failed to

present that argument before the District Court, MI is precluded from raising it for

the first time on appeal. See Holland, 181 F.3d at 605.

MI cites a series of cases in its Brief for the proposition that “a party may

not recover damages that derive from its own unlawful conduct.” MI Brief at 60,

n.23. However, the cases cited by MI bar the recovery of damages for unlawful

29 The District Court determined that the judgment in favor of Liberty on its breach of contract claim “must be remitted by $210,000” (the amount that Liberty paid toward the settlement at Marais) because Liberty had: (a) failed to prove the proper allocation of the indemnity payment between itself and Zurich Insurance; and (b) allocated defense costs at Marais between itself and Zurich. JA2367-73. Liberty chose to accept the remittitur. JA2377-78.


52

practice of law by bank employees,30 bribery,31 usery,32 forgery and fraud so

pervasive that it “suggests a danger to the administration of justice,”33 and “patent

claims infected with fraud and perjury.”34 In contrast, Liberty in this case

defended and settled (within the limits of the policy) multiple lawsuits against its

insured -- conduct which is not illegal, unlawful or immoral, but rather was

required by the terms of the Policies. Liberty performed its obligations under the

Policies by defending and settling the claims. MI cannot avoid its deductible

obligations under the plain language of the Policies merely by invoking “bad

faith,” particularly where the District Court has enumerated the many benefits to

MI resulting from the settlements.

B. The District Court Should Have Awarded Prejudgment Interest and Costs to Liberty on the Breach of Contract Claim.

The award of prejudgment interest and costs rests within the discretion of

the trial court. See Jacobs v. Am. Mut. Fire Ins. Co. of Charleston, 340 S.E.2d

142, 143 (S.C. 1986). However, the District Court abused its discretion by

30 Wachovia Bank, N.A. v. Coffey, 698 S.E.2d 244, 248 (S.C. Ct. App. 2010). 31 Jackson v. Bi-Lo Stores, Inc., 437 S.E.2d 168, 170-71 (S.C. Ct. App. 1993). 32 Ewell v. Daggs, 108 U.S. 143, 148-49 (1883). 33 Buchanan Home and Auto Supply Co. v. Firestone Tire and Rubber Co., 544 F. Supp. 242, 247 (D.S.C. 1981). 34 Precision Instr. Mfg. Co. v. Automotive Maint. Mach. Co., 324 U.S. 806, 819 (1945).


53

applying the wrong legal standard to Liberty’s request for prejudgment interest,

ignoring the relevant claims to which that request applied, and failing to award

costs to Liberty as the prevailing party.

1. The District Court Should Have Awarded Prejudgment Interest. South Carolina law allows prejudgment interest “on obligations to pay

money from the time when, either by agreement of the parties or operation of law,

the payment is demandable, if the sum is certain or capable of being reduced to

certainty.” Babb v. Rothrock, 426 S.E.2d 789, 791 (1993).35 The District Court

denied Liberty’s motion for prejudgment interest based on its conclusion that “the

amount due to Liberty was not capable of being readily ascertained at the time the

claim arose.” JA2384. The District Court ruled that the amount due to Liberty

could not be fixed at the time the Amended Complaint was filed because “the

Court had to determine the rights of the parties under the policies,” which required

the Court to consider “complex issues under South Carolina insurance law.”

JA2384-85. The Court further cited the fact that Liberty “pleaded $851,443.53 in

contract damages, but maintained a judgment of $684,416.01” as evidence

demonstrating “that Liberty Mutual’s entitlement was not susceptible to a

formulaic determination by the parties at the time the claim arose.” Id. at 6.

35 The relevant statute in South Carolina governing prejudgment interest states that “in all cases wherein any sum or sums of money shall be ascertained and, being due, shall draw interest according to law, the legal interest shall be at the rate of eight and three-fourths percent per annum.” S.C. Code Ann. §34-31-20(A).


54

The Court applied the wrong legal standard in denying Liberty’s motion for

prejudgment interest. The fact that a particular sum is subject to dispute does not

preclude an award of prejudgment interest. Babb, 426 S.E.2d at 791. Rather, “the

proper test for determining whether prejudgment interest may be awarded is

whether or not the measure of recovery, not necessarily the amount of damages, is

fixed by conditions existing at the time the claim arose.” Id. (emphasis added).

