Pennsylvania National Mutual Casualty Insurance Company v. Beach Mart, Inc. et al
Filing
133
ORDER granting in part and denying in part 113 Motion for Summary Judgment; granting in part and denying in part 116 Motion for Partial Summary Judgment. Where additional claims remain for trial in accordance with case m anagement order as amended August 23, 2021, this case now is ripe for entry of an order governing deadlines and procedures for final pretrial conference and trial. The parties are DIRECTED to confer and file within 14 days from the date of this order a joint status report. Signed by District Judge Louise Wood Flanagan on 9/30/2022. (Collins, S.)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
NORTHERN DIVISION
NO. 2:14-CV-08-FL
PENNSYLVANIA NATIONAL MUTUAL
CASUALTY INSURANCE COMPANY,
Plaintiff,
v.
BEACH MART, INC.,
Defendant.
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ORDER
This long-lived matter is before the court on plaintiff’s motion for summary judgment and
defendant’s motion for partial summary judgment. (DE 113, 116). For the following reasons, the
motions are granted in part and denied in part.
STATEMENT OF THE CASE
Plaintiff seeks in this action initiated February 4, 2014, declarations of non-coverage under
insurance policies issued to defendant. This coverage dispute stems from an underlying lawsuit
previously before this court, Beach Mart, Inc. v. L&L Wings, Inc., case no. 2:11-CV-44-FL, filed
by defendant Beach Mart, Inc. (“Beach Mart”) against a competing beachwear retailer, L&L
Wings, Inc. (“L&L”). L&L asserted counterclaims in that action, and defendant requested a
defense and indemnification from plaintiff. In the instant case, plaintiff seeks declaration that
L&L’s counterclaims do not fall within the insurance agreements and plaintiff therefore had no
obligation to provide a defense.1
1
Plaintiff also sought declaratory judgment that it had no duty to indemnify defendant; however, successful
defense in the underlying action of L&L’s counterclaims up to and through trial, together with the entry of final
Before responsive pleadings in this matter became due, the court granted a consent motion
to stay the case predicated on suspension of activities in the underlying action. The stay was lifted
over three years later, on September 25, 2017, following which defendant filed answer and
counterclaims. Plaintiff concurrently filed the operative amended complaint2 again seeking a
declaration of noncoverage under the policies, and defendant filed an amended answer and an
amended counterclaim for declaration of coverage. Defendant additionally asserts amended
counterclaims3 for breach of the insurance policies for inadequate defense and claims of bad faith
and unfair and deceptive practices stemming from plaintiff’s handling of defendant’s request for
defense and indemnification under the policies.
On March 6, 2018, the court granted plaintiff’s motion for judgment on the pleadings
pursuant to Federal Rule of Civil Procedure 12(c) and dismissed the case. The court’s dismissal,
based upon its determination that the insurance policies’ prior publication exclusion barred
coverage, was reversed on appeal in Pennsylvania Nat’l Mut. Cas. Ins. Co. v. Beach Mart, Inc.,
932 F.3d 268 (4th Cir. 2019). The United States Court of Appeals for the Fourth Circuit did not
reach any policy exclusion other than the prior publication exclusion in its opinion.
The case thereafter was remanded to the undersigned.4 A lengthy and contentious period
of discovery ensued, prolonged by party and counsel involvement in the underlying action and
judgment on March 29, 2021, and the post-judgment settlement including dismissal with prejudice of all rights by
L&L to appeal, have extinguished any duty of plaintiff to indemnify defendant under the policies. That part of
plaintiff’s claim accordingly is mooted.
2
Hereinafter, all references to the “complaint” in the text, or “Compl.” in citations, are to the operative
amended complaint filed October 2, 2017.
3
Hereinafter, all references to defendant’s “counterclaim” or “counterclaims” in the text are to the operative
amended counterclaims filed October 16, 2017, unless otherwise specified.
4
This case originally was assigned to Senior United States District Judge James C. Fox, and then reassigned
to United States District Judge Terrence W. Boyle on May 31, 2017, before being reassigned to the undersigned on
August 28, 2019.
2
issues emanating therefrom, raised in at least two consent motions to revise and extend the
discovery schedule and to further stay the case. Discovery delays then required cumulative
extension of the dispositive motions deadline by almost a year, to October 15, 2021, on which date
plaintiff filed its motion for judgment as a matter of law on its claim for declaratory judgment and
dismissing defendant’s counterclaims. Plaintiff relies in support of its motion upon: 1) the
governing insurance policies; 2) defendant’s responses to written discovery; 3) deposition
testimony of Wendy Ray (“Ray”), defendant’s corporate secretary; Israel Golasa (“I. Golasa” ),
defendant’s president; Byran Tilden (“Tilden”), serving as an expert for defendant; Crouse Gray
(“Gray”), defendant’s outside counsel; Art Debaugh (“Debaugh”), former counsel for defendant;
Jack Hicks (“Hicks”), defendant’s outside counsel; attorney David Brown (“Brown”), engaged by
plaintiff to represent defendant in the underlying action; and Gregory Gross (“Gross”), claims
specialist with plaintiff assigned to defendant’s claims under the insurance policies; and 4) various
filings in the underlying action.
Defendant’s opposition makes reference to additional evidence including: 1) sworn
testimony of Gary Gibson (“Gibson”), supervisor with plaintiff; Frank Benedek (“Benedek”),
agent for plaintiff; and Adam Parsons (“Parsons”), in-house counsel for plaintiff; 2) plaintiff’s call
logs from October 2012 to January 2013 detailing communications between claims specialist
Gross and defense counsel Brown; 3) correspondence from Ray to Gross dated February 4, 2013;
and 4) plaintiff’s litigation claims manual.
Defendant’s motion for partial summary judgment is predicated on its first counterclaim
for declaratory judgment and part of its fourth counterclaim for unfair and deceptive trade practices
for reimbursement of certain defense costs. Defendant also moves for judgment on the amount of
damages to be awarded on its counterclaim of reimbursement. Defendant relies in support of its
3
upon: 1) a form dated June 8, 2012, noticing plaintiff of defendant’s alleged advertising injury loss
in the underlying action; 2) correspondence from plaintiff to defendant professing to reserve all
rights under the insurance policies; 3) insurance claim files by plaintiff detailing investigations by
plaintiff into coverage and defendant’s reimbursement claim; 4) email transmittals between
representatives of plaintiff and defendant covering the time period between tender of the
underlying claims and notice of representation by Brown; 5) a coverage question report completed
by Gross; 6) storefront photos produced by L&L in the underlying action; 7) summary of
defendant’s attorneys’ fees from June 8, 2012, to January 15, 2013, the dates for which defendant
presently seeks reimbursement; and 8) sworn testimony of Steve Oliver (“Oliver”), corporate
designee of plaintiff, Parsons, Monty Ross (“Ross”), plaintiff’s agent who sold defendant the
insurance policies; Benedek; and Maeyan Golasa (“M. Golasa”).
STATEMENT OF FACTS
In 2007, for coverage effective as of January 1, 2008, and as thereafter renewed through
December 31, 2011, plaintiff sold eight commercial insurance policies to defendant. (Pl.’s Opp.
Stmt. (DE 121) ¶ 6).5 Four of those policies are business owner’s liability policies, and four are
commercial umbrella liability policies. (Id. ¶¶ 8-9).
The business owner’s liability policies create a right and duty to defend the insured,
defendant Beach Mart, against any suit seeking damages caused by “advertising injury,” inclusive
of injury arising out of “misappropriation of advertising ideas or style of doing business” or
“infringement of copyright, title, or slogan.” (Id. ¶¶ 10-11). The policies exclude, however,
5
Where a fact asserted in the movants’ statement of material facts is undisputed, the court cites to the opposing
parties’ responsive statement of facts, where it indicates the fact is admitted, undisputed, or without opposing fact.
4
advertising injury arising out of “[b]reach of contract, other than misappropriation of advertising
ideas under an implied contract.” (Id. ¶ 12).
The umbrella liability policies also create a right and duty to defend the insured against any
suit seeking damages for “personal and advertising injury” when the underlying insurance policy
does not provide coverage, or its limits are otherwise exhausted. (Id. ¶ 13). The umbrella liability
policies define “personal and advertising injury” to include injury arising out of “the use of
another[’s] advertising idea in [the insured’s] advertisement” as well as “infringing upon another’s
copyright, trade dress, or slogan in [] advertisement.” (Id.). The umbrella liability policies
however exclude coverage for personal and advertising injury “[a]rising out of a breach of contract,
except an implied contract to use another’s advertising idea in [the insured’s] advertisement.” (Id.
