LORETTA C. BIGGS, District Judge.
Plaintiff, Westfield Insurance Company ("Westfield"), brings this action against Nautilus Insurance Company ("Nautilus"), alleging that Nautilus breached its duty to defend and indemnify Westfield's insured, J. Wayne Poole, Inc. ("Poole"), in an underlying state court action. Before the Court are Westfield's Motion for Judgment on the Pleadings, (ECF No. 17), and Nautilus's Motion for Summary Judgment, (ECF No. 21). For the reasons that follow, the Court grants Nautilus's motion in part,
On or about February 7, 2012, Poole contracted with the Guilford County Board of Education to serve as the general contractor for a project involving renovations to the roof of Alamance Elementary School. (ECF No. 1 ¶ 12.) Poole then entered into a subcontractor agreement with Associated Steel Crane & Rigging, LLC ("Associated Steel"), whereby Associated Steel was to install structural steel and steel decking at the school. (Id. ¶ 13; ECF No. 1-4 § 2.) As part of the subcontract, Associated Steel was to obtain commercial general liability insurance and name Poole as an additional insured on the policy. (ECF No. 1-4 § 7.1.) Associated Steel secured a commercial general liability insurance policy from Nautilus, (ECF No. 1-2), that included an endorsement naming as an additional insured any entity that Associated Steel agreed to name as an additional insured. (ECF No. 1-3.) The endorsement provided coverage for the additional insured only with respect to liability for property damage caused in whole or in part by Associated Steel in connection with Associated Steel's ongoing operations for the additional insured. (Id.)
On July 20, 2012, a rain event led to water entering the interior of the school and causing damage. (ECF No. 1 ¶¶ 17-18.)
On December 3, 2012, Afterdisaster filed a lawsuit against Poole in state court because the bill for Afterdisaster's services had not been paid. (Id.; ECF No. 1-6 ¶ 11.) In the lawsuit, Afterdisaster asserted that Poole had failed to pay $258,437.25, the amount of Afterdisaster's services to remediate the school. (ECF No. 1-6 ¶ 11.) Westfield provided a defense for Poole in that lawsuit under a full reservation of rights. (ECF No. 1 ¶ 22.) On February 28, 2013, Poole filed a third-party complaint against Associated Steel in the state court lawsuit. (Id. ¶ 23; ECF No. 1-7.) In the third-party complaint, Poole claimed that Associated Steel breached the subcontractor agreement by failing to protect the school's premises from the water intrusion. (ECF No. 1-7 ¶ 34.) Poole further claimed that Associated Steel agreed to indemnify Poole for "any damages, losses, or expenses arising out of or resulting from [Associated Steel's] work on the Project." (Id. ¶ 41.) Nautilus provided a defense for Associated Steel against Poole's claims. (ECF No. 1 ¶ 25.)
On May 17, 2013, Poole tendered a demand to Nautilus for defense and indemnity based on the claim asserted by Afterdisaster. (Id. ¶ 26; ECF No. 1-9.) Nautilus responded that although Poole was an additional insured under Associated Steel's policy, there was no coverage for Afterdisaster's claim against Poole. (ECF No. 1 ¶¶ 28-30; ECF No. 1-10 at 4.) Specifically, Nautilus stated:
(ECF No. 1-10 at 4.)
In July 2013, Poole entered into a settlement agreement with Afterdisaster, and Westfield paid the entire settlement amount of $268,000. (ECF No. 1 ¶¶ 32-33.) Poole also dismissed its third-party suit against Associated Steel. (Id. ¶ 32.) Following resolution of the state court action, Poole assigned to Westfield all of its rights to pursue coverage under the Nautilus policy for the damages arising out of the July 2012 incident at Alamance Elementary School. (Id. ¶ 35.)
On September 9, 2014, Westfield filed this action against Nautilus to recover the amounts it paid in defending and settling the state court action between Poole and Afterdisaster. Westfield asserts four causes of action: (1) that Westfield is entitled to a declaratory judgment that Nautilus had a duty to defend Poole in the state action; (2) that Nautilus breached its contractual obligations under the Nautilus policy by not providing a defense and indemnifying Poole in the state action; (3) that Westfield is entitled to subrogation against Nautilus to recover amounts incurred in investigating, defending, and resolving the claims arising out of the water intrusion event; and (4) that Westfield is entitled to equitable subrogation against Nautilus to recover the amounts it incurred in resolving the water intrusion event. (See ECF No. 1 at 8-12.)