The plain language of the applicable Policies required MI to reimburse Liberty on

a monthly basis for the first $500,000 in “reimbursable expenses,” which are

defined to include defense costs and settlement or indemnity payments. JA1656-

59, 1743-46, 1827-30, 1881-82, 1951-52, 2023-24; see also JA2346. Thus, “the

measure of recovery” -- the reimbursement of defense and indemnity payments up

to $500,000 -- was “fixed by conditions existing at the time” the Amended

Complaint was filed.

Even MI, in opposing Liberty’s motion for prejudgment interest, did not

argue that the amount of Liberty’s breach of contract claim was “not capable of

being readily ascertained at the time the claim arose.” MI raised four other

arguments in opposing Liberty’s motion, but never claimed that the amount of

Liberty’s breach of contract claim was not capable of being determined for

purposes of obtaining pre-judgment interest.36 In fact, MI conceded that “the

36 See Response to Plaintiffs’ Motion for Award of Prejudgment Interest, March


55

purpose of prejudgment interest is to ensure that the prevailing party is made

whole.” Id. at 3. Here, MI breached the contract by refusing to reimburse Liberty

for defense and indemnity payments made by Liberty on behalf of MI Windows.

In order to be “made whole” under the terms of the insurance policies, Liberty is

entitled to an award of prejudgment interest for the period during which it had

made the expenditures on behalf of MI Windows, but was not reimbursed as

required under the policies.

Contrary to the District Court’s decision, the fact that Liberty alleged one

amount ($851,443.53) as damages for the breach of contract by MI in its

complaint, but “maintained a judgment of $684,416.01” on the breach of contract

claim after the District Court’s August 10, 2012 order deciding the post-trial

motions, does not invalidate Liberty’s claim for prejudgment interest. A

contractual claim for a fixed amount that became due and payable at a particular

time under the contract is not converted into a claim for an uncertain amount

simply because the other party to the contract disputed the amount owed. See, e.g.,

Smith-Hunter Constr. Co. v. Hopson, 616 S.E.2d 419, 421 (S.C. 2005); Davis v.

26, 2012 [DE 306] at 2: “The Court must deny plaintiffs’ motion for prejudgment interest for four reasons: (1) Prejudgment interest is applied to the net judgment…which for Liberty is $0 [at that time]; (2) Liberty may not recover damages, including prejudgment interest, that arise from its own tortious conduct; (3) prejudgment interest is not available where a party with unclean hands seeks it; and (4) Liberty’s decision to forego drawing on MI’s letter of credit cannot create a right to prejudgment interest.”


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Carpenter, 270 S.E.2d 810, 812 (Ga. Ct. App. 1980), rev’d on other grounds, 274

S.E.2d 567 (Ga. 1981). Even MI has acknowledged that “prejudgment interest is

calculated on the amount due after being adjusted by the jury’s verdict” and after

deducting any discounts or offsets. See MI Response [DE 306] at 3. Thus, the fact

that Liberty received an award of contract damages in an amount different from the

amount alleged in its amended complaint does not invalidate its entitlement to

prejudgment interest on the amount actually awarded.

The District Court also concluded that prejudgment interest should not be

awarded because the Court was required to consider “complex issues under South

Carolina insurance law” in order to determine the rights of the parties under the

policies. JA2384-85. However, the “complex issues” that the Court was required

to consider did not involve the reimbursement obligation under the policies. While

the allegations of bad faith in MI’s counterclaims may have required the Court to

consider unusual issues under South Carolina insurance law, the existence, nature

and extent of the insured’s reimbursement obligations under the Policies did not.

By failing to award prejudgment interest, the District Court failed to compensate

Liberty for the time value of the unreimbursed expenditures and served to

encourage parties to turn contractual reimbursement obligations into interest-free

loans by delaying their reimbursement.


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2. The District Court Also Abused Its Discretion By Denying Costs to Liberty.

Federal Rule 54(d)(1) states that “costs -- other than attorney’s fees -- should

be allowed to the prevailing party” unless a federal statute, the federal rules or a

court order provides otherwise. FRCP 54(d)(1). Although the District Court has

discretion to award or deny costs in a particular case, Rule 54(d) creates “a

presumption in favor of an award of costs to the prevailing party.” Teague v.

Bakker, 35 F.3d 978, 996 (4th Cir. 1994). The Amended Final Judgment leaves no

question that Liberty was the prevailing party. MI breached its obligation to

reimburse Liberty for deductible amounts that MI promised to pay under the

Policies. The court should have awarded costs to Liberty.

