Federal Insurance Company et al v. Southern Lithoplate Inc. et al

Filing 102

ORDER denying as moot 47 Motion to Dismiss; granting 73 Motion for Judgment on the Pleadings; denying as moot 75 JOINT MOTION TO ADOPT PRIOR BRIEFING OF MOTION TO DISMISS; denying as moot 83 Motion for Judgment on the Pleadings; denying as moot 88 Motion for Judgment on the Pleadings; denying as moot 96 Motion to Strike. Counsel is reminded to read the order in its entirety for detailed information. Signed by Senior Judge James C. Fox on 3/14/2014. (Edwards, S.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:12-CV-793-F

FEDERAL INSURANCE COMPANY, and GREAT
NORTHERN INSURANCE COMPANY,
Plaintiffs,

)
)
)
)

)

v.
SOUTHERN LITHOPLA TE, INC., SPECTRA TECH
INTERNATIONAL, INC., and SAM T. ADAMS,
Defendants.

SOUTHERN LITHOPLATE, INC., SPECTRATECH
INTERNATIONAL, INC., and SAM T. ADAMS,
Counterclaim and Third-Party Plaintiffs,
V.

FEDERAL INSURANCE COMPANY, GREAT
NORTHERN INSURANCE COMPANY, ARROWOOD
INDEMNITY COMPANY, WAUSAU
UNDERWRITERS INSURANCE COMPANY,
WAUSAU BUSINESS INSURANCE COMPANY,
LIBERTY INSURANCE CORPORATION, PHOENIX
INSURANCE COMPANY, and TRAVELERS
INDEMNITY COMPANY,

)
)

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

ORDER

)

Counterclaim and Third-Party Defendants.

)

This matter is before the court on Third-Party Defendants Travelers Indemnity Company
and Phoenix Insurance Company's motion for judgment on the pleadings [DE-73]. Phoenix and
Travelers (collectively "Travelers") move for judgment on the pleadings as to all third-party

claims asserted by Southern Lithoplate, Spectratech, and Sam T. Adams (collectively "Southern
Lithoplate"). The remaining parties in this litigation have reached a settlement as to all
remaining claims. Stipulation of Dismissal [DE-101]. For the reasons that follow, the motion is
ALLOWED and all third-party claims against Travelers and Phoenix are DISMISSED.

FACTUALANDPROCEDURALBACKGROUND
Southern Lithoplate's third-party complaint requests, inter alia, a declaratory judgment
finding that Travelers has a duty to defend Southern Lithoplate in two separate West Virginia
state court environmental lawsuits ("the underlying actions"). In the underlying actions, the
plaintiffs allege that Southern Lithoplate's industrial activities contaminated the groundwater in
various West Virginia locations. Upon receiving notice of the West Virginia lawsuits, Southern
Lithoplate notified their various insurance providers, including Travelers, and requested that
these companies assume its legal defense and provide indemnification in the event Southern
Lithoplate is found liable. Travelers did not immediately assume Southern Lithoplate's defense
in the underlying actions, but placed Southern Lithoplate's claims under consideration. Plaintiffs
Federal Insurance and Great Northern assumed Southern Lithoplate's defense, but under a
reservation of rights clause in the insurance contract that allows these companies to deny
coverage and terminate the legal defense if the companies subsequently determine that the
policies do not afford coverage. Federal Insurance and Great Northern thereafter filed the instant
lawsuit, seeking a declaratory judgment that the insurance policies provide no coverage for
environmental pollution claims.
Southern Lithoplate's initial third-party complaint [DE-24] added Travelers and Phoenix
as Third-Party Defendants and sought a declaratory judgment that the insurance polices provide

