Insurance Coverage Under North Carolina Law:
Having the Right Protections for Your Business, and
Effectively Litigating Coverage Disputes
November 7, 2012
Steve DeGeorge
sdegeorge@rbh.com
John Garver
jgarver@rbh.com
Kate Payerle
kpayerle@rbh.com
Insurance Coverage
First, Read the Policy
•
Forms vary
•
Application of policy to facts is not
always obvious
•
Ambiguity favors coverage
Insurance Coverage
Different States; Different Law
• Fifty States: significant differences in
interpretation of policies
• Choice of law can determine outcome
Coverage Policy Structure
• Declarations
• Insuring Agreement (Coverages)
• Exclusions
• Who is Insured
• Limits of Insurance
• Conditions
• Definitions
• Endorsements
Claims Made Policies
• Claim must come in during the year of policy coverage or
any extended notice period
• Accident could have occurred prior to beginning of policy
term
• Important to make sure no break in coverage (e.g.,
changing insurers)
• Typically used for D&O, malpractice and professional
liability
Occurrence-Based Policies
• Coverage for bodily injury or property
damage that occurred during the policy
period
• Claim could be made years later
• Most CGL is occurrence-based
Red Flag – Policy Form or Carrier Changes
• High alert
• Unintended consequences
Case Intake and Informal Investigationcs
1.
When a “claim” is made, one of the first steps is to evaluate
the possibility of coverage.
2.
Obtain copies of policies and evaluate possible coverage.
3.
Getting policies can be difficult if the events giving rise to
the claim occurred years ago (asbestos, environmental,
etc.). (This is addressed in the next section.)
4.
Do not blindly accept broker’s or carrier’s conclusion of
no coverage.
Case Intake and Informal Investigation
(continued)
5.
Arriving at the correct answer on possible coverage often requires
fact investigation concerning the underlying claim. Be careful not
to take too long, and be mindful that associated attorneys’ fees
will not be covered in most instances.
6.
Determine if the matter constitutes the sort of “claim” that trigger’s
the duty to notify the insurer. Some policies define “claim” as a
lawsuit or arbitration. When in doubt, be safe and give notice.
7.
Insurer’s duty to defend is triggered when it receives notice of the
claim, not when the claim is filed against the insured. Kubit v.
MAG Mut. Ins. Co., 708 S.E.2d 138 (N.C. App. 2011).
Finding Sources and Limits of Coverage
1.
The perils of “long-tail” risks can engender lawsuits long after the
“occurrence” giving rise to insurance coverage.
2.
In a coverage action, the insured must prove the terms of the policy and
the facts to bring its claim within the policy’s coverage. Rogers v. Unitrim
Auto and Home Inc. co., 388 F. Supp. 2d 638, 642 (W.D.N.C. 2005);
Duncan v. Cuna Mut. Ins. Society, 171 N.C. App. 403, 405, 614 S.E. 2d
592, 594 (2005).
3.
Rule 1004 of the Federal and North Carolina Rules of Evidence provides
that the original of a document is not required, and other evidence
(“secondary evidence”) to prove its contents is admissible, if the
proponent establishes that the document was lost or destroyed without
bad faith, and that the proponent made a diligent effort to find the
document.
4.
Rule 1004 applies in actions where coverage is alleged notwithstanding
that the policy has been lost or destroyed. Vaughan v. Carolina Indus.
Insulation, 183 N.C. App. 25, 32, 643 S.E. 2d 613, 617-18 (2007); Pecar
v. St. Paul Fire & Marine Ins. Co., 2003 WL 21912282 at * 2 (4th Cir.
2003).
Finding Sources and Limits of Coverage
(continued)
5.
Under Evidence Rule 1004, the insured must present evidence that it did
not lose or destroy the insurance policy fraudulently or in bad faith. E.g.,
Vaughan v. Carolina Indust. Insulation, 183 N.C. App. 25, 32, 643 S.E. 2d
613, 617-18 (2007); Sellmayer Packing Co. v. Commissioner, 146 F. 2d
707, 709 (4th Cir. 1944).
6.
The standard of proof regarding the contents of a lost policy is unsettled in
North Carolina, although one case suggests that a preponderance of the
evidence may suffice. Vaughan v. Carolina Indust. Insulation, 183 N.C.
App. 25, 34, 643 S.E. 2d 613, 619 (2007).
7.
In many jurisdictions, the terms of a lost policy must be established by
“clear and convincing” evidence, rather than by the preponderance
standard. E.g., Klopman v. Zurich American Ins., Co., 2007 WL 1381599
(4th Cir. 2007) (Maryland law); In re Wallace & Gale Co., 284 B.R. 553,
555-56 (D. Md. 2002).
8.
