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Insurance Coverage Under North Carolina Law: Having the Right Protections for Your Business, and Effectively Litigating Coverage Disputes


State insurance regulatory authorities. ... 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. – PowerPoint PPT presentation

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Title: Insurance Coverage Under North Carolina Law: Having the Right Protections for Your Business, and Effectively Litigating Coverage Disputes

Insurance Coverage Under North Carolina Law
Having the Right Protections for Your Business,
and Effectively Litigating Coverage Disputes
  • November 7, 2012

Steve DeGeorge John
Garver Kate Payerle kpayerle_at_rbh.
Insurance CoverageFirst, Read the Policy
  • Forms vary
  • Application of policy to facts is not always
  • 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 DO, 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
  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 brokers or carriers
    conclusion of no coverage.

Case Intake and Informal Investigation
  1. 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
  2. Determine if the matter constitutes the sort of
    claim that triggers the duty to notify the
    insurer. Some policies define claim as a
    lawsuit or arbitration. When in doubt, be safe
    and give notice.
  3. Insurers 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
  • The perils of long-tail risks can engender
    lawsuits long after the occurrence giving rise
    to insurance coverage.
  • In a coverage action, the insured must prove the
    terms of the policy and the facts to bring its
    claim within the policys 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).
  • 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)
  • 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).
  • 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).
  • 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)
  • Proof of the actual language of a lost policy
    is generally unnecessary. Dart Ind. v.
    Commercial Union Fire Ins., Co., 52 P.3d 79
  • 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
  • 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
  • Old loan and other transaction documents may
    include proof of insurance provisions.
  • Beware of mergers, asset acquisitions and name

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
  • R.M. Fields International
  • LECG Corporation

Negotiating the Claim with the Claimant/Insurance
  • 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
  • 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
  • Underlying claim is for property damage only. 
  • Underlying claim is not yet the subject of a
  • Reputation of/relationship with claimants
    opposing counsel indicates likelihood of fruitful

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)
  1. 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).
  2. Agents make mistakes, so keep a written record. 
    (In fact, always keep a written record.)
  3. Generally, forego notifying insurer if it is
    clear the deductible will not be reached.
  4. 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)
  1. 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
  2. Insurers 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).
  3. 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)
  1. 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
  2. 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 insurers 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 insurers 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), affd 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

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
    partys 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

Filing a Dispositive Motion(continued)
  • 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).
  • 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).
  • 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.
  • 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 partys 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)
  1. 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
  2. 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).
  3. The insured generally has the burden of proving
    coverage under a policy. Natl 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).
  4. However, where an insurer denies coverage based
    on an exclusion, the insurer must prove
    application of the exclusion. Id.

Filing a Dispositive Motion(continued)
  1. 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).
  2. 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 ambiguitywill 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
  3. 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)
  • 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).
  • 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.
  • 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)
  • 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 Assn 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
  • 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
  • In state court, declaratory judgment actions are
    governed by the North Carolina Declaratory
    Judgment Act. N.C. Gen. Stat. 1-253 et seq.
  • 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.
  • A declaratory judgment complaint is a good way to
    have the dispute resolved in a favorable venue.
  • 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)
  • 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
  2. Most insurance companies are subject to personal
    jurisdiction in several states, often in all 50
  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)
  1. Thus, a policyholder should not inform insurer
    that policyholder intends to file a coverage
  2. 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.
  3. Venue may also lie in any state where the insurer
    conducts business.
  4. Venue may also lie where the underlying claim
    against the policyholder arose and/or where a
    lawsuit against the policyholder is pending. is

Venue, Jurisdiction and Choice of Law(continued)
  1. Policyholders counsel should carefully evaluate
    available venues to determine which would be
  2. 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.
  3. 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).
  4. 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)
  • Venue can have a significant substantive impact
    because the forum states 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).
  • Under North Carolinas 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).
  • Different choice of law rules elsewhere. Several
    states use the complex analysis contained in the
    Restatement (Second) of Laws Conflict of Law.
  • 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)
  1. 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).
  2. 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. Natl Multiple
    Sclerosis Society, 2008 WL 4372787 at 5
    (W.D.N.C. 2008).
  3. 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.
    310-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.
  4. If governing law will be unfavorable if suit is
    filed in the insureds 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).
  5. Demand a jury trial.

North Carolina Unfair and Deceptive Trade
Practices Act (UDTPA)
  • The UDTPA outlaws unfair or deceptive acts or
    practices in or affecting commerce. N.C. Gen.
    Stat.  75-1.1(a).
  • The UDTPA provides for mandatory treble damages,
    and discretionary award of attorneys fees. N.C.
    Gen. Stat.  75-16 and 75-16.1.
  • 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

North Carolina Unfair and Deceptive Trade
Practices Act (UDTPA) (continued)
  • 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.
  • 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 facts
  • An arbitration agreement or other provision in an
    insurance policy probably cant 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 Assn, 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).
  • N.C. Gen. Stat.  58-63-15 sets forth several
    acts and practices that are deemed unfair and
    deceptive in the business of insurance.
  • 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 Assn, 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. Natl
    Union Fire Ins. Co. of Pittsburgh, 472 F.3d 99,
    125 (4th Cir. 2006).

North Carolina Unfair and Deceptive Trade
Practices Act (UDTPA) (continued)
  • 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
  • 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)

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

Alternative Dispute Resolution and Other
Settlement Options (continued)
  1. North Carolina law does not prohibit arbitration
    clauses in insurance policies.
  2. 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).
  3. An insurer must be careful not to load up an
    arbitration clause with too much baggage despite
    our laws 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)
  1. 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).
  2. 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.
  3. 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)
  1. 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.
  2. 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).
  3. An arbitration agreement probably cant
    effectively preclude recovery of treble damages
    under the UDTPA. In re Cotton Yarn Antitrust
    Litigation, 505 F. 3d 274, 288 (4th Cir. 2007).
  4. 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
  • 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
  • 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
  • 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
  • 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

The Tripartite Attorney-Client Relationship
  • 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 lawyers
    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
  • 2003 Formal Ethics Opinion 12 (October 21, 2004)
    allows an attorney to provide both the insured
    and insurer with the attorneys 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

The Tripartite Attorney-Client Relationship
  1. 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), affd 360 N.C. 356, 625 S.E.2d
    779 (2006).  See also Raymond V. North Carolina
    Benevolent Assn, Inc., 365 N.C. 94, 721 S.E.2d
    923 (2011).

Kate Payerle