Embed Size (px)
Citation preview
Insurance Coverage Under North Carolina Law: Having the Right Protections for Your Business, and
Effectively Litigating Coverage Disputes
November 7, 2012
Steve [email protected]
John [email protected]
Kate [email protected]
Insurance CoverageFirst, Read the Policy
• Forms vary
• Application of policy to facts is not always obvious
• Ambiguity favors coverage
Insurance CoverageDifferent 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.
3. Both statutes authorize trial courts to “declare rights, status and other legal relations,” even where no other relief is sought.
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, 256-57 (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 DeGeorge704.377.8380
John Garver704.377.8377
Kate Payerle704.377.8129
