By James W. Bryan

On February 20, 2018, the North Carolina Court of Appeals upheld a ruling of the North Carolina Business Court that provides further clarification on whether a claimant with a judgment against the insured may sue the insurer for deceptive trade practices.  USA Trouser, S.A. de C.V. v. Williams, 2018 WL 943639 (N.C.App. 2018).  In this case, Navigators Insurance Co. issued a directors and officers liability insurance policy to the insured International Legwear Group, Inc. (“ILG”).  Plaintiff USA Trouser S.A. de C.V. (“USAT”), a trade creditor of the insured, sold socks on credit to the insured.  In federal court in Charlotte, USAT sued ILG and three of its directors/officers for failing to disclose ILG’s worsening financial condition while continuing to obtain products from USAT upon credit.  USAT obtained a default judgment for $2.0 mil.   USA Trouser later filed the instant action in state court against Navigators asserting claims for, among other things, bad faith claims settlement practices and unfair trade practices pursuant to N.C. Gen. Stat. § 75-1.1.  Navigators moved to dismiss.  In opposing the motion, USAT argued it became a third-party beneficiary to the insurance policy upon entry of the default judgment and obtained the right to payment on the judgment and to sue the insurer directly for its failure to pay.  Business Court Judge Gale granted the motion to dismiss and USAT appealed.

Affirming the trial court, the Court of Appeals rejected the argument that USAT is a third-party beneficiary of the policy.  The Court started its analysis by noting the general rule that “[while] a plaintiff generally cannot sue the insurance company of an adverse party under G.S. § 75-1.1, if the plaintiff achieves the status of an intended third-party beneficiary arising from the contractual relationship between the adverse party and the adverse party’s insurance company, the plaintiff may then bring a claim against the insurance company for violating the unfair and deceptive practices statute.”  Prince v. Wright, 141 N.C. App. 262, 270, 541 S.E.2d 191, 197 (2000).  The controlling case regarding direct actions by a third-party plaintiff against an insured’s insurer is Wilson v. Wilson, 121 N.C. App. 662, 468 S.E.2d 495 (1996). In Wilson, the Court of Appeals held “North Carolina does not recognize a cause of action for third-party claimants against the insurance company of an adverse party based on unfair and deceptive trade practices under N.C.G.S. § 75-1.1.” Id. at 665, 468 S.E.2d at 497. Shortly after Wilson was decided, the Court of Appeals created an exception to the Wilson rule, and held, “[t]he injured party in an automobile accident is an intended third-party beneficiary to the insurance contract between insurer and the tortfeasor/insured party.” Murray v. Nationwide Mut. Ins. Co. 123 N.C. App. 1, 15, 472 S.E.2d 358, 366 (1996), rev. denied, 345 N.C. 344, 483 S.E.2d 173 (1997).

Following Murray, the Court of Appeals required the third-party plaintiff, in an automobile accident context, to have obtained a judgment against the liability insurance company’s insured before it may have standing to sue the insurance company directly. See Craven v. Demidovich, 172 N.C. App. 340, 342, 615 S.E.2d 722, 724 (2005) (affirming dismissal of plaintiff’s claims against insurer when insured’s liability had not been judicially determined).

USAT argued Murray holds that a third-party claimant’s obtainment of a judgment against the insurance company’s insured ipso facto raises the claimant to a retroactive intended third-party beneficiary of the insurance contract, and thereby places the third-party claimant in privity of contract with the insurer. The Court of Appeals disagreed, noting that USAT’s argument ignores the fact that the third-party claimant’s privity with the insurer is based upon the third-party claimant being an injured party in an automobile accident. See Murray, 123 N.C. App. at 15, 472 S.E.2d at 366.  In the automobile accident context, an injured party is recognized as a third-party beneficiary to the liability insurance policy, because, under the statute, “[t]he primary purpose of th[e] compulsory motor vehicle liability insurance is to compensate innocent victims who have been injured by financially irresponsible motorists.” Nationwide Mut. Ins. Co. v. Chantos, 293 N.C. 431, 440, 238 S.E.2d 597, 604 (1977).  According to the Court, Murray did not recognize nor implement a general rule that judgments against insureds provide claimants with rights to recover from insurers directly.  Further, the Court noted that USAT has not cited any binding authority which tends to establish a trade creditor is in privity with its debtor and the debtor’s insurer with respect to a directors and officers liability insurance policy, merely by virtue of the trade creditor’s obtainment of a judgment against the insured debtor.  It was undisputed and admitted that USAT is not specifically and expressly named in the Policy.

Thus, USAT failed to establish the privity required by Murray for it to have standing to assert claims for unfair or deceptive trade practices and bad faith claims settlement. Without privity, the general rule that “a private right of action under N.C.G.S. § 58-63-15 and N.C.G.S. § 75-1.1 may not be asserted by a third-party claimant against the insurer of an adverse party[,]” prevailed. Lee, 136 N.C. App. at 810, 525 S.E.2d at 856  USAT did not have standing to assert its unfair or deceptive trade practices claim and bad faith settlement claim and failed to state such claims upon which relief could be granted.  Navigators won.