¶ 14). Together, the collective liability limits for occurrences of advertising injury covered under
the policies is $8,000,000.00. (Id. ¶ 17).
Defendant Beach Mart filed the underlying action against L&L in this court on September
9, 2011, concerning the use of the names “WINGS,” “SUPER WINGS,” and “BIG WINGS.”
(Def.’s Opp. Stmt. (DE 126) ¶ 8). Defendant Beach Mart asserted two claims against L&L for
breach of contract and declaratory judgment, with both claims arising out of a 2005 contractual
agreement between the parties. (Id.). On November 22, 2011, L&L answered and counterclaimed
for breach of contract, violation of an implied covenant of good faith and fair dealing, two separate
violations of the Lanham Act, for both trademark infringement under 15 U.S.C. § 1114 and false
designation of origin under 15 U.S.C. § 1125(a), unfair and deceptive trade practices pursuant to
N.C. Gen. Stat. § 75-1.1, and unfair competition under North Carolina common law. (Pl.’s Opp.
Stmt. (DE 121) ¶ 18). L&L’s trade infringement claims were dismissed by October 3, 2014, order
granting defendant’s motion for discovery sanctions, and L&L additionally was precluded from
5
asserting trademark infringement and unfair competition claims against defendant. (Id. ¶ 29).
L&L filed amended counterclaims on February 23, 2017, seeking declaratory relief and asserting
claims for breach of contract and of the implied covenant of good faith and fair dealing. (Id.).
Defendant tendered to plaintiff L&L’s original counterclaims, seeking defense against
them, by June 8, 2012. (Def.’s Opp. Stmt. (DE 126) ¶ 10). Plaintiff issued correspondence to
defendant dated July 18, 2012, styled as a reservation of rights letter, confirming receipt of L&L’s
original counterclaims and providing that it was investigating the matter. (Id. ¶ 12). Plaintiff sent
largely identical correspondence August 7, 2012, indicating that the investigation was ongoing,
and excerpting several pages worth of provisions in the policies, including exclusions. (Id. ¶ 13).
Plaintiff elected to defend defendant Beach Mart in the underlying action subject to a full
reservation of rights under the insurance policies and engaged attorney Brown for that purpose in
November and December 2012. (Id. ¶¶ 14-15). Between the time of tender of L&L’s underlying
counterclaims on June 8, 2012, and Brown’s engagement in the action, defendant Beach Mart
retained independent counsel and underwent significant discovery and trial preparations. (Pl.’s
Opp. Stmt. (DE 121) ¶ 60). Brown communicated with defendant’s retained counsel in January
2013, and plaintiff additionally sent defendant formal notice of its decision to retain Brown, dated
January 15, 2013, again styled as a reservation of rights letter. (Id. ¶¶ 16-17). This letter mirrored
those earlier sent by plaintiff, but added two paragraphs pertaining to defense counsel, Brown,
provisionally provided. (Id. ¶ 17). Plaintiff sent a fourth letter March 14, 2013, confirming that
plaintiff would retain Brown and would not retain the outside counsel already involved in the case.
(Def.’s Opp. Stmt. (DE 126) ¶ 25).
On December 1, 2014, through its counsel, defendant submitted for reimbursement by
plaintiff $470,000.00 of its previously-incurred post-tender defense costs, relating to defense
6
between June 8, 2012, when the original underlying claims were first tendered to plaintiff for
defense, and January 15, 2013, when defendant Beach Mart received official notice by letter of
plaintiff’s retention of Brown. (Pl.’s Opp. Stmt. (DE 121) ¶ 57). Beyond confirmation and
substantiation of the beginning and ending dates for the time period comprising defendant’s
reimbursement claim, to which defendant promptly responded, there was no correspondence from
plaintiff regarding the claim in 2015 or 2016. (Id. ¶ 67).
On or around July 27, 2017, plaintiff communicated through its counsel an oral counteroffer of $50,000.00.6 (Id. ¶ 71).
According to defendant, this counteroffer was contingent on
defendant fully releasing plaintiff from obligations under the policies. (Id.). Defendant requested
in February 2020 for plaintiff to make an unconditional payment in satisfaction of its claim for
reimbursement, to which plaintiff responded with a conditional counteroffer of payment
contingent upon defendant executing a release of all claims relating in any way or manner to the
duty to defend against L&L’s counterclaims in the underlying action and its filing of a stipulation
of dismissal of the pending coverage case. (Pl.’s Opp. Stmt. (DE 121) ¶¶ 72-73). Plaintiff still
has not reimbursed defendant for its post-tender legal expenses. (Id. ¶ 74).
COURT’S DISCUSSION
A.
Standard of Review
Summary judgment is appropriate where “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R.
Civ. P. 56(a). On cross-motions for summary judgment, the court “consider[s] each motion
separately on its own merits to determine whether [any] of the parties deserves judgment as a
6
Plaintiff objects to admission of evidence of settlement negotiations under Federal Rule of Evidence 408. As
the settlement offers are not relied upon here to “prove or disprove the validity or amount of a disputed claim or to
impeach by a prior inconsistent statement or a contradiction,” plaintiff’s objections are overruled. Fed. R. Evid. 408.
7
matter of law.” Defs. of Wildlife v. N.C. Dep’t of Transp., 762 F.3d 374, 392 (4th Cir. 2014).7
The party seeking summary judgment “bears the initial responsibility of informing the district
court of the basis for its motion, and identifying those portions of [the record] which it believes
demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986).
Once the moving party has met its burden, the non-moving party must then “come forward
with specific facts showing that there is a genuine issue for trial.” Matsushita Elec. Indus. Co.
Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). Only disputes between the parties over
facts that might affect the outcome of the case properly preclude the entry of summary judgment.
See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (holding that a factual dispute
is “material” only if it might affect the outcome of the suit and “genuine” only if there is sufficient
evidence for a reasonable jury to return a verdict for the non-moving party).
“[A]t the summary judgment stage the [court’s] function is not [itself] to weigh the
evidence and determine the truth of the matter but to determine whether there is a genuine issue
for trial.” Id. at 249. In determining whether there is a genuine issue for trial, “evidence of the
non-movant is to be believed, and all justifiable inferences are to be drawn in [non-movant’s]
favor.” Id. at 255; see United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (“On summary
judgment the inferences to be drawn from the underlying facts contained in [affidavits, attached
exhibits, and depositions] must be viewed in the light most favorable to the party opposing the
motion.”).
Nevertheless, “permissible inferences must still be within the range of reasonable
probability, . . . and it is the duty of the court to withdraw the case from the [factfinder] when the
7
Throughout this order, internal citations and quotation marks are omitted from citations unless otherwise
specified.
8
necessary inference is so tenuous that it rests merely upon speculation and conjecture.” Lovelace
v. Sherwin-Williams Co., 681 F.2d 230, 241 (4th Cir. 1982). Thus, judgment as a matter of law
is warranted where “the verdict in favor of the non-moving party would necessarily be based on
speculation and conjecture.” Myrick v. Prime Ins. Syndicate, Inc., 395 F.3d 485, 489 (4th Cir.
2005). By contrast, when “the evidence as a whole is susceptible of more than one reasonable
inference, a [triable] issue is created,” and judgment as a matter of law should be denied. Id. at
489-90.
B.
Analysis
1.
Claims for Declaration of Coverage or Noncoverage
a.
Principles of Interpretation
Both parties seek declaration of whether plaintiff was obligated under its policies to defend
defendant Beach Mart against the underlying original and amended counterclaims by L&L.
“Pursuant to North Carolina law, the interpretation of an insurance policy is a question of
law” for the court.8 State Auto Prop. & Cas. Ins. Co. v. Travelers Indem. Co. of Am., 343 F.3d
249, 254 (4th Cir. 2003); Accardi v. Hartford Underwriters Ins. Co., 373 N.C. 292, 295 (2020).
Specifically, it is a question of contract law. Gaston Cty. Dyeing Mach. Co. v. Northfield Ins. Co.,
351 N.C. 293, 299 (2000). “As with all contracts, the object of construing an insurance policy is
to arrive at the insurance coverage intended by the parties when the policy was issued.”
Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 9 (2010). “When the
policy language is clear and unambiguous, a court is required to enforce the policy as written.”
Cont’l Cas. Co. v. Amerisure Ins. Co., 886 F.3d 366, 371 (4th Cir. 2018). “Terms defined in
8
The parties do not dispute North Carolina law applies here. Further, North Carolina choice of law is
applicable, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, (1941), and guides application of North
Carolina substantive law, Fortune Ins. Co. v. Owens, 351 N.C. 424, 428 (2000), and North Carolina statutory law,
N.C. Gen. Stat. § 58-3-1.