2

1

coverage. Southern Lithoplate subsequently filed an amended third-party complaint [DE-67],
which is the operative third-party complaint and the subject of Travelers' motion for judgment on
the pleadings. Southern Lithoplate's insurance claims remained under consideration at Travelers
until Southern Lithoplate joined Travelers in the instant litigation. Travelers now asserts that the
policies it issued to Southern Lithoplate contained an "absolute pollution exclusion" that
precludes coverage.
Southern Lithoplate is in the business of producing lithographic plates and other products
for the graphics and photography industries. In July, 2012, Eleanor, John, and William Rodman
filed suit in West Virginia state court against Southern Lithoplate, alleging various tort claims
related to groundwater contamination. The complaint specifically alleges that Southern
Lithoplate "generated, stored, transported and disposed of various hazardous wastes, including
but not limited to trichloroethylene (TCE)" and that these pollutants contaminated the
groundwater. Rodman Complaint [DE-63-1] ,-r 19. The Rodmans assert claims for (1) private
nuisance; (2) public nuisance; (3) negligence; (4) continuing trespass; (5) strict liability; and (6)
negligent infliction of emotional distress. The second West Virginia action involves a separate
group of property owners, the Fryes. The Fryes assert the same factual allegations and legal
claims against Southern Lithoplate as the Rodmans.
As of the time of the filing of the instant motion for judgment on the pleadings (July,
2013), discovery in the underlying actions had not progressed to the point where the precise

' Southern Lithoplate's third-party complaint initially named the Travelers parties as "Travelers
Insurance Company." However, the court allowed the parties' consent motion to substitute Phoenix
Insurance Company and Travelers Indemnity Company for the Travelers Insurance Company. May 13,
2013 Order [DE-53]. For purposes of clarity, the court refers to both Travelers and Phoenix as
"Travelers" throughout this order.
3

hazardous wastes that contaminated the groundwater had been identified. For purposes of
deciding the instant motion, the court assumes that the identity of the hazardous wastes remains
unknown at this time.
DISCUSSION
A. Standard of Review
Federal Rule of Civil Procedure 12(c) provides that "[a]fter the pleadings are closed-but
early enough not to delay trial-a party may move for judgment on the pleadings." Fed. R. Civ.
P. 12(c). Judgment on the pleadings is appropriate where the case turns on a legal question and
the pleadings demonstrate that the moving party is entitled to judgment as a matter of law. See
Med-Trans Corp. v. Benton, 581 F. Supp. 2d 721, 728 (E.D.N.C. 2008); Smith v. McDonald, 562
F. Supp. 829, 842 (M.D.N.C. 1983), aff'd, 737 F.2d 427 (4th Cir. 1984), aff'd, 472 U.S. 479
(1985)). The court assumes the facts alleged by the nonmoving party are true and all reasonable
inferences are drawn the nonmoving party's favor. See Volvo Constr. Equip. N. Am. v. CLM
Equip. Co., Inc., 386 F.3d 581, 591 (4th Cir. 2004); Burbach Broad. Co. v. Elkins Radio Corp.,
278 F .3d 401, 405-06 (4th Cir. 2002). Where the insurance policy is "integral to and explicitly
relied on in the complaint" and its "authenticity is not in question[,]" the court may consider the
policy itself along with the factual allegations of the complaint and answer, without converting
the motion into one for summary judgment. See Colin v. Marconi Commerce Sys. Emps. 'Ret.
Plan, 335 F. Supp. 2d 590, 596 (M.D.N.C. 2004); see also Phillips v. LCI Int'l, Inc., 190 F.3d
609,618 (4th Cir. 1999) (discussing standard in context ofRule 12(b)(6)).

4

B. Choice of Law Issue
As a preliminary matter, the court finds that North Carolina law governs this dispute. A
federal court sitting in diversity must apply the choice of law rules of the forum state. Klaxon
Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487,496 (1941). In North Carolina, under the principle
of lex loci contractus, the substantive law of the state where the last act to make the binding
insurance contract controls resolution of disputes relating to the contract. Fortune Ins. Co. v.
Owens, 351 N.C. 424, 428, 526 S.E.2d 463, 466 (2000). The "last act to make the binding
contract" is typically the delivery of the policy to the insured. !d.
Southern Lithoplate does not seriously contest that these policies were delivered in North
Carolina, thereby rending North Carolina law applicable. As Travelers notes, Southern
Lithoplate and Spectratech's third-party complaint alleges that the companies are North Carolina
corporations with their principal places of business in North Carolina. More importantly, the
insurance contracts themselves indicate that they were delivered to Southern Lithoplate in North
Carolina. Exhibits A-J to Answer to Third-Party Complaint [DE-72-1 to 5]. Although Southern
Lithoplate does not outright state this, it essentially concedes North Carolina law applies by
relying almost exclusively on North Carolina law in its response in opposition. See Response
[DE-91].
The court acknowledges that Southern Lithoplate's response "incorporated as fully set
forth" a separate brief it filed in this litigation [D E-91] and that brief challenges application of
North Carolina law. However, neither of Southern Lithoplate's briefs address the argument
raised by Third-Party Defendants that the policies demonstrate on their face that they were

5

delivered in North Carolina. Accordingly, the court will apply North Carolina law to this
dispute.

