Camico Mutual Insurance Company v. Jackson CPA Firm et al

Filing 78

FINDINGS OF FACT AND CONCLUSIONS OF LAW. Signed by Honorable Patrick Michael Duffy on 12/22/2016. (adeh, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
CHARLESTON DIVISION
CAMICO Mutual Insurance Company,

)
)
Plaintiff,
)
)
v.
)
)
Jackson CPA Firm f/k/a Jackson and
)
Hammond, LLC f/k/a Jackson and Hill
)
LLC; Brent Hill; Frank Jackson; David
)
Brooks; Marcia Brooks; Jarrod Brooks;
)
Zita, Inc.; AAA Fence Company of
)
Charleston, Inc.; and Mike Dohoney’s
)
Barrier Island Construction Specialists,
)
Inc.,
)
)
Defendants.
)
___________________________________ )

C.A. No. 2:15-cv-1823-PMD
FINDINGS OF FACT AND
CONCLUSIONS OF LAW

This matter is before the Court following a bench trial. For the reasons stated herein, the
Court enters judgment for Plaintiff CAMICO Mutual Insurance Company.
BACKGROUND
This is a professional liability insurance coverage dispute between an insurance carrier,
the accountants and accounting firm it insured, and several of the firm’s clients. The dispute
relates to three state-court malpractice lawsuits the clients have filed against the accountants over
the alleged mishandling of their taxes. In this case, CAMICO seeks a judicial declaration of the
extent of its obligation to defend and indemnify Defendants Jackson CPA Firm, Brent Hill, and
Frank Jackson (the “Accountants”) in those malpractice cases.

The Accountants contend

CAMICO has breached one or more of the insurance policies it sold them and that it has acted in
bad faith.

Defendants David Brooks, Marcia Brooks, Jarrod Brooks, Zita, Inc., AAA Fence

Company of Charleston, Inc., and Mike Dohoney’s Barrier Island Construction Specialists, Inc.

(the “Clients”) also seek a declaratory judgment regarding CAMICO’s obligations in their
lawsuits.
CAMICO filed this action in April 2015. After the parties conducted discovery and filed
cross-motions for summary judgment, the Court found there were genuine issues of material fact
and therefore denied the motions. The parties tried the case on August 16 and 17, 2016. Having
considered the evidence admitted at trial, as well as the parties’ pre-trial briefs and post-trial
submissions, the Court now makes the following findings of fact and conclusions of law in
accordance with Federal Rule of Civil Procedure 52(a).
FINDINGS OF FACT
Based on the preponderance of the evidence in the record, the Court finds as follows: 1
I.

The Accountants and Their Insurance Policies
1.

For years, certified public accountants Frank Jackson and Brent Hill worked

together in their two-member accounting firm, Jackson and Hill, LLC. Their association ended
with Hill’s retirement in August 2011. Following some additional personnel changes, Jackson
now practices alone in Jackson CPA Firm, LLC.
2.

Since 2005, CAMICO has insured the Accountants under a series of professional

liability, claims-made-and-reported policies. The policies have a retroactive date of July 1, 1998.
3.

Each policy provides a year of coverage that begins on January 28 of the year.

For example, the main policy at issue here has an effective date that runs from January 28, 2011,
to January 28, 2012 (the “2011–2012 policy”).

1. The Court recognizes that certain of its factual findings could be perceived as commenting on the merits of the
Clients’ state-court malpractice claims. The Court stresses that it expresses no opinion as to liability or damages in
those cases.

2

4.

Each policy’s declarations page lists a general indemnity limit of $1,000,000 per

claim and $2,000,000 aggregate. An endorsement to each policy provides a separate limit of
$250,000 for defense costs and other claim expenses.
5.

Each policy contains an identical insuring agreement. However, each policy also

has an endorsement titled “Limited Coverage for ‘Known Claims’ Endorsement” that changes
parts of the insuring agreement. For example, the known-claims endorsement for the 2011–2012
policy deletes section A of that policy’s insuring agreement and replaces it with an insuring
agreement that provides, in relevant part, as follows:
A.

Coverage for Damages and Reporting Requirements
1.

The Company will pay those sums that an Insured becomes legally
obligated to pay as Damages because of a Claim arising out of an
Insured’s negligent act, error or omission in rendering or failing to
render Professional Services performed after the Retroactive Date
and before the end of the Policy Period, provided that:
(a)

The Claim was first made against the Insured and reported
to the Company during the same Policy Period; and

(b)

The Claim was not reported to any professional liability
insurer, including the Company, prior to the effective date
of the Policy Period identified in the policy’s Declarations.

....
4.

If any Insured became aware of a Claim or a Potential Claim either
after the Retroactive Date of this Policy or during the twelve (12)
months prior to the Effective Date of this Policy Period, whichever
is later, and reports that Claim or Potential Claim to the Company
during the Policy Period, that Claim or Potential Claim shall be
deemed timely reported to the Company during the Policy Period;
however, the Limits of Liability applicable to such Claim or
Potential Claim shall be limited to the amount stated in section I.
INSURING AGREEMENTS, C. Limits of Liability, Sub-Limits
and Deductibles, paragraph 1.c.

3

6.

The policies define “Claim” as follows:

a demand received by any Insured for money or services, and includes the service
of suit(s), a request that an Insured agree to waive a legal right or sign an
agreement to toll a statute of limitations, or a demand for arbitration. A Claim
also includes two or more Claims arising out of or resulting from a single act,
error or omission in rendering Professional Services, or from Multiple Acts,
Errors or Omissions in rendering Professional Services, whether such demands
are made: (1) against one or more Insureds; (2) by one or more Persons, or (3)
during one or more Policy Periods.
7.

