There is a case making its way through Onslow County Superior Court that you may want to keep an eye on. In Ortez and the Estate of Estes v. Penn National Security Insurance Company (Penn National) a trial court recently awarded judgment against Penn National for treble damages of $28,949,424.80, for breach of its duty to defend and breach of its duty to settle a claim against its insured driver. A Rule 59 motion for reconsideration is pending. This case could generate caselaw on several important coverage issues.

Penn National insured Kitchen and Lighting Designs Inc. under a commercial auto policy, with liability and UM/UIM limits of $1,000,000. Kitchen and Lighting’s employee (Ortez) was driving an Isuzu box truck that was a covered auto and was involved in a two-vehicle accident in which Ortez’ passenger/co-employee (Estes) was fatally injured. The Estes Estate sued Ortez, Fissaha (the driver of the other vehicle) and Passport (Fissaha’s employer) in Craven County (The Underlying Action). Fissaha and Passport settled the claims against them for $863,000. Relying on exclusions for injury to an employee of the insured or to a co-employee of the insured, Penn National denied coverage and refused to provide a defense to Ortez. In response to the coverage denial, the Estes Estate asserted an uninsured motorist claim under the Penn National policy.

Summary judgment was entered against Ortez on liability. A hearing on damages was scheduled for a Tuesday morning. On the Friday immediately preceding the hearing, the Estate offered to give a covenant not to execute to Ortez, if Penn National would deliver a check for $30,000 to the Estate’s attorneys before 3:00 pm on Monday. Penn National responded that it would pay the $30,000 but could not deliver the check until Tuesday. The Estate refused to accept that payment. The hearing on damages was conducted on Tuesday morning and the Court awarded damages of $9,500,000.

The day after the judgment was filed, Ortez and the Estes Estate filed suit against Penn National (The Coverage Action). Ortez sued for breach of duty to defend, breach of duty to settle, unfair trade practices and bad faith. The Estate sued for breach of contract, failure to pay the UM claim, breach of the covenant of good faith and fair dealing in connection with the UM claim, unfair trade practices in connection with the UM claim and bad faith refusal to pay the UM claim. Penn National answered the complaint and Ortez filed a motion for judgment on the pleadings. This motion resulted in the nearly 29-million-dollar judgment against Penn National. The Coverage Action Court determined that after adjustments for the $863,000 paid by Fissaha and Passport, costs of court and interest, the judgment in the Underlying Action was $9,649,808.27. The Coverage Action Court awarded Ortez damages of $9,649,808.27 for breach of the duty to defend, breach of the duty to settle, and unfair trade practices and trebled those damages, pursuant to N.C.G.S. Sectoin 75-16.

Ortez had alleged that Penn National owed him a defense because the complaint in the Underlying Action did not allege that Ortez and Estes were co-employees and Penn National could not look at facts outside of the complaint in determining whether a defense was owed. Ortez also alleged that the employee/co-employee exclusions were invalid to the extent that N.C.G.S. Section 20-279.21 required the policy to provide liability coverage of at least $30,000. (There was no indication that another liability policy might satisfy the financial responsibility requirements for the Isuzu box truck – a North Carolina personal auto policy does not provide coverage for a named insured driving his employer’s vehicle in the scope of employment unless that vehicle is a private passenger auto.) Ortez alleged that because Penn National breached its obligation to provide a defense, it was estopped from asserting the policy exclusions. Without so stating, the Coverage Action Court appeared to agree.

While the complaint in the Underlying Action did not explicitly allege that Estes and Ortez were co-employees, it implied that they were co-employees by anticipating the workers compensation exclusivity defense. The complaint in the Underlying Action alleged that Ortez’s conduct was grossly negligent, reckless, and willful and wanton and further alleged: “Defendant Luis J. Ortez is liable to the Plaintiff based on the legal precedent of Pleasant v. Johnson, and subsequent legal authority in North Carolina recognizing that legal duty and that legal right of recovery.” (Pleasant v. Johnson, 312 N.C. 710 (1985), held that “the North Carolina Workers’ Compensation Act does not insulate a co-employee from the effects of his willful, wanton and reckless negligence.” ) Was the Estate’s citation to Pleasant v. Johnson a sufficient allegation that Mr. Ortez and Mr. Estes were co-employees to allow Penn National to rely on the co-employee exclusion in determining whether a defense was owed? Although it was not alleged in the underlying action, the Estes Estate received workers compensation payments. Could/should the Estate’s successful workers compensation claim influence the courts to find that the reference to Pleasant v. Johnson was sufficient to trigger the application of the co-employee exclusion? If these issues are ultimately resolved in Penn National’s favor, that would still leave open the question of how Penn National could have avoided coverage altogether (and the related duty of defense), as opposed to providing minimum limits coverage. N.C.G.S. Section 20-279.21 mandates that all vehicles have at least minimum limits coverage. In the absence of any other liability coverage applicable to the vehicle driven by Ortez, the argument for why the Penn National policy could exclude liability coverage completely is not readily apparent.

The judgment in the Coverage Action states that the pleadings demonstrated that Ortez was entitled to recover damages for Unfair Trade Practices from Penn National as a matter of law. It did not state whether that recovery was based on a breach of the duty to defend, a breach of the duty to settle or both. It did not state whether the breach that supported the recovery was accompanied by aggravating circumstances and, if so, what aggravating circumstances formed the basis for the Unfair Trade Practices award. Perhaps the Court based the Unfair Trade Practices award on the proposition that any time a carrier incorrectly determines that it does not owe a defense a treble damage award must follow. This remains to be seen.