IV. The Tyger River Instruction to the Jury Was Erroneous and Prejudicial.

At trial, over Liberty’s objections,37 the District Court instructed the jury as

follows, based on the South Carolina Supreme Court’s decision in Tyger River:

If an insurer assumes the defense of its policyholder in a liability case where the policyholder may potentially be exposed to liability above and beyond the policy limits, the insurer has the duty to settle the case if it is the reasonable thing to do. Also, if the interests of the insurer conflict with the interests of the policyholder during the insurer’s defense of the claim against the policyholder, the insurer must sacrifice its own interests in favor of those of the policyholder.

37 JA1425, 1549-50; DE 256 at 232-255; DE 257 at 3-12.


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JA1563-64, 2211. The District Court also denied Liberty’s motion for a new trial,

concluding that its Tyger River instruction on the bad faith counterclaim “was a

correct statement of law that was applicable to the facts in this case.” JA2350.

The Tyger River instruction was improper in this case because none of the

facts upon which that decision was based is present here. In Tyger River, the

insurer refused to accept a settlement offer at the upper end of its policy limits,

gambling that its insured would prevail at trial. 170 S.E. 346. At trial, the insured

suffered an adverse verdict in an amount that exceeded the policy limits and the

amount for which the case could have been settled. Id. at 347. Unlike the situation

in Tyger River, Liberty accepted settlement offers that not only were within the

policy limits, they were within MI’s agreed-upon deductible. Thus, the first

sentence of the jury instruction was completely irrelevant to the facts in this case

because there was no possibility that the settlement decisions by Liberty could

subject MI to liability beyond the policy limits.

The second sentence of the Tyger River charge given to the jury also is

completely inapplicable to the facts present here. The court in Tyger River stated

that the insurer had undertaken a contractual obligation in the policy “to hold the

respondent harmless in the disposition of Chesser’s [the underlying plaintiff]

claim,” and that “[i]f, in the effort to do this, its own interests conflicted with

those of respondent, it was bound, under its contract of indemnity, and in good


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faith, to sacrifice its interests in favor of those of the respondent.” Id. at 348 (bold

added; italics in original). The nature of the Policy at issue here is fundamentally

different in that Liberty could not and did not undertake in the Policy to hold MI

harmless from the underlying claims -- MI had expressly agreed to fund the first

$500,000 of defense and indemnity costs for each occurrence. In other words, the

Tyger River instruction was based on completely different policy obligations, and

its application in this case eviscerates MI’s contractual agreement that MI would

reimburse the first $500,000 per occurrence and that Liberty had the right and duty

to settle the cases in its discretion.

The District Court erred when it concluded that the Tyger River instruction

“was a correct statement of law that was applicable to the facts of this case” despite

the obvious and significant factual differences between this case and Tyger River.

This was a case where the insurer aggressively defended and settled the underlying

claims within the limits of the applicable policies, but the Court instructed the jury

on the law of “bad faith” applicable to cases where the insurer denies claims or

refuses to settle them within the limits of the applicable policies. As the District

Court acknowledged, no South Carolina case has ever held an insurer liable for bad

faith where it defended and settled an underlying action against an insured for an

amount within the limits of the policy.


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The District Court also ignored the Fourth Circuit’s decision in Am. Cas. Co.

v. Howard, 187 F.2d 322 (4th Cir. 1951) with respect to the limits of Tyger River.

There, the Fourth Circuit reversed the District Court’s determination that the

insurer was required under Tyger River to “sacrifice its own interests in favor of

those of the policyholder” and to accept the offer of full policy limits. Rather, the

Fourth Circuit concluded that the insurer “in no way breached its duty to the

insured, as that duty is outlined in the Tyger River case” when it “refused an offer

of settlement for all liability arising from the accident upon payment of $5,000.”

Id. at 327-28. The insurer had relied upon the advice of underlying defense

counsel, who had concluded “after a thorough study of the case” that its

“settlement worth” was $4,000. Id. at 328. Like the insurer in American Casualty,

Liberty retained experienced trial counsel and relied upon the detailed evaluations

and recommendations of counsel in making its settlement determinations.

The prejudicial effect of the erroneous Tyger River charge is obvious.

Consistent with the District Court’s determination on summary judgment that the

plain language of the Policies gave Liberty the contractual right to settle the claims

“at our discretion,” the jury awarded Liberty breach of contract damages that

included the full amount paid by Liberty for each of the five settlements.

