BROWN et al v. PENN NATIONAL SECURITY INSURANCE COMPANY

Filing 40

MEMORANDUM ORDER. Signed by JUDGE THOMAS D. SCHROEDER on 3/17/2014, that the Magistrate Judge's Recommendation is ADOPTED as modified herein, and that Penn National's motion for summary judgment (Doc. 19 ) is GRANTED as to Plaintiffs' claim for coverage under the Policy but is DENIED as to coverage under the Act. (Daniel, J)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

DELORIS BROWN; JEREMY
and TIFFANY WILMOUTH,

BROWN;

Plaintiffs,
v.
PENN
NATIONAL
SECURITY
INSURANCE COMPANY d/b/a PENN
NATIONAL INSURANCE,
Defendant.

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1:12CV1204

MEMORANDUM ORDER
THOMAS D. SCHROEDER, District Judge.
This is a declaratory judgment action regarding insurance
coverage

for

damages

resulting

from

an

accident.

The

Recommendation of the United States Magistrate Judge was filed
with the court in accordance with 28 U.S.C. § 636(b) and, on
January 28, 2014, was served on the parties in this action.
(Docs.

28,

29.)

The

Magistrate

Judge

recommended

that

the

motion for summary judgment (Doc. 19) filed by Defendant Penn
National

Security

Insurance

Company

d/b/a

Penn

National

Insurance (“Penn National”) be granted in part and denied in
part.
Wilmouth

Plaintiffs

Deloris

(collectively

Brown,

Jeremy

“Plaintiffs”)

and

Brown,
Penn

and

Tiffany

National

filed

timely objections to the Recommendation as well as responses
pursuant to Federal Rule of Civil Procedure 72.

(Docs. 30, 31,

34, 35.)

For the reasons noted below, the Recommendation will

be adopted, as modified herein.
I.

BACKGROUND
The

facts

are

adequately

described

in

the

Magistrate

Judge’s Recommendation (Doc. 28 at 1–4) and are summarized here
as relevant to the following discussion:
This

case

arises

out

of

an

automobile

accident

between

Plaintiffs and a cable installation van (the “van”) owned by KTS
Cable Installations, Inc. (“KTS”), that was driven by Angella
Ferguson (“Mrs. Ferguson”).

(Id. at 1; Doc. 23-2 at 10-18.)

Mrs. Ferguson’s husband, Brian Ferguson (“Mr. Ferguson”), was an
employee of KTS and had been issued the van for the purposes of
his

employment.

(Doc.

28

at

3.)

Penn

National

issued

an

insurance policy (the “Policy”) to KTS covering the van for the
relevant period.

(Id. at 1.)

KTS is the named insured on the

Policy, but the Policy also covers “[a]nyone else while using
[the van] with [KTS’] permission . . . .”
at 23.)

(Id. at 2; Doc. 9–1

KTS issued the van to Mr. Ferguson on the condition

that he sign the KTS Vehicle Agreement (the “Agreement”).
28 at 3; Doc. 20 at 6 (Agreement).)
preamble

that

describes

its

(Doc.

The Agreement contains a

purpose.

It

begins:

“Agreement

between [KTS] . . . and [Mr. Ferguson] for the assignment of a
[KTS]-owned
privileges.”

car

for

(Doc.

business
20

at

use

6.)
2

with
The

certain
body

of

personal
the

use

Agreement

contains several restrictions on Mr. Ferguson’s use of the van;
most

notably,

“[p]ersonal

use

of

the

[KTS]

vehicle

is

not

permitted under any circumstance” (id. ¶ 7), and “the carrying
of passengers not employed by [KTS] is not allowed” (id. ¶ 11).
Despite

the

restrictions

in

the

Agreement,

occasionally allowed his wife to drive the van.
Doc. 25–2 ¶ 3.)

Mr.

Ferguson

(Doc. 28 at 4;

Mrs. Ferguson claims she was unaware that she

was not permitted to drive it.

(Doc. 28 at 4; Doc. 25-2 ¶ 4.)

