DEFENSE OBLIGATIONS – THE DUTY TO DEFEND AND THE DUTY TO PAY

The following is from Sections 4.03 and 4.04 of Chapter 4 of the LexisNexis Practice Guide: North Carolina Insurance Litigation (2018 Edition). Chapter 4 is entitled “Commercial General Liability Insurance” and was written by PCKB’s Deb Bowers. Section 4.03 pertains to the insurance company’s duty to defend and section 4.04 addresses the duty to pay a covered claim.

Section 4.03: Defense Obligation – The Duty to Defend. 

The defense obligation or duty to defend aspect of CGL [Commercial General Liability] coverage is an important part of the coverage provided by a CGL policy. It provides for an insurer paid lawyer to defend the insured against the claims alleged as well as the cost of investigation, expert witness fees, and other costs associated with litigating claims.

The determination of the duty to defend involves analyzing the claims asserted against an insured and comparing those claims to the policy provisions. If the insurance policy provides coverage for the facts as alleged, then the insurer has a duty to defend, even if those facts turn out to be untrue. Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, 364 N.C. 1, 692 S.E.2d 605 (2010). In addition to comparing the complaint allegations to the policy, facts learned from the insured and facts discoverable by reasonable investigation should also be considered in determining whether there is a duty. Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986) (an insurer’s duty to defend may still be found where the insurer “knows or could reasonably ascertain facts, that if proven, would be covered by [the] policy)”; accord, Builders Mutual Insurance Company v. Mitchell, 210 N.C. App. 657, 709 S.E.2d 528 (2011). If an insurer knows of or could reasonably ascertain facts that would bring the claim within policy coverage, it is bound to defend even if the facts as alleged appear otherwise. Westfield Ins. Co. v. Nautilus Ins. Co., 154 F. Supp. 3d 259, 264–65 (M.D.N.C. 2016).

The reverse is not true. That is, extrinsic evidence (information outside the four corners of the complaint) may not be used to avoid coverage if coverage is implicated by the facts alleged. Nationwide Prop. & Cas. Ins. Co. v. Brinley’s Grading Serv., Inc., 225 N.C. App. 531, 737 S.E.2d 192 (2013) (insurer cannot rely on “facts” not alleged in complaint to deny a defense); St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1179 (M.D.N.C. 1989), aff’d 919 F.2d 235 (4th Cir. 1990); see also New NGC, Inc. v. Ace American Ins. Co., 105 F. Supp. 3d 552, 568 (W.D.N.C. 2015).

It is often said that the duty to defend arises if the allegations in the complaint arguably fall within the policy coverage. See St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1179 (M.D.N.C. 1989), aff’d, 919 F.2d 235 (4th Cir. 1990). That is a true statement that is articulated in many decisions by courts applying North Carolina law. However, the North Carolina Supreme Court has stated that “the question is not whether some interpretation of the facts as alleged could possibly bring the injury within the coverage provided by the insurance policy; the question is, assuming the facts as alleged to be true, whether the insurance policy covers that injury.” Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, 364 N.C. 1, 7, 692 S.E.2d 605, 611 (2010). This is a narrower question. The insurer is not required to accept a tortured or fantastical interpretation of the alleged facts in order to determine whether there is a defense obligation; it may rely on the facts as actually alleged. If, under those facts, if proven, there would be a covered claim, then the insurer must defend.

§ 4.04: Indemnity Obligation – The Duty to Pay.

The duty to indemnify is the duty to pay for settlement or to pay a judgment rendered against an insured. It is determined by the facts proven at trial. Harleysville Mutual Insurance Company v. Buzz Off Insect Shield, LLC, 364 N.C. 1, 692 S.E.2d 605 (2010). Because the indemnity obligation is dependent on the facts proven or elucidated beyond the pleadings stage, courts will often refuse to rule on any declaratory judgment action over coverage until after the underlying case is resolved. See Travelers Indem. Co. v. Miller Bldg. Corp., 221 Fed. Appx. 265, 267 (4th Cir. 2007) (“As a general practice, courts wait to decide coverage until litigation or agreement has determined the particular damage for which an insured will be responsible.”); Westfield Ins. Co. v. Weaver Cooke Constr., LLC, 2017 U.S. Dist. LEXIS 28662 (E.D.N.C. Mar. 1, 2017).

The indemnity obligations of an insurer are typically narrower than the defense obligation. Wake Stone Corp. v. Aetna Cas. & Sur. Co., 995 F. Supp. 612, 615 (E.D.N.C. 1998). Once an insurer undertakes to defend, it must defend all claims, even those that are not covered. That is the “in for a penny; in for a pound” rule. However, indemnity dollars are only paid for covered damages, so there may be times when an entire case is defended but only one claim is potentially covered and only those damages are indemnified by the insurer. There may even be times when a fact finder awards damages on only the non-covered claims, in which case there is no indemnity obligation.

Attorney’s Tip:Insurers will often settle claims in their entirety without parsing out covered versus non-covered claims. However, an insured may be asked to contribute toward settlement of non-covered claims, especially in circumstances where only one claim is potentially covered but there are many other non-covered claims that are being defended. If both covered and non-covered claims are being defended, the insurer may move to intervene in its own name and may submit special interrogatories to the fact finder in order to separate damages arising from the non-covered claims versus those that may be covered.