On March 16, 2015, Westfield moved, pursuant to Rule 12(c), for judgment on the pleadings as a matter of law, requesting a declaration that Nautilus breached its duty to defend Poole in the underlying state action. (ECF No. 17.) Nautilus then moved for summary judgment under Rule 56, asserting that it had no duty to defend Poole in the underlying state action and further that it is entitled to summary judgment on all claims brought by Westfield. (ECF No. 21.) The parties' briefings reference a number of documents attached to the complaint, and Nautilus has attached the notices of dismissal in the state court action to its briefing. Ordinarily, before a court exercises its discretion to convert a motion under Rule 12(c) into one for summary judgment, "[a]ll parties must be given a reasonable opportunity to present all the material that is pertinent to the motion." Fed. R. Civ. P. 12(d). However, Nautilus and Westfield agree that the duty to defend issue is ripe for review and needs no further factual development to resolve. (See ECF No. 27 at 2 n.1.) This Court, therefore, converts Westfield's motion into one for summary judgment, thus treating the parties' motions as cross-motions for summary judgment. See Sea-Land Serv., Inc. v. United States, 622 F.Supp. 769, 771-72 (D.N.J.1985) (converting the motion to dismiss into one for summary judgment, thereby "treat[ing] the motions ... as cross-motions for summary judgment because they raise the identical legal issue, and the parties appear to agree that no material facts are in dispute").
"Summary judgment is appropriate only if the record shows `that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'" Woollard v. Gallagher, 712 F.3d 865, 873 (4th Cir.2013) (quoting Fed. R. Civ. P. 56(a)). Where, as in this case, the court has before it cross-motions for summary judgment, the court reviews each of them separately to determine if either party
The Court has subject matter jurisdiction in this action based on diversity of citizenship and therefore looks to North Carolina's choice of law principles to determine which state's substantive law applies. See Klaxon Co. v. Stentor Elec. Mfg. Co. Inc., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Under North Carolina law, where the parties' dispute involves an insurance policy, the state in which the policy was issued governs the dispute. See Roomy v. Allstate Ins. Co., 256 N.C. 318, 322, 123 S.E.2d 817, 820 (1962). The Nautilus policy was issued in North Carolina to its insured, Associated Steel, (ECF No. 1-2 at 3), and thus, the Court must interpret the policy according to North Carolina law.
In North Carolina, an insurance policy is a contract, and its terms govern the parties' rights and duties. Fidelity Bankers Life Ins. Co. v. Dortch, 318 N.C. 378, 380, 348 S.E.2d 794, 796 (1986). Courts are to construe the policy's provisions with the goal of determining the parties' intent at the time the policy was issued. Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 505, 246 S.E.2d 773, 777 (1978). The party seeking benefits under the policy bears the burden of demonstrating coverage. Fortune Ins. Co. v. Owens, 351 N.C. 424, 430, 526 S.E.2d 463, 467 (2000). Interpretation of an insurance policy is a question of law for the court. Allstate Ins. Co. v. Runyon Chatterton, 135 N.C. App. 92, 94, 518 S.E.2d 814, 816 (1999).
