Bad Faith in Uninsured Motorist Coverage, Underinsured
Motorist Coverage And Medipay
By: Steven L. Satter, Esq.
Charles G. Monnett, III, Esq.
CHARLES G. MONNETT & ASSOCIATES
Charlotte, North Carolina
North Carolina has long recognized the need to protect innocent, injured parties from the financially irresponsible motorist. Nixon v. Liberty Mutual Ins. Co., 120 S.E.2d 430, 433, (N.C. 1961). In 1953, the North Carolina Legislature passed the Financial Responsibility Act (N.C.G.S. §20-279.1, et seq.) in an attempt to protect innocent, injured parties from financially irresponsible motorists on our roads and highways. The Act essentially mandated the purchase of liability insurance on vehicles registered in North Carolina and created a captive market for insurance companies. As a result North Carolina also recognized the need to protect consumers from unfair insurance practices. In order to protect consumers from an insurer's "bad faith" practices, North Carolina has developed a statutory and common law scheme which permits a cause of action directly against an insurance carrier who engages in unfair, deceptive or other prohibited claim settlement practices. This paper will examine the historical background, applicable statutes and case law of "bad faith"1 litigation against insurance carriers in North Carolina relative to uninsured motorist coverage (UM), underinsured motorist coverage (UIM) and medical payments coverage (med pay).
II. GENERAL COVERAGE CONSIDERATIONS
a. General Coverage Considerations
In determining "whether insurance coverage is provided by a particular automobile liability insurance policy, careful attention must be given to the type of coverage, the relevant statutory provisions, and the terms of the policy." Smith v. Nationwide Mut. Ins. Co., 400 S.E.2d 44, 47, 328 N.C. 139, reh'g denied, 403 S.E.2d 514, 328 N.C. 577 (1991). When a statute is applicable to the terms of an insurance policy, the provisions of the statute become terms of the policy, as if written into it. If the terms of the statute and the policy conflict, the statute prevails. Sutton v. Aetna Cas. & Sur. Co., 382 S.E.2d 759, 762, 325 N.C. 259, 263 reh'g denied, 384 S.E.2d 546, 325 N.C. 437 (1989).
Very often, the holding and analysis applied to an uninsured motorist case (UM) will also apply to an underinsured motorist case (UIM). As stated by the court in Braddy v. Nationwide Mut. Liability Ins. Co., 470 S.E.2d 820, 822, 122 N.C.App.402 (N.C.App.1996), "although the legal principles herein followed are often enunciated in uninsured motorists cases, this Court has nonetheless found them applicable to UIM actions." citing, Brace v, Strother, 368 S.E.2d 447, 449, 90 N.C.App. 357, 360 disc. review denied, 373 S.E.2d 104 (1988), 323 N.C. 171, overruled on other grounds, Ragan v. Hill, 447 S.E.2d 371, 337 N.C. 667 (1994). Consequently, much of the case law in the area of "bad faith" practices by insurers is applicable to both UM and UIM claims. In reviewing a cause of action for "bad faith" practices by insurance carriers, UM and UIM case law should be considered together when preparing arguments. See e.g., Bray v. North Carolina Farm Bureau Mut. Ins. Co., 462 S.E.2d 650, 341 N.C. 678 (N.C. 1995).
b. Uninsured Motorist Coverage - Generally
The Motor Vehicle Safety and Financial Responsibility Act, §20-279.1 et seq., requires an operator to provide proof of financial responsibility in order to lawfully operate a vehicle on North Carolina roadways. Typically, proof of financial responsibility is satisfied by purchasing liability insurance coverage provided by insurance carriers that are licensed in North Carolina.
In addition to requiring proof of financial responsibility,2 the North Carolina Financial Responsibility Act requires insurers to offer policy owners the opportunity to purchase uninsured motorist coverage (UM) and underinsured motorist coverage (UIM).3 While there are many issues regarding UM and UIM coverage, and a comprehensive examination of these issues is beyond the scope of this paper,4 it is important to note generally that the primary purpose of UM coverage is to protect an injured party against loss due to the negligence of another party who does not have the mandatory liability insurance. N.C.G.S.§20-279.21(b)(3).
UM coverage is a type of coverage which is purchased by the policy owner from his or her insurance carrier5 and which provides coverage to the insured, family members related by blood or marriage who reside in the same household, and the occupants of the insured vehicle should it become involved in a collision with an uninsured vehicle. The policy behind such coverage is to compensate innocent victims of financially irresponsible motorists. Bray, 445 S.E.2d at 81, Nationwide Mut. Ins. Co., v. Aetna Life & Cas. Co., 283 N.C.87, 194 S.E.2d 834 (1973). Specifically, §20-279.21(b)(3) provides that UM coverage will apply when a person insured under the policy is "legally entitled to recover damages from owners or operators of uninsured motor vehicles and hit-and-run motor vehicles because of bodily injury, sickness or disease, including death, resulting therefrom."