C. North Carolina Insurance Law
It is well-settled that the interpretation of an insurance contract is a question of law for the
court. North Carolina Farm Bureau Mut. Ins. Co. v. Mizell, 138 N.C. App. 530, 532, 530 S.E.2d
93, 95 (2000). "' [I]f the meaning of the policy is clear and only one reasonable interpretation
exists, the courts must enforce the contract as written .... "' Dawes v. Nash Cnty., 357 N.C. 442,
448-49, 584 S.E.2d 760, 764 (2003) (quoting Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500,
506, 246 S.E.2d 773, 777 (1978)). However, any doubt or ambiguity as to coverage must be
resolved in favor ofthe insured. Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C.
688, 693, 340 S.E.2d 374, 378 (1986).
The North Carolina Supreme Court has distinguished the duty to defend and the duty to
indemnify. To determine whether an insurer must defend an insured in an underlying action, "the
pleadings [in the underlying action] are read side-by-side with the policy to determine whether
the events as alleged are covered or excluded." Id. at 692, 340 S.E.2d at 378. If there is "a mere
possibility" that the facts alleged in the underlying action are covered under the policy, the
insurer has a duty to defend. Id. at 691 n.2, 340 S.E.2d at 377 n.2. By contrast, the duty to
indemnify arises only if the facts as determined in the underlying action are covered by the
policy. Id.

6

D. Comparison of the policies and the facts alleged in the underlying actions.
During the relevant time frame, Travelers issued approximately ten separate policies to
Southern Lithoplate. 2 However, the pollution exclusion provision is identical across all the
policies. The policies each define the term "pollutants" as "any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and
waste." See, e.g., Phoenix Insurance Policy, Commercial General Liability Coverage Form [DE72-2] at 2; Travelers' Br. in Supp. ofMot. for J. on the Pleadings [DE-74] at 7 (explaining each
policy uses the same definition). The pollution exclusion provision is also identical across
policies. The provision excludes claims for bodily injury or property damage "arising out of the
actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of
pollutants." See, e.g., Phoenix Insurance Policy, Commercial General Liability Coverage Form
[DE-72-2] at 2; Travelers' Br. in Supp. of Mot. for J. on the Pleadings [DE-74] at 7-8 (explaining
each policy uses the same or substantially similar definition). The policies also separately
exclude claims for reimbursement of costs a company may incur as a result of governmental
remediation3 or other requests/demands for remediation.
The factual allegations in the underlying actions allege the precise type of pollution
excluded by the policies. For example, the claims against Southern Lithoplate allege that it
caused a public and private nuisance by "the release of hazardous wastes and contaminants from
2

Travelers issued this relatively large number of policies because it needed to issue new policies
whenever an amendment or reinstatement occurred.
3

Under CERCLA and various state environmental laws, private companies responsible for
environmental contamination must reimburse state or federal authorities for the costs of remediation. See
generally Scottsdale Indem. Co. v. Vi!!. of Crestwood, 673 F.3d 715, 718-19 (7th Cir. 2012). These
provisions exclude insurance coverage for claims associated with governmental remediation liability or
other private demands for remediation. /d.
7

[Southern Lithoplate] facilities," see, e.g., Rodman Complaint [DE-63-1] ~ 46; that Southern
Lithoplate's negligent actions "caused TCE and other hazardous wastes and contaminants to be
deposited into Plaintiffs property[,]" id. ~ 65; that Southern Lithoplate's "acquisition, use,
storage, and disposal ofTCE and other toxic chemicals was ultrahazardous" and therefore
Southern Lithoplate should be strictly liable for any damages caused by the pollutants, id.

~

72;

and that Southern Lithoplate negligently inflicted emotional distress by its conduct in negligently
disposing of the pollutants. ld.

~

76.

