An insurance agent or broker is obligated to immediately advise the insurer of a suit served upon its insured. The insured is, similarly, obligated to advise the agent or the insurer, immediately upon being served. Failure to do so can have devastating results that will expose the insured and the agent or broker to massive judgments being entered by default, where the court assumes that the defendant admits all of the allegations of the complaint.
Every insurance agent and broker who writes liability insurance has two obligations to insureds:
- The agent or broker must educate the insured about the importance of providing the agent, broker or insurer with notice of a suit served on the insured immediately upon receipt of service by personal delivery, fax or e-mail
- The agent or broker must be certain to, upon receiving a suit from an insured, immediately deliver the suit papers to the insurer with a demand that it appoint counsel to defend the insured.
Failure to do both can expose the agent or broker to litigation by the insured if, because of the delay, a default judgment is entered against the insured and the insured is denied the right to defend itself to the allegations of the complaint. For example, in Sundown Operating Co. Inc. v. Intedge Industries Inc. (No. 26700, S.C. 08/17/2009), the South Carolina Supreme Court refused to set aside a default judgment against an insured because both the insured and the agent were negligent in promptly responding to a suit.
The Sundown case sought judgment for negligence and breach of contract as a result of a fire that burned down a restaurant and pub owned by Sundown Operating Co. Inc. ("Sundown") and others. Sundown filed suit against defendant BFPE International Inc. and four other defendants. The trial court granted a default judgment against BFPE, and following a damages hearing, the master-in-equity awarded damages to Sundown. Both parties appealed.
The evidence showed that on Sept. 16, 1998, Sundown's restaurant and pub burned down. On Aug. 24, 2001, Sundown filed suit against the defendants, alleging that an electric fryer had malfunctioned and ignited a quantity of frying oil. On Aug. 27, 2001, Sundown served the suit. On Sept. 5, 2001, Leonard gave the summons and complaint to the general manager of the petitioner's Clayton, N.C. office, who then forwarded the papers to petitioner's vice president.
On or about Sept. 14, 2001, the petitioner's vice president notified the petitioner's insurance agent of the lawsuit. On Oct. 1, 2001, the vice president forwarded the summons and complaint to the insurance agent. On Oct. 2, 2001, the insurance agent telephoned Sundown's counsel to request an extension of time to file an answer to the complaint. Sundown's counsel informed the agent that he already had moved for an entry of default. On Oct. 2, 2001, the Horry County Clerk of Court filed the entry of default.
The case was then referred to the master-in-equity for a hearing to assess damages. The master entered judgment in the amount of $273,336 in actual damages to Sunrise; $394,848.38 in actual damages to Sundown, and $524,800.70 in actual damages to High Noon. The master denied Sundown' requests for prejudgment interest.
The Supreme Court found that a decision whether to set aside an entry of default or a default judgment lies solely within the sound discretion of the trial judge, citing Harbor Island Owners' Assn. v. Preferred Island Props. Inc. (369 S.C. 540, 544, 633 S.E.2d 497, 499 [2006]). The trial court's decision cannot be disturbed on appeal absent a clear showing of an abuse of that discretion, according to the Supreme Court's reliance on Mitchell Supply Co. Inc. v. Gaffney (297 S.C. 160, 162-63, 375 S.E.2d 321, 322-23 [Ct. App. 1988]). An abuse of discretion occurs when the judge issuing the order was controlled by some error of law or when the order, based upon factual, as distinguished from legal conclusions, is without evidentiary support.
The Supreme Court concluded, after a review of the evidence, that the defendant did not meet the most minimal showing of good cause. It, therefore, refused to provide it relief from the entry of default.
It often is observed that mistake, inadvertence, excusable neglect, surprise, newly discovered evidence, fraud, or misrepresentation are relevant in determining whether good cause has been shown, as in New Hampshire Ins. Co. v. Bey Corp. (312 S.C. 47, 50, 435 S.E.2d 377, 378-79 [Ct. App. 1993]) The New Hampshire court held that, "as a practical matter," factors are relevant. However, the Supreme Court cautioned that this language invites trial courts to apply a heightened standard to such motions. The factors are indeed relevant to an analysis, but only insomuch as proof of any one of these factors is sufficient to show "good cause." Lethargy, sloth or simple negligence on the part of the insured or the agent or broker is no excuse for failure to promptly respond to a lawsuit.
The law is clear that an attorney or insurance company's misconduct is imputable to the client as in Williams v. Vanvolkenburg (312 S.C. 373, 375, 440 S.E.2d 408, 409 [Ct. App. 1994]) and Roberts v. Peterson (292 S.C. 149, 151, 355 S.E.2d 280, 281 [Ct. App. 1987]). The negligence of an attorney or insurance company is imputable to a defaulting litigant.
Although the presence of other factors, in the totality of the circumstances, may amount to a showing of "good cause," a defendant may not be relieved from the entry of default solely because it relied to its detriment on a negligent insurance agent. In this case, the petitioner shares the responsibility for the entry of default with its insurance agent. The petitioner did not forward the summons and complaint to the insurance agent until approximately two weeks after initially notifying the agent of the lawsuit and several days after the time to answer expired.
Furthermore, the petitioner's "good cause" argument is based entirely upon the Sept. 4, 2001, service date. Petitioner has put forth no explanation with regard to the fate of the summons and complaint served on Randy Adams on Aug. 28, 2001. As the court of appeals correctly held, the service of process was proper pursuant to Roche v. Young Bros. Inc. of Florence (318 S.C. 207, 456 S.E.2d 897 [1995]).
Even if the Supreme Court was to assume that good cause was shown as to why the summons and complaint that arrived in the possession of the insured, and the agent was not answered in a timely manner, it concluded it must nevertheless affirm the entry of default because petitioner has failed to show good cause as to why the summons and complaint that arrived in Myrtle Beach went unanswered.
The lesson every agent and broker should take from this decision is to avoid litigation by setting up procedures to educate the insureds to promptly report losses and suits and to set up procedures in its office to immediately forward law suits filed against its insureds to the insurer for immediate action. Failure to do so will get the agent or broker sued and expose him or her to pay the judgment entered against the insured.
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