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insurance policies are applied to all clauses of the insurance contract, while undefined terms are
construed in accordance with their ordinary meaning.” Id.
However, “ambiguities in the terms of an insurance policy must be construed against the
insurer and in favor of coverage.” N.C. Farm Bureau Mut. Ins. Co., Inc. v. Martin ex rel. Martin,
376 N.C. 280, 286 (2020) (explaining that “this rule of construction is only triggered when a
provision in an insurance agreement is ambiguous”). Accordingly, “[w]hen the meaning of words
or the effect of provisions is uncertain or capable of several reasonable interpretations, the doubts
will be resolved . . . in favor of coverage.” Cont’l Cas., 886 F.3d at 371.
The scope of coverage under an insurance policy may encompass both a “duty to defend”
and a “duty to indemnify.” Harleysville, 364 N.C. at 7. “In determining whether an insurer has a
duty to defend, the facts as alleged in the complaint are to be taken as true and compared to the
language of the insurance policy.” Id. “If the insurance policy provides coverage for the facts as
alleged, then the insurer has a duty to defend.” Id. As the comparison is made with reference to
the facts alleged, the label of a claim is not determinative. Id.
“[P]leadings that disclose a mere possibility that the insured is liable (and that the potential
liability is covered) suffice to impose a duty to defend upon the insurer.” Waste Mgmt. of
Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691 n.2 (1986). Indeed, “the duty to defend is
not dismissed because the facts alleged in a third-party complaint appear to be outside coverage,
or within a policy exception to coverage.” Id. at 691. Rather, the duty to defend is additionally
triggered “[w]here the insurer knows or could reasonably ascertain facts that, if proven, would be
covered by its policy.” Id. “[T]he insurer’s refusal to defend is at his own peril: if the evidence
subsequently presented at trial reveals that the events are covered, the insurer will be responsible
10
for the cost of the defense.” Id. Further, “allegations of facts that describe a hybrid of covered
and excluded events . . . suffice to impose a duty to defend upon the insured.” Id. at 691 n.2.
“Under North Carolina law, if an insurer improperly refuses to defend a claim, it is
estopped from denying coverage . . . even if it made an honest mistake in its denial.” In re Abrams
& Abrams, P.A., 605 F.3d 238, 241 (4th Cir. 2010). By contrast, the insurer will not be so estopped
if it defends under a “full reservation of its right to deny coverage,” or if it gives timely notice to
its insured of “reservation of all of its rights and defenses” of noncoverage under a policy. Shearin
v. Globe Indem. Co., 267 N.C. 505, 509 (1966); Jamestown Mut. Ins. Co. v. Nationwide Mut. Ins.
Co., 266 N.C. 430, 435 (1966).
b.
Interpreting the Policies in Question
Each of plaintiff’s policies issued to defendant impose a duty to defend for “advertising
injury” or “personal and advertising injury,” defined to include infringement on “trade dress” or
“slogan.” (See, e.g., BL Policy 2008 (DE 40-1) at 45, 55; UL Policy 2008 (DE 40-5) at 27, 38).
L&L’s underlying counterclaims, which allege in part infringement upon L&L’s trade dress and
slogan, fall comfortably within those definitions. (See L&L Original Counterclaims (DE 40-10)
at 10-13; L&L Amended Counterclaims (DE 40-12) at 14-15, 17).
Central to the parties’ dispute, however, are exclusions for advertising injury “arising out
of . . . [b]reach of contract, other than misappropriation of advertising ideas under an implied
contract,” (BL Policy 2008 (DE 40-1) at 51), or otherwise “arising out of a breach of contract,
except an implied contract to use another’s advertising idea in your advertisement,” (UL Policy
2008 (DE 40-5) at 27).
The policies do not define what it means to “aris[e] out of” a contract breach. Considering,
then, the phrase’s ordinary meaning, Cont’l Cas. Co., 886 F.3d at 371, an injury arises out of a
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breach of contract when it “spring[s] up from” or “originate[s]” in the contract. Danby of N. Am.,
Inc. v. Travelers Ins. Co., 25 F. App’x 186, 194 (4th Cir. 2002) (relying upon Black’s Law
Dictionary to determine the ordinary meaning of “arise out of” under North Carolina law). It
follows from that definition that an injury does not arise out of a contract when the underlying
actions are alleged to be unlawful independent of any contractual relationship between the parties.
Thus, if claims for injury rely upon a legal source other than contract law, they do not arise out of
a breach of contract and are not subject to the breach of contract exclusion under the policies. See,
e.g., Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co., 677 F.3d 250, 257 (5th Cir.
2012) (“[A] claim for relief cannot be considered to have ‘arisen out of’ a breach of contract where
the legal support for the claim emanates from a source other than contract law.”).
c.
Application of the Policies to L&L’s Counterclaims in the Underlying
Action
Determination of the duty to defend in this case thus turns on whether L&L’s counterclaims
in the underlying suit rely upon sources other than contract law. The court considers L&L’s
original and amended counterclaims in turn below.
i.
L&L’s Original Counterclaims
Turning first to L&L’s original counterclaims, filed November 22, 2011, L&L asserted
claims for breach of a 2005 agreement based upon defendant Beach Mart’s use of the “WINGS”
trademark, trademark infringement and false designation of origin in violation of the Lanham Act,
15 U.S. C. §§ 1114, 1125(a), and unfair competition in violation of North Carolina statutory law,
N.C. Gen. Stat. § 75-1.1, and North Carolina common law. (See L&L Original Counterclaims
(DE 40-10) at 6). Though L&L’s claim for breach of the 2005 agreement plainly arises out of a
contract, its claims for trademark infringement, false designation of origin, and unfair competition
do not. Rather, these latter claims exist with legal support beyond the duties imposed by the 2005
12
agreement, including federal and state statutory law. They are not subject to the policies’ breach
of contract exclusion, and plaintiff’s duty to defend defendant against all the counterclaims was
accordingly triggered upon their tender. See Waste Mgmt. of Carolinas, Inc., 315 N.C. at 691 n.2
(duty to defend triggered by hybrid claims).
Plaintiff’s arguments to the contrary are unavailing. Plaintiff argues that the facts as
alleged in L&L’s counterclaims all arise solely out of defendant’s breach of the 2005 agreement,
as exemplified by L&L’s inclusion of all defendant’s alleged wrongs under the heading “Beach
Mart’s Breach Of The 2005 Agreement.” It is well settled, however, that the same acts or
omissions may constitute breaches of general duties as well as contractual duties and may give rise
to both actions in tort and actions in contract. Newton v. Standard Fire Ins. Co., 291 N.C. 105,
229 (1976). Likewise, the same acts or omissions that violate contractual duties may also violate
statutory law. The facts supporting plaintiff’s alternative claims need not be distinct from those
supporting a breach of contract, but rather the claims themselves must arise from an alleged
violation other than violation of a duty imposed by contract. Here, L&L alleges such separate and
distinct claims.
Danby, upon which plaintiff relies in support, does not reason otherwise. There, the court
held that an insurance company did not have a duty to defend the plaintiff in an underlying action
as all allegations in the underlying complaint supported a claim for an unjust termination of an
agreement and were accordingly subject to the breach of contract exclusion. Danby, 25 Fed. App’x
at 192-93. In opposition, the insured cited allegations by the nonparty complainant that the insured
had breached the agreement by disparaging it to potential customers, which contentions the insured
argued did not arise out of the contract. Id. at 193. In rejecting the insured’s argument, the court
determined that the allegations of disparagement were made only as justification for the nonparty
13
complainant’s failure to perform under the agreement, and were not used to support alternative,
non-contract claims. Id. (“Although [the nonparty complainant] asserted that [the insured] had
advised potential customers that the Danby System was inappropriate for small diameter pipe, it
did so as a justification for its failure to perform under the Agreement.”). By comparison, L&L’s
additional counterclaims resemble those in Builders Mut. Ins. Co. v. Allora, LLC, No. 4:11-CV210-H, 2013 WL 12250811 (E.D.N.C. Aug. 13, 2013), also relied upon by plaintiff, as they are
“founded upon principles of [trademark] law, [and] exist[] independently of its [2005] agreement
with [defendant Beach Mart]. In fact, its claim[s] would exist even absent the [2005] agreement.
Coverage is therefore not excluded by the [b]reach of [c]ontract exclusion.” Id. at *5.
ii.