The North Carolina Supreme Court has held that an insurer's duty to defend is broader than, and is independent from, its duty to indemnify. See Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986). The duty to defend is generally determined by analyzing the pleadings in the underlying lawsuit. Id. To determine whether circumstances give rise to a duty to defend, courts employ the "comparison test;" "the pleadings are read side-by-side with the policy" to determine whether there is coverage for the events alleged in the complaint. Id. at 693, 340 S.E.2d at 378. When the terms of the policy cover the events in the pleadings, the insurer has a duty to defend, irrespective of the outcome of the case. Erie Ins. Exch. v. Builders Mut. Ins. Co., 227 N.C. App. 238, 245, 742 S.E.2d 803, 810 (2013). An insurer's obligation, however, does not end with a review of the pleadings and applicable policy. See id. "Where the insurer knows or could reasonably ascertain facts that, if proven, would be covered by its policy," the duty to defend is triggered. Waste Mgmt. of Carolinas, Inc., 315 N.C. at 691-92, 340 S.E.2d at 377. This is true even if the alleged facts appear to be outside coverage or within a policy exclusion. Erie Ins. Exch., 227 N.C.App. at 245, 742 S.E.2d at 810. The mere possibility that the claim is covered "suffice[s] to impose a duty to defend upon the insurer." Waste Mgmt. of Carolinas, Inc., 315 N.C. at 691 n. 2, 340 S.E.2d at 377 n. 2. An insurer that unjustifiably refuses to provide a defense to its insured faces severe consequences; it is liable for the amount and costs of a reasonable settlement entered into by the insured. Pulte Home Corp. v. Am. S. Ins. Co., 185 N.C. App. 162, 163-64, 647 S.E.2d 614, 616 (2007) ("[An insurer undertakes a substantial risk when it chooses not to provide a defense."). "[A]ny doubt as to coverage must be resolved in
Although the duty to defend is broad, it is not limitless; rather, its scope is measured by the insurance contract between the parties. See Lambe Realty Inv., Inc. v. Allstate Ins. Co., 137 N.C. App. 1, 5, 527 S.E.2d 328, 331 (2000) (explaining that "an insurer's duty to defend an action brought against its insured is determined by the language in the policy"); Brown v. Lumbermens Mut. Cas. Co., 90 N.C. App. 464, 475, 369 S.E.2d 367, 373 (1988) (noting that an insurer "could presumably contractually limit its duty to defend"). It is therefore the intention of the parties, as expressed by the terms of the policy, that is "the controlling guide" in interpreting the policy. Hawley v. Indem. Ins. Co. of N. Am., 257 N.C. 381, 387, 126 S.E.2d 161, 167 (1962).
Unlike the duty to defend, the duty to indemnify "is measured by the facts ultimately determined at trial." Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 6, 692 S.E.2d 605, 610 (2010) (quoting Waste Mgmt. of Carolinas, Inc., 315 N.C. at 691, 340 S.E.2d at 377). Those adjudicated facts are then compared to the terms outlined in the insurance policy to determine whether there is coverage for the claim. Id. at 7, 692 S.E.2d at 611. "The difference in scope between the duty to defend and the duty to indemnify is based on the source of the factual narrative." Id. As explained by the North Carolina Supreme Court, "the duty to defend is broader than the duty to indemnify in the sense that an unsubstantiated allegation requires an insurer to defend against it so long as the allegation is of a covered injury." Id. at 7, 692 S.E.2d at 610-11.
In employing the comparison test, i.e., reading the pleadings side-by-side with the policy, the Court must first determine the scope of coverage under the Nautilus policy issued to Associated Steel. The Court starts with a review of the pertinent terms in the policy.
(ECF No. 1-2 at 10.)
The additional insured endorsement under the Nautilus policy provides in relevant part:
(ECF No. 1-3 at 2.)
Based on the policy, Associated Steel, as the named insured, has coverage when there is an accident that causes damage to property other than the work product itself. Coverage for Poole as an additional insured under the Nautilus policy is triggered when there is property damage caused in whole or in part by some act or omission by Associated Steel. To determine whether the underlying state court action triggered Nautilus's duty to defend Poole as an additional insured, the Court turns to the allegations asserted by Afterdisaster in its complaint. In relevant part, those allegations are:
(ECF No. 1-6 ¶¶ 5-8, 11.)
Nautilus does not appear to dispute Westfield's argument that the July 20, 2012 rain event constituted an "occurrence" that caused at least some "property damage" at the school. (See ECF No. 29 at 5 n.3.) Rather, Nautilus argues that it owed no duty to defend Poole because Afterdisaster sued Poole in the state court action for breach of contract, and "[c]ontractual damages are not property damages." (ECF No. 22 at 7-8.) According to Nautilus, Afterdisaster's complaint "does not include allegations that describe accidental conduct" as defined under the policy.