In its Rule 59 motion, Penn National raised some interesting questions, including whether the complaint and answer in the Coverage Action supported a Rule 12(c) judgment, whether awarding $29,000,000 to Ortez based on a judgment against him in the Underlying Action that was premised on his willful, wanton or reckless negligence would constitute unjust enrichment, whether all of the damages that were trebled could properly be attributed to an unfair trade practice, and whether the failure to provide a defense justified disregarding the other terms and conditions of the contract. The most pressing issue for many readers may be with respect to time limit demands. The judgment against Penn National contains a finding that there was no issue of genuine fact raised by the pleadings and Penn National breached its duty to settle. Was this based on Penn National’s response to a time limit demand by undertaking to deliver a $30,000 check to the Estate’s attorneys on Tuesday, rather than Monday? If so, will the North Carolina appellate courts create case law that makes time limit demands a weapon for creating coverage that did not otherwise exist? (There is at least one case making its way through the North Carolina courts on time limit demands already.)

The Estate’s UM/UIM claims against Penn National also raise interesting issues. It appears that the Estate is intent upon recovering the uninsured motorists limits of $1,000,000 and extra contractual damages, apart from any satisfaction that it may obtain from Mr. Ortez. Under Hairston v. Harward, 821 S.E.2d 384 (N.C. 2018), Ortez would not be entitled to a credit for any amounts that the Estate receives from Penn National on the UM/UIM claim.

The Isuzu box truck did not qualify as an uninsured motor vehicle under N.C.G.S. Section 20-279.21(b)(3). Under the statute, “the term ‘uninsured motor vehicle’ shall not include a motor vehicle owned by the named insured.” A policy can grant more generous coverage than is required by the statute. Endorsement CA 21 16 (likely the most commonly used ISO endorsement for UM/UIM coverage on commercial auto policies in North Carolina) defines an uninsured motor vehicle as a vehicle for which no policy provides the minimum limits required by the Financial Responsibility Act. Unlike the Financial Responsibility Act, endorsement CA 21 16 does not state that “uninsured motor vehicle” does not include a motor vehicle owned by the named insured. Will the courts hold that a vehicle owned by the named insured can be an uninsured motor vehicle under CA 21 16? Under N.C.G.S. Section 20-279.21(b)(3), a vehicle for which the insurance company writing the liability coverage denies coverage is an uninsured vehicle. Will the courts hold Penn National to its coverage denial on liability coverage for purposes of determining whether the Isuzu box truck was an uninsured motor vehicle, even if the courts determine that Penn National owed minimum limits liability coverage?

If the Penn National policy must provide minimum limits liability coverage, the Estate’s UM claim potentially becomes a UIM claim. The UIM raises an unresolved issue of statutory interpretation. N.C.G.S. Section 20-279.21(b)(4) provides: “[A] highway vehicle shall not be an ‘underinsured motor vehicle’ for purposes of an underinsured motorist claim under an owner’s policy insuring that vehicle unless the owner’s policy insuring that policy provides underinsured motorist coverage with limits that are greater than that policy’s bodily liability limits.” In Benton v. Hanford, 195 N.C. App. 88 (2009), the Court interpreted this limitation to apply only in cases where there are multiple claimants. Appling Benton, the Isuzu box truck would likely qualify as an underinsured motor vehicle, even though the Penn National policy declared the same limits for the liability and UIM coverages. This leaves the issue of whether the UIM coverage in the Penn National policy is voluntary coverage, such that the policy provisions alone control. The Penn National commercial auto policy listed 11 vehicles on the declarations page, meaning that it would qualify as a fleet policy. N.C.G.S. Section 20-279.21(b)(4) states that “no policy of motor vehicle liability insurance applicable … solely to fleet vehicles shall be required to provide underinsured motorist coverage.” N.C.G.S. Section 20-279.21(g) provides that policies may provide coverage in addition to that required by the Financial Responsibility Act, and such voluntary coverage is not subject to the provisions of the Act. Endorsement CA 21 16 provides: “[A]n underinsured motor vehicle does not include a ‘covered auto’ unless the limit of Underinsured Motorists Coverage shown in the Declarations or Schedule is greater than the Limit of Insurance for Liability Coverage shown in the Declarations of this policy.” If the UIM coverage is deemed to be voluntary coverage, the policy terms would trump any interpretation of the Financial Responsibility Act that would have one compare the UIM limits to the liability coverage available after the application of the employee/co-employee exclusions, as opposed to comparing the UIM limits to the liability limits shown on the policy declarations page. There are two opinions from Federal District Courts sitting in North Carolina finding that the UIM coverage on fleet vehicles is voluntary coverage and the Financial Responsibility Act’s requirements do not apply to such coverage. See, Union Fire Insurance Company v. Njuguna, 15 F.Supp.3d 637 (E.D.N.C. 2014); Travelers v. Seretta Construction Mid-Atlantic, 333 F.Supp.3d 540 (W.D.N.C. 2018). There are no decisions from the North Carolina appellate courts on this issue.

This case gives coverage attorneys a lot to study and think about. It holds potential for the North Carolina appellate courts to provide important guidance for future coverage analyses. Stay tuned!

September 30, 2019/by InsuranceLaw