L&L’s Amended Counterclaims
As a discovery sanction, L&L’s counterclaims for trademark infringement were dismissed
on October 3, 2014. (Order (DE 117) at 34). L&L additionally was precluded from asserting
unfair competition claims against defendant. (Id.). With those counterclaims removed, all
remaining original counterclaims pertained to defendant’s alleged breach of contract. (See L&L
Original Counterclaims (DE 40-10)). On February 23, 2017, L&L filed amended counterclaims
for breach of the 2005 agreement, breach of the implied covenant of good faith and fair dealing
“aris[ing] out of the 2005 [a]greement,” as well as a claim for declaration of construction of the
2005 agreement. (L&L Amended Counterclaims (DE 40-12) at 24). In effect, L&L’s amended
counterclaims each allege breach of the 2005 agreement and are accordingly excluded by the
insurance policies’ breach of contract exclusions.
Plaintiff’s duty to defend defendant in the underlying action thus terminated upon the
October 3, 2014, dismissal order, and the duty was not reinvigorated by L&L’s filing of its
amended counterclaims. See, e.g., Restatement of the L. of Liab. Ins. § 18 cmt. e (Am. L. Inst.
14
2019) (“If the component of the action that triggered the duty to defend is dismissed with prejudice,
the insurer’s duty to defend is terminated.”).
Defendant argues that plaintiff nonetheless has a duty to defend defendant against the
amended counterclaims because of waiver. According to defendant, each of plaintiffs’ four
reservation of rights letters were untimely and did not fairly inform defendant of plaintiff’s
coverage position, particularly by explaining application of the breach of contract exclusion upon
which plaintiff now relies. Instead, the letters include generic statements of potential noncoverage
coupled with excerpts of various parts of the insurance policies, furnished through a cut-and-paste
method. (See generally Reservation of Rights Letter 7-18-2012 (DE 123-5); Reservation of Rights
Letter 8-7-2012 (DE 123-6); Reservation of Rights Letter 1-15-2013 (DE 123-7); Reservation of
Rights Letter 3-14-2013 (DE 123-8)). On this basis, defendant argues that plaintiff failed properly
to preserve its coverage defenses, and those rights consequently are waived.
Defendant does not refer to North Carolina law in support of its argument. It is well-settled
in North Carolina, however, that “doctrines of implied waiver and of estoppel, based upon the
conduct or action of the insurer, are not available to bring within the coverage of a policy risks not
covered by its terms.” Hunter v. Jefferson Standard Life Ins. Co., 241 N.C. 593, 595 (1955).
Though exception to that general rule may exist where the insurer defends an insured without any
reservation of rights, see, e.g., Early v. Farm Bureau Mut. Auto. Ins. Co., 224 N.C. 172, 174 (1944),
North Carolina courts have not required a reservation of rights to include particular explanation of
the insurer’s theory of noncoverage or that they be made at a specific time. See, e.g., Shearin, 267
N.C. at 509; Jamestown, 266 N.C. at 435; Fortune Ins. Co. v. Owens, 132 N.C. App. 489, 494
(1999) (holding that insured had “full knowledge that [the insurer] contested coverage” even
though “[t]here is no reservation of rights letter in the record,” and noting that “filing of a
15
declaratory judgment action to clarify coverage issues has the same effect as . . . a reservation of
rights”).
Here, plaintiff’s reservation of rights letters assert a clear, unequivocal reservation of rights,
which provided defendant with full knowledge that plaintiff contested coverage. Indeed, all four
letters expressly provide: “Please be advised that this is not a denial of coverage, but rather to
inform Beach Mart, Inc. of a potential coverage issue.” (See, e.g., Reservation of Rights Letter 718-2012 (DE 123-5) at 3). As to timing, plaintiff sent the first reservation of rights letter one
month after tender of the underlying counterclaims, and a third reservation of rights letter the
month defendant received notice that plaintiff would defend it against L&L’s underlying
counterclaims. (See generally id.; Reservation of Rights Letter 1-15-2013 (DE 123-7)). The letters
therefore cannot reasonably be considered untimely. Accordingly, plaintiff is not now estopped
from disputing coverage.
Defendant’s arguments to the contrary rely upon case law from outside of North Carolina.
See, e.g., Harleysville Grp. Ins. v. Heritage Communities, Inc., 420 S.C. 321, 336 (2017) (holding
that a reservation of rights letter that “merely provides the insured with a copy of the policy,
coupled with a general statement that the insurer reserves all of its rights” is insufficient to properly
reserve the right to contest coverage); Advantage Bldgs. & Exteriors, Inc. v. Mid-Continent Cas.
Co., 449 S.W.3d 16, 22-23 (Mo. Ct. App. 2014); Hoover v. Maxum Indem. Co., 291 Ga. 402, 406,
730 S.E.2d 413, 417 (2012). Where those cases apply terms and conditions governing reservations
of rights that are different from the law as announced by the North Carolina Supreme Court, the
court does not incorporate those terms and conditions into North Carolina law as a matter of first
impression. See Brendle v. Gen. Tire & Rubber Co., 505 F.2d 243, 245 (4th Cir. 1974) (“A federal
16
court, sitting in North Carolina in a diversity case, must apply the law as announced by the highest
court of that state or, if the law is unclear, as it appears the highest court of that state would rule.”).
In the alternative to waiver, defendant argues L&L’s amended claim for breach of the
implied covenant of good faith and fair dealing is excepted from the breach of contract exclusion
as it alleges “misappropriation of advertising ideas under an implied contract.” (BL Policy 2008
(DE 40-1) at 51) (excluding coverage for advertising injury “arising out of . . . [b]reach of contract,
other than misappropriation of advertising ideas under an implied contract” (emphasis added));
UL Policy 2008 (DE 40-5) at 27 (excluding personal and advertising injury “arising out of a breach
of contract, except an implied contract to use another’s advertising idea in your advertisement”
(emphasis added))). L&L’s claim is not made under an implied contract, however, but is instead
made pursuant to the express 2005 agreement between L&L and defendant. (See, e.g., L&L
amended counterclaims (DE 40-12) at 24 (“These wrongful actions of Beach Mart constitute a
breach of the covenant of good faith and fair dealing that arises out of the 2005 Agreement.”
(emphasis added))). Clearly, then, L&L’s amended claim does not fall under the implied contract
exception to the breach of contract exclusion.
Finally, defendant argues L&L’s amended counterclaims are not excluded as the breach of
contract exclusion does not apply to copyright claims, trade dress claims, or slogan claims for
infringement used in advertisements. The exception referenced by defendant, however, is not
applicable to the breach of contract exclusion, but, rather, is included under an entirely different
exclusion in the policy. (See BL Policy 2008 (DE 40-1) at 90; UL Policy 2008 (DE 40-5) at 2728).
In the business owner’s liability policies, the breach of contract exclusion is listed in
subparagraph (1) under paragraph (q), but the exception cited by defendant is included only under
17
subparagraph (6), and is only applicable to the exclusion provided therein, for advertising injury
“arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual
property rights.” (BL Policy 2008 (DE 40-1) at 90). The same is true under the umbrella policies.
(UL Policy 2008 (DE 40-5) at 27-28).
In sum, plaintiff’s duty to defend defendant, triggered by L&L’s original counterclaims,
does not apply to defense of L&L’s amended counterclaims, as they fall under the breach of
contract exclusion of the governing policies. Plaintiff’s motion for declaratory judgment of no
coverage under the policies is denied as to L&L’s original counterclaims but granted as to L&L’s
amended counterclaims. Likewise, defendant’s motion for declaratory judgment of coverage
under the policies is granted as to L&L’s original counterclaims but denied as to L&L’s amended
counterclaims.
2.
Defendant’s Counterclaims
a.
Whether Defendant’s Counterclaims are Time-Barred
Plaintiff contends that defendant’s counterclaims, first filed October 3, 2017, are time
barred under North Carolina law. Defendant does not dispute that its counterclaims would be timebarred if their filing date is operative, but argues that because its counterclaims are compulsory,
under federal law they relate back to plaintiff’s filing of its complaint February 4, 2014. Plaintiff
asserts that North Carolina law instead controls, and under North Carolina law compulsory
counterclaims do not relate back.
Neither North Carolina Rule of Civil Procedure 13(a) nor Federal Rule of Civil Procedure
13(a), both of which govern compulsory counterclaims, include mention of relation back. The
North Carolina Court of Appeals has interpreted absence of express statutory authorization to
relate back in Rule 13(a) to mean that counterclaims do not relate back to the date a plaintiff’s
18
action was filed. Pharmaresearch Corp. v. Mash, 163 N.C. App. 419, 427 (2004). By comparison,
acknowledging the similar absence of express authority to relate back in the federal rule, the United
States Court of Appeals for the Fourth Circuit has held that compulsory counterclaims relate back
to the filing of the plaintiff’s complaint. See Burlington Indus. v. Milliken & Co., 690 F.2d 380,
389 (4th Cir.1982) (“[T]he institution of plaintiff’s suit tolls or suspends the running of the statute
of limitations governing a compulsory counterclaim[.]”).
