The duty to defend is a threshold question in nearly every insurance coverage matter. Several recent decisions from federal and state courts in North Carolina contain excellent discussions and analysis of that duty. They are summarized below.

1. Craige v. Geico, No. 1:19-cv-408, 2020 WL 6946937 (M.D.N.C. November 25, 2020, Judge Schroeder).

This case is a primer on the duty to defend in North Carolina. In Craige, Judge Schroeder held that because the insurers had unjustifiably refused to defend their insured in the underlying lawsuit, they were responsible to pay a judgment against the insured, up to their policy limits.

A. Facts

Craige arose from a car accident. The two plaintiffs were riding in a vehicle that was hit by a vehicle driven by James Rigsbee. Rigsbee’s brother, Matthew, was the named insured on an automobile policy issued by Nationwide. Rigsbee’s mother and stepfather were the named insured on another auto policy issued by Geico. Both the Geico policy and the Nationwide policy showed an address for the insureds of 108 East Edgewood Drive in Durham. However, the definition of “insured” in the Geico and Nationwide policies also included “family members,” which the policies defined as “a person related to you by blood, marriage, or adoption who is a resident of your household.”

The at fault driver, Rigsbee, definitely was related by blood to his brother and his mother. The issue was whether he was a “resident of their household” which was listed as the Edgewood Drive address.

So, here is the first learning point from Craige: look at all policies that might conceivably provide insurance – not only policies maintained by the drivers, but also policies maintained by members of their families/households.

Before filing suit, the plaintiffs in the underlying action informed both Nationwide and Geico that there were making a claim against Rigsbee, and that they believed that the Nationwide and Geico policies maintained by Rigsbee’s brother and mother provided coverage. Nationwide and Geico each did an independent investigation of the claim, and each determined that Rigsbee was not a covered insured under their policies, because their investigations revealed he was not a resident of the Edgewood Drive address.

The plaintiff later filed a lawsuit against Rigsbee. Nationwide and Geico both denied coverage, and did not provide a defense to Rigsbee in the underlying action. Rigsbee did not appear at trial, and the trial court entered a judgment of approximately $270,000 in favor of the plaintiffs.

The plaintiffs then filed a declaratory judgment against Nationwide and Geico, seeking a declaration that they were entitled to payment of their judgment against Rigsbee from the Nationwide and Geico policies maintained by Rigsbee’s brother and mother. That suit resulted in the Craige v. Geico decision in late 2020.

B. Duty to Defend

The primary issue in Craige was whether Nationwide and Geico had a duty to defend Rigsbee in the underlying lawsuit. Judge Schroeder made the following points summarizing the law on duty to defend in North Carolina.

The duty to defend is generally determined by analyzing the pleadings in the underlying lawsuit. North Carolina uses the “comparison test,” where the pleadings are read side by side with the policy to determine whether the events as they are alleged in the pleadings are covered or excluded. The facts alleged in the pleadings are taken as true, and then compared to the language of the insurance policy.
Where the allegations of a complaint even arguably bring a claim within the coverage of the policy, an insurer’s duty to defend is absolute. An insurer has a duty to defend even against groundless, false or fraudulent accusations.
Only if the facts alleged are not even arguably covered by the policy language can an insurer be excused from its duty to defend.
Even where the complaint fails to assert claims falling within the coverage provided, an insurer may still have a duty to defend where it knows or could reasonably ascertain facts that, if proven, would be covered by the policy. However, the inverse of that rule is not true – evidence outside the pleadings may not negate allegations in the complaint, i.e., an insurer cannot use other evidence to negate a duty to defend if the facts alleged in the complaint fall within the policy’s coverage language.

In Craige, the policies did not define “resident” or “residing.” Comparing the language with the policy to the facts alleged in the underlying complaint, Judge Schroeder found that Geico and Nationwide were put on notice of the possibility that Rigsbee was a resident of the named insured’s household, and therefore was covered for insurance purposes.

