Judge Thomas Schroeder of the U.S. District Court for the Middle District of North Carolina recently wrote an opinion in Craige v. Geico, 2020 WL 6946937 (November 25, 2020) that is a primer on the duty to defend in North Carolina. In Craige, Judge Schroeder held that because the insurers had unjustifiably refused to defend their insured in the underlying lawsuit, they were responsible to pay a judgment against the insured, up to their policy limits. The decision is important for both insurers and insureds, not only for duty to defend issues, but also for where available insurance coverage may be found, as well as proper notice of claims.

Facts

Craige arose from a car accident. The two plaintiffs were riding in a vehicle that was hit by a vehicle driven by James Rigsbee.  Rigsbee’s brother, Matthew, was the named insured on an automobile policy issued by Nationwide. Rigsbee’s mother and stepfather were the named insured on another auto policy issued by Geico. Both the Geico policy and the Nationwide policy showed an address for the insureds of 108 East Edgewood Drive in Durham. However, the definition of “insured” in the Geico and Nationwide policies also included “family members,” which the policies defined as “a person related to you by blood, marriage, or adoption who is a resident of your household.”  

The at-fault driver, Rigsbee, definitely was related by blood to his brother and his mother. The issue was whether he was a “resident of their household” which was listed as the Edgewood Drive address.  

So, here is the first learning point from Craige: look at all policies that might conceivably provide insurance - - not only policies maintained by the drivers, but also policies maintained by members of their families/households.

Before filing suit, the plaintiffs in the underlying action informed both Nationwide and Geico that they were making a claim against Rigsbee, and that they believed that the Nationwide and Geico policies maintained by Rigsbee’s brother and mother provided coverage. Nationwide and Geico each did an independent investigation of the claim, and each determined that Rigsbee was not a covered insured under their policies, because their investigations revealed he was not a resident of the Edgewood Drive address.  

The plaintiff later filed a lawsuit against Rigsbee. Nationwide and Geico both denied coverage and did not provide a defense to Rigsbee in the underlying action. Rigsbee did not appear at trial, and the trial court entered a judgment of approximately $270,000 in favor of the plaintiffs.  

The plaintiffs then filed a declaratory judgment against Nationwide and Geico, seeking a declaration that they were entitled to payment of their judgment against Rigsbee from the Nationwide and Geico policies maintained by Rigsbee’s brother and mother. That suit resulted in the Craige v. Geico decision in late 2020.  

Duty to Defend 

The primary issue in Craige was whether Nationwide and Geico had a duty to defend Rigsbee in the underlying lawsuit. The following points summarize law on duty to defend in North Carolina.

• The duty to defend is generally determined by analyzing the pleadings in the underlying lawsuit.  North Carolina uses the “comparison test,” where the pleadings are read side by side with the policy to determine whether the events as they are alleged in the pleadings are covered or excluded.  The facts alleged in the pleadings are taken as true and then compared to the language of the insurance policy.  
• Where the allegations of a complaint even arguably bring a claim within the coverage of the policy, an insurer’s duty to defend is absolute.  An insurer has a duty to defend even against groundless, false, or fraudulent accusations.  
• Only if the facts alleged are not even arguably covered by the policy language can an insurer be excused from its duty to defend.  
• Even where the complaint fails to assert claims falling within the coverage provided, an insurer may still have a duty to defend where it knows or could reasonably ascertain facts that, if proven, would be covered by the policy.  However, the inverse of that rule is not true - - evidence outside the pleadings may not negate allegations in the complaint, i.e., an insurer cannot use other evidence to negate a duty to defend if the facts alleged in the complaint fall within the policy’s coverage language.  

In Craige, the policies did not define “resident” or “residing.”  Comparing the language with the policy to the facts alleged in the underlying complaint, Judge Schroeder found that Geico and Nationwide were put on notice of the possibility that Rigsbee was a resident of the named insured’s household, and therefore was covered for insurance purposes.  

Although the underlying complaint did not specifically allege that Rigsbee resided at the Edgewood address, the complaint attached documents that indicated Rigsbee and the plaintiffs may have considered the Edgewood address to be his residence, including a traffic citation for an expired registration that listed the Edgewood address and a civil summons filed against Rigsbee listing the Edgewood address. In addition, the plaintiffs had provided Nationwide and Geico with an Affidavit signed by Rigsbee that listed the Edgewood address, and Rigsbee had received an N.C. State identification card listing the Edgewood address.

The defendants responded with multiple affidavits indicating that Rigsbee was not a resident of the Edgewood address at the time of the accident.  In the duty to defend analysis, however, these affidavits were irrelevant: “Once a complaint implicates the possibility of coverage, an insurer may not exonerate itself by preliminarily determining that no coverage actually exists, despite the allegations of the complaint.” 2020 WL 6946937 at *5. Even though Nationwide and Geico may have been convinced that their evidence was far more persuasive and accurate, they still retained a duty to defend Rigsbee in the underlying suit because the allegations of the Complaint arguably indicated coverage. 

Timely Notice

Nationwide and Geico also argued that they were not given timely notice, and accordingly that they should not have to defend or indemnify Rigsbee. We have previously written about the duty to provide notice in a blog post dated January 11, 2017.  In Craige, Judge Schroeder correctly noted that an unexcused delay in giving notice to the insurer does not relieve the insurer of its obligation to defend unless the delay operates to materially prejudice the insurer’s ability to investigation and defend. Nationwide and Geico had received notice almost 15 months before the trial, and therefore they were unable to show that the late notice materially prejudiced their ability to investigate and defend.

Moreover, Judge Schroeder noted that even where late notice might excuse the duty to defend, the rule in North Carolina is that an insurer’s denial of coverage on another ground operates as a waiver of notice requirements, the denial being regarded as a statement that payment would not be made even if the notice provisions of the policy had been complied with. Here, Geico and Nationwide did not allege that they would have defended Rigsbee if timely notice had been given; rather, they indicated all along that they believed they had no duty to defend based on their determination that Rigsbee was not covered under their policies, and the 7 expressly denied coverage. As a result, any claim that their duties to defend were excused due to late notice was waived.  

Consequences of Unjustified Breach of Duty to Defend 

Because the evidence was sufficient to put Geico and Nationwide on notice that there was a possibility of coverage for Rigsbee’s accident under their policies, they breached their duty to defend, and their refusal to defend was unjustified. A refusal to defend is unjustified even if, as in Craige, it is based on an honest but mistaken belief that the claim is not covered.  

Judge Schroeder explained that an insurer has three options under North Carolina law when it is faced with a request to defend an insured against claims that the insurer believes are outside the policy’s coverage. An insurer may (1) seek a declaratory judgment regarding its obligations, before or pending trial of the underlying action; (2) defend the insured under a reservation of rights; or (3) refuse to either defend or to seek a declaratory judgment, at the insurer’s peril that it might later be found to have breached its duty to defend.  

In Craige, Geico and Nationwide chose the third option. Where that happens, and a court later determines that the insurer had a duty to defend, any judgment rendered in favor of the plaintiff in the underlying lawsuit, or any reasonable settlement made by the insured, is binding on the insurer to the extent of its policy limits. Accordingly, in Craige, Judge Schroeder entered a judgment against both Geico and Nationwide up to their policy limits.