The policies define “Multiple Acts, Errors or Omissions” as “all acts, errors or

omissions in rendering Professional Services that are logically or causally connected by any
common fact(s), circumstances, situation, transaction(s), event(s), advice or decision(s).” The
policies go on to state that a single per-claim coverage limit “applies to a Claim arising from
Multiple Acts, Errors or Omissions, regardless of the number of claimants, lawsuits, or Insureds
involved.”
8.

The policies define “Potential Claim” as “an event or circumstances that any

Insured might reasonably expect would be the basis for a Claim.” In turn, Insured includes Hill,
Jackson, their firm, and its employees.
9.

As mentioned above, paragraph A.4 of the known-claims endorsement’s insuring

agreement limits the coverage for certain claims to “the amount stated in section I. INSURING
AGREEMENTS, C. Limits of Liability, Sub-Limits and Deductibles, paragraph 1.c.” That
subparagraph, which the endorsement adds, provides as follows:
The maximum amount payable by the Company for Damages and Claim
Expenses for each covered Claim reported during this Policy Period pursuant to
section I. INSURING AGREEMENTS, A. Coverage for Damages and Reporting
Requirements, paragraph 4., shall be either $100,000 or 25% of the Per Claim
Limit of Liability stated on the Declarations, whichever is less. Amounts paid on
behalf of an Insured pursuant to this paragraph are chargeable against the
applicable Deductible and the Limits of Liability.

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10.

Finally, the known-claims endorsement eliminates separate defense limits for

claims that are afforded coverage under the known-claims endorsement.
II.

Hill’s Declining Health and Work Performance
11.

Hill was diagnosed with Parkinson’s disease in 2006. After being diagnosed, he

continued to practice accounting for several years.
12.

Over those years, the symptoms of Parkinson’s disease gradually worsened,

affecting Hill’s work. The disease caused Hill to experience tremors, fatigue, and a loss of
concentration, such that he became disorganized and frequently could not complete much work
in a typical work day.
13.

As those physical and mental impediments worsened, they were also exacerbated

by certain stressors, including the demands of caring for his mother as her own health declined
and financial difficulties that arose due to his inability to produce billable time. As a result,
Hill’s ability to work suffered even more. Among other things, he could no longer complete his
work in time to either meet his clients’ filing deadlines or seek extensions. Hill’s failures to file
resulted in clients being assessed interest and late penalties.
14.

By 2010, Hill’s conditions reached, as he put it, “critical mass.” Due to the

symptoms of his Parkinson’s disease and those external stressors, on many days he could barely
accomplish three hours of work over the course of a twelve-hour workday. However, he did not
notify clients of his growing inability to work or the consequent tax problems they were facing.
15.

At Jackson’s suggestion, the firm began delegating some of Hill’s work. Staff

accountant Rita Hammond recommended the firm contract with accountant Marty Hicks to help
Hill. Hicks’ primary responsibility was to negotiate with state and federal tax agencies in an
effort to reduce or abate interest and penalties they had assessed against Hill’s clients for Hill’s

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late filings. The firm also hired an assistant to help Hill with organization and to communicate
with clients.
16.

In February and March 2011, Hill sent the IRS a series of letters relating to late

penalties it had assessed against several of his clients due to their returns not being timely filed.
Each letter included the following:
I would like to take responsibility for the failure to file on time and for any lack of
a prompt response to notices regarding the matter.
Due to personal
circumstances, I was unable to complete returns for all of my clients by the
extended deadlines, and am just now finding myself able to pay proper attention
to wrapping up my commitments to some of my clients related to 2009.
On-going adjustments to living with Parkinson’s disease and problems with the
side effects of medications reduced my productivity greatly for most of last year.
Also, I have been the only family member available to see to the care of my 83year old mother, and that role intensified through 2010 as her mental and physical
conditions deteriorated. The last four months of the year have proved to be the
most stressful of my life, as most of my time and energy was spent seeing her
through seven hospital visits, a move from her home to an assisted living facility,
then to a nursing home, where she spent her final six weeks under hospice care.
She passed away January 2nd. With that behind me, and with a recent change in
medication making the Parkinson’s more tolerable, I am now getting my health
and life back in balance and better able to do the job of helping my clients meet
their tax-filing responsibilities in a timely manner.
He concluded at least one of the letters by declaring, under penalty of perjury, that the blockquoted language above was true.
17.

Hill concluded several of the letters by asking the IRS to abate his clients’ late

penalties “due to circumstances beyond taxpayer control”; in at least one other letter, he sought
abatement “due to circumstances beyond taxpayer control (and preparer) control.” 2

2. It is not clear how many of these letters Hill sent the IRS. The Clients have asserted in this case that there is no
evidence that Hill sent such letters in relation to any of them. In state court, however, Zita and the Brooks family
have alleged they believe Hill did send the IRS such a letter on their behalf. Based on those allegations and the
circumstantial evidence in the record, the Court finds that Hill did send the IRS such letters on behalf of each of the
Clients that contained the block-quoted language above.

6

18.

Hill retired in August 2011. He announced his retirement to his clients through a

mass letter he sent on August 22, in which he stated, “Most Parkinson’s patients reach a point
when they can no longer function effectively in a job that involves a high volume of deadlineintensive work. I am past that point.”
19.

When Hill retired in August 2011, Hicks and staff accountant Rita Hammond

took over Hill’s files. Hammond joined with Jackson to form the firm Jackson and Hammond,
LLC, which continued contracting with Hicks. Hammond and Hicks thereafter continued to
work with tax agencies on behalf of Hill’s former clients in an attempt to mitigate the
consequences of missed filing deadlines. Hammond and Hicks left the accounting firm in
September 2012, taking with them all the files for Hill’s former clients. They formed their own
firm and performed work for a number of Hill’s former clients.
20.

Hill’s health has continued to decline since he retired. By the time of trial, Hill’s

memory of his work for the Clients was significantly diminished due to his disease. Thus,
through no fault of his own, his testimony carried little weight.
III.

The RMTP Claim
21.