Examples of standard policy forms or contemporaneous policies issued by
the insurer provide secondary evidence of the terms of a lost policy, as is
testimony by a witness familiar with the terms of a lost policy. Klopman v.
Zurich American Ins. Co. of Illinois, 233 Fed. App. 256, 260 (4th Cir. 2007).
Finding Sources and Limits of Coverage
(continued)
9.
The “mere mention of a policy number in another document” is helpful evidence,
but standing alone is “insufficient to prove the existence of terms of insurance
coverage.” Boyce Thompson Inst. V. Ins. Co. of North America, 751 F. Supp.
1137, 1140 n. 2 (S.D.N.Y. 1990)
10.
Proof of the “actual language” of a lost policy is generally unnecessary. Dart Ind.
v. Commercial Union Fire Ins., Co., 52 P.3d 79 (2002).
11.
Common sources of information on historical insurance coverage:
•
Excess carriers often have information on primary liability coverage.
•
Insurance brokers often maintain copies of policies, premium registers and
other information.
•
State insurance regulatory authorities.
•
Conduct computer searches for old lawsuits involving the insured, some of
which may have been covered and, therefore, handled by counsel engaged
by the insurer.
•
Check with lawyers who represented the insured historically.
•
Old loan and other transaction documents may include proof of insurance
provisions.
•
Beware of mergers, asset acquisitions and name changes.
Finding Sources and Limits of Coverage
(continued)
•
Old cancelled checks or check registries.
•
Contact former employees of the insured who may have dealt with insurance
issues.
•
Search the “attic.”
12. Try an “Insurance Archaeologist”
Insurance Archaeology Group
www.iagltd.com
R.M. Fields International
www.rmfields.com
LECG Corporation
www.lecg.com
Negotiating the Claim with the
Claimant/Insurance Company
1.
Nature, amount, and procedural status of underlying claim typically
determines whether it makes sense to try negotiating settlement
before tendering the claim to a client's insurer. Usually worthwhile
pursuing direct settlement under the following circumstance:
•
Insurance coverage for underlying claim is unlikely.
•
High likelihood of no liability on the underlying claim
(misidentified or obvious defense).
•
Dollar amount of underlying claim is small, particularly if it is very
unlikely to reach the deductible.
•
Underlying claim is for property damage only.
•
Underlying claim is not yet the subject of a lawsuit.
•
Reputation of/relationship with claimant’s opposing counsel indicates
likelihood of fruitful negotiations.
Tendering the Claim for Defense
1.
Virtually all liability policies contain provisions requiring the policyholder
to provide the insurer with notice of each claim for which coverage is
sought.
2.
Notice provisions serve the important purpose of allowing the insurer an
adequate opportunity to investigate the underlying claim.
3.
Policy language varies (“promptly”, “as soon as possible”, “immediately”,
etc.). Despite varying notice language, North Carolina Courts generally
ask whether the policyholder gave notice "as soon as practicable." E.g.,
Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571, 573 S.E.2d 118
(2002).
4.
“As soon as practicable” allows delay, as long as the policyholder acted
in “good faith” and the insurer was not “materially prejudiced.” Great Am.
Ins. Co. v. C.G. Tate Constr. Co., 315 N.C. 714 (1986); Erie Ins.
Exchange v. Szamatowicz, 164 N.C. App. 748, 597 S.E.2d 136 (2004).
Tendering the Claim for Defense
(continued)
5.
Policyholders commonly notify their agent of a claim, and rely on the
agent to notify the insurer. This is generally an acceptable form of notice
in North Carolina. E.g., Kubit v. MAG Mut. Ins. Co., 708 S.E.2d 138 (N.C.
App. 2011).
6.
Agents make mistakes, so keep a written record. (In fact, always keep a
written record.)
7.
Generally, forego notifying insurer if it is clear the deductible will not be
reached.
8.
Insurer has three basic options upon receiving notice/coverage demand,
(i) acknowledge coverage; (ii) deny coverage; or (iii) provide a defense
under a reservation of rights.
Tendering the Claim for Defense
(continued)
9.
In some states (probably not North Carolina), a defense under reservations of rights
triggers a conflict of interest, and gives the policyholder a right to independent
counsel, paid by the insurer. Sometimes referred to as “Cumis counsel.”
10. Insurer’s denial of coverage can be risky, because unjustified coverage denial can
open door to bad faith or unfair/deceptive trade practices claim. Certain claim
settlement practices, such as misrepresenting policy provisions and failure to adopt
reasonable claim investigation standards, are per se “unfair or deceptive acts or
practices.” N.C. Gen. Stat. Sec. 58-63-15. These automatically entitle the
policyholder to relief un the Unfair and Deceptive Trade Practices Act. E.g., Thorpe
v. Ameritas Inv. Corp., 2012 U.S. Dist. LEXIS 134049 (E.D.N.C. 2012); Cobb v. Pa.