On June 3, 2012, while driving the van to pick up her daughter,
Mrs.

Ferguson

was

involved

in

an

(Doc. 28 at 4; Doc. 25–2 ¶ 2.)
judgment that

Penn

National

accident

with

Plaintiffs.

Plaintiffs seek a declaratory

is

liable

based

on

two

grounds.

First, they argue that Mrs. Ferguson qualifies as an “insured”
under

the

Policy

because

permission of KTS.

she

was

driving

the

van

with

the

Second, Plaintiffs contend that even if the

express terms of the Policy do not cover Mrs. Ferguson, coverage
is

required

Financial

under

North

Responsibility

Carolina’s
Act

of

Motor

1953

(the

Vehicle
“Act”),

Safety

and

N.C.

Gen.

Stat. § 20-279.1 et seq., as amended.
The Magistrate Judge rejected Plaintiffs’ first argument,
concluding

that

Mrs.

Ferguson

did

not

have

the

express

or

implied permission of KTS to drive the van and thus was not an
“insured” under the Policy.

(Doc. 28 at 8-10.)

However, as to

the second argument, the Magistrate Judge concluded that a fact
3

issue

precluded

summary

judgment.

(Id.

at

11-13.)

He

determined that the Agreement was ambiguous as to the scope of
Mr. Ferguson’s personal use privileges, and thus a jury could
find

that

both

Fergusons

had

a

good

faith

belief

that

Mrs.

Ferguson was in “lawful possession” of the van under the Act.
(Id.)
Plaintiffs and Penn National object to the Recommendation.
Plaintiffs contend the Magistrate Judge erred by concluding that
the

Policy

National

did

not

contends

cover

that

Mrs.

no

Ferguson.

genuine

dispute

(Doc.
of

31.)

Penn

material

fact

exists and that Mrs. Ferguson was not in “lawful possession” of
the

van

as

matter

of

law.

responded to each argument.
II.

(Doc.

30.)

The

parties

have

(Docs. 34, 35.)

ANALYSIS
A.

Standard of review

Pursuant to Federal Rule of Civil Procedure 72(b)(3), this
court is required to conduct a de novo review of those portions
of the Magistrate Judge’s Recommendation to which an objection
is made.

Diamond v. Colonial Life & Accident Ins. Co., 416 F.3d

310, 315 (4th Cir. 2005).

The parties object to both aspects of

the Recommendation, so the court will conduct a de novo review
of the entire Recommendation.
“The court shall grant summary judgment if the movant shows
that there is no genuine dispute as to any material fact and the
4

movant is entitled to judgment as a matter of law.”
Civ.

P.

56(a).

The

moving

party

bears

the

Fed. R.

burden

of

establishing that no genuine dispute of material fact remains.
When the non-moving party has the burden of proof on the merits,
the moving party is entitled to summary judgment if it shows the
absence of material disputed facts.
477

U.S.

317,

322-23,

325

Celotex Corp. v. Catrett,

(1986).

In

assessing

whether

a

genuine dispute of material fact sufficient to preclude summary
judgment exists, the court regards the non-movant’s statements
as

true

and

inferences

in

accepts
the

all

admissible

non-movant’s

evidence

favor.

Lobby, Inc., 477 U.S. 242, 255 (1986).

and

Anderson

draws
v.

all

Liberty

But a non-moving party

must establish more than the “mere existence of a scintilla of
evidence” to support his position.

Id. at 252.

If the evidence

is “merely colorable, or is not significantly probative, summary
judgment may be granted.”

Id. at 249-50 (citations omitted).

Ultimately, summary judgment is appropriate where the non-movant
fails to offer “evidence on which the jury could reasonably find
for the plaintiff.”
B.

Id. at 252.

Liability under the Policy

The Magistrate Judge concluded that Mrs. Ferguson was not
covered under the Policy because KTS had not given her express
or implied permission to drive the van.
novo review, the court agrees.

After conducting a de

Therefore, for the reasons set
5

forth in the Recommendation, Penn National’s motion for summary
judgment on Plaintiffs’ claim for liability under the Policy
will be granted.
C.