When a situation is covered by one of the Federal Rules of Civil Procedure, courts are to
apply the Federal Rule unless it transgresses either the terms of the Rules Enabling Act, 28 U.S.C.
§ 2072, or constitutional restrictions. Hanna v. Plumer, 380 U.S. 460, 471 (1965). “The first
question must therefore be whether the scope of the Federal Rule in fact is sufficiently broad to
control the issue before the [c]ourt.” Walker v. Armco Steel Corp., 446 U.S. 740, 749-50 (1980).
If the situation is not covered by the Federal Rules, “the general rule [is] that a federal court is to
apply state substantive law and federal procedural law in diversity cases.” Hottle v. Beech Aircraft
Corp., 47 F.3d 106, 109 (4th Cir. 1995). Thus, it falls to the court to determine whether the state
rule in question is substantive or procedural, an inquiry that is functional in nature based on the
“twin aims of the Erie rule: discouragement of forum-shopping and avoidance of inequitable
administration of the laws.” Hanna, 380 U.S. at 468.
Federal Rules are to be “given their plain meaning” in determining whether they control
the issue at hand. Walker, 446 U.S. at 749-50. Though the Fourth Circuit held in Burlington that
the institution of an action tolls the running of the limitation period on compulsory counterclaims
under Federal Rule of Civil Procedure 13(a), that holding was made in relation to federal claims
and was based on what the court determined to be “the better view” rather than being required by
19
the rule itself. 690 F.2d at 389. Given the absence of a relation-back provision in the text of Rule
13(a), the court determines it is not broad enough to control the issue before the court by its terms.
Proceeding, then, to “the typical, relatively unguided Erie choice,” Hanna, 380 U.S. at 471,
the court finds Davis v. Piper Aircraft Corp., 615 F.2d 606 (4th Cir. 1980) instructive. There,
plaintiff sought leave to amend his complaint to allege his capacity as ancillary administrator by
North Carolina appointment made after the statute of limitations had run. Id. at 608. Plaintiff
argued Federal Rule of Civil Procedure 15(a), (c) controlled rather than a contrary state rule which
would, categorically, prohibit the allowance of amendments changing a plaintiff’s capacity when
the result would be to cure by relation back a lack of capacity that existed when an applicable
statute of limitations had run. Id. at 609.
The court held that Rule 15(c), which, unlike Rule 13(a), expressly provides for relation
back of amendment to a pleading, was sufficiently broad in scope to cover the ground occupied by
the state rule, and thus had to be applied. Id. at 610-11. The court additionally reasoned, however,
that the result would be the same under the Erie analysis, and its twin aims of discouraging forum
shopping and avoiding inequitable administration of the laws:
Here, application of the federal rule could not encourage forum shopping, since at
the time of forum choice the need for invocation of a relation back rule of pleading
is simply not in the picture for a claimant. Similarly, a balancing of federal interests
in uniformity of application of procedural rules and in the maintenance of a
coherent approach to related procedural matters such as the standards for stating
claims sufficiently outweighs any discernible state interest in effectively preventing
curative appointment of a personal representative after the timely commencement
of judicial proceedings.
Id. at 612. Here, too, relation back of defendant’s counterclaims does not encourage forum
shopping, as it is no more likely to figure into plaintiff’s choice of forum than the relation back of
amendment to its complaint. Similarly, the federal interests favoring uniformity in pleading weigh
in favor of following the federal rule. See Welch v. Louisiana Power & Light Co., 466 F.2d 1344,
20
1346 (5th Cir. 1972) (“[A]pplication of state rules as to relation back would disrupt important
federal policies favoring simplification and uniformity of pleading.” ).
The court accordingly finds federal law controls, under which defendant’s counterclaims,
all compulsory, relate back to plaintiff’s filing of its complaint. With a consequent date of
February 4, 2014, they are not time barred.
In the alternative, assuming North Carolina law governs, equitable tolling properly here
serves to extend the applicable statutes of limitations. Though North Carolina has no controlling
decision addressing equitable tolling, the Fourth Circuit has predicted that North Carolina’s courts
would apply equitable tolling where the plaintiff received timely notice of the defendant’s
counterclaims, there was no resulting prejudice, and the defendant acted with diligence. Aikens
v. Ingram, 524 F. App’x 873, 880 (4th Cir. 2013).
Before responsive pleadings in this matter became due, and before any applicable statute
of limitations had run on defendants’ counterclaims,9 the court granted a consent motion and stayed
the case May 5, 2014. The stay was premised upon the indefinite suspension of all activity in the
underlying action pending resolution of another related action filed by L&L in New York. That
stay was not lifted until three years later, on September 25, 2017, following which time defendant
timely filed its counterclaims and amended counterclaims. Defendant bore no fault for the delay
as, though it consented to the stay, the stay was prompted by L&L’s actions. Defendant, together
with plaintiff, reasonably concluded that it was economical for the parties and the court to suspend
activity until the underlying action resumed, given that coverage issues attendant in the present
action arise solely in the context of the underlying action.
9
According to plaintiff, the statute of limitations ran for defendant’s breach of contract claim in March 2016
and it ran for its bad faith and unfair and deceptive trade practices claims in March 2017.
21
There is no indication in the record that plaintiff failed timely to receive notice of the
counterclaims or of resulting prejudice, and the court finds defendant acted diligently in asserting
its counterclaims seven days after the stay was lifted. Accordingly, it is appropriate to invoke the
doctrine of equitable tolling.
In arguing to the contrary, plaintiff disputes that defendant acted diligently, with reliance
upon Staffing Advantage LLC v. Definitive Staffing Sols., Inc., No. 7:20-CV-00150-M, 2021 WL
2426340 (E.D.N.C. June 14, 2021). Staffing Advantage, however, is readily distinguishable.
There, the defendant had earlier brought litigation against the plaintiff, and, despite knowing the
same facts at the time of the original filing, defendant did not raise the challenged counterclaims
until a later lawsuit, after expiration of the statute of limitations. Id. at *8. Further, the first
litigation ended in a settlement agreement with carveouts for future litigation but silent as to the
tolling of any statutes of limitations. Id. at *7. That the parties expressly agreed to reserve rights
regarding party claims but did not agree to toll the limitations period applicable thereto made the
court hesitant to employ equity to imply such a term. Id. By comparison, here there is no such
earlier lawsuit between these parties, and though they agreed to stay the case for an indefinite
period, that agreement does not evince a settlement as to the disposition of future claims. Thus,
unlike in Staffing Advantage, applying equity does not “supply terms . . . to which the parties
never agreed.” Id. Finally, while the defendant there waited nearly a year after settlement to bring
its claim, defendant here asserted its counterclaims seven days after the stay was lifted.
In sum, federal law controls, and defendant’s counterclaims relate back to plaintiff’s filing
of its complaint, and thus are not time barred. In the alternative, under North Carolina law,
equitable considerations justify that the applicable statutes of limitations be tolled. The court
accordingly considers defendant’s counterclaims on the merits.
22
b.
Breach of Contract
“The elements of a claim for breach of contract are (1) existence of a valid contract and (2)
breach of the terms of the contract.” Wells Fargo Ins. Servs. USA, Inc. v. Link, 372 N.C. 260, 276
(2019). Where an insurance policy creates a duty to defend the insured, the insurer’s breach of
that duty justifies the insured in defending against the suit and seeking recovery of costs and
expenses from the insurer. See Lowe v. Fid. & Cas. Co. of N. Y., 170 N.C. 445, 87 S.E. 250, 252
(1915).
There is no dispute that the parties entered into valid contracts in the form of insurance
policies. Pursuant to the forgoing analysis, this court also has determined that under those policies,
plaintiff had a duty to defend defendant against L&L’s original counterclaims, a duty which
defendant in its counterclaims alleges plaintiff breached. Plaintiff argues there is no evidence of
such breach. In response, defendant contends plaintiff breached its duty in three respects: by 1)
refusing to honor defendant’s retention of independent counsel and moving forward instead with
Brown; 2) enabling a seven-month delay in its decision to hire counsel and defend defendant; and
3) selecting counsel not competent to defend against L&L’s underlying counterclaims.
i.