Life Insurance, Co., 715 S.E.2d 541 (N.C. App. 2011); Noble v. Hooters of
Greenville, LLC, 199 N.C. App. 163, 681 S.E.2d 448 (2009).
11. Timely notice is especially important in relation to claims-made policies, because
these policies are structured specifically to provide coverage for claims made
against the insured during the policy period. Courts consider the notice provision to
be part of the insuring agreement in a claims-made policy, and view notice to
the insurer during the policy period as a condition precedent to coverage. In other
words, in the vast majority of states, actual prejudice to the insurer is immaterial if
notice is not provided during the period of coverage under a claims-made policy.
Tendering the Claim for Defense
(continued)
12.
Timely notice can also impact a policyholder's right to defense costs. In North
Carolina, an insurer's duty to defend is not triggered by the filing of a lawsuit
against the insured, but only by the insurer's receipt of notice of the claim. Kubit v.
MAG Mut. Ins. Co., 708 S.E.2d 138 (2011).
13.
If insurer defends a lawsuit, policyholder must cooperate in the defense, including
providing information, documents and testimony, Failure to cooperate can void
coverage. However, policyholder must be careful if insurer is defending under
reservation of rights
Denial of Coverage and Its Potential
Consequences for Both Sides
1.
As noted above, an insurer’s unjustified coverage denial can trigger bad faith
and UDTPA liability.
2.
If a coverage denial letter does not explain the legal and factual basis of the
denial, demand for such an explanation. This may prompt a more thorough
analysis by the insurer.
3.
If a bad faith or UDTPA claim is possible, tell the insurer that the coverage
denial is unjustified, and why, and that a bad faith or UDTPA claim is under
consideration. This record can help establish the insurer’s bad faith. Be
careful, however, if you do not want to trigger a declaratory judgment action by
the insurer. (See discussion on venue/choice of law below.)
4.
“When an insurer breaches its duty to defend, it waives its right to rely on any
coverage defense and is then liable for the full amount of any judgment or
settlement against its insured in the action it refused to defend.” Race City
Fasteners, Inc. v. Selective Ins. Co., 2007 U.S. Dist. LEXIS 32808 (W.D.N.C.
2007), aff’d 279 Fed. App. 250 (4th Cir. 2008), citing Ames v. Continental Cas.
Co., 79 N.C. App. 530 (1986).
5.
Coverage denial requires the policyholder to defend itself against the underlying
claim. This can be disastrous, particularly if the underlying claim will involve
significant defense costs and/or the policyholder has very limited resources.
Filing a Dispositive Motion
1.
Whether a policy provides coverage is resolved by construing the policy, a
question of law, suitable for summary judgment. State Auto Property and Casualty
Ins. Co. v. Travelers Indemnity Co. of America, 343 F.3d 249, 254 (4th Cir. 2003).
2.
Summary judgment should be entered if discovery responses and affidavits
show there is no “genuine issue” of “material fact.” Roumillat v. Simplistic
Enterprises, Inc., 33 N.C. 57, 62, 414 S.E. 2d 339, 341 (1992), quoting,
N.C.R. Civ. P. 56(c). Accord, Emmett v. Johnson, 532 F.3d 291, 297 (2008).
3.
Summary judgment serves the valuable purpose of avoiding trial “where only
questions of law remain and an is unmistakable weakness in a party’s claim
of defense exists.” Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571, 579,
573 S.E.2d 118, 123 (2002).
4.
Once the movant meets its initial burden, the burden shifts to the non-movant
to present evidence establishing that there are “genuine issues of material
fact,” such that the non-movant can prove a “prima facie case at trial.”
Collingwood v. G.E. Real Estate Equities, 324 N.C. 63, 66, 376 S.E.2d 425,
427 (1989); Celatex v. Catrett, 477 U.S. 317, 322-23 (1986).
Filing a Dispositive Motion
(continued)
5.
The existence of “some” factual dispute will not avoid summary judgment; “the
requirement is that there be no genuine issue of material fact.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original).
Accord, Mosley v. WAM, Inc., 167 N.C. App. 594, 597, 606 S.E.2d 140, 142
(2004).
6.
An issue is “genuine” if it is supported by “substantial evidence,” such that it
could reasonably persuade a jury. Liberty Mut. Ins. Co. v. Pennington, 356
N.C. 571, 579, 573, S.E.2d 118-124 (2002). Accord, Beale v. Hardy, 769 F.2d
213, 214 (4th Cir. 1985).
7.
An issue is “material” if its resolution will affect the “outcome” of a case. Koontz
v. City of Winston-Salem, 280 N.C. 513, 518, 186 S.E.2d 897, 901 (1972).
