Fireworks on the Fourth of July Lead to a Dispute Regarding a Landlord and Its Insurers’ Right of Action Against a Tenant

Post by Logan Wells

The Fourth of July is fast approaching, and so our thoughts turn to fun, freedom, and of course, fireworks. With that in mind, this post discusses a 2002 opinion of the United States Court of Appeals for the Fourth Circuit in which the court found that (1) S.C. Code Ann. § 38-75-60 did not bar an insured landlord’s action against its tenant for damages resulting from a July 4^th blaze; and (2) the presence of the landlord’s insurers in the action would not have reduced the amount of the insured landlord’s damages for which the tenant could be found liable.

In Balcor Equity Properties XVIII v. Caligo Limited, in early June 1994, Caligo began an industrial cleaning project in Greer, South Carolina. Caligo staffed the project in part with employees from outside the Greer area and housed these employees in apartments leased from Balcor, including Units 161 and 166. During the evening of July 4, some Caligo employees residing in Units 161 and 166 were discharging fireworks onto the ground from their outside balconies. The employees subsequently began shooting bottle rockets and Roman candles at each other. Shortly afterward, the wooden deck of Unit 164 (which was not leased by Caligo, but which was situated between Units 161 and 166) caught on fire, and the resulting blaze caused more than $1,000,000 in damage to the complex.

Balcor had purchased fire insurance coverage for the apartment complex from four different insurance carriers. After the fire, the carriers jointly paid Balcor $991,796.41, which represented Balcor’s claimed damages less its $100,000 deductible. Balcor then filed suit against Caligo in the United States District Court for the District of South Carolina, claiming Caligo was liable for the conduct of its employees in discharging the fireworks and seeking to recover damages in the full amount of the loss caused by the fire. Specifically, Balcor alleged, inter alia, that Caligo breached Paragraph 10 of the lease contract, which stated, “You agree ... to indemnify us from any damage or loss we may sustain because of any fire or the extinguishing of such fire originating in the premises which damages our property.” Caligo generally denied Balcor’s claims and also asserted that the action was barred by S.C. Code Ann. § 38-75-60, which provides as follows:  

Notwithstanding any other provision of law, no insurer has a cause of action against a tenant who causes damage to real or personal property leased by the landlord to the tenant when the insurer is liable to the landlord for the damages under an insurance contract between the landlord and the insurer, unless the damage is caused by the tenant intentionally or in reckless disregard of the rights of others.

In addition, Caligo moved to join Balcor’s insurers as involuntary plaintiffs; however, after the carriers stipulated that they would be bound by the judgment, the district court denied the joinder motion. The district court also struck Caligo’s § 38-75-60 defense, ruling the statute did not apply to Balcor’s suit, and inter alia, granted summary judgment to Balcor as to its breach of contract cause of action.

Caligo appealed, arguing the district court erred in granting summary judgment as to the breach of contract cause of action, in denying its motion to join Balcor’s insurers, and in striking its statutory defense. The court reversed the district court’s grant of summary judgment on the breach of contract claim. In addition, the court concluded the district court correctly ruled that § 38-75-60 did not bar the breach of contract claim because the statute bars insurers’, not landlords’, claims. For the same reason, the court also determined that the statute would not have barred Balcor’s claim even if Balcor’s insurers had been joined as involuntary plaintiffs. Thus, the court concluded that any error in denying Caligo’s motion to join the insurers was harmless.

On remand to the district court, following a jury trial, judgment was entered in Balcor’s favor for $1,050,000, which represented the entire amount of Balcor’s fire damage. Caligo moved to amend the judgment, arguing that it should be responsible only for the $100,000 in fire damage for which Balcor was not compensated by insurance benefits. Caligo further argued that Balcor’s insurers should have been joined as involuntary plaintiffs, and if they had been, § 38-75-60 would have barred recovery of the amounts paid by the insurers to Balcor. The district court denied the motion, noting that Caligo’s argument had been rejected earlier by the Fourth Circuit.

Caligo appealed, alleging inter alia that the district court erred in denying its motions to join Balcor’s insurers as involuntary plaintiffs. Specifically, Caligo contended that because Balcor’s insurers paid Balcor $991,796.41 as a result of the fire, the insurers owned a portion of Balcor’s claim. Caligo continued that had the insurers been joined as involuntary plaintiffs, they would have been prohibited under § 38-75-60 from asserting their claims, and therefore Balcor’s damages would have been reduced by $991,796.41.

The court rejected Caligo’s argument, finding the district court correctly ruled that the court had rejected Caligo’s precise argument in the first appeal. Further, the court found not joining Balcor’s insurers did not increase the amount of damages for which Caligo could be found liable:

In any event, Caligo’s argument that Balcor’s damages would have been reduced if its insurers had been joined as involuntary plaintiffs is simply incorrect. In partial subrogation cases, the insured’s right of action against the wrongdoer is "single and indivisible, even though the insurer is subrogated to the rights of the insured to the extent of the loss paid." Spearman v. J & S Farms, Inc., 755 F. Supp. 137, 141 (D.S.C. 1990); see Pringle v. Atl. Coast Line R.R., 47 S.E.2d 722, 724 (S.C. 1948). Additionally, South Carolina follows the "collateral source rule," under which compensation from insurance proceeds will not reduce the amount of damages for which the wrongdoer is liable. See Citizens & S. Nat’l Bank of S.C. v. Gregory, 463 S.E.2d 317, 318 (S.C. 1995); Otis Elevator, Inc. v. Hardin Constr. Co. Group, 450 S.E.2d 41, 45-46 (S.C. 1994) (applying rule in contractual indemnity setting). Accordingly, as we determined [previously], any error in not joining Balcor’s insurers as involuntary plaintiffs did not increase the amount of damages for which Caligo could be liable.

Accordingly, the court found Caligo was not prejudiced by the denial of its joinder motion, and therefore, affirmed the judgment of the district court.