A great deal of litigation arises out of determining the parties rights pursuant to the "stacking of policies"6 and in determining whether coverage is available for classes of insured's. N.C.G.S. §20-279.21(b)(3) provides for two classes of persons insured. The first class consists of the named insured, and while a resident of the same household, the spouse of the named insured and relatives of either. The second class consists of any persons who use an insured vehicle with the consent of the owner and guests in the vehicle. Insureds of the first class are covered whether or not they are injured while in the insured vehicle. Insureds of the second class are insured only when in the vehicle and only for coverage provided for persons in that vehicle. Harrington v. Stevens, 434 S.E.2d 212, 334 N.C. 586 (1993), See generally, Bray, 462 S.E. at 653-54.
c. Underinsured Motorist Coverage - Generally
Pursuant to §20-279.21(b)(4), underinsured motorist coverage (UIM), provides a type of insurance coverage that allows an insured to be indemnified by his own insurer, in whole or in part, for damages caused by a negligent motorist who is inadequately insured. See, N.C. Farm Bureau v. Hilliard, 369 S.E.2d 386 1988). Under UIM coverage, an automobile liability insurer is required to offer the policy owner the opportunity to select underinsured motorist coverage limits in an amount between the statutory minimum and one million dollars ($1,000,000.00) and to obtain a valid rejection or selection of UIM limits which are different from the liability limits. State Farm Mutual v. Fortin, 513 S.E.2d 782, 350 N.C. 264 (1999).
d. Medical Payments Coverage - Generally
Medical payments coverage (med pay) typically provides coverage for medical and funeral expenses of occupants of the insured automobile. Under med pay coverage, insureds receive coverage either because of a relationship to the policyholder or a relationship to the covered vehicle. Generally, these coverages are listed under Part B of the standard personal auto policy. Members of a policyholder's household are covered whenever involved in a vehicular accident. In addition, if a member of a policyholder's household operates a private vehicle and is involved in a vehicular accident, the passengers of the vehicle are also covered. This coverage is purely contractual, and premiums do not increase in response to medical payment claims.7
III. COMMON LAW- BAD FAITH
a. Bad Faith - Generally
What remedies are available to an insured when an insurance carrier fails to live up to its end of the bargain? It is clear that the insured has an action for breach of contract. However, our courts have recognized that simply receiving the benefit of the insurance contract does not adequately compensate an insured when a carrier fails to pay sums due pursuant to an insurance contract nor does it discourage such conduct by the insurance carrier in the future. How can an insured recover damages over and above those for simple breach of contract? One solution would be a claim for fraud. However, fraud claims are difficult to prove where the wrongful conduct is based on the refusal to settle a claim. Another answer would be to pursue a tort claim against the carrier for "bad faith" refusal to settle. Unfortunately, common law actions for "bad faith" claims have historically been difficult to pursue. This issue was addressed by the North Carolina Supreme Court in Marshall v. Miller, 276 S.E.2d 397, 302 N.C. 539 (N.C. 1981), when it discussed the purpose for implementing statutory authority for unfair and deceptive trade practices. The Court stated:
... our Legislature intended to establish an effective private cause of action for aggrieved consumers in this State.
Such legislation was needed because common law remedies had proved ineffective. Tort actions for deceit in cases of misrepresentation involved proof of scienter as an essential element and were subject to the defense of 'puffing.' Proof of actionable fraud involved a heavy burden of proof, including a showing of intent to deceive. Actions alleging breach of express and implied warranties in contract also entailed burdensome elements of proof. A contract action for rescission or restitution might be impeded by the parol evidence rule where a form contract disclaimed oral misrepresentations made in the course of a sale. Use of a product after discovery of a defect or misrepresentation might constitute an affirmance of the contract. Any delay in notifying a seller of an intention to rescind might foreclose an action for rescission. Against this background, and with the federal act as guidance, North Carolina and all but one of her sister states have adopted unfair and deceptive trade practice statutes. (Emphasis added, citations omitted.)
Id. at 400. Consequently, the statutory and case law scheme developed in North Carolina has proven to be more effective in recovering damages than has been pursuing common law causes of action.
In establishing a "bad faith" cause of action, it is important to review the carrier's policies and actions directed against the insured. An insurance company is expected to deal fairly and in good faith with its policyholders. Robinson v. North Carolina Farm Bureau, 356 S.E.2d 392.There are numerous reported opinions in which our courts have held that every insurance contract includes an implied covenant of good faith and fair dealing which requires the parties (both the insurer and insured) to conduct themselves so that nothing is done which impairs the right of the other to receive the benefit of the agreement.8 A breach of that obligation by an insurance carrier may give rise to a cause of action for bad faith refusal to settle. If bad faith can be established, the insured is entitled to damages over and above those recoverable for a breach of contract, including punitive damages.
Proof of breach of the insurance contract may also constitute proof of bad faith."[U]nder some circumstances our law permits the recovery of punitive damages on claims for a tortious, bad faith refusal to settle under an insurance policy, even though, as in this instance, the refusal to settle is also a breach of contract." Dailey vs. Integon General Ins. Corp., 331 S.E.2d 148, 75 N.C.App. 387 (1985). Dailey defines bad faith as a refusal to pay or settle the insured's claim on any reasonable basis not based on an honest disagreement or innocent mistake.
The general rule in North Carolina is that punitive or exemplary damages are not recoverable for a mere breach of contract, unless the contract is one to marry. King v. Insurance Company of North America, 273 N.C. 396, 159 S.E. 2d 891 (1968). The North Carolina Supreme Court recognized that punitive damages might be appropriate in breach of contract actions that "smack of tort because of the fraud and deceit involved" or those actions "with substantial tort overtones emanating from the fraud and deceit." Oestreicher v. American National Stores, 290 N.C. 118, 225 S.E.2d 797 (1976). Thus, "when there is an identifiable tort even though the tort also constitutes, or accompanies, a breach of contract, the tort may itself give rise to a claim for punitive damages.... The tortious conduct must be accompanied by or partake of some element of aggravation before punitive damages will be allowed" Newton v. Standard Fire Insurance Co., 291 N. C. 105, 229 S.E. 2d 297 (1976). Aggravated conduct has been defined to include "fraud, malice, gross negligence, insult,.... willfully, or under circumstances of rudeness or oppression, or in a manner which evinces a reckless and wanton disregard of the plaintiff's rights." Baker v. Winslow, 184 N.C. 1, 113 S.E. 570 (1922).