Rejection of Defense Offered Under a Reservation of Rights
Defendant argues that under National Mortgage Corp. v. American Title Insurance Co., 41
N.C. App. 613, 623 (1980), policyholders are entitled to reject the insurer’s defense when offered
under a reservation of rights. Accordingly, when plaintiff agreed to defend defendant against the
counterclaims in the underlying action under a reservation of rights, following National Mortgage
defendant had a right to reject the defense and seek instead reimbursement from plaintiff for
defendant’s preferred, and already retained, counsel. Plaintiff thus breached the policies when it
insisted upon representation by Brown. As an initial matter, National Mortgage was reversed by
23
the North Carolina Supreme Court. 299 N.C. 369 (1980). In addition, National Mortgage is
distinguishable as the insured in that case contended that such defense under a reservation of rights
created a conflict of interest, an argument not made here. Id. at 621. It also represents a minority
view, pursuant to which an insurer effectively forfeits the right to control the defense whenever it
provides notice to the insured of a potential ground for contesting coverage. See Restatement of
the L. of Liab. Ins. § 15 cmt. e (Am. L. Inst. 2019) (“Only a minority of jurisdictions allow insureds
to reject a defense under a reservation of rights.”).
In any event, the plain language of the policy here controls. None of the policies expressly
grant the insured the authority to deny a defense offered under a reservation of rights. Instead,
they grant plaintiff, the insurer, “the right . . . to defend the insured” against suits seeking covered
damages, without qualification. (See BL Policy 2008 (DE 40-1) at 45; UL Policy 2008 (DE 40-5)
at 27).
Accordingly, under the unambiguous language of the policy, plaintiff had the right to
control the defense against L&L’s counterclaims, even contingent on its reservation of rights,
unless it otherwise breached the policies. Therefore, there is no genuine issue that plaintiff
breached the agreement on this basis.
ii.
Breach Based Upon Delay
Defendant additionally contends plaintiff breached its duty to defend by belaboring its
decision to defend. First, an insurer cannot be said to have met its “duty to defend the insured
against a[] suit,” as required by the policies, if it does not offer its defense in a reasonably timely
manner. (BL Policy 2008 (DE 40-1) at 45; UL Policy 2008 (DE 40-5) at 27). It is here undisputed
that seven months elapsed between the time defendant tendered L&L’s underlying counterclaims
and plaintiff’s formal notice to defendant of its decision to retain Brown. (Pl.’s Opp. Stmt. (DE
24
121) ¶ 60). During that time, there were significant discovery and trial preparations in the
underlying action, which defendant participated in by retaining independent counsel. (Id.).
Defendant has introduced evidence that plaintiff’s investigation was prolonged by repeated
analyses by claims specialists and in-house counsel, engagement of outside counsel, auditors, and
experts, as well as extended communications with defense counsel. (See, e.g., id. ¶¶ 41-45, 69).
Plaintiff contests defendant’s characterization of the process, and contends that “[defendant]’s own
expert, Bryan Tilden, even opined that it would have been reasonable for [plaintiff] to have
determined whether it was going to defend [defendant] before Thanksgiving 2012, which
[plaintiff] did by contacting David Brown to act as defense counsel.” (Pl.’s Mem. (DE 114) at 20).
Where reasonableness of the investigation must ultimately be evaluated in light of these
contested facts, summary judgment on the basis of breach by delayed action necessarily is
precluded.
iii.
Breach Based Upon Selection of Counsel
There is also a genuine issue of material fact as to whether plaintiff breached its duty to
defend through its selection of Brown as defense counsel. Defense by counsel necessarily is
implied by the duty to defend the insured corporation against a “suit.” (BL Policy 2008 (DE 401) at 45; UL Policy 2008 (DE 40-5) at 27). So too must that counsel be reasonably competent to
“defend” against the suit. See, e.g., R.C. Wegman Constr. Co. v. Admiral Ins. Co., 629 F.3d 724,
728 (7th Cir. 2011) (stating that insurer’s duty to defend includes “the hiring of competent counsel”
(quoting 4 Couch on Insurance § 202:17 (3d ed. 2007))).
Defendant has introduced evidence that the underlying suit concerned complicated issues
of trademark law including competing claims to trademark ownership, and Brown focuses his
practice on insurance law. (Brown Depo. (DE 117-12) at 99:4-15; 114:17-20; 43:121-22 (65% of
25
federal cases involved insurance law)). None of Brown’s awards, publications, bar admissions,
professional affiliations, or speaking engagements have been related to trademark or intellectual
property law except in the context of insurance coverage determinations. (Id. at 94:17-95:5; 99:16103:11). Brown has handled one trademark infringement case, and that case did not involve
comparable matters of trademark law at issue in the underlying case. (Id. at 82:1-3l 83:1-16; 86:2417; 104:4-15; 105:4-106:10). That case also was settled a few months into the discovery process,
prior to dispositive motions or trial. (Id. at 80:17-81:25).
Viewing these facts in the light most favorable to defendant, a factfinder reasonably could
infer that plaintiff breached its duty to defend with competent counsel. Thus, summary judgment
is inappropriate at this juncture.
In sum, plaintiff’s motion for summary judgment on defendant’s counterclaim for breach
of contract on the basis of delay and selection of counsel is denied.10
c.
Bad Faith
“In every contract there is an implied covenant of good faith and fair dealing that neither
party will do anything which injures the right of the other to receive the benefits of the agreement.”
Bicycle Transit Auth., Inc. v. Bell, 314 N.C. 219, 228 (1985). North Carolina law indeed
particularly “imposes on the insurer the duty of carrying out in good faith its contract of insurance.”
Alford v. Textile Ins. Co., 248 N.C. 224, 229 (1958). To establish a claim for bad faith against an
insurer, the insured must prove “(1) a refusal to pay after recognition of a valid claim; (2) bad faith;
and (3) aggravating or outrageous conduct.”
Topsail Reef Homeowners Ass’n v. Zurich
10
Defendant has also introduced evidence that it raised concerns with plaintiff’s retention of Brown and
plaintiff failed to respond to those concerns. As the court finds genuine issue of material fact precluding summary
judgment on this count on the basis of the length of time that elapsed between tender and notification and choice of
counsel, the court declines to address this additional basis for the purposes of deciding the instant motions.
26
Specialties London, Ltd., 11 F. App’x 225, 237 (4th Cir. 2001) (quoting Lovell v. Nationwide Mut.
Ins. Co., 108 N.C. App. 416, 421 (1993)).
Bad faith does not arise where there is an “honest disagreement” regarding the validity of
a claim. Lovell, 108 N.C. App. at 421; see ABT Bldg. Prod. Corp. v. Nat’ l Union Fire Ins. Co.
of Pittsburgh, 472 F.3d 99, 125 n.32 (4th Cir. 2006); Danby, 25 F. App’x 186 at 194 n.9. It also
does not include an “honest mistake in judgment.” Abernethy v. Utica Mut. Ins. Co., 373 F.2d
565, 568 (4th Cir. 1967); see, e.g., Dailey v. Integon Gen. Ins. Corp., 75 N.C. App. 387, 396 (1985)
(stating that bad faith means “not based on . . . innocent mistake”). Aggravated conduct includes
“fraud, malice, gross negligence, insult . . . . [or] when the wrong is done willfully or under
circumstances of rudeness or oppression, or in a manner which evinces a reckless and wanton
disregard of the plaintiff’s rights.” Baker v. Winslow, 184 N.C. 1, 113 S.E. 570, 572 (1922); see
Topsail, 11 F. App’x at 239. When an insurer denies a claim that is reasonably in dispute based
on a legitimate disagreement, the insurer is entitled to judgment as a matter of law because the
plaintiff cannot establish bad faith or aggravated conduct on the part of the insurer. Topsail, 11 F.
App’x at 239.
Plaintiff contends there is no evidence that it recognized a duty to defend under the
governing policies, or that its position of noncoverage was unreasonable. The court agrees.
In opposition, defendant introduces into evidence a coverage report completed by Gross,
the claims specialist assigned by plaintiff to determine coverage for the underlying counterclaims,
wherein Gross reported that coverage of at least two counterclaims was “possible.” (Coverage
Question Report (DE 120-21) at 2). Gross, however, ultimately recommended that “no coverage
be afforded” based in part on exclusions in the policies. (Id. at 2). Defendant additionally relies
upon testimony provided by plaintiff’s in-house counsel, Parsons, that the advertising injury
27
provisions of defendant’s policies were “likely implicated” by the allegations in L&L’s underlying
counterclaims. (Parsons’s Dep. (DE 120-27) at 83:18-84:20). Parsons’s testimony, however, did
not make a determination of coverage but rather was in response to a question that assumed “no
exclusion applie[d].” (Id. at 83:18-84:2). He further clarified that he did not “know whether there
[was] going to be a defense or indemnity required” but plaintiff still would “afford the insured the
benefit of the doubt and provide a defense for those allegations against the insured.” (Id. at 84:320; see also 85:22-86:1 (“We believed at the time that the information in our possession would
support the fact that [L&L’s underlying counterclaims] potentially implicated advertising injury.”
