Collins Holding Corp. v. Wausau Underwriters Insurance

This case is an appeal from a grant of summary judgment in favor of Respondent Collins Holding Corporation (“Collins”), in which the trial court found that Appellant Wausau Underwriters Insurance Company (“Insurance Company”) breached its duty to defend Collins. Finding that Insurance Company was not obligated to defend Collins on the underlying claim, we reverse.

Factual/Procedural Background

Collins is an owner, operator, and distributor of amusement devices and gambling machines. In 1997, several parties (“the Plaintiffs”) filed suit against Collins and several other defendants alleging harm caused by the then-legal gambling machines. Collins maintained a commercial general liability and umbrella insurance policy with Insurance Company. The policy provided that Insurance Company would “pay those sums that the insured becomes legally obligated to pay ... because of ‘bodily injury,’ ” only if such injury was caused by an occurrence, and defined an “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Collins notified Insurance Company of the suit on June 1, 2000, and on June 16, 2000, Insurance Company issued a letter stating that it did not have a duty to defend Collins and would not indemnify Collins for any loss resulting from the suit since the allegation in the complaint did not create a potential for coverage under the *576policy. Consequently, Collins hired private counsel and eventually settled the lawsuit for $500,000.1

Subsequently, Collins brought a declaratory judgment action against Insurance Company to determine whether Insurance Company breached its duty to defend Collins in the underlying lawsuit. After reviewing the Plaintiffs’ complaint, the trial court granted partial summary judgment in favor of Collins and determined that Insurance Company breached its duty to defend Collins in the underlying lawsuit because the Plaintiffs asserted a negligent misrepresentation cause of action against Collins which created the possibility of an accident or occurrence. The trial court further found that Insurance Company waived any defense to coverage under the policy based on Collins’s untimely notice of the lawsuit because it failed to assert this defense to coverage in its answer.

Insurance Company appealed the trial court’s order, and this Court certified the case pursuant to Rule 204(b), SCACR. Insurance Company presents the following issues for review:

I. Did the trial court err in finding Insurance Company had a duty to defend Collins because the Plaintiffs’ complaint did not assert an “occurrence” as defined in the insurance policy?

II. Did the trial court err in ruling that Insurance Company waived any defense to coverage based on Collins’s untimely notice of the underlying lawsuit?

Standard of Review

Summary judgment is appropriate where there is no genuine issue of material fact and it is clear the moving party is entitled to a judgment as a matter of law. Rule 56(c), *577SCRCP. In determining whether any triable issues of fact exist, the evidence and all inferences which can be reasonably drawn from the evidence must be viewed in the light most favorable to the nonmoving party. Koester v. Carolina Rental Ctr., 313 S.C. 490, 493, 443 S.E.2d 392, 394 (1994).

Law/Analysis

I. Duty to Defend

Insurance Company argues that the trial court erred in ruling that it had a duty to defend Collins in the underlying lawsuit because the Plaintiffs’ complaint did not allege an “occurrence.” We agree.

In an action for a declaratory judgment, the obligation of a liability insurance company to defend and indemnify is determined by the allegations in the complaint. Mfrs. and Merchants Mut. Ins. Co. v. Harvey, 330 S.C. 152, 162, 498 S.E.2d 222, 227 (Ct.App.1998) (citing R.A. Earnhardt Textile Mach. Div. Inc. v. S.C. Ins. Co., 277 S.C. 88, 282 S.E.2d 856 (1981)). If the facts alleged in the complaint fail to bring a claim within the policy’s coverage, the insurer has no duty to defend. S.C. Med. Malpractice Liab. Ins. Joint Underwriting Assn. v. Ferry, 291 S.C. 460, 463, 354 S.E.2d 378, 380 (1987). In examining the complaint, a court must look beyond the labels describing the acts to the acts themselves which form the basis of the claim against the insurer. Prior v. S.C. Med. Malpractice Liab. Ins. Joint Underwriting Assn., 305 S.C. 247, 249, 407 S.E.2d 655, 657 (Ct.App.1991) (citing Ferry, 291 S.C. at 462, 354 S.E.2d at 379-80).