The element of aggravation was examined by the Court of Appeals in Lovell v. Nationwide Mut. Ins. Co., 424 S.E.2d 181, 86-87, 108 N.C.App.416 (N.C.App. 1993), when the court considered plaintiff's claim that defendant insurer, with "bad faith," refused to settle a medical payments claim and whether punitive damages would be available to plaintiff. In Lovell, two high school students were killed in a car accident the morning after their prom. The policy provided med pay coverage of $2,000.00 per person, per accident. Defendant, through its employee, a master adjuster, made repeated promises that it would pay the med pay claim within two weeks of the submission of the appropriate bills. On July 21, 1988, plaintiffs submitted the bills for payment. Despite its promise to pay the med pay claim within the two week period, defendant then proceeded to attempt to link the med pay claim with other liability claims arising out of the accident stating that it preferred to pay all claims at once. In May 1989, when the plaintiffs filed their lawsuit the med pay claim still remained outstanding. Defendant's excuse for failing to pay the med pay claim was that it "just plumb forgot." Id. at 184. The court determined that plaintiff had sufficiently alleged aggravated conduct against the defendant and held inter alia, that an award for punitive damages was properly granted by the jury. Id. at 186-87.
In Miller v. Nationwide Mut. Ins. Co., 435 S.E.2d 537, 112 N.C.App 295 (1993) the Court of Appeals held that plaintiff's complaint was sufficient to seek punitive damages. The court addressed the issue of the insurer's breach of its "good faith" obligation and concluded that the allegations that plaintiff made in his complaint were sufficient to make out a claim for punitive damages. The court stated:
Plaintiff alleged that defendant breached its duty of good faith in refusing, without reason, to pay plaintiff the full UIM coverage due under the Miller policy and in refusing to effectuate a prompt, fair and equitable settlement of plaintiff's claim when liability was clear. Plaintiff specifically alleged that in refusing to pay sums due plaintiff under the Miller policy, defendant first claimed not to have sufficient information to determine the extent of plaintiff's damages, but that when plaintiff provided defendant with substantial additional documentation, defendant continued to refuse payment. Plaintiff alleged further that defendant withheld payment of $150,000 in remaining funds it acknowledged were due plaintiff in an effort to coerce plaintiff to relinquish his claims for an additional $100,000. Plaintiff also alleged that defendant failed to cite any case law or statutory authority to support its refusal to pay plaintiff, and that defendant has adopted an "across-the-board" policy and practice in the handling of its first-party insured UIM claims to uniformly contest, and refuse to pay UIM claims which involve a "stacking" of UIM coverages, in total disregard of the applicable policy provisions. These allegations of plaintiff's claim to the extent that such claim relates to or arises out of defendant's alleged bad faith refusal to pay plaintiff the UIM coverage for the second of the two automobiles issued under the Miller policy.
Id, at 545.
Thus, in order to recover punitive damages for the tort of an insurance company's bad faith refusal to settle, the plaintiff must prove (1) a refusal to pay after recognition of a valid claim, (2) bad faith, and (3) aggravating or outrageous conduct.
III. UNFAIR AND DECEPTIVE TRADE PRACTICES - G.S §58-63-15 and §75-1.1
When combined these statutes provide a powerful remedy for insureds who have been injured by wrongful claims practices.
c. North Carolina General Statute 58-63-15
In North Carolina, unfair trade practices in the insurance business are regulated by the provisions of N.C. Gen Stat. §58-63-1, et seq. Unfair claim settlement practices are defined in §58-63-15(11). This statute prohibits carriers from engaging in any activity the statute defines as an unfair act in the business of insurance. §58-63-15(11) contains fourteen subsections specifying acts which constitute unfair claim settlement practices when committed with "such frequency as to indicate a general business practice..." They are:
(a). Misrepresenting pertinent facts or insurance policy provisions relating to coverages at issue;
(b). Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies;
(c). Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;
(d). Refusing to pay claims without conducting a reasonable investigation based upon all available information;
(e). Failing to affirm or deny coverage of claims within a reasonable time after proof-of-loss statements have been completed;
(f.). Not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear;
(g). Compelling [the insured] to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insured;
(h). Attempting to settle a claim for less than the amount to which a reasonable man would have believed he was entitled;
(i). Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured;
(j). Making claims payments to insureds or beneficiaries not accompanied by [a] statement setting forth the coverage under which the payments are being made;
(k). Making known to insureds or claimants, a policy of appealing from arbitration awards in favor of insured's or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;
(l). Delaying the investigation or payment of claims by requiring an insured claimant, or the physician, [or] either, to submit a preliminary report and then requiring the subsequent submission of formal proof-of-loss forms, both of which submissions contain substantially the same information;
(m). Failing to promptly settle claims where liability has become reasonably clear, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage; and
(n). Failing to promptly provide a reasonable explanation of the basis in the insurance policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.