Although Westfield is correct that the label of a claim is not dispositive of an insurer's duty to defend, a general commercial liability policy traditionally has its origin in negligence or "draws on traditional tort concepts of fault, proximate cause and duty." Anthem Elecs., Inc. v. Pac. Emp'rs Ins. Co., 302 F.3d 1049, 1054 (9th Cir.2002); see Key Custom Homes, Inc. v. Mid-Continent Cas. Co., 450 F.Supp.2d 1311, 1317 (M.D.Fla.2006) ("General liability insurance `is for tort liability for physical damages to others and not for contractual liability of the insured for economic loss.'" (quoting Harris Specialty Chems., Inc. v. U.S. Fire Ins. Co., No. 3:98-CV-351-J-20B, 2000 WL 34533982, *6 (M.D.Fla. Jul. 7, 2000))). It is therefore relevant that the state court lawsuit did not involve either negligence or fault, particularly since coverage for Poole as an additional insured under the Nautilus policy depended on some alleged act or omission by Associated Steel. As the Fourth Circuit noted, the purpose of the additional insured endorsement is to provide protection for the additional insured where the named insured is at least partially negligent. Capital City Real Estate, LLC v. Certain Underwriters at Lloyd's London, 788 F.3d 375, 380 (4th Cir.2015). Afterdisaster's state complaint did not mention Associated Steel, and there is no fact that would have been determined in the underlying state suit for breach of contract that would have arguably dealt with any act or omission on the part of Associated Steel.
While each party has cited cases, none speaks directly to the issue presented here, and the Court finds no North Carolina authority that addresses the specific issues raised in this case. Although not binding, the Court finds several district court cases instructive. In Key Custom Homes, Inc. v. Mid-Continent Casualty Co., the plaintiff, a general contractor and builder for a home construction project, was sued by the owners of the land on which the home was to be built and various subcontractors after an accidental fire totally destroyed the home. 450 F.Supp.2d 1311, 1313-14 (M.D.Fla.2006). The Hunt Family, who owned the land, brought suit for breach of contract against the general contractor to recover money it advanced to the general contractor for expenses associated with the project. Id. at 1313. Subcontractors also sought to recover money due to them for labor and material they provided on the project. Id. at 1313-14. The plaintiff general contractor made a claim under its general liability policy which, similar to the policy in this case, covered "those sums that the insured becomes legally obligated to pay as damages because of ... property damage." Id. at 1314. The insurer denied coverage, explaining that the claims by the Hunt Family and the subcontractors were economic damages arising out of contracts entered into by the parties. Id. at 1315. The plaintiff then commenced an action, seeking a declaration that the insurance policy provided coverage for the claims asserted by the Hunt Family and the subcontractors. Id. In its decision holding that the policy did not provide coverage for the claims in the underlying action, the court stated:
Id. at 1318.
In Woodcraft Manufacturing, Inc. v. Charter Oak Fire Insurance Co., a subcontractor was sued by a general contractor for the recovery of money the general contractor was held liable for with respect to a workers' compensation claim filed by an employee of the subcontractor. No. 3:08cv455/MCR/EMT, 2009 WL 1329138, at *1, *2 (N.D.Fla. May 12, 2009). Pursuant to its agreement with the general contractor, the subcontractor was required to obtain workers' compensation insurance for its work on the general contractor's project. Id. at *1. The subcontractor's employee was injured at the worksite and brought suit against his employer, the subcontractor, along with the general contractor. See id. at *1 & n. 7. The subcontractor turned to its workers' compensation carrier for coverage, but the carrier denied coverage. Id. at *1. After judgment was entered against the subcontractor and general contractor, the general contractor brought suit seeking contribution and indemnification from the subcontractor and also asserting a claim for breach of contract due to the subcontractor's failure to obtain the necessary workers' compensation coverage under the subcontract. Id. at *2. The subcontractor then made a claim under its commercial general liability policy for defense and indemnification, but the insurer denied coverage on the ground that the general contractor's lawsuit involved only economic claims against the subcontractor. Id. The subcontractor filed suit against the commercial liability insurer for breach of the insurer's duty to defend and indemnify it. Id. at *2. Similar to this case, the policy at issue stated that the insurer was to "pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury'" and that the insurer would "have the right and duty to defend the insured against any `suit' seeking those damages." Id. at *1. Based on the terms of the policy, the court stated that "[n]one of [the general contractor's] claims against [the subcontractor]... were based on bodily injury." Id. at *3. Although the employee's "physical injury formed the background for [the general contractor's] lawsuit, [the general contractor] did not sue [the subcontractor] because [the employee] was injured and did not seek damages for [that] injury." Id. The court stated that the general contractor brought suit against the subcontractor "because it was forced to pay the workers' compensation benefits [the subcontractor]... had been contractually obligated to cover with insurance but failed to obtain." Id. Noting that economic loss and not physical injury was the basis of the general contractor's claims, the court went on to hold that the insurer was not obligated to defend or indemnify the subcontractor in the suit brought by the general contractor. Id. at *3, *5.