However, based on the erroneous Tyger River instruction, the jury also awarded

MI “bad faith” damages that included the amount paid by Liberty for each of the


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settlements, except Marais, which was the only claim for which MI agreed that it

should pay to settle. JA912, 1226. Thus, the same settlements that were

authorized under the Policy were determined to constitute bad faith because

Liberty did not “sacrifice its own interests in favor of those of the policyholder”

with respect to the four claims that MI wanted to take to trial. Further, by giving

the erroneous Tyger River instruction, the District court effectively eviscerated her

prior ruling that Liberty had the contractual right to control settlement. The charge

created an implication that Liberty had acted improperly – by not "sacrificing its

own interests in favor of those of the policyholder" – through its contractual choice

to settle the cases over the objection of MI.

Finally, the prejudice to Liberty was compounded further by the fact that

Liberty obviously undertook to settle the underlying lawsuits “willfully.” Thus,

the jury was instructed by the Court that the insurer must sacrifice its interests to

those of the insured, and if the insurer willfully did not do so, punitive damages

were appropriate.

V. The Jury’s Award of Punitive Damages Was Unconstitutional and Otherwise Invalid.

After finding that MI had “not proven actual or consequential damages

resulting from any bad faith on the part of Liberty Mutual,” the District Court

concluded that “the award of punitive damages cannot stand” and, therefore, it did

not consider Liberty’s motion to alter or amend the judgment regarding punitive


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damages. JA2366. However, in the event that the Court does not affirm the

amended final judgment, the Court must remand the case to the District Court with

instructions to eliminate or reduce the jury’s punitive damages award because it is

grossly excessive and violates the Plaintiffs' constitutional right to procedural and

substantive due process. See GTR Rental, LLC v. DalCanton, 547 F. Supp. 2d 510,

520 (D.S.C. 2008) (“the court must conduct a post-verdict review of the punitive

damages award”).

Punitive damages exist to punish a defendant for conduct which is clearly

“willful, wanton, or undertaken in reckless disregard of plaintiff’s rights.” Kuznik

v. Bees Ferry Assoc., 538 S.E.2d 15, 32 (S.C. Ct. App. 2000). Punitive damages

are not proper when the evidence demonstrates ordinary or gross negligence. See

Lengel v. Tom Jenkins Realty, Inc., 334 S.E.2d 834, 837 (S.C. Ct. App. 1985);

Hubbard & Felix, The South Carolina Law of Torts 595 (3d ed. 2004) (noting that

“punitive damages are not awarded for negligence, whether simple or ‘gross’”).38

An award of punitive damages must be supported by clear and convincing

evidence. S.C. Code Ann. § 15-33-135. There was no evidence, let alone clear

and convincing evidence, that Liberty had no reasonable basis for the settlements

and settled the underlying claims in “willful, wanton, or…reckless disregard” of

38 See also n. 16, supra, discussing this Court’s decision in Tadlock Painting Co., 1996 U.S. App. LEXIS 24747.


63

MI’s rights. To the contrary, MI had expressly agreed in the Policies that Liberty

had the right to settle the claims at its discretion.

Where an award of punitive damages “is grossly excessive, it furthers no

legitimate purpose and constitutes an arbitrary deprivation of property” in violation

of the Constitution. State Farm v. Campbell, 538 U.S. 408, 416-17 (2003). In

BMW of N. Am. v. Gore, 517 U.S. 559 (1996), the United States Supreme Court

established a three-part test for review of a punitive damages award, including:

(a) the degree of reprehensibility of the party’s conduct; (b) “the disparity between the actual or potential harm suffered by the plaintiff and the amount of the punitive damages award,” known as the ratio; and (c) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.”

517 U.S. at 575. The jury’s award of $12.5 million in punitive damages fails on all

three measures.

In examining the “reprehensibility” of the conduct, a reviewing court must

consider whether: (1) the harm caused was physical as opposed to economic; (2)

the tortious conduct evinced an indifference to or a reckless disregard for the health

or safety of others; (3) the target of the conduct had financial vulnerability; (4) the

conduct involved repeated actions or was an isolated incident; and (5) the harm

was the result of intentional malice, trickery, or deceit, rather than mere accident.

See Campbell, 538 U.S. at 419. Here, there was no proof of any harm at all to MI,


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no physical injury or reckless disregard for health and safety, and MI was not

financially vulnerable, having chosen to include a $500,000 deductible in each of

the Policies. The relevant language was identical in each of the Policies regarding

Liberty’s right to settle claims at its discretion, and MI failed to prove any

intentional malice, trickery or deceit by Liberty in settling the claims.