This chapter authorizes the Insurance Commissioner to institute administrative action against any insurer whom he has reason to believe has engaged in or is engaging in any unfair act as defined in the statute. The Insurance Code vests in the Commissioner only the power to determine whether an insurer violated the regulatory statute, and not whether the purpose or effect of an insurer's actions is injurious to an individual consumer. Phillips v. Integon Corp. 319 S.E.2d 673, 675, 70 N.C.App. 440 (1984). There is no private right to enforce the provisions of this chapter.
The preceding subsections may form the basis for an action for "bad faith" refusal to settle against an insurance carrier, and each subsection should be considered as possible grounds for relief. However, a review of published cases suggests that subsections (f, h, m and n) are the leading sections under which relief has been sought. See, e.g., Miller v. Nationwide Mut. Ins. Co., 435 S.E.2d 537, 112 N.C.App. 295 (N.C. App. 1993), (f, h, m, n); Robinson v. North Carolina Farm Bureau Ins. Co., 356 S.E.2d 392, 86 N.C.App. 44 (N.C.App. 1987) (e, f, h); Lovell v. Nationwide Mut. Ins. Co., 424 S.E.2d 181, 108 N.C. App. 416 (N.C.App. 1993) (m) and Gray v. North Carolina Ins. Underwriting Ass'n, 510 S.E.2d 396, 132 N.C.App. 63 (N.C.App. 1999) (f, h, l, m).
b. Relationship between G.S. 58-63-15 and G.S. 75-1.1
Although §58-63-15 does not allow for a private cause of action, individuals may use the North Carolina Unfair and Deceptive Trade Practices Act to enforce the provisions of §58-63-15.
N.C. Gen.Stat. §75-1.1 (1994) provides in part:
(a). Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are declared unlawful.
(b). For purposes of this section, "commerce" includes all business activities, however, denominated, but does not include professional services rendered by a member of a learned profession.
N.C. Gen. Stat. §75-16 provides:
If any person shall be injured or the business of any person, firm or corporation shall be broken up, destroyed or injured by reason of any act or thing done by any other person, firm or corporation in violation of the provisions of this Chapter, such person, firm or corporation so injured shall have a right of action on account of such injury done, and if damages are assessed in such case judgment shall be rendered in favor of the plaintiff and against the defendant for treble the amount fixed by the verdict.
Thus, N.C.G.S. §75-16 allows a private cause of action for violation of N.C. Gen.Stat. §75-1.1, and mandates the imposition of treble damages. See, Marshall, 276 S.E.2d at 403.
Pursuant to §75-1.1, in order for a plaintiff to prevail on a claim for unfair and deceptive trade practices, a claimant must demonstrate the existence of three factors: (1) an unfair or deceptive act or practice, or unfair method of competition, (2) in or affecting commerce, and (3) which proximately caused actual injury to the plaintiff or his business. Murray v. Nationwide Mut. Ins. Co., 472 S.E.2d 358, 362, (N.C.App.1996), quoting, Miller v. Nationwide Mut. Ins. Co., 435 S.E.2d 537, See generally, Spartan Leasing v. Pollard, 400 S.E.2d 476, 482, (1991).
Although the statutory provisions of §75-1.1 do not define "unfair act," the courts have interpreted an "unfair act" to be any act that offends established public policy or that is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. See, Johnson v. Phoenix Mut. Life Ins. Co., 266 S.E.2d 610, 300 N.C. 247, (1980), Marshall v. Miller, 276 S.E.2d 397. A practice is unfair when it offends established public policy and when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. Johnson v. Beverly-Hanks & Assoc., 400 S.E.2d 38, 42, 328 N.C. 202 (1991). If a party engages in conduct that results in an inequitable assertion of his power or position, he has committed an unfair act or practice. Id.
Any violation of §58-63-15 constitutes an unfair and deceptive trade practice in violation of §75-1.1, as a matter of law. Pearce v. American Defender Life Ins. Co., 343 S.E.2d 174, 316 N.C. 461, (N.C. 1986).9 Our courts have held that the purpose of the UTPA is to enable injured individuals to recover damages for injuries incurred from unethical business practices. Marshall v. Miller, 276 S.E.2d 397, 403, 302 N.C. 539 (1981). Under UTPA, insurance business is one "in commerce" as an "exchange of value" occurs when a consumer purchases a policy. Pearce, 343 S.E.2d at 179. The purpose of the Insurance Code is to regulate insurance to prevent potential injury to the public. Phillips v. Integon Corp., 319 S.E.2d 673, 70 N.C.App. 440 (1984). Moreover, any judgment rendered in favor of the plaintiff shall be assessed against the Defendant for treble damages.10 See, Gray v. North Carolina Ins. Underwriting Ass'n., 510 S.E.2d 396, 399,132 N.C.App. 63 (N.C.App.1999).
While treble damages may be awarded, it is important for the practitioner to be aware that attorney's fees may also be awarded pursuant to Chapter 75. Under §75-16.1 the trial court is permitted to award reasonable attorneys' fees to the prevailing party. The trial court may award attorneys' fees in its discretion upon a finding that: (1) the party charged with the violation has willfully engaged in the act or practice, and there was an unwarranted refusal by such party to fully resolve the matter which constitutes the basis of such suit; or (2) the party instituting the action knew, or should have known, the action was frivolous and malicious. Torrance v. AS&L Motors, Ltd., 459 S.E.2d 67, 119 N.C.App. 552 (N.C. App. 1995). Moreover, in order to award attorney's fees under §75-16.1, the trial court must make findings of fact that (1) the plaintiff is the prevailing party, (2) defendant willfully engaged in a deceptive act or practice; and (3) defendant made an unwarranted refusal to resolve the matter.