Comparing the pollution exclusion provisions to the facts alleged in the underlying
actions, it is plain that Travelers has no duty to defend at this stage of the litigation. The policies
define the term "pollutant" broadly and it obviously covers any "hazardous waste" capable of
contaminating the plaintiffs' properties. Plaintiffs in the underlying actions allege that they
sustained both property damage and bodily injuries as a result of Southern Lithoplate's negligent
release ofTCE and other hazardous wastes onto their property. As Travelers notes, it is difficult
to contemplate a more textbook example of allegations covered by the policies' pollution
exclusion provisions. See, e.g., Phoenix Insurance Policy, Commercial General Liability
Coverage Form [DE-72-2] at 2 (excluding coverage for bodily injury or property damage "arising
out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape
of pollutants."). Although the plaintiffs in the underlying actions raise a host of different legal
claims, each claim is predicated on factual allegations similar to those outline above-and these
factual allegations are plainly excluded by the policies' pollution exclusion provisions.
Southern Lithoplate focuses on the fact that discovery has not been completed in the
underlying actions and argues it is therefore "premature" for the court to find that these policies

8

exclude coverage. With respect to the duty to defend, however, this argument misconstrues the
law. The duty to defend is determined by comparing the allegations in the underlying complaints
to the policy provisions. Waste Management, 315 N.C. at 691-93; 340 S.E.2d at 377-78. The
facts alleged in the underlying actions fall squarely within the policies' pollution exclusions and
therefore exclude even the "mere possibility" that Travelers needs to assume Southern
Lithoplate's defense. See id. at 691 n.2, 340 S.E.2d at 377 n.2; Home Indem. Co. v. Hoechst
Celanese Corp., 128 N.C. App. 226,234-35,494 S.E.2d 768, 773-74 (1998) (denying coverage

under plain language of the pollution exclusion provision). The duty to indemnifY-a separate
issue-is addressed below.

E. West Am. Ins. v. Tufco Flooring
Southern Lithoplate's primary argument is that the court should not enforce the pollution
exclusion provisions pursuant to the so-called "business activities exception." See West Am. Ins.
v. Tufco Flooring E. Inc., 104 N.C. App. 312,320-21,409 S.E.2d 692,697-98 (1991), review
allowed, 330 N.C. 853, 413 S.E.2d 555 (1992), and review denied as improvidently granted, 332

N.C. 479,420 S.E.2d 826 (1992), and overruled on other grounds by Gaston Cnty. Dyeing
Mach. Co. v. Northfield Ins. Co., 351 N.C. 293, 524 S.E.2d 558 (2000). 4 In Tufco, Perdue Farms

hired Tufco to perform floor resurfacing work at one of its chicken processing facilities. !d. at
314, 409 S.E.2d at 693. In the course of the resurfacing work, contaminants seeped into a cooler
containing approximately $500,000 worth of chicken. !d. The contaminants spoiled the chicken
entirely and Perdue brought suit for damages caused by the seepage. !d. Subsequently, West

4

The Fourth Circuit has held that a federal court sitting in diversity and applying North Carolina
law is "obliged to follow [Tufco ]"where it is directly on point. Auto-Owners Ins. v. Potter, 105 F. App'x
484, 489 (4th Cir. 2004).
9

American Insurance brought a declaratory judgment action seeking a declaration that the policy's
pollution exclusion provision precluded coverage. !d.
The North Carolina Court of Appeals held that "four independent grounds" supported its
conclusion that the pollution exclusion provision did not exclude coverage. !d. at 316, 409
S.E.2d at 695. As relevant here, the second ground is known as the "central business activities
exception." The exception only applies when the policy is ambiguous with respect to coverage
for a particular loss. !d. at 320, 409 S.E.2d at 697 (applying central business activity exception
because the "policy applied to this claim is ambiguous"). In such a circumstance, North Carolina
law requires that the contract be construed against the drafter and "as a reasonable person in the
position ofthe insured would have understood it to mean." !d. at 321,409 S.E.2d at 697.
Because the policy in Tufco was ambiguous with respect to the issue of whether the pollution
exclusion provision should apply to the loss associated with the contaminated chicken, the court
construed the policy in favor of awarding coverage. As the Tufco court explained, "[a]
reasonable person in the position ofTufco would have understood claims such as Perdue's to be
covered. Tufco is in the business of installing industrial flooring, and Tufco purchased a
commercial liability policy to protect it from liabilities arising from the very type of activity at
issue here." !d. The Tufco court also noted that "[t]o allow West American to deny coverage for
claims arising out ofTufco's central business activity would render the policy virtually useless to
Tufco." !d.
Southern Lithoplate maintains that Tufco's central business activities exception precludes
judgment on the pleadings in this case. According to Southern Lithoplate, applicability of the
pollution exclusion provision can never be decided on a motion for judgment on the pleadings