The jury’s punitive damages award also fails on the ratio factor. The United

States Supreme Court has determined that “few awards exceeding a single-digit

ratio between punitive and compensatory damages . . . will satisfy due process.”

See Campbell, 538 U.S. at 425 (emphasis added). Moreover, where, as here,

“compensatory damages are substantial, then a lesser ratio, perhaps only equal to

compensatory damages, can reach the outermost limit of the due process

guarantee.” Id. (emphasis added).39 Even if Plaintiffs' conduct had been highly

reprehensible, which it was not, awarding $12.5 million in punitive damages in

39 Compensatory damages in the range awarded are “substantial.” See, e.g., Fresh v. Entm’t U.S.A., Inc., 340 F. Supp. 2d 851, 859 (W.D. Tenn. 2003) (compensatory damages award of $179,402 was “significant” and “substantial”); Aken v. Plains Elec. Generation & Transmission Coop., 49 P.3d 662, 671 (N.M. 2002) (“An actual damages award of $100,000 is substantial in itself and thus a lower ratio” of punitive damages is appropriate.); see also Kendrick v. Broadcast Media Group LLC, No. 2:02CV1034-N, 2006 WL 2709846, at *6 (M.D. Ala. Sept. 20, 2006) (“[t]he relief granted to plaintiff . . . was substantial: $100,000 in compensatory damages, $30,000 in punitive damages, and $16,071.81 in back pay”); Guzman v. Bevona, No. 92 CIV. 1500 RPP, 1996 WL 374144, at *3 (S.D.N.Y. July 3, 1996) (“compensatory damages of $100,000 . . . conferred a substantial benefit”); WB Music Corp. v. Rykodisc, Inc., No. CIV.A.94-2902, 1995 WL 631690, at *4 (E.D. Pa. Oct. 26, 1995) (“damages in excess of $100,000” are “substantial”).


65

connection with purported actual damages of $684,416.01 – a ratio of over 18 to 1

-- is a denial of Liberty’s due process rights and therefore unconstitutional.

Finally, the “difference between the punitive damages awarded by the jury

and the civil penalties authorized or imposed in comparable cases” further

demonstrates that the jury’s punitive damages award was wildly out of line. The

Department of Insurance may impose a penalty of $15,000 for claims handling

misconduct on insurers, and increase such a fine to $30,000 for willful violations.

S.C. Code Ann. Section 38-2-10 (2002). Obviously these amounts pale in

comparison to the enormous punitive damage award here. Hence, none of the

Gore guidelines supports the constitutionality of the punitive damages award in

this case.

Lastly, as is demonstrated by the evidence discussed herein, there was no

“clear and convincing” evidence justifying punitive damages in any event. If this

Court does not sustain the amended final judgment, it must remand the case with

instructions to consider Liberty’s motion to alter or amend the initial judgment and

to vacate the jury’s award of punitive damages.

VI. The District Court Did Not Err in Excluding Other Evidence at Trial.

MI also argues that “the District Court’s erroneous evidentiary rulings

should be corrected” if a new trial is ordered. MI Brief at 61. Specifically, MI

contends that the District Court erroneously excluded “motive evidence” (Id. at 61-


66

62) as well as evidence of “dozens of other cases” nationwide in which Liberty had

defended MI and had settled claims within the limits of MI’s deductible. Id. at 63.

Unlike review of the grant of a motion for judgment as a matter of law, the

standard of review for the District Court’s evidentiary rulings at trial is abuse of

discretion. See Simms v. Mutual Benefit Ins. Co., 137 Fed. App’x 594, 597 (4th

Cir. 2005) (evidentiary rulings are reviewed with “great deference” and are

disturbed on appeal only when the trial court acted “arbitrarily” or “irrationally”).

The District Court properly exercised its discretion with respect to each of these

rulings.

MI contends that the District Court erroneously “barred as irrelevant the

proferred evidence of motive” in the form of deposition testimony of John Bogart,

an expert retained on behalf of Liberty to rebut MI’s underwriting expert, Donald

Brayer (JA1071), “as well as other expert testimony and underwriting documents.”

MI Brief at 61-62. MI claims that the proffered evidence would show that

“Liberty’s underwriters anticipated paying no claims at the time of underwriting.”