In United Laboratories, Inc. v. Kuykendall, 437 S.E.2d 374, 335 N.C. 183 (N.C. 1993), the North Carolina Supreme Court held that permitting the plaintiff, an employer, to recover both punitive damages and attorneys fees would not result in double redress for a single wrong as the conduct required for award of fees was different from that required for award of punitive damages. The Court stated that:
... the policies behind recovering attorneys fees and recovering punitive damages are wholly different. Punitive damages are designed to punish willful conduct and to deter others from committing similar acts. The purpose of attorneys fees in Chapter 75, however is to 'encourage private enforcement' of Chapter 75 an award limited to attorneys fees plus treble damages will often prove inadequate to punish and deter the type of willful conduct that leads to punitive damages at common law. The only provision in Chapter 75 relating to willful acts provides that attorneys fees may be awarded, but this is in the discretion of the court and the amount in no way related to the need to deter or punish. Similarly, recovery of punitive damages, although requiring willful conduct, does not account for an 'unwarranted refusal by one [who commits unfair practices ] to fully resolve the matter. Permitting recovery of punitive damages on the common law claim in addition to attorneys fees on the unfair practices claim best serves Chapter 75's policy of encouraging private enforcement of the Act. (Citations omitted).
Id. at 380.
Note, however, that where the same source of conduct gives rise to a traditionally recognized cause of action, i.e., breach of contract, and also gives rise to a cause of action for violation of §75-1.1, damages may be recovered either for the breach of contract claim, or for the violation of §75-1.1, but not for both. Id at 379. See also, Vasquez v. Allstate Ins. Co., 529 S.E.2d 480, 137 N.C.App.741 (N.C.App. 2000).
Prior to 1977, North Carolina did not recognize an individual's private cause of action based on unfair trade practices conducted by insurance companies. In that year, however, in Ray v. United Family Life Ins. Co., 430 F.Supp. 1353 (W.D.N.C. 1977), the United States District Court for the Western District Court of North Carolina opened the door to permit private consumer litigation arising out of unfair trade practices of insurance companies. In recognizing this right, Ray was the first North Carolina case to reconcile the Unfair Trade Practices Act with the Insurance Code. In reaching its decision, the court recognized that the Insurance Code provides a mechanism for the administrative regulation of unfair practices, but the court also held that the insurance industry was not exempt from the UTPA and permitted the plaintiff to recover under §75-1.1. Id. at 1356. The Ray court emphasized that the Insurance Code had no provisions for civil damage actions. Consequently, the court concluded that the source for the UTPA's private right of action §75-16 was the vehicle for individual consumer redress against insurers.
Following Ray, the applicability of §75-1.1 to §58-63-15 was broadened by the holding of Ellis v. Smith-Broadhurst, Inc., 268 S.E.2d 271 (1980). In Ellis, the court held that the UTPA provides a remedy for unfair insurance practices by creating a private right of action against insurers under §75-1.1.18 Finally, in Pearce, the court held that a violation of §58-63-15 was, as a matter of law, an unfair trade practice within 75-1.1.19
North Carolina courts have consistently held that for a violation of §58-63-15(11) to be actionable pursuant to Chapter 75, the plaintiff must show that the defendant engaged in the prohibited acts "with such frequency as to indicate a general business practice." See, Bentley v. North Carolina Ins. Guar. Ass'n, 418 S.E.2d 705, 107 N.C.App.1 (N.C.App.1992), Wake County Hosp. System Inc. v. Safety Nat. Cas. Corp, 487 S.E.2d 789, 127 N.C.App. 33 N.C.App.1997), Beasley v. National Savings Life Ins. Co., 330 S.E.2d 207, 75 N.C. App. 104 (N.C.App.1985), Belmont Land and Inv. Co. v. Standard Fire Ins. Co., 403 S.E.2d 924, 102 N.C.App, 745, (N.C.App. 1991), Von Hagel v. Blue Cross and Blue Shield of North Carolina. 370 S.E.2d 695, 91 N.C.App.58 (N.C.App.1988). Consequently, to state a cause of action for unfair trade practices based on a violation of §58-63-15(11), there must be an allegation that the defendant engaged in the prohibited acts with "such frequency as to indicate a general business practice." A plaintiff must still prove an actual injury proximately caused by the insurer's unfair act in order to prevail under this statutory scheme. Ellis v. Smith-Broadhurst, Inc., 268 S.E.2d 271, 273-74, 48 N.C.App.180 (1980).
An example of pleading the necessary elements of "such frequency as to indicate a general business practice" can be found in Miller v. Nationwide Mut. Ins. Co., 435 S.E.2d 537, (N.C. App.1993). In Miller, the plaintiff, the son of the named insured, brought an action against the automobile insurer after the insurer refused to allow intra-policy stacking of underinsured motorist coverages on insured's two vehicles, asserting claims for breach of contract, unfair trade practices, and punitive damages. The unfair trade practices were brought under subsections (f, h, m, n), of §58-63-15(11). The trial court entered judgment for plaintiff on the breach of contract claim but dismissed claims for unfair trade practices and punitive damages. Plaintiff appealed and the appellate courts reversed on the grounds, inter alia, that plaintiff's allegations were sufficient to state claims for unfair trade practices in settlement procedures and for punitive damages.