10

under Tufco because the "mere possibility" always exists that the pollutants were used in the
course of the insured's central business activity. The court does not agree.
The central business activity exception cannot be read so broadly that it eviscerates the
pollution exclusion in every case in which an insured uses a pollutant in the course of its central
business activity. See Hoechst Celanese, 128 N.C. App. at 234-35, 494 S.E.2d at 773-74
(enforcing pollution exclusion provision); Viii. of Crestwood, 673 F .3d at 718-20 (explaining
policy justification for pollution exclusion and reviewing typical environmental cases in which
the exclusion applies). The proper reading of Tufco is not that it creates a blanket rule whereby
every company that uses pollutants in the course of its central business activity is exempt from
the pollution exclusion provisions of their insurance contracts. Instead, Tufco applies to the
(much narrower) circumstance in which an ambiguity exists between application of the pollution
exclusion to the particular facts alleged in the underlying actions and the insured's primary
business activity itsel[.S See Tufco, 104 N.C. App. at 321,409 S.E.2d at 697 (employing central
business activities exception where the "policy applied to this claim is ambiguous" and noting
"Tufco is in the business of installing industrial flooring, and Tufco purchased a commercial
liability policy to protect it from liabilities arising from the very type of activity at issue here.").

5

The court notes that the Fourth Circuit appears to have interpreted Tufco even more narrowly,
albeit in an unpublished opinion. In Potter, the Fourth Circuit read Tujco as requiring an ambiguity
between the pollution exclusion provision and another written provision of the insurance contract that
arguably provided coverage under the circumstances. See Potter, 105 F. App 'x at 492-93 ("Because we
find that no ambiguity existed in the interplay between these contractual terms, we need not further
entertain Appellants' argument that the [policy] is ambiguous because it purportedly does not provide
coverage for claims arising out of [the insured's] central business activity." (citation omitted)). Here,
Southern Lithoplate argues that under Tufco the pollution exclusion provision cannot exclude coverage
for an insured's central business activity as a general matter, regardless of whether an ambiguity exists
between the pollution exclusion and other provisions of the contract. Because it does not affect the
outcome ofthis case, the court gives Southern Lithoplate the benefit of the doubt on this issue and
presumes the North Carolina Supreme Court would adopt Southern Lithoplate's interpretation.
11

Southern Lithoplate's attempts to cherry-pick statements out of Tufco to suggest that the
possibility of coverage exists whenever an insured uses pollutants in the course of its central
business activity entirely divorces the central business activity exception from Tufco's facts.
Tufco addressed contamination of a container of frozen chicken that occurred during floor
resurfacing work. The court of appeals understandably considered application of the pollution
exclusion provision ambiguous in that context. By contrast, there is absolutely no indication that
the central business activity exception applies in the context of traditional environmental
contamination, where the plain language of the policy obviously excludes coverage. Instead, the
exception applies where an insurer is attempting to apply the pollution exclusion to an injury that
is not associated with traditional environmental pollution, in an attempt to "hide behind
ambiguities in the policy and deny coverage for good faith claims that arise during the course of
the insured's normal business activities." !d.
This case, in contrast (and contrary to Southern Lithoplate's arguments), is a typical
environmental pollution case. The plaintiffs in the underlying actions accuse Southern Lithoplate
of contaminating their groundwater, a prototypical environmental harm that triggers application
of the pollution exclusion. See Nationwide Mut. Ins. Co. v. Mabe, 342 N.C. 482, 492, 467
S.E.2d 34, 40 (1996) (explaining "if a policy is not ambiguous, then the court must enforce the
policy as written"); Vill. of Crestwood, 673 F .3d at 720-21 (applying pollution exclusion
provision to groundwater contamination and noting "groundwater contamination ... is extremely
common and a fertile source of environmental litigation"). Moreover, it is simply not plausible
that an insured would voluntarily sign an insurance contract with a broad pollution exclusion
provision if its central business activity presented the risk of traditional environmental harm. As