Id. at 62 (emphasis in original). After examining the proffered evidence, the

District Court ruled that it “has very little probative value” and any such probative

value “is substantially outweighed by the risk of confusion and unfair prejudice”

because the underwriting documents that MI proposed to introduce:

(a) “do not state that Liberty Mutual’s intent [was] to avoid paying any claims;”


67

(b) related to “a projection of expected claims” that “does not suggest that if any claims did in fact arise Liberty Mutual would not adjust them in good faith;” and (c) were “not specific to MI Windows but rather deal[] with all contractors and manufacturers general liability policies.”

JA1368. MI’s own expert, Mr. Miller, testified that he was unaware of any

evidence indicating that the claims handlers knew of any of the underwriting

information. JA1139-40. Consequently, the District Court properly excluded

evidence seeking “to establish financial motive through underwriting policies.”

JA1370.

MI further argues that Mr. Bogart’s de benne esse deposition testimony

“should have been admitted as a party admission” because the testimony was taken

at Liberty’s request and Liberty “made a tactical decision to not withdraw him or

seek pre-trial to bar his testimony.” MI Brief at 62, n.27. However, Mr. Bogart

was retained “to address the Defendants’ allegations of improper underwriting.”

JA208. The District Court excluded all of MI’s underwriting evidence, not

because it was hearsay, but rather because the Court determined that it lacked

probative value and its prejudicial effect would outweigh any minimal probative

value that it might have. Under those circumstances, the Court’s properly refused

to allow MI to circumvent its ruling on the relevance and admissibility of the

underwriting evidence through the purported “admissions” of Mr. Bogart.


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MI then argues that the District Court also erred in excluding evidence that

purportedly showed that “in dozens of other cases in which Liberty had defended

MI nationwide, Liberty had never paid a dollar in defense or indemnity above the

policies’ $500,000 deductible.” MI Brief at 63. MI contends that this “evidence”

should have been admitted pursuant to Federal Evidence Rule 404 to prove motive

-- again based in MI’s theory that Liberty’s “decisions to settle the cases stemmed

from pre-lawsuit underwriting decisions not to pay claims on MI’s policies.” Id.

As set forth above, the District Court properly excluded the underwriting evidence

proffered by MI, and then applied that ruling to other purported evidence that MI

admits was based upon the excluded underwriting evidence.

CONCLUSION

Liberty respectfully requests that the amended final judgment be affirmed

because MI suffered no damages as a result of any “bad faith” conduct by Liberty.

Liberty aggressively defended and settled the claims, as it was expressly

authorized to do under the plain language of the Policies. Liberty did not engage

in bad faith because it had a reasonable basis to settle the cases, given the case

evaluations and recommendations provided by experienced underlying defense

counsel, despite MI’s professed desires to the contrary. Liberty also requests that

the Court add prejudgment interest and costs to the contract damages awarded to

Liberty. In the event that the Court vacates the amended final judgment, it should


69

order a new trial absolute without the erroneous and prejudicial Tyger River

instruction on the bad faith claim. In the event that the Court vacates the amended

final judgment and reinstates the preceding judgment, it must remand the case with

instructions to the District Court to consider Liberty’s motion to alter or amend the

initial judgment and to eliminate or reduce the punitive damages.


70

REQUEST FOR ORAL ARGUMENT

Pursuant to Fed. R. App. P. 34, Plaintiffs-Appellees/Cross-Appellants

Liberty Fire Insurance Company and Employers Insurance of Wausau, a Mutual

Company now known as Employers Insurance Company of Wausau, respectfully

request the Court to afford oral argument in this matter.


71

Respectfully submitted, s/C. Mitchell Brown C. Mitchell Brown (Fed Bar No. 5283) William C. Wood, Jr. (Fed Bar No. 5731) Nelson Mullins Riley & Scarborough LLP Post Office Box 11070 Columbia, SC 29211-1070 (803) 799-2000 s/Morgan S. Templeton Morgan S. Templeton (Fed Bar No. 7187) Wall, Templeton & Haldrup, P.A. 145 King Street, Suite 300 Post Office Box 1200 Charleston, South Carolina 29402 (843) 329-9500 s/J. Mark Langdon J. Mark Langdon (NC Bar No. 19359) Admitted Pro Hac Vice 1001 Wade Avenue, Suite 423

Raleigh, North Carolina 27605 (919) 865-9500

Attorneys for Plaintiffs- Appellees/Cross Appellants Liberty Mutual Fire Insurance Company and Employers Insurance of Wausau, a Mutual Company, n/k/a Employers Insurance Company of Wausau

April 4, 2013


04/13/2012

SCC

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

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