The Miller court held that the plaintiff pled sufficient facts to satisfy the pleading requirements demanded by the statute simply by alleging that "defendant has adopted a policy and practice in the handling of its first-party insured UIM claims to uniformly contest, and refuse to pay UIM claims which involve 'stacking' of UIM coverages." This holding suggests that the well-pleaded complaint should include allegations that defendant has adopted certain policies and practices as a general business practice.20
Another example of appropriate pleading, pursuant to §58-63-15(11), may be found in Robinson v. North Carolina Farm Bureau. 356 S.E.2d 392, 86 N.C.App 44 (N.C.App. 1987). In Robinson, the North Carolina Court of Appeals reversed the lower court's partial granting of defendant's summary judgment motion. The facts of the case indicate that plaintiff's restaurant burned down and seven-months later the insurance company paid the policy limits. However, during the initial seven-month period, the carrier engaged in an unreasonable practice by employing questionable tactics in appraising the remains of the structure. After receiving the policy limits, plaintiff brought suit alleging, inter alia, that defendant's delay in paying the building claim was unreasonable and done in bad faith and as such, that under subsections (e, f, h) defendant had violated the above statute. The trial court granted partial summary judgment and dismissed plaintiff's claim for punitive damages. In reversing the lower court, the appellate court held that:The defendant delayed payment because the plaintiff hired a property loss consultant, and the defendant further instructed a building contractor to produce a low estimate to do the repairs. The defendant did not pay the $100,000 until seven months after the fire, when the umpire21 set the loss at $170,000. This evidence is sufficient to establish a tortious bad faith refusal to settle in a timely manner. The evidence of the defendant's instructions to the contractor to lower his estimate meets the requirement of the accompanying aggravated22 conduct. Emphasis added.
Id. at 396.
The above holding suggests that in pleading a successful cause of action under Chapter 75 for a violation of §58-63-15(11), a complaint which alleges that defendant engaged in a prohibited course of conduct over an extended period of time and that such conduct satisfies plaintiff's burden of showing that defendant engaged in prohibited acts with "such frequency as to indicate a general business practice."
Finally, in Lovell v. Nationwide Mut. Ins. Co., 424 S.E.2d 181, 108 N.C. App. 416 (N.C.App. 1993), plaintiff alleged that defendant's actions amounted to "aggravated conduct" with the "aggravated conduct" arising out of the insurer's conduct in settling med pay claims and a wrongful death claim. Plaintiff alleged that defendant linked the med pay claim and the liability claim stating that it wanted to settle all claims at once in order force a low settlement of the wrongful death claim. The court agreed that such an allegation indicated aggravated conduct, and also stated such action was a violation of subsection (m) of §58-63-15.23 Id. at 186.
Although §5-63-15(11) and §75-1.1 provide relief to insureds from unfair and deceptive insurance practices conducted by the carriers, 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 §75-1.1. In a case of first impression, the North Carolina Court of Appeals, in Wilson v. Wilson, 468 S.E.2d 495, 121 N.C.App. 662, (N.C.App. 1996), refused to recognize this third-party cause of action.
In Wilson, the plaintiff, Aishah Wilson, the wife of the defendant, Ivey Wilson, suffered injury as a result of her husband's alleged negligence in driving a vehicle insured by defendant Nationwide Mutual Fire Insurance Company. The court set forth two primary reasons for denying plaintiff relief under this cause of action. Stated the court: "First, allowing such third-party suits against insurers would encourage unwarranted settlement demands, since plaintiffs would be able to threaten a claim for an alleged violation of §58-63-15 in an attempt to extract a settlement offer." Id. at 498. As its basis for its second reason for denying the cause of action, the court stated:
[that] allowing a third party claim against the insurer of an adverse party for violating §58-63-15 may result in a conflict of interest for the insurance company. Upon defending its insured, the insurer has a duty to act diligently and in good faith to its insured.(citation omitted). The insurer has a duty to safeguard the interests of its insured. Allowing a third-party action because of a violation of §58-63-15 would require the insurer to also act in the best interests of the party adverse to its insured. Such a result would likely put the insurer in a position of conflict with its insured - the party adverse to the third party.
Although the court in Wilson refused to expand the combined scope of §58-63-15 and §75-1.1, plaintiffs in North Carolina enjoy a strong basis for recovering damages against insurance carriers who fail to deal in good faith or engage in other unfair settlement practices.
When §58-63-15 and §75-1.1 are combined, these statutes provide a strong basis for gaining relief and recovering treble damages for the client, as well as providing a potential opportunity for receiving a judgment for attorneys fees. Furthermore, under §75-16.1, the trial judge may allow attorneys fees upon a finding that the party charged willfully engaged in the practice and there was an unwarranted refusal by the party charged to resolve the issue fully. The decision to whether to award attorneys fees is in the trial court's discretion. Vasquez v. Allstate Ins. Co., 529 S.E.2d 480, 483, 137 N.C.App. 741, (N.C.App. 2000).
In Vasquez, Tomas Mejia, was a passenger in vehicle operated by Oscar Trejo. Mr. Trejo's vehicle was struck head on by a vehicle operated by James Eric Brevard, an uninsured motorist. Mr. Mejia died as a result of the accident. Mr. Mejia and Mr. Trejo had UM insurance policies with defendant Allstate. Plaintiff, Mejia's administrator, brought suit under §75-1.1, alleging that defendant Allstate improperly refused to pay under the UM policies, and sought damages for breach of contract and deceptive trade practices. Id. at 481.