We hold that Insurance Company did not breach its duty to defend Collins against the underlying lawsuit because the Plaintiffs’ complaint did not allege the possibility of an “occurrence” as defined in the policy. The facts of the complaint asserted that Collins systematically violated South Carolina laws specifically enacted to protect the public from excessive gambling losses. For example, the Plaintiffs asserted Collins exceeded the maximum daily payout limit of $125 and engaged in advertising schemes which fraudulently induced the Plaintiffs to believe that they could win jackpots in excess of the $125 limit. Additionally, the Plaintiffs employed words and *578phrases such as: unlawfully and fraudulently seek to induce and entice; engaged in advertising about and offering inducements ... that are clearly and expressly prohibited by South Carolina law; racketeering activity; conspiring; knowingly engaging; and knowingly conducting. These allegations constitute intentional, deliberate, and illegal acts executed with the purpose of addicting patrons to gambling machines, and in our view, such alleged conduct cannot be construed as accidental in nature. See Green v. U. Ins. Co. of Am., 254 S.C. 202, 205, 174 S.E.2d 400, 402 (1970) (defining accident as an unexpected happening or event, which occurs by chance and usually suddenly, with harmful result, not intended or designed by the person suffering the harm or hurt). Therefore, we hold that there is no possibility of coverage under the policy and that Insurance Company did not violate its duty to defend.

We further hold that the trial court erred in basing its finding of the possibility of coverage on the negligent misrepresentation cause of action. In Manufacturers and Merchants Mutual Insurance Company v. Harvey, 330 S.C. 152, 498 S.E.2d 222 (Ct.App.1998), the parents of children whom Norman Harvey sexually abused filed suit against Harvey and his wife alleging, among other things, negligent supervision. The court of appeals looked beyond the mere label of negligence, and determined that the underlying facts of the complaint did not support a cause of action for negligent conduct. Specifically, the court found that the facts alleged that Harvey committed intentional acts and then incorporated the acts into the negligence cause of action. Accordingly, the court held that Harveys insurance company did not have a duty to defend.

In our view, this case presents a similar situation. The Plaintiffs alleged eight causes of action including Racketeer Influenced and Corrupt Organizations (RICO) Act violations, fraud and deceit, South Carolina Unfair Trade Practices Act violations,- and civil conspiracy. While the complaint does state a cause of action for negligent misrepresentation, we must look beyond the label of negligence to determine if Insurance Company had a duty to defend Collins. See id. at 163, 498 S.E.2d at 228 (holding that where a complaint mischaracterizes intentional conduct as negligent conduct, a court *579may find no duty to defend despite the label of negligence in the complaint). To support their negligent misrepresentation claim, the Plaintiffs incorporated the previous facts and alleged Collins sold, leased, and distributed machines that were equipped in a manner as to permit manipulation and that were configured to be used in a manner that violated laws expressly designed to protect the public from the lure of excessive gambling. In our view, these allegations do not support a claim for negligent conduct. Compare Isle of Palms Pest Control Co. v. Monticello Ins. Co., 319 S.C. 12, 15, 459 S.E.2d 318, 319 (Ct.App.1994) (finding a duty to defend where the complaint alleged a negligent termite inspection caused property damage). Therefore, because the negligent misrepresentation claim incorporates the same facts and does not allege an “occurrence,” we hold that this cause of action did not trigger Insurance Company’s duty to defend.

II. Waiver

Insurance Company argues that the trial court erred in ruling that it waived any defense based on Collins’s untimely notice of the underlying lawsuit. In light of our holding regarding the duty to defend, this issue is moot, and we therefore decline to address the merits of this issue. See Seabrook v. Knox, 369 S.C. 191, 197, 631 S.E.2d 907, 910 (2006) (recognizing that this Court will not decide moot questions in which a judgment rendered will have no practical legal effect).

Conclusion

For the foregoing reasons, we reverse the trial court’s order granting summary judgment, and hold that Insurance Company had no duty to defend Collins in the underlying lawsuit.