Accord, In re Peanut Crop. Insurance Litigation, 524 F.3d 458, 470 (4th Cir.
2008).
8.
Substantial evidence in support of every element of a claim or defense is
necessary, “since a complete failure of proof concerning an essential element
of the non-moving party’s case necessarily renders all other facts immaterial.”
Cray Communications, Inc. v. Novatel Computer Systems, Inc., 33 F.3d 390,
393 (4th Cir. 1994). Accord, Roumillat v. Simplistic Enterprises, Inc., 331 N.C.
57, 63, 414 S.E.2d 339, 342 (1992).
Filing a Dispositive Motion
(continued)
9.
A successful summary judgment motion starts long before the
brief is written. Carefully crafted discovery requests, particularly
deposition questions, lay the foundation for a successful motion.
10.
A summary judgment ruling that imposes coverage (with
damages undetermined) is not subject to immediate appeal.
Tridyn Ind., Inc. v. American Mut. Ins. Co., 296 N.C. 486, 492,
251 S.E. 2d 443, 448 (1979).
11.
The insured generally has the burden of proving coverage under a policy.
Nat’l Union Fire Ins. Co. of Pittsburgh v. Reichhold, Inc., 2009 WL
1579544 at *7 (M.D.N.C. 2009), citing, Nationwide Mut. Ins. Co. v.
McAbee, 268 N.C. 326, 328, 150 S.E.2d 496, 497 (1966).
12.
However, where an insurer denies coverage based on an exclusion, the
insurer must prove application of the exclusion. Id.
Filing a Dispositive Motion
(continued)
13.
The “universal rule is that insurance contracts will be liberally construed in favor of
the insured and strictly construed against the insurer, since the insurance company
selected the language used in the policy.” Mazza v. Medical Mutual Ins. Co. of
North Carolina, 311 N.C. 621, 631, 319 S.E.2d 217, 223 (1984).
14.
“Where a provision in a policy of insurance is susceptible of two interpretations,
when considered in light of the facts in the case, one imposing liability, the other
excluding it, the provision will be construed against the insurer”; “any
ambiguity…will be resolved in favor of the insured and against the insurance
company.” Maddox v. Colonial Life and Accident Ins. Co., 303 N.C. 648, 650, 280
S.E.2d 907, 908 (1981); Roach v. Pyramid Life Ins. Co., 248 N.C. 699, 701, 104
S.E.2d 823, 824-25 (1958) (emphasis supplied).
15.
Where an insurance policy fails to define a term, and its meaning therefore is
“uncertain,” “doubts will be resolved against the insurance company” and the term
“must” be construed to have “the meaning most favorable to the policyholder.”
Gaston County Dyeing Mach. Co. v. Northfield Ins. Co., 351 N.C. 293, 299-300,
524 S.E.2d 558, 563 (2000); Wachovia Bank & Trust Co. v. Westchester Fire Ins.
Co., 276 N.C. 348, 354, 172 S.E.2d 518, 522 (1970). Accord, Monin v. Peerless
Ins. Co., 159 N.C. App. 334, 341, 583 S.E.2d 393, 398 (2003); Grant v. Emmco Ins.
Co., 295 N.C. 39, 43, 243 S.E.2d 894, 897 (1978).
Filing a Dispositive Motion
(continued)
16.
Where an insurer writes a policy using a “slippery” word that has an uncertain meaning, “it
is not the function of the court to sprinkle sand upon the ice by strict construction of the
term.” If the term can be reasonably construed in a manner that affords coverage, it
should be so construed. “If, in the application of this principle of construction, the limits of
coverage slide across the slippery area and the company falls into coverage more
extensive than it contemplated, the fault lies in its own selection of the words by which it
chose to be bound.” Cowell v. Gaston County, 660 S.E.2d 915, 918 (2008), quoting,
Grant, 295 N.C. at 43, 243 S.E.2d at 897 (1978), quoting, Insurance Co. v. Insurance Co.
266 N.C. 430, 437-38, 146 S.E.2d 410, 416 (1966).
17.
In construing an undefined term in an insurance policy, our courts look for its “ordinary
meaning” using “standard, non-legal dictionaries” as a guide. Gaston County, 351 N.C. at
302, 524 S.E.2d at 564.
18.
Provisions of an insurance policy that provide coverage “must be construed liberally so as
to afford coverage whenever possible by reasonable construction,” whereas coverage
exclusions are “not favored, and are to be strictly construed against the insurer and in
favor of the insured, again, to find coverage.” State Capital Ins. Co. v. Nationwide Mut.
Ins. Co., 318 N.C. 534, 538, 350 S.E.2d 66, 68 (1986); North Carolina Farm Bureau Mut.