(emphasis added))).
Defendant also relies upon testimony by Oliver, plaintiff’s corporate designee, that outside
counsel recommended plaintiff obtain defense counsel for defendant in the underlying action.
(Oliver’s Dep. (DE 120-26) at 107:6-5). That testimony, however, did not provide the basis for
counsel’s recommendation, particularly whether outside counsel’s recommendation followed from
recognition of a valid claim as opposed to, for instance, reflecting a pervasive defensive tactic used
to protect plaintiff’s interests. See, e.g., Waste Mgmt. of Carolinas, Inc., 315 N.C. at 691 (“[T]he
insurer’s refusal to defend is at his own peril: if the evidence subsequently presented at trial reveals
that the events are covered, the insurer will be responsible for the cost of the defense.”). Indeed,
due to redactions, the email upon which Oliver’s testimony was based provides only that plaintiff
should retain defense counsel “per [outside counsel’s] recommendation,” without more. (Oliver’s
Dep. (DE 120-26) at 107:3-10).
Defendant additionally relies upon two files wherein claims specialist Gross reports that
the timing of the underlying claims is “ambiguous,” and that plaintiff likely could not sustain the
position that it was prejudiced by defendant’s late tendering of the underlying counterclaims. (Pl.’s
28
Claims File dtd 10-19-2012 (DE 120-12); Pl.’s Claims File dtd 10-29-2012 (DE 120-12)). Even
viewed in the light most favorable to defendant, however, neither notation demonstrates
recognition of a valid claim, but rather evinces one claims specialist’s opinion with regard to the
sustainability of a single possible defense—the timing of tender. Finally, defendant introduces
into evidence a report to plaintiff by retained auditors identifying only $106,500.00 of the
$470,000.00 requested for defendant’s reimbursement claim as subject to challenge. (Pl.’s Claims
File dtd. 12-2014 to 4-2016 (DE 120-12)). That report, however, additionally notes that whether
there is indeed a duty to defend had not yet been determined. (Id.).
As there is no evidence plaintiff recognized a duty to defend defendant against the
underlying counterclaims, or that its failure to recognize such a duty was unreasonable, the court
grants plaintiff’s motion for summary judgment on defendant’s counterclaim for bad faith.
d.
Unfair and Deceptive Trade Practices
“A practice is unfair when it offends established public policy as well as when the practice
is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.” See
Gray v. N.C. Ins. Underwriting Ass’n, 352 N.C. 61, 68 (2000). North Carolina declares as
unlawful “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts
or practices in or affecting commerce.” N.C. Gen. Stat. § 75-1.1(a). “In order to establish a prima
facie claim for unfair trade practices, a plaintiff must show: (1) defendant committed an unfair or
deceptive act or practice, (2) the action in question was in or affecting commerce, and (3) the act
proximately caused injury to the plaintiff.” Dalton v. Camp, 353 N.C. 647, 656 (2001).
Insurance law in North Carolina is governed by North Carolina General Statute § 58-6315(11), which enumerates certain unfair claim settlement practices. Gray, 352 N.C. at 68. “[T]he
acts proscribed in [N.C. Gen. Stat.] § 58–63–15(11) were designed to protect the consuming
29
public” based on the determination that the specified conduct is “inherently unfair, unscrupulous,
immoral, and injurious to consumers.” Id. at 70-71. In considering the intersection between North
Carolina General Statute § 75-1.1 and § 58-63-15(11), the Fourth Circuit has explained as follows:
North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”), N.C. Gen.
Stat. § 75-1.1, prohibits unfair and deceptive acts or practices, generally, and North
Carolina’s “Unfair Claim Settlement Practices” statute, N.C. Gen. Stat. § 58-6315(11), defines unfair practices in the settlement of insurance claims. As relevant
here, § 75-1.1 provides a private cause of action for violations, whereas § 58-6315(11) does not; instead “the remedy for a violation of section 58-63-15 is the filing
of a section 75-1.1 claim.” Country Club of Johnston Cty., Inc. v. U.S. Fid. & Guar.
Co., 150 N.C.App. 231, 563 S.E.2d 269, 278 (2002) (internal quotation marks
omitted). Thus, an individual may file an independent § 75-1.1 claim, or may file a
§ 75-1.1 claim that relies on a violation of § 58-63-15(11). See Gray v. N.C. Ins.
Underwriting Ass’n, 352 N.C. 61, 529 S.E.2d 676, 684 (2000).
Elliott v. Am. States Ins. Co., 883 F.3d 384, 396 (4th Cir. 2018). Unlike with allegations of
common law bad faith, good faith is not a defense to an alleged violation of N.C.G.S. § 58-6315(11). See Gray, 352 N.C. at 68 (“Good faith is not a defense to an alleged violation of [N.C.
Gen. Stat.] § 75–1.1.”).
Defendant contends plaintiff violated § 58-63-15(11)(a), (b), (c), (d), (e), (g), (h), (m), and
(n). Plaintiff moves for summary judgment on all subsections, and defendant moves for partial
summary judgment, limited to those parts pertaining to plaintiff’s conduct with respect to
defendant’s reimbursement claims.
The court addresses each subparagraph in turn. Where neither the Supreme Court of North
Carolina nor the United States Court of Appeals for the Fourth Circuit, when interpreting North
Carolina law, has analyzed the subparagraphs in question, the court relies on the plain language of
the statute and the exemplary analyses of the provisions by its sister courts in the circuit and North
Carolina’s Court of Appeals.
i.
§ 58-63-15(11)(a)
30
Defendant contends plaintiff’s reservation of rights letters “misrepresent[] pertinent facts
or insurance policy provisions relating to coverages at issue,” in violation of N.C.G.S. § 58–63–
15(11)(a). Construed in the light most favorable to defendant, such a misrepresentation may be
inferred from certain language in the reservation of rights letters.
In particular, while these letters communicate clearly a reservation of rights sufficient to
overcome defendant’s waiver argument, addressed previously, those that include excerpts from
the policies omit reference to the breach of contract exclusion of the umbrella policy, and they
include other exclusions that are unrelated to the L&L counterclaims. (See Reservation of Rights
Letter 8-7-2012 (DE 123-6); Reservation of Rights Letter 1-15-2013 (DE 123-7); Reservation of
Rights Letter 3-14-2013 (DE 123-8)).
None of the letters include discussion of plaintiff’s position as the various provisions, nor
do they explain how the allegations in L&L’s counterclaims might create coverage issues. (See
id.; Reservation of Rights Letter 7-18-2012 (DE 123-5)). Thus, it is reasonable to infer in this
respect that they “[m]isrepresent[] pertinent facts or insurance policy provisions relating to
coverages at issue.” N.C. Gen. Stat. § 58-63-15(11)(a) (emphasis added).
Therefore, summary judgment in favor of plaintiff on this part of defendant’s claim must
be denied.
ii.
§ 58-63-15(11)(b)
Subparagraph (b) enumerates “[f]ailing to acknowledge and act reasonably promptly upon
communications” relating to a claim under an insurance policy as an unfair claim settlement
practice. Courts in North Carolina have eschewed a bright line deadline to constitute unreasonable
delay, concluding for example that a delay in communication of “54 days is not enough, by itself
to show an unfair settlement practice.” See, e.g., First Protective Ins. Co. v. Rike, 516 F. Supp. 3d
31
513, 533-34 (E.D.N.C. 2021); Meadlock v. Am. Fam. Life Assur. Co., No. COA11-1009, 2012
WL 2891079, at *7 (N.C. Ct. App. July 17, 2012) (explaining that a four-month delay in
communication, in and of itself, was not unreasonable and that further evidence was needed to
determine whether that delay was reasonable or not). Instead, courts have looked to whether “[t]he
responses were reasonably prompt under the circumstances.” Federated Mut. Ins. Co. v. Williams
Trull Co., 838 F. Supp. 2d 370, 423 (M.D.N.C. 2011). However, the fact that a defendant insurer
“fail[s] to respond to multiple communications” militates towards a conclusion that they have not
acknowledged and acted reasonably promptly upon communications. Guessford v. Penn. Nat.
Mut. Cas. Ins. Co., 918 F. Supp. 2d 453, 465 (M.D.N.C. 2013).
