Ellett Brothers, Incorporated v. United States Fidelity & Guaranty Company Fidelity and Guaranty Insurance Underwriters, Incorporated St. Paul Mercury Insurance Company, and International Insurance Company Rli Insurance Company Mount Hawley Insurance Company United National Insurance Company, American Insurance Association National Shooting Sports Foundation National Association of Independent Insurers, Amici Curiae. Ellett Brothers, Incorporated v. United States Fidelity & Guaranty Company Fidelity and Guaranty Insurance Underwriters, Incorporated St. Paul Mercury Insurance Company, and International Insurance Company Rli Insurance Company Mount Hawley Insurance Company United National Insurance Company, American Insurance Association National Shooting Sports Foundation National Association of Independent Insurers, Amici Curiae
Docket: 01-1130
Court: Court of Appeals for the Fourth Circuit; December 27, 2001; Federal Appellate Court
Ellett Brothers, a handgun manufacturer, is involved in four lawsuits. Three are filed by California municipalities alleging that Ellett's marketing practices create public and private nuisances and violate the California Business and Professions Code. The municipalities seek injunctive relief to address the nuisances, restitution for funds obtained illegally, disgorgement of profits from violations, civil penalties, and litigation costs; one suit also requests attorneys' fees and additional equitable relief. Importantly, these municipalities do not pursue compensatory or punitive damages.
In the fourth lawsuit, the NAACP claims that Ellett has established an illegal secondary market for firearms. The NAACP seeks an injunction to alter Ellett's marketing practices, a requirement for Ellett to contribute to a fund overseeing gun dealers, attorneys' fees, and other relief as deemed appropriate by the court, without seeking compensatory or punitive damages.
Ellett's commercial general liability policy requires insurers to cover damages for "bodily injury" or "property damage" and to defend Ellett in related lawsuits. Ellett is seeking a declaratory judgment for its insurers to defend against lawsuits filed by California municipalities and the NAACP, which the district court interpreted as seeking only equitable relief, resulting in the granting of summary judgment to the insurers regarding the duty to defend. Ellett was permitted to voluntarily dismiss its indemnity claim under Federal Rule of Civil Procedure 41.
On appeal, Ellett contends that "damages" could refer to both legal and equitable relief. However, precedent establishes that "damages" in insurance contracts refers exclusively to legal damages, and comprehensive general liability policies typically do not cover equitable claims. The court confirmed that the contract between Ellett and its insurers did not indicate an intention to include equitable relief, thus upholding the district court's ruling.
Ellett also argued the term "damages" is undefined in the policy and that South Carolina law favors interpretations against the drafter. Nonetheless, the court maintained that the established default rule from prior cases applies, affirming that "damages" means legal damages only. As for the nature of the lawsuits against Ellett, under South Carolina law, an insurer's duty to defend is determined by the allegations in the underlying complaints. If any claim is covered by the policy, the insurer must defend, regardless of additional claims.
None of the complaints against Ellett seek "damages." The California municipalities and the NAACP request restitution, disgorgement, civil penalties, attorney's fees, costs, and contributions to a monitoring fund, but these do not qualify as damages for past injuries. Restitution and disgorgement are equitable remedies aimed at recovering ill-gotten gains, not compensating for losses. Civil penalties are fines payable to the government, and the NAACP’s fund is prospective relief. The contract in question differentiates between costs/attorney's fees and damages, stipulating that the insurers owe these amounts only if required to defend the suit. The complaints do not allege legal damages as required under South Carolina law, and a request for "further relief" does not support a claim for damages.
The district court dismissed Ellett's indemnity claim against its insurers without prejudice, finding it not ripe and that Ellett could face irreparable harm regarding the underlying suits. The insurers cross-appealed, claiming this was erroneous and they were entitled to summary judgment. Under South Carolina law, the duty to defend is based on complaint allegations, while the duty to indemnify depends on factual findings. Since no such findings exist in the lawsuits against Ellett, the indemnity claim is not ripe. The potential for a subsequent lawsuit does not constitute legal prejudice for denying the voluntary dismissal of the claim. Consequently, the district court's judgment is affirmed.
Michael, Circuit Judge, concurs with the judgment and part III of the majority's opinion, which interprets South Carolina law to mean that "damages" in an insurance contract typically refers to legal damages rather than equitable relief, based on the precedent set in Cincinnati Ins. Co. v. Milliken, Co. However, he notes that South Carolina law has evolved since 1988, suggesting that "damages" may now encompass equitable relief in certain circumstances, leaving the issue unsettled. As a result, he refrains from endorsing parts I and II of the majority's opinion.
The majority references Braswell v. Faircloth to assert that the legal/equitable distinction from Milliken has been upheld by South Carolina courts. Although Braswell cites Milliken, it does not support the conclusion that "damages" strictly means legal damages; in fact, its ruling seems to contradict Milliken's distinction. In Braswell, a lessor sought a declaration regarding insurance coverage for cleanup costs related to a chemical spill, with the insurance contract mirroring the one in the present case by limiting coverage to lawsuits for "damages" from "property damage" without defining "damages." The trial court dismissed the lessor's claims, ruling that they were restitutionary and sought only equitable relief, thus not qualifying as claims for "damages."
On appeal, the lessor in Braswell distinguished his case from Milliken by asserting it was a suit for breach of contract damages rather than restitution or equitable relief. The South Carolina Court of Appeals focused on whether the lessee's insurer was required to indemnify costs from complying with a government directive, irrespective of the suit's characterization as legal or equitable. The court analyzed coverage based on whether it pertained to costs for remediating past or future injuries. It ruled that the removal costs of stored chemicals, which had not caused physical injury, were not covered, aligning with precedent from Maryland Cas. Co. v. Armco, Inc. However, the court found that costs from a government-ordered cleanup of a chemical spill were covered under the insurance policy, determining these costs constituted "damages." Braswell implicitly contradicted Milliken's exclusion of equitable relief from the term "damages" by awarding coverage for environmental cleanup costs categorized as equitable relief by the trial court. The South Carolina courts have not definitively resolved whether "damages" in insurance contexts can include equitable relief, but the interpretation of "damages" can significantly impact other legal contexts. Other cases, such as Boeing Co. v. AETNA Cas. Sur. Co., support the view that damages can include cleanup costs resulting from property damage, indicating a broader interpretation of "damages" in insurance contracts. The author suggests not applying the Milliken rule, which conflicts with the Braswell outcome.
The lawsuits at issue do not seek "damages" as typically defined in legal contexts. According to South Carolina law, terms in insurance contracts should be understood in their ordinary meaning. "Damages" generally refer to monetary compensation for injuries sustained. The underlying lawsuits request remedies including an injunction to abate a nuisance, restitution, disgorgement of profits, civil penalties, attorneys' fees, costs, and contributions to a monitoring fund for gun dealers. These forms of relief focus on preventing future harm and punishing misconduct, rather than compensating for past injuries. Specifically, the injunction aims to alter firearm distribution practices, while civil penalties serve to deter future violations. Although restitution and disgorgement can sometimes restore damaged property, in this case, any funds would go to public treasuries rather than directly to victims of gun violence. Consequently, these lawsuits do not align with the traditional understanding of seeking damages, supporting the conclusion that summary judgment for the defendant-insurers regarding the duty to defend claim is appropriate.
