Court: District Court, E.D. North Carolina; January 26, 2015; Federal District Court
Greenwich Insurance Company filed a complaint for declaratory judgment on May 23, 2014, asserting that the "Errors and Omissions" clause in its insurance contract with Medical Mutual Insurance Company absolves it from any obligation to defend or indemnify Medical Mutual in a lawsuit filed by Dr. Arleen Thom. On the same day, both parties filed motions for summary judgment. Medical Mutual is an insurance provider that had issued a medical malpractice policy to Dr. Thom, covering up to $1,000,000. In May 2008, Dr. Thom faced a medical malpractice lawsuit from Stephen Nicholson, which Medical Mutual defended, hiring two attorneys and rejecting several settlement offers within the coverage limits. The jury ultimately ruled against Dr. Thom, awarding Nicholson $4,650,000 in damages. Subsequently, Dr. Thom sued Medical Mutual for various claims, including bad faith refusal to settle. Medical Mutual sought coverage from Greenwich under a reinsurance policy, which Greenwich denied based on the exclusionary clause. Following further correspondence, Greenwich initiated its declaratory judgment action. The court ultimately granted Greenwich's summary judgment motion while denying Medical Mutual's. Prior to this decision, both parties recognized the legal nature of their disputes as narrow and suitable for resolution through dispositive motions, leading to the court's order to file cross-motions for summary judgment while staying discovery.
Summary judgment is granted when the moving party shows no genuine dispute over material facts and is entitled to judgment by law (Fed. R. Civ. P. 56(a)). The moving party must first demonstrate an absence of such disputes or lack of evidence supporting the nonmoving party (Celotex Corp. v. Catrett). If this burden is met, the nonmoving party must present specific facts to establish a genuine issue for trial (Matsushita Elec. Indus. Co. v. Zenith Radio Corp.). A genuine issue exists if sufficient evidence could lead a jury to favor the nonmoving party (Anderson v. Liberty Lobby, Inc.), and a mere scintilla of evidence is insufficient. Speculation or building inferences does not create a genuine issue (Anderson). Only factual disputes that affect outcomes under the law can prevent summary judgment. The court must view facts favorably for the nonmoving party (Matsushita).
For cross-motions for summary judgment, each motion is examined separately (Desmond v. PNGI Charles Town Gaming, L.L.C.). Under North Carolina law, an insurer's duty to defend is based on the facts alleged in pleadings, while the duty to pay is determined by facts established at trial (Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co.). An insurer must defend against allegations of covered injuries, regardless of ultimate liability. Conversely, if pleadings indicate an injury is not covered and the insurer is unaware of any contrary facts, the insurer has no duty to defend. The duty to defend is broader than the duty to indemnify, as unsubstantiated allegations require defense if they concern covered injuries (Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C.). Courts use a "comparison test" to assess whether allegations align with policy coverage (Waste Mgmt.), and the Supreme Court of North Carolina holds that if underlying allegations include both covered and excluded claims, the possibility of liability that is covered imposes a duty to defend (Waste Mgmt. at 691 n. 2).
The Supreme Court of North Carolina established that, when determining the duty to defend under an insurance policy, the focus is on whether the alleged facts, if taken as true, fall within the policy's coverage. The interpretation of an insurance contract is guided by the parties' intent, which must be discerned from the contract language. Courts enforce insurance policies as written and do not rewrite them, but any ambiguities are resolved against the insurer. The Greenwich insurance policy explicitly excludes coverage for losses resulting from claims related to a lack of good faith or unfair dealing in handling claims under any insurance contract.
In the case examined, the Greenwich policy excludes coverage for any claim alleging Medical Mutual’s lack of good faith or unfair dealing regarding its obligations under Dr. Thom's policy. Even if a jury finds Medical Mutual acted in good faith, coverage is still excluded if the Thom complaint alleges bad faith or unfair dealing. The Thom complaint indeed alleges such lack of good faith and unfair dealing extensively, asserting that Medical Mutual's actions led to Dr. Thom's injuries, particularly related to the refusal to settle a claim within policy limits. Although one claim in the complaint mentions negligence, all claims collectively depict a continuous course of conduct by Medical Mutual characterized by a lack of good faith and unfair treatment in handling Dr. Thom's insurance claim. Thus, the policy excludes coverage for all claims due to the allegations contained in the complaint.
All claims related to Dr. Thom's allegations against Medical Mutual regarding bad faith and unfair dealing in her insurance claim are interconnected and fall under the Errors and Omissions exclusion. Several case precedents establish that if the core factual allegations involve excluded conduct, there is no duty to defend against claims that arise from or are related to that conduct. Medical Mutual's assertion that some claims might not be barred by the Errors and Omissions clause contradicts the clause's clear language, which excludes coverage for any claims alleging lack of good faith or unfair dealing. The North Carolina court emphasizes the importance of the contractual language, affirming that Greenwich Insurance has no obligation to defend or indemnify Medical Mutual in the Thom case. Despite Medical Mutual's dissatisfaction with this ruling, the court notes that insurance companies can seek secondary reinsurance for excluded conduct. The court granted the plaintiff's motion for summary judgment and denied the defendant's motion, clarifying that the duty to defend requires a definitive connection to coverage, which is not present here. The court also assumes, without ruling, that a "lack of good faith" aligns with bad faith, highlighting Dr. Thom's allegations of Medical Mutual's reckless disregard in settlement negotiations.