Defendant has introduced evidence of appreciable delays or lapses in communications
following defendant’s tender of L&L’s counterclaims and of its reimbursement claim. For
instance, defendant introduced letters and emails from defendant’s president, Golasa, and from its
corporate secretary, Ray, to claims specialist Gross inquiring of plaintiff’s retention of defense
counsel and of the status of defendant’s reimbursement claim, which defendant contends went
unanswered. (See Golasa’s Letter dtd 1-25-13 (DE 120-8) (questioning why plaintiff hired “a
second law firm” for the case and asking if plaintiff “is going to reimburse [defendant] for the
money that it has spent so far defending [in the underlying action]”); Maeyan Golasa’s Decl. 13
(DE 120-30) (declaring that defendant received no response to the 1-25-13 email); Ray’s Email
dtd. 2-4-13 (DE 128-4)). Plaintiff argues, however, that these letters were never received, and all
other communications were timely responded to. (See, e.g., Pl.’s Opp. Stmt. (DE 121) ¶¶ 54-56).
There thus remain material disputes of fact as to plaintiff’s liability under North Carolina
General Statute § 58-63-15(11)(b), and the court denies plaintiff’s and defendant’s motions under
this subparagraph.
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iii.
§ 58-63-15(11)(c) and (d)
North Carolina General Statute § 58-63-15(11) deems it unlawful to “[f]ail[] to adopt and
implement reasonable standards for the prompt investigation of claims arising under insurance
policies,” N.C. Gen. Stat. § 58-63-15(11)(c), and to “[r]efus[e] to pay claims without conducting
a reasonable investigation based upon all available information,” N.C. Gen. Stat. § 58-6315(11)(d).
Defendant has introduced evidence that plaintiff underwent an investigation to determine
liability under the policies which endured for seven months and involved engagement of multiple
specialists. Where determination of the reasonableness of these procedures and the promptness of
the investigation hinges on contested facts previously discussed, the court denies summary
judgment under subparagraphs (c) and (d).
iv.
§ 58-63-15(11)(e), (g), (h), and (m)
Subparagraphs (e), (g), (h), and (m) all govern an insurer’s conduct once liability under the
governing policy is either reasonably clear or not disputed. Defendants claims under these
subsections accordingly fail for the same reason defendant’s crossclaim for common law bad faith
failed—defendant has not introduced evidence that liability under the policies was reasonably clear
prior to issuance of this order.
North Carolina General Statute § 58-63-15(11)(e) makes it an unfair and deceptive trade
practice for insurance companies to “[f]ail[] to affirm or deny coverage of claims within a
reasonable time after proof-of-loss statements have been completed.” N.C. Gen. Stat. § 58-6315(11)(e). The plaintiff however disputed liability under the policies up through and including the
instant motion before the court, and no evidence on the record indicates that dispute was wholly
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unreasonable. Therefore, the court finds as a matter of law that defendant did not engage in any
unfair or deceptive acts in violation of subsection (e).
Section 58-63-15(11)(g) prohibits “[c]ompelling [the] insured to institute litigation to
recover amounts due under an insurance policy by offering substantially less than the amounts
ultimately recovered in actions brought by such insured.” N.C. Gen. Stat. § 58-63-15(11)(g). As
no amount is “due” until liability is determined, typically this subsection “require[s] that the
coverage issue be determined in favor of the insured.” Elliott v. Am. States Ins. Co., 883 F.3d
384, 398 (4th Cir. 2018). The subsection by its terms additionally requires that the insurer offer
“substantially less than the amounts ultimately recovered” by the insured before there is a
violation. N.C. Gen. Stat. § 58-63-15(11)(g). Here, liability has only just been announced in this
written decision, and there has not yet been a determination of the amount defendant ultimately
will recover.
Thus, the court finds as a matter of law that plaintiff did not violate subsection (g). For the
same reason, defendant’s claim under subsection (m), prohibiting “[f]ail[ure] to promptly settle
claims where liability has become reasonably clear, under one portion of the insurance policy
coverage in order to influence settlements under other portions of the insurance policy coverage,”
also fails. N.C. Gen. Stat. § 58-63-15(11)(m).
Finally, subsection 58-63-15(11)(h) prohibits “[a]ttempting to settle a claim for less than
the amount to which a reasonable man would have believed he was entitled.” N.C. Gen. Stat. §
58-63-15(11)(h). Where liability has not been conclusively determined, it cannot be said that a
reasonable person would believe himself entitled to either the maximum coverage provided under
the policy, or the amount ultimately recovered, before the fact or amount of liability had been
determined. Elliott v. Am. States Ins. Co., 883 F.3d 384, 398-99 (4th Cir. 2018) (“The mere fact
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of having [] coverage does not entitle the insured to recover at all.”). Thus, the court determines
as a matter of law that plaintiff did not violate subsection (h) by making settlement offers for less
than the entire amount claimed in defendant’s reimbursement claim. The court accordingly grants
plaintiff’s motion for summary judgment as to this part of defendant’s counterclaim.
v.
§ 58-63-15(11)(n)
Lastly, subsection (n) requires insurers to “promptly provide a reasonable explanation of
the basis in the insurance policy in relation to the facts . . . for denial of a claim or for the offer of
a compromise settlement.” N.C. Gen. Stat. § 58-63-15(11)(n). Defendant contends plaintiff
denied its reimbursement claim by failing to respond to it, and in its failure to respond, plaintiff
additionally failed to provide reasonable explanation for its denial. (Def.’s Resp. (DE 127) at 23).
Defendant does not cite to any case law supporting its construction of subsection (n), and the court
declines to extend the subsection’s reach by adopting it, particularly where subsection (b) overtly
addresses a failure to communicate.
In sum, the court grants plaintiff’s motion for summary judgment under N.C. Gen. Stat. §
58-63-15(11)(e), (g), (h), (m), and (n), but denies it under subsections (a), (b), (c), and (d). As the
court finds there remains dispute of material fact as to these subsections, the court additionally
denies defendant’s motion for partial summary judgment. Where the court denies defendant’s
partial motion, and the extent of liability under those subsections has not been determined, the
court also denies defendant’s motion on the amount of damages under N.C. Gen. Stat. § 58-6315(11).
CONCLUSION
Based on the foregoing, plaintiff’s motion for summary judgment (DE 113) is GRANTED
IN PART and DENIED IN PART as set forth herein. Defendant’s motion for partial summary
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judgment (DE 116) is GRANTED IN PART and DENIED IN PART, as set forth herein. Those
parts of the motions seeking a declaration of coverage as a matter of law are resolved as follows:
1. Plaintiff was obligated under the insurance policies to defend defendant against L&L’s
original counterclaims. Accordingly, plaintiff’s claims for declaration of noncoverage
under the insurance policies are DISMISSED as to L&L’s original counterclaims, and
defendant’s claim seeking a declaration of coverage and establishing a duty to defend
against L&L’s original counterclaims under the insurance policies is GRANTED.
2. Defendant’s duty to defend under the insurance policies terminated upon the October 3,
2014, dismissal order in the underlying action, and the duty was not re-triggered by L&L’s
filing of its amended counterclaims on February 23, 2017. Accordingly, plaintiff’s claims
for declaration of noncoverage under the insurance policies are GRANTED as to L&L’s
amended counterclaims, and defendant’s claim seeking a declaration of coverage and
establishing a duty to defend against L&L’s amended counterclaims under the insurance
policies is DISMISSED.
3. That part of plaintiff’s claim seeking declaratory judgment that it has no duty to indemnify
defendant is DENIED AS MOOT.
The following parts of defendant’s counterclaims additionally are DISMISSED:
1. Counterclaim III: breach of the implied covenant of good faith and fair dealing;
2. Counterclaim IV: unfair and deceptive trade practices in violation of N.C. Gen. Stat. §
58-63-15(11)(e), (g), (h), (m), and (n)
The following parts of defendant’s counterclaims remain for adjudication at trial:
1. Counterclaim II: breach of contract on the basis of delay and selection of counsel;
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2. Counterclaim IV: unfair and deceptive trade practices in violation of N.C. Gen. Stat. §
58-63-15(11) (a), (b), (c), and (d), including the amount to be awarded for its
reimbursement claim, if anything.
Where additional claims remain for trial in accordance with case management order as
amended August 23, 2021, this case now is ripe for entry of an order governing deadlines and
procedures for final pretrial conference and trial. The parties are DIRECTED to confer and file
within 14 days from the date of this order a joint status report informing of 1) estimated trial length;
2) particular pretrial issues which may require court intervention in advance of trial, if any; and
3) at least three suggested alternative trial dates. In addition, the parties shall specify if they wish
to schedule a court-hosted settlement conference or additional alternative dispute resolution
procedures in advance of trial, and if so the date for completion of such.
SO ORDERED, this the 30th day of September, 2022.
_____________________________
LOUISE W. FLANAGAN
United States District Judge
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