Ins. Co. v. Stox, 330 N.C. 697, 412 S.E.2d 318, 321 (1992) (emphasis supplied); Seymour
v. Lenoir County, 152 N.C. App. 464, 466, 567 S.E.2d 799, 801 (2002). Accord,
Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, LLC, 364 N.C. 1,692 S.E.2d 605
(2010)
Filing a Dispositive Motion
(continued)
19.
Where an insurer relies on a policy clause that excludes coverage, the
burden is on the insurer to establish the exclusion. Jenkins v. Aetna
Casualty & Surety Co., 324 N.C. 394, 378 S.E.2d 773 (1989); Nationwide
Mut. Ins. Co. v. McAbee, 268 N.C. 326, 328, 150 S.E.2d 496, 497 (1966).
Universal Ins. Co. v. Burton Farm Dev. Co., LLC, 718 S.E.2d 665 (N.C.
App. 2011). However, this burden does not arise until the insured makes
a threshold showing of coverage. Breezewood of Wilmington
Condominiums Homeowners’ Ass’n v. Amerisure Mut. Ins. Co., 2009 WL
1877465 at *1 (4th Cir. 2009), citing, Fortune Ins. Co. v. Owens, 351 N.C.
424, 430, 526 S.E.2d 463, 467 (2000).
20.
Where a coverage provision and an exclusion conflict, the conflict is resolved
in favor of coverage. Kubit v. MAG Mut. Ins. Co., 708 S.E.2d 138 (N.C. App.
2011); Southeast Airmotive Corp. v. Fire Ins. Co., 78 N.C. App. 418, 420, 377
S.E.2d 167, 169 (1985); Washington Housing Authority v. North Carolina
Housing Authorities Risk Retention Pool, 130 N.C. App. 279, 284, 502 S.E.2d
626, 630 (1998).
Declaratory Judgment Actions
1.
In state court, declaratory judgment actions are governed by the North
Carolina Declaratory Judgment Act. N.C. Gen. Stat. § 1-253 et seq.
2.
In federal court, declaratory judgment actions are governed by the Federal
Declaratory Judgment Act. 28 U.S.C. § 2201 et seq.
Both statutes authorize trial courts to “declare rights, status and other
legal relations,” even where no other relief is sought.
3.
4.
A declaratory judgment complaint is a good way to have the dispute
resolved in a favorable venue.
5.
A declaratory judgment action is intended to “settle uncertainty” regarding
the rights of parties in an “expeditious fashion,” often in situations
involving “an issue of law or the construction of a document.” Hobson
Const. Co. v. Great American Ins. Co., 71 N.C. App. 586, 588, 322 S.E.
2d 632, 634 (1984); Centennial Life Ins. Co. v. Poston, 88 F. 3d 255, 25657 (1996).
Declaratory Judgment Actions
(continued)
6. A declaratory judgment action is an appropriate means of
determining rights under an insurance policy. Harleysville Mut.
Ins. Co. v. Narron, 155 N.C. App. 362, 369, 574 S.E. 2d 490,
494 (2002); State Farm Fire and Casualty Co. v. Taylor, 118
F.R.D. 426, 428 (M.D.N.C. 1988).
7. The Declaratory Judgment Act requires the joinder of all parties
“who have or claim any interest which would be affected by the
declaration.” N.C. Gen. Stat. § 1-260.
Venue, Jurisdiction and Choice of Law
1. Generally, insurance coverage disputes may be litigated in
several possible state and federal courts which will have
subject matter jurisdiction.
2. Most insurance companies are subject to personal
jurisdiction in several states, often in all 50 states.
3. Be the plaintiff, because the plaintiff has the opportunity to
influence governing substantive law by selecting the venue.
Governing law can make-or-break a coverage dispute.
4. Insurers frequently file suit preemptively in a pro-insurer
venue.
Venue, Jurisdiction and Choice of Law
(continued)
5. Thus, a policyholder should not inform insurer that
policyholder intends to file a coverage action.
6. Venue under state and federal law will lie where the
policyholder has its principal place of business, and often
anywhere where the policyholder has an office or
employees.
7. Venue may also lie in any state where the insurer conducts
business.
8. Venue may also lie where the underlying claim against the
policyholder arose and/or where a lawsuit against the
policyholder is pending. is pending.
Venue, Jurisdiction and Choice of Law
(continued)
9.
Policyholder’s counsel should carefully evaluate available venues
to determine which would be best.
10. Unless there is a good reason to file elsewhere (there often is), a
policyholder will usually file a state court action in the Superior
Court located in the county where it has its principal place of
business. N.C. Gen. Stat.§ 1-82.
11. Again, absent a reason to file elsewhere, an insured will generally
file federal action in the district where it has its principal place of
business, provided the insurer “resides” there. 28 U.S.C. §
1391(a).