Liability under the Act

The Magistrate Judge also concluded that Penn National’s
motion for summary judgment on Plaintiffs’ claims under the Act
should be denied because a fact issue existed as to whether both
Mr. and Mrs. Ferguson had a good faith belief that Mrs. Ferguson
lawfully

possessed

the

van.

Penn

National

objects

to

this

portion of the Recommendation, arguing that there is no genuine
dispute as to whether Mr. Ferguson could have had a good faith
belief that he was permitted to loan the van to his wife in
light of the Agreement.
as

the

Magistrate

(Doc. 30 at 7-13.)

Judge

noted,

that

an

Plaintiffs contend,
ambiguity

in

the

Agreement, coupled with Mr. Ferguson’s testimony about personal
use of installation vans by other KTS employees (Doc. 23–2 at
18), establishes a fact issue as to whether Mr. Ferguson had a
good faith belief that KTS permitted him to loan the van to his
wife.

Alternatively, Plaintiffs argue, the good faith of Mr.

Ferguson is not required.
The Act requires that all auto insurance policies in North
Carolina
insure the person named therein and any other person,
as insured, using any such motor vehicle or motor
vehicles with the express or implied permission of
6

such named insured, or any other persons in lawful
possession, against loss from the liability imposed by
law for damages arising out of the ownership,
maintenance or use of such motor vehicle . . . .
N.C. Gen. Stat. § 20-279.21(b)(2) (emphasis added).
279.21’s

requirements

“prescribe

mandatory

terms

Section

which

part of every liability policy” in North Carolina.

become

Am. Tours,

Inc. v. Liberty Mut. Ins. Co., 338 S.E.2d 92, 96 (N.C. 1986).
Therefore, if Mrs. Ferguson was “in lawful possession” of the
van, Penn National is liable for
thirty thousand dollars ($30,000) because of bodily
injury to or death of one person in any one accident
and, subject to said limit for one person, sixty
thousand dollars ($60,000) because of bodily injury to
or death of two or more persons in any one accident,
and twenty-five thousand dollars ($25,000) because of
injury to or destruction of property of others in any
one accident.
N.C. Gen. Stat. § 20-279.21(b)(2).
The requirement that all policies cover drivers “in lawful
possession” of an insured vehicle was added to the statute in
1967.
243,

See Iowa Nat’l Mut. Ins. Co. v. Broughton, 196 S.E.2d
246–47

(N.C.

1973).

Penn

National

relies

heavily

on

Broughton, where a rental company rented a vehicle to a customer
under the contractual condition that no person under the age of
21 would be permitted drive it.

Id. at 247.

The customer

subsequently allowed a 19-year-old to drive the vehicle, and the
teenager was involved in an accident.

Id. at 245.

The North

Carolina Supreme Court held that the 19-year-old driver was not
7

“in lawful possession” of the vehicle under the Act.
247.

Id. at

The court concluded that while the rental car company

“obligated

itself

to

be

responsible

for

[the

customer’s]

negligence,” the customer “could not, in violation of his own
agreement, make the [company] responsible for [the teenager’s]
negligence.”

Id.

Justice

Branch,

concurring

in

the

result

only, concluded that the sole basis for the court’s denial of
coverage should have been N.C. Gen. Stat. § 20-281, which deals
more directly with persons engaged in the renting of automobiles
and requires coverage for lessees and their agents.

Id. at 247–

48 (Branch, J., concurring in the judgment).
In Belasco v. Nationwide Mutual Insurance Co., 326 S.E.2d
109 (N.C. Ct. App. 1985), the North Carolina Court of Appeals
was faced with a similar situation.

There, an insured loaned

his automobile to his daughter with the oral instruction not to
let

anyone

else

drive

it.

Id.

at

110.