Hill’s former clients included two related companies, Royal Marine Packing, Inc.

and Transport Partners, Inc. (collectively, “RMTP”). In 2010, Hill’s services to RMTP included
preparing and filing special five-year loss carryback elections. Hill worked on those election
packages during the fall of 2010, which was when his personal struggles reached “critical mass.”
22.

Hill prepared the election packages and submitted them to the IRS in November

2010. Later that month, however, the IRS rejected the elections because Hill’s submissions did
not include an IRS Form 1120, the annual corporate income tax return form, for either client.

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23.

Upon receipt of the IRS’s rejection notice, Hill and others at the firm searched the

office and found RMTP’s 1120 forms, each completed and signed by an RMTP representative.
It turned out that Hill had not mailed them when he submitted the election packages. Hill and
Hicks then sent the forms to the IRS. By that point, however, the submission was untimely. In
December, the IRS again rejected the five-year carryback elections because it had not timely
received the 1120 forms.
24.

At that time, Jackson knew Hill was having problems due to his declining health,

that Hill had made an error on RMTP’s taxes, and that Hicks was communicating with tax
agencies in an effort to abate interest and late-filing penalties that Hill’s clients had incurred.
25.

Over the next four months, Hicks communicated with the IRS in an attempt to get

it to reverse its decision and allow RMTP’s carryback elections. As Jackson would later tell
CAMICO, Hicks was asking the IRS change its position “due to [Hill’s] Parkinson’s, etc.”
26.

In March 2011, an IRS representative told Hicks that the IRS would allow the

five-year carryback elections. However, the IRS ultimately rejected the elections for a final time
that June. In September 2011, RMTP filed standard two-year carryback elections, which the IRS
accepted. According to Jackson, Hill’s failure to obtain the five-year carryback elections cost
RMTP $20,600.
27.

In September 2011, RMTP’s manager contacted Jackson to make a claim for the

losses sustained due to the failed carryback elections (the “RMTP claim”).

Jackson then

reported the claim to CAMICO. Prior to that report, no one had informed CAMICO about Hill’s
errors or the subsequent efforts to persuade the IRS to allow the elections.
28.

Because Hill and others in the firm were aware of Hill’s error and the IRS’s initial

rejection in late 2010 but did not report the problem to CAMICO until September 2011,

8

CAMICO processed the RMTP claim under Paragraph A.4 of the 2011–2012 policy’s insuring
agreement and the known-claims endorsement’s reduced coverage limit of $1,000,000.

In

November 2011, CAMICO settled the RMTP Claim for $20,600, leaving $79,400 left on the
limit for that claim.
IV.

The Clients’ Claims
29.

The Client defendants in this case are all former clients of Hill. In their state-

court lawsuits, the Clients all allege Hill committed professional negligence in his handling of
their various tax matters.
A.

Zita, Inc. and the Brooks Family

30.

Zita, Inc. is a consulting company that Jarrod Brooks, David Brooks, and Marcia

Brooks own. David and Marcia are Jarrod’s parents. From 2004 to 2011, the Brooks family
retained Hill to prepare their and Zita’s income tax returns.
31.

Hill did not complete their returns for the years 2003, 2004, 2005, and 2006 until

the end of 2007. By that point, those returns were all overdue with both the IRS and the South
Carolina Department of Revenue (“SCDOR”), resulting in the assessment of interest and late
penalties.
32.

When Hill completed that set of returns, he advised David and Marcia Brooks not

to file their returns for 2003 to 2005 until they had sufficient funds available to pay their tax
liabilities for those years. They followed that advice, which resulted in further penalties being
assessed.
33.

Although retained to do so, Hill never prepared Zita’s or any of the Brooks family

members’ tax returns for the tax years 2008, 2009, and 2010. Rather, Hammond prepared and
filed them in 2012. By that point, however, the returns were well past due.

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34.

The IRS and the SCDOR assessed interest and late penalties against Zita and the

Brooks family members for the late filing of their returns for the years spanning 2003 to 2010.
35.

In December 2010, Jarrod Brooks discussed the assessments and the late filings

with Hill, who referred Brooks to a tax attorney. Brooks consulted that attorney in late 2010 or
early 2011, but then instead used Hicks to attempt to abate the interest and penalties assessed
against him, his parents, and their company.
36.

With Hicks’ assistance, the Brooks family and Zita resolved their tax issues

regarding years 2003 to 2006 in the summer of 2011 by paying significant amounts to the IRS.
After Hill retired, they continued working with Hicks. They resolved their tax issues for the
years 2008 to 2010 in 2014.
B.

Mike Dohoney’s Barrier Island Construction Specialists, Inc.

37.

As its name suggests, Mike Dohoney’s Barrier Island Construction Specialists,

Inc. (“BICS”) is a construction company that Michael Dohoney owns. From 2009 to 2011,
Dohoney retained Hill to handle all of BICS’s tax needs, including payroll tax accounting and
reporting.
38.

When Dohoney first retained Hill in late 2009, BICS was delinquent in its filing

of payroll tax returns. Dohoney hired Hill to address the delinquency. Hill told Dohoney that he
would address that problem and also work with BICS’s secretary to improve payroll tax
reporting in the future. Thereafter, Hill assured Dohoney that he was addressing those past
issues and was working on new payroll tax returns as they arose.
39.

The following year, however, BICS received a number of past-due notices from

the IRS and from the SCDOR. The notices related to reporting periods for which Hill was

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supposed to prepare and file returns. Both agencies assessed interest and late penalties against
BICS based on a failure to file returns.
40.

In late 2010 or early 2011, Dohoney confronted Hill, who admitted he had

“dropped the ball” on BICS’s payroll tax needs and had failed to file returns for the company.
Hill mentioned he had been under stress from his mother’s declining health. Hill again promised
to address BICS’s issues. However, he did not do so.
41.