12. Under federal law, a defendant “resides” in any federal judicial district
where it is subject to personal jurisdiction. 28 U.S.C. § 1391; VE
Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1584
(Fed. Cir. 1990).
Venue, Jurisdiction and Choice of Law
(continued)
13.
Venue can have a significant substantive impact because the forum state’s
choice of law rules will govern. Stokes v. Wilson and Redding Law Firm, 72
N.C. App. 107, 112, 323 S.E. 2d 470, 475 (1984); Volvo Const. Equipment
North America, Inc. v. CLM Equip. Col, 386 F.3d 581, 599-600 (4th Cir.
2004).
14.
Under North Carolina’s choice of law rules, an insurance policy is interpreted
and the rights of the parties determined in accordance with the substantive
law of the state where the last act to make a binding contract occurred,
usually delivery of the policy. Fortune Ins. Co. v. Owens, 351 N.C. 424, 427,
526 S.E. 2d 463, 465-66 (2000); American Motorists Ins. Co. v. CTS Corp.,
356 F.Supp.2d 583, 589 (W.D.N.C. 2005).
15.
Different choice of law rules elsewhere. Several states use the complex
analysis contained in the Restatement (Second) of Laws – Conflict of Law.
16.
Venue/governing substantive law can significantly affect recoverable
damages. For example, the law of some states, including North Carolina,
cap punitive damage awards. N.C. Gen. Stat.§ 1D-25.
Venue, Jurisdiction and Choice of Law
(continued)
17. North Carolina law allows for a claim against an insurer for treble damages under
the North Carolina Unfair and Deceptive Trade Practices Act. E.g., Lee v. Allstate
Ins. Co., 2010 N.C. App. LEXIS 1420 (N.C. App. 2010); Chew v. Progressive
Universal Ins. Co., 2010 U.S. Dist. LEXIS 113531 (E.D.N.C. 2010).
18. For choice of law purposes, recoverable damages is an issue of substantive law,
generally governed by the law of the state where the injury occurred. Stetser v. Tap
Pharmaceutical Products, Inc., 165 N.C. App. 1, 15, 598 S.E.2d 570, 580 (2004);
Giblin v. Nat’l Multiple Sclerosis Society, 2008 WL 4372787 at *5 (W.D.N.C. 2008).
19. Venue/governing law can also impact rules of insurance policy construction,
applicability of particular exclusions, and burdens of proof. See, e.g., New NGC,
Inc. v. ACE American Ins. Co., et al., United States District Court, Western District of
North Carolina, Case No. 3:10-CV-00022. In this case, pollution exclusion should be
inapplicable under North Carolina law, but would be applicable under the law of
Florida and other states where the coverage action could have been brought.
20. If governing law will be unfavorable if suit is filed in the insured’s home state, in most
cases one or more other states will provide an appropriate venue. 28 U.S.C. §
1391; Mitrano v. Hawes, 377 F.3d 402, 405 (4th Cir. 2004).
21. Demand a jury trial.
North Carolina Unfair and Deceptive Trade
Practices Act (“UDTPA”)
1.
The UDTPA outlaws “unfair or deceptive acts or practices in or
affecting commerce.” N.C. Gen. Stat. § 75-1.1(a).
2.
The UDTPA provides for mandatory treble damages, and discretionary
award of attorneys’ fees. N.C. Gen. Stat. §§ 75-16 and 75-16.1.
3.
To prevail on a UDTPA claim, a plaintiff must prove (1) the defendant
committed an unfair or deceptive act or practice; (2) in or affecting
commerce; and (3) the plaintiff was injured thereby. Atl. Mgmt. Corp.
v. Dunlea Realty Co., 131 N.C. App. 242, 252, 507 S.E.2d 56, 63
(1998).
4.
An act is “unfair” if it is “immoral, unethical, oppressive, unscrupulous,
or substantially injurious to consumers.” Marshall v. Miller, 302 N.C.
539, 548, 276 S.E.2d 397, 403 (1981).
North Carolina Unfair and Deceptive Trade
Practices Act (“UDTPA”) (continued)
5.
An act is “deceptive” if it has the tendency or capacity to deceive;
proof of intent to deceive or actual deception is unnecessary. Jones
v. Capitol Broadcasting Co., Inc., 128 N.C. App. 271, 276, 495
S.E.2d 172, 175 (1998); Miller v. Nationwide Mut. Ins. Co., 112 N.C.
App. 295, 301-02, 435 S.E.2d 537, 542 (1993); Gilbane Building Co.
v. Federal Reserve Bank of Richmond, Charlotte Branch, 80 F.3d
895, 902-03 (4th Cir. 1996).
6.
UDTPA claims have replaced many common law fraud and bad faith
claims because they are easier to prove and treble damages are
mandatory, rather than being left to the finder of fact’s discretion.