The

daughter

nevertheless loaned it to a third party, who became involved in
an accident.
consistent

Id.
with

After surveying the case law, the court held,
Broughton,

that

“a

person

is

in

lawful

possession of a vehicle . . . if he is given possession of the
automobile by the automobile's owner or owner's permittee under
a good faith belief that giving possession of the vehicle to the
third party would not be in violation of any law or contractual
obligation.”

Id. at 113.

The court continued that, “[a]pplying
8

these

principles

to

the

present

case,

we

conclude

that

[the

third party], having been given possession of the vehicle by one
in lawful possession, with no notice of restrictions on its use,
was in lawful possession.” 1

Id.

Thus, it is clear that in order

to be in “lawful possession” of a vehicle, a third party must
have a good faith belief that the permittee had the authority to
give her the van.
Penn

To this extent, the parties agree.

National

argues

further

that

Nationwide

Mutual

Insurance Co. v. Baer, 439 S.E.2d 202, 205 (N.C. Ct. App. 1994),
imposes an additional requirement: that the original permittee
(here, Mr. Ferguson) must have had a good faith belief that
giving possession to the third party (Mrs. Ferguson) would not
violate any legal obligation.

Penn National contends that the

Magistrate Judge erred in determining that the Agreement was
ambiguous
privileges.

with

respect

to

Mr.

Ferguson’s

personal

use

Rather, it contends, Mr. Ferguson could not have

had a good faith belief that Mrs. Ferguson could possess the van
when such possession would be contrary to the Agreement.
Baer denied coverage - under both the applicable policy and
the Act - to a third party who took control of a vehicle after
1

The court also relied on Engle v. State Farm Mutual Auto Insurance
Co., 245 S.E.2d 532, 535–36 (N.C. Ct. App. 1978), where the court,
addressing a similar oral instruction not to let anyone else drive a
car that was later loaned to another who was involved in an accident,
held that where an original permittee gives another express permission
to use a vehicle, the other person is placed in lawful possession of
it under section 20-279.21.

9

the owner had directly told him never to do so.
203,

205.

Penn

National

addressing

the

question

expressly

excluded

any

relies

of

on

coverage

person

the

court’s

under

using

439 S.E.2d at

the

the

discussion

policy,

van

which

“without

reasonable belief that that person is entitled to do so.”

a
Id.

at 204.

In finding this policy provision consistent with North

Carolina

law,

the

court

stated

that,

under

Belasco,

it

is

required “not only that the owner or the owner's permittee must
give possession to a third party in good faith, but also that
the third party must take in good faith and without any notice
Id. at 205; see also N.C. Farm

of restrictions on his use.”

Bureau Ins. Co. v. Nationwide Mut. Ins. Co., 608 S.E.2d 112,
113–14 (N.C. Ct. App. 2005).

Penn National argues that the

first part of this statement supports its contention that the
good faith of the permittee is required.

Notably, Penn National

does not address the Baer court’s separate discussion where it
finds that the third party was not “in lawful possession” under
the Act.
is

not

In so finding, the court acknowledged that while “it
fair

to

impose

liability

on

an

owner,

through

his

insurance company, when that owner has done everything in his
power to limit those individuals who have permission to use his
vehicle,” the purpose of the Act - to protect innocent motorists
-

is

best

parties

served

who

take

by

requiring

possession

coverage
of

10

a

only

vehicle

on

those

unaware

third
of

a

restriction
Nationwide

prohibiting
Mut.

Ins.

their

use.

v.

Chantos,

Co.

Id.
238

at

205

S.E.2d

(citing

597

(N.C.

1977)).
In their response, Plaintiffs, drawing on the Magistrate
Judge’s observation (Doc. 28 at 12 n.2), rely on Osmanzada v.
Eldridge

Concrete

No.

3:10-cv-1,

2011 WL 926235, at *4–5 (W.D. Va. Mar. 15, 2011).

Osmanzada

addressed

Construction,

directly

permittee/lender

is

Inc.,

whether

the

good

under

required

concluded that it is not.

Civ.