12

Travelers notes, if Southern Lithoplate wanted coverage for traditional environmental pollution,
it could have negotiated (presumably at higher premiums) for such coverage.
For the foregoing reasons, the court finds that Tufco's central business activity exception
cannot possibly apply to the claims alleged in the underlying complaint. See Peerless Ins. Co.,
315 N.C. at 691 n.2, 340 S.E.2d at 377 n.2 (explaining the insurer has a duty to defend ifthe
underlying allegations present even the "mere possibility" that the policy provides coverage).
Southern Lithoplate reads Tufco far too broadly and entirely ignores the factual circumstances
that gave rise to the central business activities exception. As explained in the more detail below,
however, this finding applies solely to the duty to defend, and should not be construed as
precluding Southern Lithoplate from arguing that Tufco applies in the context of the duty to
indemnify when that claim becomes ripe.

F. Nature of the Underlying Claims
Southern Lithoplate also raises the argument that the nature of the underlying claims, the
majority of which sound in negligence, obligates Travelers to defend regardless of the fact that
the injuries were allegedly caused by pollution. This argument is precluded by the plain language
of the pollution exclusion, which excludes coverage for "for bodily injury or property damage
arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or
escape ofpollutants." See, e.g., Phoenix Insurance Policy, Commercial General Liability
Coverage Form [DE-72-2] at 2; Travelers' Br. in Supp. ofMot. for 1. on the Pleadings [DE-74]
at 7 (explaining each policy uses the same definition). The applicability of this provision is not
determined by the nature of the legal claims asserted against Southern Lithoplate, but instead by
the nature ofthe facts alleged. As explained above, "the pleadings [in the underlying action] are

13

read side-by-side with the policy to determine whether the events as alleged are covered or
excluded." Waste Mgmt., 315 N.C. at 693,340 S.E.2d at 378 (emphasis added).
The court recognizes that in some cases application ofthe plain language of the pollution
exclusion produces absurd results. As Judge Posner noted in Village of Crestwood,
Suppose a tanker truck filled with perc crashes into a bridge abutment, spilling its
liquid cargo, and another vehicle skids on the wet surface of the highway into the
abutment, injuring the driver. Perc is both a contaminant and a cause of the bodily
injuries in this example. But it would be absurd to argue-and the insurers do not
argue-that a claim arising from such an accident would be within the pollution
exclusion, since in no reasonable sense of the word "pollution" was the driver a
victim of pollution.
673 F.3d at 717. In this example, while the injured driver's claim arguably may be covered by
the plain language of the pollution exclusion, courts are reluctant to deny coverage because the
injury, while caused by the pollutant, is not a traditional environmental claim. In these cases, the
courts will often uphold coverage despite the pollution exclusion. See id. at 716-17 (collecting
cases). By contrast, the claims against Southern Lithoplate are prototypical environmental
claims. See id. at 720-21. That the claims involve allegations such as the "failure to warn" and
"failure to abate the condition" do not change the fact that the factual allegations fit squarely
within the policies' pollution exclusion provisions.
G. Unfair and Deceptive Trade Practices Claim
Southern Lithoplate also argues that the unfair and deceptive trade practices claim should
proceed because Travelers' failed to address it in its motion for judgment on the pleadings. This
claim is predicated on Travelers' refusal to immediately assume Southern Lithoplate's defense in
the underlying actions. Travelers responds (in its reply brief) that if it never had a duty to defend,

14

its refusal to immediately assume Southern Lithoplate's defense cannot be an unfair or deceptive
trade practice.
This argument is entirely convincing. The court has ruled as a matter of law that
Travelers does not have a duty to defend Southern Lithoplate in the underlying litigation.
Accordingly, nothing about Travelers' refusal to immediately provide a defense in the underlying
actions was unfair or deceptive. See ABT Bldg. Prods. Corp. v. Nat'! Union Fire Ins. Co., 472
F.3d 99, 122 (4th Cir. 2006) (explaining that conduct must be unfair or have the capacity or
tendency to deceive to make out a claim for unfair and deceptive trade practices under North
Carolina law). While it is true that Travelers took several months to provide a coverage position,
that circumstance alone does not rise to the level of an unfair or deceptive trade practice,
especially in light of the significant uncertainty regarding coverage for Southern Lithoplate's
claims. 6 See Dalton v. Camp, 353 N.C. 647, 657, 548 S.E.2d 704, 711 (2001) (explaining a
practice is only unfair or deceptive where "some type of egregious or aggravating circumstances"
are present (internal quotation marks omitted)). Because the only unfair or deceptive practice
alleged in the third-party complaint cannot possibly (let alone plausibly, see Bell At!. Corp. v.
Twombly, 550 U.S. 544, 555 (2007)) support a claim for unfair and deceptive trade practices, the
claim is dismissed.