After Dohoney continued to receive past-due and penalty notices, he spoke with

Jackson sometime in the first half of 2011 about Hill’s conduct. After Dohoney suggested to
Jackson that he may sue if the issues were not resolved, Jackson assigned Dohoney’s file to
Hicks to help with the IRS audits.
42.

With Hicks’ help, Dohoney was able to mitigate some of the penalties and interest

assessed due to Hill’s omissions. However, by the time this case came up for trial, Dohoney was
still negotiating with the IRS on other such assessments.
C.

AAA Fence Company of Charleston, Inc. and Gordon Ogle

43.

AAA Fence Company of Charleston, Inc. is a fencing company that Gordon Ogle

owns. From 2009 to 2011, Hill provided accounting services to Ogle and AAA Fence including
personal and corporate income tax reporting and corporate payroll tax services.
44.

After Ogle hired Hill in 2009, Ogle began receiving past-due payroll and income

tax notices. In those notices, the IRS and the SCDOR assessed interest and late penalties against
AAA Fence for failing to file returns. Ogle had hired Hill to prepare and file those returns.
45.

Ogle, like Brooks and Dohoney, discussed the notices and assessments with Hill

in 2010. Hill assured Ogle that he would take care of the late filings and the assessments.
However, he did not do so.

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46.

During their professional relationship, Ogle also granted Hill power of attorney to

deal with the IRS on his behalf. Thereafter, the IRS directly sent Hill more past-due notices
relating to additional returns that Hill failed to file for AAA Fence.
47.

In 2011, Hicks took over Ogle’s and AAA Fence’s files and attempted to mitigate

the IRS’s and the SCDOR’s assessments. Hicks continued those efforts after he and Hammond
formed their own firm. For example, in December 2012, Hicks wrote the IRS a letter stating that
AAA Fence’s tax problems were caused by Hill, who “suffered from dementia” while
performing work for AAA Fence.
48.

With Hicks’ help, Ogle and AAA Fence resolved their issues by establishing a

payment plan with the IRS.
D.

The Clients’ Lawsuits

49.

In December 2012, Jarrod Brooks called Jackson and informed him that his father

was incurring significant penalties and interest related to Hill’s prior work and indicated he
needed Jackson’s help fixing that problem. Jackson reported that call to CAMICO.
50.

On January 14, 2013, CAMICO received a copy of a faxed letter addressed to

Jackson from an attorney representing the Clients in relation to Hill’s accounting work. The
attorney stated the Clients had sustained substantial monetary losses from Hill’s negligence.
51.

Upon receipt of the letter, a CAMICO representative discussed the matter with

Jackson, who explained that Hill had been struggling with Parkinson’s disease and that in 2010,
it became evident that Hill could not keep up with his clients’ work. Jackson also stated he
believed that Hill’s disease caused or was related to the issues referenced in the January 14 letter.

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52.

In June 2013, the Clients, the Accountants, and CAMICO entered into a tolling

agreement as CAMICO investigated the Clients’ claims. CAMICO retained counsel for Hill and
the firm at that time, subject to a reservation of rights.
53.

Over the course of the investigation, the Clients provided CAMICO with

information regarding their claims. Included within that information were IRS and SCDOR tax
notices, several of Hill’s abatement letters to the IRS, and several of his retirement letters.
54.

In May 2014, CAMICO received a letter from the Clients’ attorney that was

addressed to the Accountants’ retained lawyer. At one point, the Clients’ attorney summarized
the growing dispute between the Clients and the Accountants as follows:
While these individuals each has his or her own specific issues, particular scope
of work for which they relied on Mr. Hill, and particular damages, they all share
one thing: the story of how Mr. Hill represented to each of them that he was able
to do the work they believed they hired him to do; how Mr. Hill represented to
each of them that he was in fact doing the work they believed they hired him to
do; how Mr. Hill advised them to rely on him and not to worry about certain
deadlines because he was taking care of it; how Mr. Hill never (until very late in
the game) disclosed to them his deteriorating health; and how they were all left
with a substantial tax mess to clean up after he abruptly ceased his accounting
work.
55.

The Clients terminated the tolling agreement early in 2015. Thereafter, they filed

three separate lawsuits 3 in South Carolina state court against Hill (individually) and Jackson and
Hill, LLC. In their lawsuits, the Clients seek damages for losses they allege Hill caused.
56.

The Clients’ amended complaints are similar, in that they each allege that Hill

failed to properly prepare and file tax returns for certain years due to limitations he was
experiencing as a result of Parkinson’s disease and that he wrongfully concealed his disease and
the resulting errors he was making on the Clients’ tax matters.

3.

Zita and the Brooks family filed the first suit, AAA Fence and Ogle filed the second, and BICS filed the third.

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57.

Each pleading also alleges Hill and his former firm were negligent in the

following ways:
(1) Failing to prepare and deliver tax returns on a timely basis; (2) Failing to
exercise the reasonable care or competence of accountants in communicating
information about available extensions, the nature and scope of penalties should
the client not file or not have the funds available to pay the taxes indicated on the
returns; [and] (3) Failing generally to exercise the degree and standard of care
expected of certified public accountants in acknowledging and communicating
honestly regarding [Hill’s] personal issues, including issues relating to the care of
his elderly mother and/or deteriorating mental and physical health conditions and
any resulting limitations on his ability to perform professional services.
58.

CAMICO has continued to provide a defense to Hill and to Jackson and Hill, LLC

while reserving its right to contest the existence and amount of coverage it owes. It exercised
that right by filing this declaratory judgment action.
59.

The Clients’ pleadings and the evidence in the record lead the Court to find that,

but for the progressively debilitating effects of Hill’s disease, which were exacerbated at times
by the stress of caring for and losing his mother, Hill would not have mishandled RMTP’s taxes
or made the errors and omissions for which the Clients are now suing him.
CONCLUSIONS OF LAW
The parties agree that South Carolina law governs their dispute. In South Carolina,
insurance policies are subject to the general rules of contract construction. Nationwide Mut. Ins.
Co. v. Commercial Bank, 479 S.E.2d 524, 526 (S.C. 1996). The insurer’s duties under a policy
of insurance are set forth by the terms of the policy and cannot be enlarged or curtailed by
judicial construction.