7.
An arbitration agreement or other provision in an insurance policy
probably can’t deprive a claimant of the right to treble damages
under the UDTPA. In re Cotton Yarn Antitrust Litigation, 505 F.3d
274, 288 (4th Cir. 2007).
North Carolina Unfair and Deceptive Trade
Practices Act (“UDTPA”) (continued)
8.
The UDTPA applies to the business and acts of insurers. Gray v.
North Carolina Ins. Underwriting Ass’n, 352 N.C. 61, 70-71, 529
S.E.2d 676, 682-83 (2000); Kron Medical Corp. v. Collier Cobb &
Assoc., 107 N.C. App. 331, 335, 420 S.E.2d 192, 194 (1992).
9.
N.C. Gen. Stat. § 58-63-15 sets forth several acts and practices that
are deemed “unfair and deceptive” in the “business of insurance.”
10. Although § 58-63-15 does not provide for a direct private right of
action, the acts and practices set forth in § 58-63-15 are examples of
conduct that support a claim under the UDTPA. Gray v. North
Carolina Ins. Underwriting Ass’n, 352 N.C. 61, 71, 529 S.E.2d 676,
682-83 (2000); Carter v. West American Ins. Co., 661 S.E.2d 264, 271
(2008); ABT Building Products Corp. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, 472 F.3d 99, 125 (4th Cir. 2006).
North Carolina Unfair and Deceptive Trade
Practices Act (“UDTPA”) (continued)
11.
A mere breach of contract (i.e., an insurance policy), even if
intentional, cannot sustain a UDTPA claim. There must be
“aggravating factors – like fraudulent or deceptive conduct, or
conduct that amounts to an inequitable assertion of power.”
Strategic Outsourcing, Inc. v. Continental Casualty Co., 2008 WL
1751789 at *6 (4th Cir. 2008), citing, Oestreicher v. Am. Nat.
Stores, Inc., 290 N.C. 118, 225 S.E.2d 797, 809 (1976).
12.
An insurer is not subject to a UDTPA claim by a plaintiff that is not
a direct insured or in contractual privity with the insurer. Wilson v.
Wilson, 121 N.C. App. 662, 666, 468 S.E.2d 495, 498 (1996);
Woods v. Sentry Ins. Mut. Co., 2008 WL 4471407 at *2-3 (N.C.
App., Oct. 7, 2008) (unpublished).
Alternative Dispute Resolution and Other
Settlement Options
1.
The law involving arbitration clauses in insurance policies is in
flux.
2.
Although the Federal Arbitration Act requires enforcement of all
arbitration agreements in transactions affecting commerce (9
U.S.C. § 2), the federal McCarran-Ferguson Act creates an
exception. 15 U.S.C. § 1011 et seq.
3.
The McCarran-Ferguson Act provides that no federal statute may
“invalidate, impair, or supersede” any state law governing
insurance. 15 U.S.C. § 1011 et seq.
4.
Several states, including South Carolina, have passed laws
prohibiting or limiting arbitration clauses in insurance policies.
E.g., S.C. Code § 15-48-10(b)(4).
Alternative Dispute Resolution and Other
Settlement Options (continued)
5.
North Carolina law does not prohibit arbitration clauses in
insurance policies.
6.
Nor does North Carolina law prohibit insurance policy provisions
that preclude punitive damages, although such a provision must
“unequivocally exclude” punitive damages. WMC, Inc. v. Weaver,
166 N.C. App. 352, 359, 602 S.E. 2d 706, 711 (2004), citing,
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 59-60
(1995).
7.
An insurer must be careful not to load up an arbitration clause with
too much baggage; despite our law’s overall favorable view of
arbitration, an arbitration provision can be attacked on “such
grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2; N.C. Gen. Stat. § 1-569.6(a).
Alternative Dispute Resolution and Other
Settlement Options (continued)
8.
Unconscionability and violation of public policy are grounds on
which any contract, including an agreement to arbitrate, can be
revoked. Sydnor v. Conseco Fin. Serv. Corp., 252 F. 3d 302, 305
(4th Cir. 2001); Tillman v. Commercial Credit Loans, Inc., 362
N.C. 93, 102, 655 S.E. 2d 362, 369-70 (2008).
9.
An otherwise enforeceable agreement to arbitrate may be
revoked if it contains too many provisions that that favor or
prejudice one party, such as venue selection, one-way
arbitrability, limitation of remedies and/or damages, shifting of
fees and/or costs, preclusion of class actions, multiple arbitrators.
10.
The North Carolina Supreme Court has rejected an arbitration
agreement as unconscionable because the “collective effect of
the arbitration provisions” prevented the claimants from
“effectively vindicating their rights.” Tillman v. Commercial
Credit Loans, Inc., 362 N.C. 93, 104, 655 S.E. 2d 362, 371
(2008).