The trial court trifurcated the trial. Phase I dealt with the wrongful death claim against Mr. Brevard. Phase II addressed plaintiff's claim for unfair and deceptive trade practices and during Phase III, the jury considered plaintiff's claim for punitive damages. At the end of Phase I, the jury determined that Mr. Brevard's negligence caused Mejia's death and that the plaintiff sustained $104,003.00 in damages. After the Phase I verdict, defendant stipulated that the plaintiff was entitled to payment under any Allstate insurance policy in effect at the time of the accident. Following Phase II, the jury determined, pursuant to a special set of interrogatories submitted by the trial court, that defendant had failed to adjust the plaintiff's loss fairly, follow its own standards, act reasonably in communications, conduct a reasonable investigation and to effect a fair settlement in good faith. Id.
On appeal, the defendant argued that the plaintiff failed to show that he suffered any actual injury, with the basis for its position being that the plaintiff would ultimately receive the contract price after the plaintiff conducted his breach of contract action successfully. Therefore, defendant contended that his actions did not injure the plaintiff other than to delay his recovery of the contract price. In ruling against defendant's position, the court held that "defendant cannot now successfully suggest that by stipulating to pay the contract damages after a determination of liability he has eliminated the plaintiff's injury. Defendant's course of conduct in refusing to pay the claim gave rise to both the breach of contract claim and the unfair and deceptive trade practices claim." Id., at 782, quoting, Garlock v. Henson,435 S.E.2d 114, 112 N.C.App.243 (1993). In interpreting §75-1.1, the court further stated that "where the same course of conduct gives rise to both claims, the plaintiff may recover under either the breach of contract action or the action under §75-1.1 [and] if the plaintiff elects to recover under §75-1.1, the defendant cannot prevent that recovery by stipulating to pay damages for the breach of contract claim." Id. 24
In a case of first of impression, PHC, Inc., v. North Carolina Farm Bureau Mut. Ins. Co., 501 S.E.2d 701 129 N.C.App. 801, (N.C.App. 1998), the Court of Appeals for North Carolina held that an insured could recover attorney fees for insurer's unwarranted refusal to pay undisputed amount of claim without full release and title to vehicle.25 In PHC, although defendant agreed that it owed plaintiff some amount for its property loss, defendant refused to "pay" any amount without receiving a release from liability and the title to plaintiff's vehicle. In order to receive "payment," plaintiff would have to accept an amount it believed was less than its loss. The court held that "defendant's refusal to pay at least the undisputed amount of loss to plaintiff was unwarranted" and awarded plaintiff attorney's fees pursuant to §6-21.1 which permits the trial court, in its discretion, to allow reasonable attorneys' fees to a litigant who (1) obtains a judgment for recovery of damages; (2) in the amount of $10,000 or less; (3) against an insurance company; (4) in a property damage suit; (5) where the insured is the plaintiff; (6) upon a finding by the court that there was an "unwarranted refusal" to pay the claim which is the basis for the suit.
As set forth in §58-63-15(11) there are many areas in which insurers may breach the duty to deal in "good faith." However, §58-63-15(11) does not define what "bad faith" is under the statute. Consequently, in defining "bad faith," North Carolina courts have looked to §75-1.1 and §75-16 for guidance. See, Marshburn v. Associated Indem. Corp., 353 S.E.2d 123, 84 N.C.App. 365, Phillips v. Integon Corp., 319 S.E.2d 673 (1984). In Johnson v. Phoenix Mut. Life Ins. Co., 266 S.E.2d at 262-63, the North Carolina Supreme Court defined the terms "unfair" and "deceptive." The court stated:
What is an unfair or deceptive trade practice usually depends upon the facts of each case and the impact the practice has in the marketplace...The concept of "unfairness" is broader than and includes the concept of "deception." A practice is unfair when it offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers. (citations omitted).
The obligation of a liability insurer to defend an action brought by an injured third-party against the insured is absolute when the allegations of the complaint bring the claim within the coverage of the policy. Indiana Lumbermen's Mut. Ins. Co. v. Champion, 343 S.E.2d 15, 80 N.C.App. 370, (N.C.App. 1986), quoting, Insurance Co. v. Insurance Co., 269 N.C. 358, 152 S.E.2d 513 (1967), Stanback v. Westchester Fire Ins., Co., 314 S.E.2d 775, 68 N.C.App.107 (1984). The insurer's refusal to defend the action is unjustified if it is determined that the action is in fact within the coverage for the policy. Id., quoting, 14 Couch, Insurance 2d §51:156 (1982). This is so even if the refusal to defend is based on the insurer's honest but mistaken belief that the claim is outside the policy coverage. Id. Moreover, the plaintiff need not show fraud, "bad faith," deliberate acts of deception or actual deception, but must show that the acts had a tendency or capacity to mislead or created the likelihood of deception. Spartan Leasing Inc., v. Pollard, 400 S.E.2d 476, 101 N.C.App. 450, (N.C.App. 1991), quoting, Chastain v. Wall, 337 S.E.2d 150, 78 N.C.App. 350, disc. review denied, 342 S.E.2d 891, 316 N.C. 375 (1986).