Id.

Therefore, the Court must give clear policy language its plain,

ordinary, and popular meaning. See id. However, where policy provisions may be reasonably
interpreted in more than one way, the court must use the interpretation most favorable to the
insured. State Farm Fire & Cas. Co. v. Barrett, 530 S.E.2d 132, 136 (S.C. Ct. App. 2000).

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I.

Declaratory Judgment Issues
The parties raise several issues over the application of the policies to the Clients’ claims:

(1) was the RMTP Claim subject to a reduced coverage limit? (2) do the Clients’ claims and the
RTMP Claim constitute a single claim? (3) assuming the Accountants did not timely report any
claims, was CAMICO substantially prejudiced by the delay? and (4) does Frank Jackson have
coverage as an innocent insured? The Court answers those questions seriatim.
A.

Amount of Coverage for the RMTP Claim

The Court first addresses whether the RMTP claim was subject to a reduced coverage
limit. Because Jackson reported the RMTP claim in September 2011, that claim would be
covered, if at all, under the 2011–2012 policy. Under paragraph A.4 of that policy’s operative
insuring agreement, if an insured became aware of a claim or potential claim in the year
preceding January 28, 2011, and reports it to CAMICO during the policy period, then it will be
treated as timely reported to CAMICO during the policy period. However, there will be reduced
coverage for the claim.
The analysis of the first condition—awareness of an actual or potential claim—begins
with the policy’s definition of “Potential Claim”: “an event or circumstances that any Insured
might reasonably expect would be the basis for a Claim.” The Accountants interpret that
language to mean they must notify CAMICO of their errors only if they reasonably expect that a
client would make a claim—that is, a demand for money or services—against them. In their
view, they did not have such an expectation until June 2011, when the IRS rejected the carryback
requests for the final time.
The parties dispute whether the definition of “Potential Claim” focuses on the likelihood
that a client will make a claim or, instead, on the likelihood that the event or circumstances at

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issue would substantiate a claim. The Court need not resolve that dispute, for the word “might”
leads to the same result under both interpretations. By the end of 2010, Hill and Jackson knew
Hill had made an error that jeopardized over $20,000 in tax savings for Hill’s clients and that the
IRS had rejected their initial attempt to correct his error. At that point, they might reasonably
have expected that Hill’s error would result in RMTP demanding money or services. In other
words, a claim is among the results that a reasonable person in that situation would expect. At
that time, they might also have reasonably expected that Hill’s oversight would give RMTP
grounds to obtain money or services from them, even if the chances of RMTP actually
demanding such things seemed remote. Under either view, “might” sets a low threshold that Hill
and Jackson crossed no later than December 2010. Thus, because an insured was aware of the
potential claim in the year preceding January 28, 2011, the first condition of paragraph A.4 is
met.
The Accountants and the Clients place great weight on Hill and Jackson testifying at trial
that in 2010, they in fact did not think RMTP would make a claim. Their subjective expectations
at that time, however, are not dispositive. Rather, the word “reasonably” in the definition injects
an objective component into the analysis—before January 28, 2011, might a reasonable person in
Jackson’s or Hill’s shoes have thought that Hill’s error and the IRS’s consequent rejection of the
carryback claim would lead to (or support) a claim? See First Prof’ls Ins. Co. v. Sutton, 607 F.
App’x 276, 283 (4th Cir. 2015) (stating question of whether something constituted potential
claim, which policy defined as “an incident which the Insured reasonably believes will result in a
claim for damages,” is “measured with respect to an objective, not subjective, standard”); Nat’l
Home Specialty Ins. Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh Pa., No. 6:10-cv-826-TMC,
2012 WL 1825370, at *3 (D.S.C. May 18, 2012) (applying a mixed subjective/objective test to

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policy provision that omitted coverage for wrongful acts committed prior to the beginning of the
policy’s period that the insured knew or could have reasonably foreseen could lead to a claim).
As the analysis above indicates, the record in this case compels the Court to answer that question
in the affirmative.
As for the second condition of paragraph A.4, Jackson reported the RMTP claim during
the 2011–2012 policy’s operative period. Thus, the 2011–2012 policy treats the RMTP Claim as
a covered, timely reported claim. However, taken in conjunction with other portions of the
known-claims endorsement, paragraph A.4 provides that the $250,000 separate defense limit is
not available for the RTMP claim and that total defense and indemnity coverage available for the
claim is limited to the lesser of $100,000 or 25% of the per-claim limit on the declarations page
(here, $1,000,000). Therefore, the 2011–2012 policy provides $100,000 in coverage for the
RMTP claim. After CAMICO paid RMTP $20,600, $79,400 of that $100,000 limit remained.
B.

Interrelatedness of the Claims

As mentioned above, “Claim” includes a demand received by an insured for money or
services. That policy definition goes on to state that—
[a] Claim also includes two or more Claims arising out of or resulting from a
single act, error or omission in rendering Professional Services, or from Multiple
Acts, Errors or Omissions in rendering Professional Services, whether such
demands are made: (1) against one or more Insureds; (2) by one or more Persons,
or (3) during one or more Policy Periods.
“Multiple Acts, Errors or Omissions” means “all acts, errors or omissions in rendering
Professional Services that are logically or causally connected by any common fact(s),
circumstances, situation, transaction(s), event(s), advice or decision(s).” CAMICO contends that
all of the Clients’ claims are logically or causally connected to one another and to the RMTP
claim and thus constitute one claim under the 2011–2012 policy.