Although the underlying complaint did not specifically allege that Rigsbee resided at the Edgewood address, the complaint attached documents that indicated Rigsbee and the plaintiffs may have considered the Edgewood address to be his residence, including a traffic citation for an expired registration that listed the Edgewood address and a civil summons filed against Rigsbee listing the Edgewood address. In addition, the plaintiffs had provided Nationwide and Geico with an Affidavit signed by Rigsbee that listed the Edgewood address, and Rigsbee had received a North Carolina State identification card listing the Edgewood address.

The defendants responded with multiple affidavits indicating that Rigsbee was not a resident of the Edgewood address at the time of the accident. In the duty to defend analysis, however, these affidavits were irrelevant: “Once a complaint implicates the possibility of coverage, an insurer may not exonerate itself by preliminarily determining that no coverage actually exists, despite the allegations of the complaint.” 2020 WL 6946937 at *5. Even though Nationwide and Geico may have been convinced that their evidence was far more persuasive and accurate, they still retained a duty to defend Rigsbee in the underlying suit because the allegations of the Complaint arguably indicated coverage.

C. Consequences of Unjustified Refusal to Defend

Because the evidence was sufficient to put Geico and Nationwide on notice that there was a possibility of coverage for Rigsbee’s accident under their policies, they breached their duty to defend, and their refusal to defend was unjustified. A refusal to defend is unjustified even if, as in Craige, it is based on an honest but mistaken belief that the claim is not covered.

Judge Schroeder explained that an insurer has three options under North Carolina law when it is faced with a request to defend an insured against claims that the insurer believes are outside the policy’s coverage. An insurer may (1) seek a declaratory judgment regarding its obligations, before or pending trial of the underlying action; (2) defend the insured under a reservation of rights; or (3) refuse to either defend or to seek a declaratory judgment, at the insurer’s peril that it might later be found to have breached its duty to defend.

In Craige, Geico and Nationwide chose the third option. Where that happens, and a court later determines that the insurer had a duty to defend, any judgment rendered in favor of the plaintiff in the underlying lawsuit, or any reasonable settlement made by the insured, is binding on the insurer to the extent of its policy limits. Accordingly, in Craige, Judge Schroeder entered a judgment against both Geico and Nationwide up to their policy limits.

2. Those Certain Underwriters at Lloyd’s, London subscribing to Certificate No. 492300 v. WH Healthcare Group, LLC, No. 1:20-CV-00039-MR-DCK, 2020 WL 6050577 (W.D.N.C. October 13, 2020, Judge Reidinger).

This dispute arose from a qui tam action pending in the Eastern District involving WH Healthcare Group and several individuals and other organizations, based on alleged submission of false or fraudulent Medicare claims in violation of the Federal False Claims Act. WH Healthcare was an additional insured under the Lloyd’s policy, which also applied to other executives. The policy covered billing errors in qui tam actions, but excluded actions based on wrongful acts of which any of the insureds had knowledge prior to the date of the policy, as well as fraudulent acts or omissions. Lloyd’s sued, seeking a declaration that it had no obligation to defend or indemnify. One of the defendants filed a motion to stay or, in the alternative, to dismiss without prejudice. The opinion arose in the context of that motion.

Judge Reidinger reviewed the duty to defend law covered above, noting that he could use the facts in the underlying suit, as well as the present suit, to determine if there was a duty to defend. He found that there was no reason to delay a decision on the duty to defend, but as to the duty to indemnify, that could only be resolved before the completion of the underlying case if no necessary facts remained in dispute. Here the parties disagreed as to whether the defendants knowingly committed a wrongful act or acted intentionally or fraudulently, so the duty to indemnify question was not ripe. Judge Reidinger granted the motion to stay, staying all proceedings as to whether there was a duty to indemnity pending the outcome of the underlying case. He did not express an opinion on whether the duty to defend existed, only holding that it was not necessary to stay or dismiss that claim at this point.

3. Murphy-Brown, LLC v. Ace American Ins. Co., No. 19 CVS 02793, 2020 WL 7711360, December 22, 2020 (Business Court, Judge McGuire).

In this case the plaintiffs sought partial summary judgment in their favor as to claims that two insurers breached their duty to defend the underlying lawsuits under CGL and business automobile liability policies that were issued during the period in question. Judge McGuire provided a lengthy discussion of the duty to defend, noting in particular that numerous decisions recognized that facts outside the pleadings may only be considered to provide for, rather than to deny, coverage.