There are different avenues of relief a practitioner may pursue as a result of an insurance carriers refusal to deal in good bad faith or a deceptive trade practice by an insurance carrier. The statutes set forth above, provide a strong basis for pursing appropriate relief. The practitioner should always seek to combine an action for bad faith refusal to settle with an action for unfair and deceptive trade practices pursuant to §63-58-15 and §75-1.1 because when used in combination, there is a greater potential for recovery by treble damages, attorney's fees or punitive damages.
1 As will be discussed throughout this paper, "bad faith" will be used interchangeably with the term "unfair and deceptive trade practices." §58-63-15 provides relief for "unfair and deceptive trade practices" and will be discussed in greater detail later in this paper.
2 On July 1, 2000, the North Carolina legislature amended §20-279.1, and increased minimum liability policy limits to 30/60.
3 An insured may reject UM and UIM coverage, but the insured's rejection must be made specifically and in writing. Lichtenberger v. American Motorists Ins. Co., 172 S.E.2d 284, 288 (N.C.App. 1970), State Farm Mut. Auto Ins. Co. v. Fortin, 513 S.E.2d 782, 350 N.C. 264, N.C. 1999). The language of N.C.G.S. §20-279.21(b)(4) is mandatory. An insurer is obligated to obtain the insured's selection or rejection of UM or UM/UIM coverage in writing and on a form promulgated by the Rate Bureau and approved by the Commissioner. Id.
4 The same caveat applies to the UIM coverage and med pay topics that are listed below. These topics involve significant issues such as coverage and policy stacking that are not intended to be covered under this paper. However, it is essential that practitioners have a basic understanding of the policy considerations that support these subjects.
5 By statute, every uninsured or underinsured motorist liability insurance policy is subject to certain implied terms whether or not such terms are specified in the text of the policy. NCGS § 20-279.21(b)(3).
6 There has been a great deal of litigation between insurers and insureds over the ability to "stack" or aggregate UM and UIM insurance. By "stacking" plaintiffs are seeking to maximize their recovery. "Inter-policy stacking" is the aggregation of coverages from different insurance policies. "Intra-policy stacking" is the aggregation of each coverage for the listed vehicles under a single, multi-vehicle policy and has been eliminated in North Carolina pursuant to 1991 amendments made to §20-279.21(b).
7 This section is paraphrased from a comprehensive article written by Jerome P. Trehy, Jr., Insurance in Bodily Injury Matters. The author would like to thank Mr. Trehy, for his kind assistance.
8 Robert E. Keeton & Alan I. Widiss, Insurance Law: A Guide to Fundamental Principles, Legal Doctrines, and Commercial Practices, at 642.
9 In 1987 and 1988 the North Carolina General Assembly mandated that former Chapter 58, among other chapters dealing with insurance be renumbered, rearranged, and consolidated, and present §58-63-15 was derived from formers §58-54.4. The Pearce holding was made pursuant to former G.S. §58.54.4.
10 Debra D. Burke, 15 Campbell L.Rev. 223, (1993) The Learned Profession Exemption of the North Carolina Deceptive Trade Practices Act: The Wrong Bright Line? No showing of willfulness or bad faith is necessary for an award of treble damages, since the UTPA was designed to encourage private enforcement and to make it economically feasible to bring a cause of action, even when the potential damages recoverable may be limited. Moreover, if two causes of action are established, one under the UTPA, and one under the common law wherein an award of punitive damages would be appropriate, the successful plaintiff must elect to recover either punitive damages under the common law, or treble damages under the Act.
18 "Unfair acts in the insurance industry are not regulated exclusively by the insurance statutes." Ellis, 268 S.E.2d at 273.
19 Failure of insurers to comply with §58-63-15 can subject insurers not only to a cease and desist order by the Insurance Commissioner, but it may also result in treble damages.
20 In her law review article, Cindy Heenan raises the issue concerning whether or not the Code would preempt the UTPA and if the Code does preempt the UTPA, would the preemption have the effect of denying an initial plaintiff relief until the business practice has become so prevalent as to qualify as a "business practice." In addressing this point Ms. Heenan wrote: "Since a person has the right to redress under the UTPA for insurance claims, it would seem absurd to suggest that the first few mistreated persons would have no cause of action in the absence of evidence of a general business practice." See, The North Carolina Unfair Trade Practices Act and the Insurance Code, 10 Campbell L.Rev. at 506.
21 Provisions of the policy provided that should the parties disagree upon the values, that the parties would each name an appraiser and if no agreement could be reached as to the value, then an umpire would be named to mediate the dispute.
22 As is discussed further in the Bad Faith portion of this paper, infra, at 13, aggravated conduct is a necessary element for recovering punitive damages for the tort of an insurance carriers bad faith refusal to settle a claim.
23 Other cases citing Pearce as authority for per se violations of §58-63-15(11): Davidson v. Knauff Ins. Agency, Inc., 376 S.E.2d 488, 93 N.C.App.20 (N.C.App.1989); Kron Medical Corp., v. Collier Cobb & Associates, Inc.,420 S.E.2d 192, 107 N.C.App.331, (N.C.App. 1992); Murray v. Nationwide Mut. Ins. Co., 472 S.E.2d 358, 123 N.C.App.1 (N.C.App. 1996); Cash v. State Farm Mut. Ins. Co., 528 S.E.2d 372, 137 N.C.App 192 (N.C.App. 2000).
24 See supra, note 7 at pg. 5.