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The upshot of such a

conclusion would be that, as part of the RMTP Claim, the Clients’ claims would all be subject to
the partially exhausted $100,000 coverage limit. That would be so because the 2011–2012
policy states that a single per-claim coverage limit “applies to a Claim arising from Multiple
Acts, Errors or Omissions, regardless of the number of claimants, lawsuits, or Insureds
involved.”
The Accountants and the Clients vigorously dispute CAMICO’s position. They argue the
Clients’ claims are in no meaningful way connected to each other or to the RMTP claim.
The parties appear to agree there are no South Carolina state authorities on point, and the
Court has not found any. However, three federal-court decisions help this Court predict how
South Carolina would treat this policy language. First, Bryan Brothers v. Continental Casualty
Corp. confirms that claims can be related even if they involve distinct acts, affect separate
people, and occur at different times. See 704 F. Supp. 2d 537 (E.D. Va. 2010), aff’d, 660 F.3d
827 (4th Cir. 2011). Bryan Brothers stemmed from an insured embezzling money from her
employer’s clients over multiple years. See 704 F. Supp. 2d. at 539. In the ensuing insurancecoverage litigation, one of the questions before the district court was whether several lawsuits
filed by the defrauded clients constituted “interrelated acts or omissions” under the policy and
thus related back to the earliest known potential claim. Id. at 542–43. The policy defined that
phrase as “all acts or omissions in the rendering of professional services that are logically or
causally connected by any common fact, circumstance, situation, transaction, event, advice or
decision.” Id. at 543. After finding that language unambiguous, the court found that even
though the claims involved different victims, they were logically connected by common facts
and circumstances because they all involved the same employee, the same scheme to defraud

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clients, and the same method of embezzlement. Id. Accordingly, the district court concluded,
the claims were interrelated. Id.
Second, a year after Bryan Brothers, Judge Joseph Anderson issued an in opinion in
Continental Casualty Co. v. Jones, No. 3:09-cv-1004-JFA, 2011 WL 3880963, at *6–7 (D.S.C.
Sept. 2, 2011), amended on other grounds on reconsideration as stated in 2012 WL 530002
(D.S.C. Feb. 17, 2012). Like Bryan Brothers, Jones involved an insured stealing money from his
clients over a period of time. See 2011 WL 3880963, at *1–4. Judge Anderson had to decide
whether the lawsuits arising out of those claims were interrelated according to policy language
identical to the provision at issue in Bryan Brothers. Id. at *6. Seeing no material distinction
between Bryan Brothers and the case before him, Judge Anderson found the claims were
interrelated “for the same reason espoused by the district court in . . . Bryan Brothers.” Id. 4
Finally, a recent Fourth Circuit opinion illustrates that multiple claims can be logically or
causally connected even if they involve distinct parties and types of activities. See W.C. & A.N.
Miller Dev. Co. v. Cont’l Cas. Co., 814 F.3d 171 (4th Cir. 2016) (“Miller”). In Miller, the
Fourth Circuit dealt with a policy that contained an “expansive” definition of “interrelated
wrongful acts” that is like the language at issue here: “any wrongful acts which are logically or
causally connected by reason of any common fact, circumstance, situation, transaction or event.”
Id. at 176. The question in Miller was whether two lawsuits involved interrelated acts. In the
first case, a plaintiff sued for breach of contract and obtained a judgment against several
defendants, including Haymount Limited Partnership. Id. at 174. After that, the plaintiff sued
those defendants and Miller, a company related to Haymount, for allegedly engaging in
fraudulent conveyances in order to make the judgment from the first case uncollectable. Id.
4.
The Court recognizes that Judge Anderson later vacated part of his opinion. See Jones, 2012 WL 530002, at
*2. However, he did so because he decided there were genuine issues of material fact that needed to be resolved by
trial. Having conducted a bench trial, the Court does not have that issue here.

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Relying on the above-quoted definition, Miller’s insurer treated the two lawsuits as a single
claim. Id. at 175. Miller sued to have the lawsuits declared separate claims, but both the district
court and the Fourth Circuit agreed with the insurer that the lawsuits were logically and causally
connected. Id. at 175, 178. Although the lawsuits did not have identical sets of defendants and
involved two distinct courses of conduct, the Fourth Circuit found they constituted a single claim
because they shared common facts and circumstances. Id. at 177.
Although Bryan Brothers applied Virginia law and Miller applied Maryland law, the
opinions nonetheless are instructive. In Jones, Judge Anderson found the Virginia law used in
Bryan Brothers aligned with South Carolina law.

See 2011 WL 3880963, at *6.

The

undersigned agrees with that assessment. Further, the principles of Maryland insurance law
applied in Miller are cornerstones of South Carolina insurance law. Compare Miller, 814 F.3d at
176 (reciting rules from Maryland cases that insurance contracts are interpreted just like other
contracts; that undefined terms in policies are generally construed according to their ordinary
meaning; that unambiguous language is enforced as written; and that ambiguous language is
construed against the insurer), with, e.g., Auto-Owners Ins. Co. v. Benjamin, 781 S.E.2d 137, 141
(S.C. 2015) (reciting same rules from South Carolina cases). Finally, the multiple-acts definition
here bears a strong resemblance to the “interrelated acts or omissions” definitions in Bryan
Brothers, Miller, and Jones. For those reasons, this Court concludes South Carolina state courts
would find the definition here unambiguous and expansive. See Episcopal Church in S.C. v.
Church Ins. Co. of Vt., 53 F. Supp. 3d 816, 821 (D.S.C. 2014) (“If the South Carolina Supreme
Court has not addressed a particular legal issue raised in this case, this Court must predict how
that court would rule if presented with the issue.” (citing Twin City Fire Ins. Co. v. Ben Arnold–
Sunbelt Beverage Co. of S.C., 433 F.3d 365, 369 (4th Cir. 2005))).

