Fourth Circuit Says Lack of Time to Investigate a Claim Can Create an Objectively Reasonable Basis for an Insurer to Refuse a Settlement Demand

Written by: Elizabeth Wieters, Esq.

In an unpublished per curium opinion styled Columbia Insurance Company v. Christopher Kamil Waymer, et al, the Fourth Circuit Court of Appeals recently reviewed and affirmed the South Carolina District Court’s decision to dismiss a claim for bad faith insurance practices. The Court concluded there was no bad faith under the circumstances because there existed an objectively reasonable basis for refusing the settlement offer, as the insurer was deprived of reasonable time to investigate the claim.

The two lawsuits at issue emanate from personal injuries incurred in a collision involving an automobile and a truck. Counsel for the claimants indicated early-on there would be a forthcoming policy limits demand directed to the insurer of the truck involved in the accident.

Subsequently, the insurer retained counsel for the truck owner, Waymer, and increased its reserves to the $1 million policy limits. In January of 2014, counsel for claimants made the first settlement demand, comprised of a ten-day offer to settle for the policy limits and a description of the claimants’ injuries; however, counsel for the claimants had yet to receive the medical records at the time and the demand lacked both substantiating medical records and hospital bills.

During the ten-day demand period, counsel for Waymer contacted counsel for claimants and indicated the insurer was in the process of gathering information to evaluate the claims. The ten-day deadline expired without acceptance from the insurer.

In April of 2014, counsel for claimants forwarded the full hospital records and bills which substantiated total medical costs of approximately $680,000.00. Three weeks later, the insurer offered the $1 million policy limits. Counsel for claimants rejected the policy limits offer and responded with a second demand, alleging the insurer had violated its duty of good faith and fair dealing towards Waymer pursuant to South Carolina’s Tyger River doctrine. As a result, counsel alleged the insurer was liable for extracontractual damages. See Tyger River Pine Co. v. Md. Cas. Co., 170 S.E. 346, 348 (S.C. 1933).

Counsel for claimants offered the insurer a “final chance” to settle within a fifteen-day deadline. The offer presented two options: 1) skip trial on liability and damages and litigate only the bad faith claim; if the jury found bad faith the insurer would pay $3.5 million, if no bad faith was found the insurer would pay $1 million policy limits; or 2) the parties would litigate the underlying case including the bad faith claim and if jury found bad faith the insurer would pay whatever the damages verdict would be in excess of policy limits, but if the jury found no bad faith then the insurer would owe $1 million policy limits. Under both scenarios the insurer was required to abandon certain defenses. The insurer rejected both, but reiterated its policy-limits offer.

After litigating the underlying case in state court, a special referee awarded a total of $6.5 million to both claimants. The insurer paid its $1 million limits.

The insurer sought declaratory judgment in federal court that its failure to accept the first settlement demand did not constitute bad faith under South Carolina law. The district court granted the insurer’s motion for summary judgment. After reviewing the district court’s decision de novo, the Fourth Circuit agreed.

The Court discussed the “critical issue” under South Carolina law is whether there is a “reasonable basis” for an insurer’s failure to settle. The question of whether a lack of opportunity to investigate the claim constitutes an objectively reasonable basis to deny a short-fuse demand had not been taken up by South Carolina courts. Therefore, the Fourth Circuit Court of Appeals tasked itself with predicting how a South Carolina court would rule. Looking to other jurisdictions, the Court agreed with the district court’s analysis and concluded that “an insurer, acting with diligence and due regard for its insured, is allowed a reasonable time to investigate a claim; no obligation exists to accept a settlement offer…without time for investigation.”

The Court caveats, however, that there will be “close cases” under this standard that will be left to a jury to decide – considering the circumstances on a case-by-case basis, which include the time limit of the demand, the information available to the insurer, and the additional investigation/documentation sought by the insurer.

In conclusion, although the opinion is not binding, it provides persuasive authority for insurers when faced with an unreasonable time-demand with no substantiation of the claim value. Plaintiff’s “short-fuse” demand letters for policy limits without backup may not suffice to invoke a bad faith claim if the insurer has not had a reasonable opportunity to investigate the claim.

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Columbia Insurance Company, Plaintiff – Appellee, v. Christopher Kamil Waymer, individually & d/b/a QE Trucking, Defendant – Appellant, & William Edmund Reynolds, Jr.; Angela D. Reynolds, Defendants. Columbia Insurance Company, Plaintiff – Appellee, No. 20-1265, 2021 WL 2556586 (4th Cir. June 22, 2021) (internal citations omitted).