6

In addition, the court presumes that in the event Travelers (or the court) found a duty to defend
arose in this case, Travelers would be liable for any litigation costs Southern Lithoplate had already
incurred. See Waste Mgmt., 315 N.C. at 691, 340 S.E.2d at 377. The fact that Southern Lithoplate
waited several months for a coverage position and incurred litigation costs during that time, while
inconvenient, cannot be "egregiously" unfair to Southern Lithoplate when it would have been reimbursed
for the costs associated with the defense if coverage attached.

15

H. Duty to Indemnify
As the court noted above, the foregoing discussion applies solely to the duty to defend.
With respect to the duty to indemnify, the court agrees with Southern Lithoplate that it cannot
render a declaratory judgment at this stage. As the North Carolina Supreme Court has stated,
"any insurer's ... duty to [indemnify] is measured by the facts ultimately determined at trial."

Waste Mgmt., 315 N.C. at 691,340 S.E.2d at 377. At this stage ofthe litigation, the record
before the court contains only the initial pleadings from the West Virginia litigation. Although it
appears unlikely, it is possible that the facts proven at trial may differ markedly from the factual
allegations contained in the underlying complaints and that those facts could trigger a duty to
indemnify. 7
However, rather than allowing this case to remain open pending further factual
development in the West Virginia state court actions, the more efficient use of judicial resources
is to dismiss Southern Lithoplate's duty to indemnify claims as unripe at the present time. The
dismissal as to the duty to indemnify claims 8 is without prejudice to Southern Lithoplate to file a
new declaratory judgment action in the event the ultimate factual findings in the underlying
litigation suggest coverage is appropriate and Travelers continues to refuse coverage. Although

7

It is also possible that Travelers ultimately may be found liable for litigation costs associated
with the underlying actions as well. See Waste Mgmt., 315 N.C. at 691,340 S.E.2d at 377 ("[T]he
insurer's refusal to defend is at its own peril: if the evidence subsequently presented at trial reveals that
the events are covered, the insurer will be responsible for the costs of the defense."). As the court is not
currently aware of the facts that will be proved at trial, nothing in this order should be construed as a
definitive finding on Travelers' ultimate responsibilities for paying Southern Lithoplate's litigation costs.
All this order holds is that the allegations in the underlying actions do not trigger a duty to defend on the
part of Travelers at this time.
8

Southern Lithoplate has also filed a breach of contract action based on Travelers' refusal to
defend or indemnify. To the extent that claim is based on the duty to indemnify, it is also dismissed
without prejudice. It is dismissed with prejudice to the extent it arises from the duty to defend.

16

this should be clear from the foregoing discussion, the court emphasizes that nothing in this order
should be construed as precluding Southern Lithoplate from litigating the duty to indemnify at a
later date.
CONCLUSION

For the foregoing reasons, Travelers' motion for judgment on the pleadings [DE-73) is
ALLOWED and all claims in the third-party complaint against the Travelers Indemnity Company
and the Phoenix Insurance Company are hereby DISMISSED. Southern Lithoplate's claims for
declaratory judgment and breach of contract against Phoenix and Travelers based on the duty to
indemnify are DISMISSED WITHOUT PREJUDICE. All other claims are DISMISSED WITH
PREJUDICE. Southern Lithoplate's motion to strike Travelers' Reply Brief [DE-96] is DENIED
AS MOOT.
The remaining parties have reached a settlement as to all the remaining claims.
Stipulation of Dismissal [DE-l 01]. Accordingly, all pending motions not addressed above are
DENIED AS MOOT. This includes the motions at docket entries 47, 75, 83, and 88. The Clerk
of Court is DIRECTED to close this case.

SO ORDERED.
y
This, the_)_):__ day of March, 2014.

17