North

A.

faith

of

the

law

and

Carolina

In Osmanzada, the district court

stated that, although language in Baer appears to impose a good
faith requirement on both the permittee and the third party, “it
is

apparent

that

the

court

intended

Osmanzada, 2011 WL 926235, at *5.

a

different

rule.”

According to the district

court, “Baer holds that to be in lawful possession of a vehicle,
a third party must have: (i) a good faith belief that the owner
or owner's permittee had authority to give possession; and (ii)
a good faith belief that there were otherwise no restrictions on
his use.”

Id.

In order to explain the contradiction between this result
and the above-quoted portion of Baer (upon which Penn National
relies), the district court pointed to the final paragraph of
the Baer opinion, where the Court of Appeals directly addressed
the issue of lawful possession under the Act.
11

The district

court noted that Baer recognized the distinction between cases
where the third party takes possession of a vehicle knowing that
she was prohibited from driving it and those where the third
party received no explicit instructions from the permittee, who
nevertheless

transferred

possession

instructions of the owner.

in

violation

of

explicit

The contrast is best illustrated by

the Baer court’s observation that “[i]t is one thing to impose
coverage when a permittee gives possession to a third party who
is unaware of any restrictions, but it is an entirely different
matter

to

impose

coverage

when

the

owner's

permittee

gives

possession to a third party who knows that he is prohibited from
using

the

vehicle.

possession.”

Such

a

person

cannot

have

lawful

Baer, 439 S.E.2d at 205; see Osmanzada, 2011 WL

926235, at *5.
The Osmanzada court also found it important that the North
Carolina Supreme Court has subsequently all but abandoned the
“restrictive meaning” it ascribed to section 279.21 in Broughton
that

“arguably

runs

counter

to

[the

Act’s]

purpose.”

See

Osmanzada, 2011 WL 926235, at *4 n.4 (citing Am. Tours, 338
S.E.2d at 96).

Now, “permission, express or implied, is not an

essential element of lawful possession” under the Act.

Id. at

*4 (quoting Caison v. Nationwide Ins. Co., 243 S.E.2d 429, 432
(N.C. Ct. App. 1978)).

12

Penn National has not addressed Osmanzada or its reasoning.
Thus, while Osmanzada’s interpretation of Baer and the North
Carolina courts’ application of section 279.21 is persuasive,
the court need not resolve Plaintiffs’ objection that the good
faith of the permittee/lender is not required.

That is because,

as the Magistrate Judge correctly concluded, there nevertheless
remains a genuine dispute of material fact as to Mrs. Ferguson’s
good faith.

(See Doc. 28 at 13.) 3

To the extent the Magistrate

Judge concluded that a genuine issue of material fact existed
also

as

to

the

good

faith

of

Mr.

Ferguson,

therefore,

that

determination (and any discussion of its factual underpinning)
is not necessary to the court’s holding and need not be adopted
here.

Therefore, Penn National’s motion for summary judgment on

the issue of coverage under the Act will be denied.
III. CONCLUSION
For the reasons stated, the court concludes that there is
no

coverage

for

Plaintiffs

under

the

Policy

because

Mrs.

Ferguson did not have express or implied permission to drive the
KTS van, but a genuine dispute of material fact exists as to
whether she was “in lawful possession” of the van at the time of
the accident to provide coverage under the Act.
3

Penn National makes much of the fact that Mrs. Ferguson did not hold
a valid driver’s license at the time of the accident, because her
license had been suspended.
(See Doc. 30 at 2, 4–5, 10, 12—13.)
However, Mrs. Ferguson avers that she was unaware her license had been
suspended.
(Doc. 25-2 ¶ 5.)
Thus, a fact issue exists as to Mrs.
Ferguson’s state of mind.

13

IT

IS

THEREFORE

Recommendation

is

ORDERED

ADOPTED

as

that
modified

the

Magistrate

herein,

and

Judge’s

that

Penn

National’s motion for summary judgment (Doc. 19) is GRANTED as
to Plaintiffs’ claim for coverage under the Policy but is DENIED
as to coverage under the Act.

/s/
Thomas D. Schroeder
United States District Judge
March 17, 2014

14