Alternative Dispute Resolution and Other
Settlement Options (continued)
11. An interlocutory order denying a motion to compel arbitration or a
motion to stay pending arbitration is immediately apealable. King v.
Owen, 166 N.C. App. 246, 248, 601 S.E. 2d 326, 327 (2004);
Americal Casualty Co. v. L-J, Inc., 35 F. 3d 133, 135 (4th Cir. 1994); 9
U.S.C. § 16(a)(1).
12. An interlocutory order compelling arbitration or granting a stay
pending arbitration is not immediately appealable. American Casualty
Co. v. L-J, Inc., 35 F. 3d 133, 135 (4th Cir. 1994); Laws v. Horizon
Housing, Inc., 137 N.C. App. 770, 771, 529 S.E. 2d 695, 696 (2000).
13. An arbitration agreement probably can’t effectively preclude recovery
of treble damages under the UDTPA. In re Cotton Yarn Antitrust
Litigation, 505 F. 3d 274, 288 (4th Cir. 2007).
14. If an insurance coverage dispute is subject to arbitration, be mindful
of some features of arbitration that can have significant impacts;
limited discovery, high costs, loose rules of evidence, arbitrator
bias, and finality.
The Tripartite Attorney-Client Relationship
1.
Insurance defense attorneys often face conflicts of interest, on account of
the “tripartite relationship between an attorney, an insurer and an
insured.” Nationwide Mut. Fire Ins. Co. v. Bourlon, 172 N.C. App. 595,
617 S.E.2d 40 (2005).
•
The North Carolina State Bar has declared that its ethics opinions
have “firmly established that a lawyer defending an insured at the
request of an insurer represents both clients.” 2003 Formal Ethics
Opinion 12 (October 21, 2004) (emphasis supplied).
•
This tripartite relationship poses difficult conflict issues where a
lawsuit against the insured asserts both covered and non-covered
claims, and the insurer reserves its coverage rights.
•
Counsel must explain the joint representation and potential conflict
to the insured, in particular, and must withdraw if the insured
refuses to accept the joint representation.
The Tripartite Attorney-Client Relationship
(continued)
•
In some states, including South Carolina, the insured is entitled to
its own independent “Cumis counsel”, paid for by the insurer, if this
conflict exists and the insured refuses to consent to the joint
representation. See Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt
Beverage Co. of S.C., 433 F.3d 365 (2005).
•
Under Ethics Opinion RPC 92 (January 17, 1991), where an
attorney represents both an insurer and insured, “the attorney‘’
primary allegiance is to the insured, whose best interest must be
served at all times.” (Emphasis supplied.)
•
98 Formal Ethics Opinion 17 (January 15, 1999) and Ethics
Opinions RPC 118 (October 18, 1991) and RPC 56 (April 14, 1989)
all specify that the insured is the lawyer's “primary client.”
•
Ethics Opinion RPC 92 (January 17, 1991) obligates the attorney to
offer “appropriate advice to the insured with regard to the
employment of independent counsel whenever the attorney cannot
fully represent [the insured's] interest.”
The Tripartite Attorney-Client Relationship
(continued)
•
98 Formal Ethics Opinion 17 (January 15, 1999) requires an
attorney to disclose to the insured any billing guidelines and
restrictions imposed by the insurer which may “restrain the
lawyer’s exercise of independent professional judgment when
determining the tasks and services necessary to represent the
insured competently.” If the insured does not consent to such
billing guidelines and restrictions after full disclosure, the lawyer is
"ethically prohibited from complying with the guidelines and
restrictions.”
•
2003 Formal Ethics Opinion 12 (October 21, 2004) allows an
attorney to provide both the insured and insurer with the attorney’s
evaluation of the case, including settlement value, but the attorney
“may not recommend that the carrier decline to settle and go to
trial if this recommendation is contrary to the wishes of the
insured.”
The Tripartite Attorney-Client Relationship
(continued)
2.
The “common interest” or “joint client” doctrine applies to protect
communications among the policyholder, insurer and counsel from
disclosure to third parties, although the communications are subject to
discovery in a coverage action between the policyholder and
insurer. Nationwide Mut. Fire Ins. Co. v. Bourlon, 172 N.C. App. 595,
617 S.E.2d 40 (2005), aff’d 360 N.C. 356, 625 S.E.2d 779 (2006). See
also Raymond V. North Carolina Benevolent Ass’n, Inc., 365 N.C. 94,
721 S.E.2d 923 (2011).
Steve DeGeorge
704.377.8380
sdegeorge@rbh.com
John Garver
704.377.8377
jgarver@rbh.com
Kate Payerle
704.377.8129
kpayerle@rbh.com