The insurer for the primary auto policy argued that there was no duty to defend because the plaintiffs had not shown that there was “bodily injury” or “property damage” caused by a covered automobile under the policies. Comparing the allegations of the Complaint to the policies, Judge McGuire held that the lawsuits at least arguably alleged bodily injury and property damage. The fact that the claimants did not seek damages for bodily injury or property damage at trial was irrelevant to the duty to defend analysis, because the duty to defend is measured by the facts alleged in the pleadings, not what later occurs at trial.

The insurers also argued that there was no coverage because the alleged injuries and property damage were not caused by an “accident” and that coverage was excluded under the “expected or intended injury” exclusion. Judge McGuire noted that an accident may involve intentional conduct if the injury is not intentional or substantially certain to be the result of the intentional act. On the other hand, there is no “accident” where the potentially damaging effects of an insured’s intentional actions can be anticipated by the insured. In this case, the complaints contained allegations that the plaintiffs knew or should have known that their operations would cause damage to neighboring residents. However, none of the lawsuits alleged that the plaintiffs knew that injury or property damage was substantially certain to result specifically from their operations. In addition, the underlying lawsuits also contained allegations of negligence and reckless disregard, and for that reason, Judge McGuire held that the allegations did not establish that the plaintiffs expected or intended the injuries and property damaged from their operations. For all these reasons, Judge McGuire held that there was a duty to defend.

4. Church Mutual Ins. Co. v. Lakepointe Assisted Living, Inc., 517 F. Supp. 3d 467 (E.D.N.C. February 4, 2021, Judge Myers).

This decision arose in the context of a motion for judgment on the pleadings by the insurer, who was seeking a declaratory judgment as to whether it was obligated to defend and indemnify an assisted living facility and its owners under professional liability and umbrella policies in an underlying class action for breach of contract, negligence and unfair trade practices. Judge Myers denied the request for a declaration that the insurer had no duty to defend, and as to the request for a declaration that there was no duty to indemnify, he denied that motion without prejudice, because the issue was not yet ripe for adjudication.

5. Mainstreet America Assurance Company v. Crumley Roberts, LLP, No. 1:19-CV-220, 2021 WL 119804 (M.D.N.C. March 30, 2021, Judge Biggs) and NC Farm Bureau Ins. Co., Inc. v. Lanier Law Group, P.A., No. COA 19-926, 277 N.C. 605, 861 S.E. 2d 565 (June 1, 2021).

Each of these cases sought a declaratory judgment that the insurer was not obligated to defend its insureds in underlying actions that alleged violations of the Driver’s Privacy Protection Act (“DPPA”) of 1994, 18 U.S.C. § 2721 et seq., by obtaining the drivers’ names and addresses from automobile accident reports and using that information for marketing purposes.

In the MainStreet America case, Judge Biggs observed that two decisions from the Western District applied North Carolina duty to defend standards involving the same or similar actions, and identical insurance policies, and decided that there was neither a duty to defend or indemnify, and in both cases, the Fourth Circuit affirmed. She further observed that the Middle District had reached the same conclusion twice recently (citations omitted). The defendant argued that the facts in this particular case were distinguishable, but Judge Biggs disagreed, given that the only claim was for alleged violations of the DPPA, so the exclusion in the policy for injury “arising directly or indirectly out of any action or omission that violates or is alleged to violate . . . any statute, ordinance or regulation . . . that prohibits or limits the sending, transmitting, communicating or distribution of material or information” applied to bar coverage.

In the Farm Bureau case, Judge Bray of the Guilford County Superior Court entered summary judgment in favor of the insurer on a similar claim, and the Court of Appeals affirmed. The Court of Appeals focused on the policy exclusion for injuries arising out of the willful violation of a penal statute. Here the plaintiffs alleged knowing violations of the DPPA. The Court of Appeals concluded that the words “willful” and “knowing” carried essentially the same or equivalent meanings, and accordingly coverage was excluded and there was no duty to defend.

April 21, 2022/by InsuranceLaw