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Under that construction of the multiple-acts definition, all of the Clients’ claims are
logically connected to one another and to the RMTP claim. They are all based on the acts and
omissions of the same person, whose tragic disease caused those acts and omissions, either in
whole or in part. To be sure, those connections do not share the obviousness of the stealconceal-repeat schemes in Bryan Brothers and Jones, nor do they form a factual web as strong as
the one in Miller. That does not mean, however, that nothing connects the claims. Rather,
CAMICO’s comprehensive policy language links claims that share even a single logically
connective fact, circumstance, or situation. Hill’s disease-induced impairment satisfies that low
threshold because, in this Court’s view of the facts, it played a causal role in the Client’s claims
and the RMTP claim. Just as the breakdowns of integrity in Bryan Brothers, Jones, and Miller
united all the claims in those cases, Hill’s breakdown of faculty unites all the claims here. 5 Thus,
they constitute a single claim.
The 2011–2012 policy states that a single limit applies for each claim, regardless of the
number of errors and parties involved. Thus, the policy provides a total of $100,000 of coverage
for the Clients’ claims, less the $20,600 already paid on the RMTP claim and less claim expenses
incurred to defend the Accountants in state court.
C.

Substantial Prejudice to CAMICO

The Accountants and the Clients contend that even if the Accountants were late in
reporting potential claims to CAMICO, the company cannot withhold coverage because the late
reporting did not substantially prejudice its rights under the policies.

Insurance policies

frequently require insureds to provide the insurer timely notice that a lawsuit or other type of
claim has been made. The purpose of such requirements “is to allow for investigation of the

5.
The Court, of course, does not mean to suggest Hill is to blame for the tragic circumstance of having
Parkinson’s disease.

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facts and to assist the insurer in preparing a defense.” Vt. Mut. Ins. Co. v. Singleton ex rel.
Singleton, 446 S.E.2d 417, 421 (S.C. 1994) (citation omitted). Generally, the insured’s failure to
comply with a notice clause “automatically relieves the insurer of its obligations under the
contract, including the payment of proceeds due, and the duty to defend and to indemnify the
insured.” Wright v. UNUM Life Ins. Co., No. 2:99-cv-2394-23, 2001 WL 34907077, at *2
(D.S.C. Aug. 31, 2001). However, when “the rights of innocent parties are jeopardized” by that
failure to comply, the insurer cannot deny coverage based on that failure unless it proves the
failure substantially prejudiced its rights under the policy. Vt. Mut. Ins. Co., 446 S.E.2d at 421
(citation omitted).
CAMICO’s policies do contain provisions that required the Accountants to report claims
and potential claims in a timely manner. For example, the policies obligated the Accountants to
“[p]romptly notify [CAMICO] or its authorized representative of any Claim or Potential Claim.”
Similar timely-notice provisions in insurance policies have generated substantial-prejudice
litigation in this Court in recent years. See, e.g., Episcopal Church in S.C., 53 F. Supp. 3d at
827–30; Berenyi, Inc. v. Landmark Am. Ins. Co., No. 2:09-cv-1556-PMD, 2010 WL 233861, at
*6–7 (D.S.C. Jan. 14, 2010). Importantly, however, the timely notice clause in CAMICO’s
policy is not the provision that has caused only a reduced amount of coverage to be available.
Rather, as discussed in section I.A of this Order, that result flows primarily from the combined
effect of the insuring agreement’s paragraph A.4 and the potential-claim definition.

The

language of those provisions differs greatly from the timely-notice clauses that have been
subjected to substantial-prejudice analysis. The Court questions whether South Carolina law
would apply the substantial-prejudice requirement to those provisions, and it has not found a
clear answer.

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Ultimately, the Court need not answer that question in this case. Even assuming the
requirement applies, CAMICO has satisfied it here. CAMICO representative Mark Aubrey
testified at trial that CAMICO engages in mitigation efforts to prevent potential claims from
becoming actual claim or, failing that, to at least mitigate losses. Because CAMICO insures
accountants, those efforts include negotiating with federal and state tax agencies and appealing
their decisions. CAMICO guarantees policyholders unlimited use of those services. With
respect to the RMTP claim—the claim that triggered the reduced coverage limit—the
Accountants did not notify CAMICO of the problem until after the IRS had rejected the claim
three times. According to Aubrey, by the time CAMICO learned of the matter, the Accountants
had already unsuccessfully exhausted the available abatement avenues; all CAMICO could do
was negotiate a settlement payment with RMTP. That loss of opportunity to investigate Hill’s
error and to engage the IRS substantially prejudiced CAMICO. Cf. Founders Ins. Co. v. Richard
Ruth’s Bar & Grill LLC, No. 2:13-cv-3035-DCN, 2016 WL 3189213, at *13 (D.S.C. June 8,
2016) (finding insurer was substantially prejudiced by not receiving notice of lawsuit against
insured until after default had been entered, as the insurer had lost the opportunity to investigate
the claim, assert defenses, or negotiate unhandicapped); see also id. at *12 (discussing South
Carolina cases that illustrate substantial prejudice).
The Accountants and the Clients argue CAMICO was not prejudiced because it learned
of the Clients’ claims well before the Clients filed their lawsuits, and it even participated in presuit investigations of those claims. Their argument stems from the statement in Vermont Mutual
Insurance Co. that the purpose of timely notice clauses is to enable insurance companies to
conduct meaningful investigations of the facts and to prepare defenses for insureds in a timely
manner. See Vt. Mut. Ins. Co., 446 S.E.2d at 421. That statement, however, contemplates the

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familiar scenario in which an injured party has formally made a claim—typically by filing a
lawsuit—against the insured.

The policy provisions at issue here contemplate a different

scenario: an insured’s error may impact a client’s liability to a tax authority but there may yet be
opportunities to change the authority’s decision before the client is harmed or asserts a claim.
Consequently, and as the record indicates, the purpose of those provisions is to afford CAMICO
a meaningful chance to participate in those pre-claim opportunities before it faces financial
exposure for the error. Although that purpose is similar in spirit to the one mentioned in
Vermont Mutual Insurance Co., it is distinct in its focus. Thus, the fact that CAMICO had
timely notice of the Clients’ claims is irrelevant to the question of whether CAMICO’s pre-claim
opportunities to engage with the IRS were substantially prejudiced. 6
D.

