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APRIL 26, 1989




Kenneth McKenzie filed suit in the Circuit Court of Jones County against South Carolina Insurance Company seeking actual damages claimed to be due under a liability insurance policy covering McKenzie and his plumbing operation issued by South Carolina Insurance Company. McKenzie further sought punitive damages under a bad faith claim asserted by him for the failure of South Carolina to cover liability of McKenzie for underground damage in his operation and, after amendment of the complaint, for failure to investigate the damage and pay same.

After trial on the merits, the jury returned a verdict for McKenzie in the amount of eighteen hundred thirteen dollars ($1,813.00) actual damages and four hundred seventy-five thousand

 dollars ($475,000) punitive damages. South Carolina has appealed from the judgment entered in the lower court and has assigned eleven (11) errors in the trial below.


 McKenzie has operated a plumbing business since 1976 and sought advice through the years from one Winston Lyon, an employee of Southern Farm Bureau Insurance Company as to what kind of policy he needed to cover his business operations. On Lyon's advice, he purchased a general liability policy from Southern Farm which contained a standard clause for plumbers which covered underground property damage and contained no deductible provision.

 In 1978, Southern Farm ceased writing commercial general liability insurance and Lyon advised McKenzie that the coverage could be written through Rural Insurance Agency, Inc. (Rural). Rural was a wholly owned subsidiary of the Farm Bureau and its agency manager, Eric Rice, had been an underwriter for Farm Bureau. Lyon contacted Rice who contacted one Sam Owens of Owens Insurance Agency to secure the commercial general liability policy. Owens, an independent agent, elected to obtain the coverage from South Carolina Insurance, a member company of the Seibels, Bruce Group. Rice had told Lyon he could obtain the same coverage for McKenzie that Southern Farm had provided, except that the policy would contain a five hundred dollars ($500.00) per occurrence deductible provision. Lyon conveyed that information to McKenzie.

 Rice sent Lyon an application form, which was filled out in Lyon's office. The application was a standard Insurance Services Offices (ISO) form (used nationwide and approved by the State of Mississippi) which required that, if a person wanted underground property damage coverage, he would have to check a block on the application form specifically requesting such coverage. The standard ISO commercial general liability policy issued to plumbers always carried an exclusion for underground property damage and such policies required a request to initiate underground coverage. Lyon did not make the request for underground coverage on the application which he submitted to Rural for McKenzie. The original policy, written according to the application, covered the period from November 24, 1978, to November 24, 1979. The policy which South Carolina wrote for McKenzie in conformity with the application completed by Lyon excluded underground property damage hazard coverage and defined that exclusion as follows:

 "underground property damage hazard" includes underground property damage as defined herein and

 property damage to any other property at any time resulting therefrom. "underground property damage" means property damage to wires, conduits, pipes, mains, sewers, tanks, tunnels, and any similar property, and any apparatus in connection therewith, beneath the surface of the ground or water, caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, burrowing, filling, back-filling, or pile driving. . . .

 The coverage was extended by new policies issued annually through 1983 and contained the exclusion.

 In 1982, McKenzie, under contract with the City of Laurel Housing Authority, was replacing water and sewer lines for a housing project. In the process, he damaged the underground cables of South Central Bell on ten (10) separate occasions in the late summer and fall of 1982. He told Lyon of the bills he had received from South Central Bell and, since McKenzie indicated there would be more bills coming, Lyon asked that he wait and submit all the bills at once, at which time Lyon would submit them all to Rural.

 McKenzie submitted the completed bills to Lyon, who forwarded them to Eric Rice at Rural. It is uncontradicted that McKenzie's policy had a $500.00 deductible per occurrence, that McKenzie knew of the deductible from the outset, and that only one of the ten incidents involved damages greater than $500.00. That one occurrence involved damage in the amount of $813.27, which was $313.27 over the deductible. There was nothing on the bills themselves to indicate whether the damage had been caused by the use of mechanical equipment or by the use of hand tools. When McKenzie presented his bills to Lyon, he was told by Lyon that the claims were not covered.

 McKenzie consulted an attorney Abernathy, who wrote directly to the Seibels, Bruce Group on February 24, 1983, claiming that the policy issued to McKenzie excluded underground coverage and asserting that South Carolina Insurance had wilfully, fraudently, and in bad faith breached a duty to McKenzie by issuing to him a policy which excluded underground damage ...

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