The Innocent-Insured Provision

As mentioned above, each of the policies at issue contains a provision that can provide
innocent insureds coverage “[i]f any coverage for a Claim would be void, excluded, suspended
or lost as a result of any Insured’s failure to comply with” the policy’s claim reporting
requirements. Jackson argues that even if Hill and the accounting firm are subject to the knownclaims endorsement’s reduced coverage, he is entitled to full coverage under that provision as an
innocent insured. CAMICO responds that the innocent-insured provision does not apply because
Jackson faces no potential personal liability in the Clients’ cases and in any event, he failed to
comply with the provision’s conditions.

6. The Court has also considered whether CAMICO was substantially prejudiced in its opportunities to intervene
before the Clients’ issues became claims. Although CAMICO did present evidence of such prejudice, that question
is not relevant. The Clients’ claims are subject to a single reduced coverage limit because they constitute a part of
the RMTP Claim under the policy’s expansive multiple-acts definition. Whether or not they were timely reported to
CAMICO plays no role in that analysis, and the policy’s multiple-acts definition could not reasonably be construed
as a timely notice provision that would trigger substantial-prejudice analysis.

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The Court agrees that the provision does not apply, but its analysis differs somewhat
from that offered by CAMICO. One of the insuring agreement’s conditions precedent is that
“the Claim was . . . made against the Insured.” Here, neither RMTP nor any of the Clients made
a claim, as the policies define that term, against Jackson as an individual. The claims—demands
for services and money, lawsuits, and tolling-agreement demands—have been made only against
the firm and against Hill individually. Consequently, even though Jackson is an insured under
the policies, he has no coverage for any of the claims at issue because they were not made
against him.
Moreover, the innocent-insured provision takes effect only if an insured loses coverage
because of a failure to follow certain claim reporting requirements. As just explained, that is not
the reason that Jackson lacks coverage. Consequently, even assuming arguendo that Jackson
complied with the innocent-insured provision’s coverage conditions, the provision is
inapplicable because the scenario triggering its applicability did not happen to him. Cf. Bryan
Bros., 704 F. Supp. 2d at 542 (finding innocent-insured provision inapplicable because insurer
denied coverage on ground unrelated to the circumstances that triggered provision).
E.

Conclusion as to Declaratory Judgment Issues

For the foregoing reasons, the Court declares that (1) the Clients’ claims and the RMTP
claim constitute a single claim under the 2011–2012 policy; (2) the 2011–2012 policy provides
$100,000 of coverage for indemnity and defense costs for that combined claim, less the $20,600
settlement and defense costs in the Clients’ lawsuits; (3) assuming South Carolina’s substantialprejudice doctrine applies here, CAMICO has proven such prejudice; and (4) Jackson does not
have coverage as an innocent insured.

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II.

The Accountants’ Counterclaims
As mentioned above, the Accountants have alleged counterclaims against CAMICO for

breach of contract and insurance bad faith. The factual theory of liability they allege for both
claims is the same: by contending the Clients’ claims are related to the RMTP Claim and its
reduced coverage limit, CAMICO is breaching the terms of one or more of the policies 7 and
violating the implied covenant of good faith and fair dealing. 8
The Accountants’ breach of contract claim fails. As explained above in Part I of this
order, CAMICO’s position is consistent with the terms of the 2011–2012 policy. Because the
Accountants cannot establish the essential element of breach, the claim fails. See S. Glass &
Plastics Co. v. Kemper, 732 S.E.2d 205, 209 (S.C. Ct. App. 2012) (“The elements for a breach of
contract are the existence of the contract, its breach, and the damages caused by such breach.”
(citing Fuller v. E. Fire & Cas. Ins. Co., 124 S.E.2d 602, 610 (S.C. 1962))).
As for insurance bad faith, the Accountants frame their claim under the elements for
recovery set forth in Bartlett v. Nationwide Mutual Fire Insurance Co.:
(1) the existence of a mutually binding contract of insurance between the plaintiff
and the defendant; (2) a refusal by the insurer to pay benefits due under the
contract; (3) resulting from the insurer’s bad faith or unreasonable action in
breach of an implied covenant of good faith and fair dealing arising on the
contract; (4) causing damage to the insured.
348 S.E.2d 530, 532 (S.C. Ct. App. 1986), overruled on other grounds by Charleston Cty. Sch.
Dist. v. State Budget & Control Bd., 437 S.E.2d 6 (S.C. 1993).

Under that rubric, the

Accountants’ claim fails at the second element. Although CAMICO is not providing all the

7.

The Accountants have not specified which insurance policy or policies they believe CAMICO breached.

8.
At trial, the Accountants also asserted, as theories of bad faith, that CAMICO improperly assigned a single
employee to handle defense and coverage issues and that it has unduly restricted the activities of the defense
attorney it retained for them. Although the Accountants did not include these theories in any pleading, the parties
tried them by implied consent. See Fed. R. Civ. P. 15(b)(2).

26

indemnity and defense coverage that the Accountants seek, it has not refused to pay any benefits
actually due.
The Court will enter judgment for CAMICO on the Accountants’ counterclaims.
CONCLUSION
In sum, based on the foregoing, CAMICO is entitled to the judicial declaration provided
in Section I.E of this Order. Additionally, CAMICO is entitled to judgment in its favor on the
Accountants’ counterclaims. Each party shall bear its own costs and fees.
Accordingly, it is ORDERED that judgment be entered in favor of CAMICO Mutual
Insurance Company.
AND IT IS SO ORDERED.

December 22, 2016
Charleston, South Carolina

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