The court in Federal Insurance Co. v. New Hampshire Insurance Co., No. 03-385-BAJ-M2, 2010 WL 3523050, *1 (M.D.La., July. 30, 2010) reached a similar result. There, an explosion at a chemical plant caused injuries to thousands of individuals. Id. at *1. One such individual, named Wayne Robins ("Robins"), commenced a lawsuit against the chemical plant and other defendants. Id. That lawsuit was consolidated with a lawsuit brought by property insurers, including an insurer named AXA Global Risks ("AXA"),
New Hampshire's policy, which is also similar to Nautilus's policy, provided that it would pay those sums that T & B "becomes legally obligated to pay by reason of liability imposed by law or assumed by [T & B] under an Insured Contract because of Bodily Injury." Id. (alteration in original). New Hampshire argued that it did not agree to repayment of the sums under the settlement agreement since "payment of that sum was not `because of' and was not the `direct result of' Robins' bodily injury claims" but was the result of "Robins' breach of the loan agreements/contracts that he had entered into with AXA." Id. The court agreed with New Hampshire, holding that the "damages in [the settlement memorandum] [were] economic damages stemming from a breach of contract, rather than bodily injury damages resulting from a tortious act." Id. at *4. In reaching this holding, the court stated:
Id. at *6. (footnotes omitted).
As in Key Custom Homes, Woodcraft Manufacturing, Inc., and Federal Insurance Co., though the contract between Afterdisaster and Poole can be traced to the property damage caused by the rain event, Poole's subsequent breach of that contract represents a separate and independent act severing the causal connection with the water intrusion event. Also like in Federal Insurance Co., the events giving rise to Poole's liability to Afterdisaster came after the rain event. See Fed. Ins. Co., 2010 WL 3523050, at *7. Such an indirect connection between Afterdisaster's claims and the rain event is insufficient to trigger Nautilus's duty to defend. To find that Afterdisaster was seeking "damages" because of "property damage" would "distort the meaning of [this] provision and extend its reach so as to provide coverage for any liability where [property damage] is a tangential factor." Id. at *4 (quoting Diamond State Ins. Co. v. Chester-Jensen Co., Inc., 243 Ill.App.3d 471, 183 Ill.Dec. 435,611 N.E.2d 1083, 1088 (1993)). The Court therefore holds that Westfield has failed to carry its burden of establishing that Nautilus had a duty to defend Poole in the state action,
Although Nautilus's arguments in support of its motion for summary judgment appear to be devoted primarily to the issue of whether it had a duty to defend Poole in the state court proceeding, Nautilus asserts that because there was no duty to defend Poole, and the duty to defend is broader than the duty to indemnify, then there can be no duty to indemnify Poole. (ECF No. 29 at 6.) To the extent that Nautilus believes that it "is entitled to summary judgment on any and all claims brought by Plaintiff Westfield Insurance Company," specifically the duty to indemnify, (ECF No. 21 at 1), the Court disagrees and denies summary judgment on all remaining issues.
It is well established that the duty to defend, though broader than the duty to indemnify, is a distinct duty. See Erie Ins. Exch., 227 N.C.App. at 245, 742 S.E.2d at
While Poole's failure to pay Afterdisaster the $258,437.25 for its services was the catalyst for Afterdisaster's state action against Poole, Westfield, as Poole's assignee, is not foreclosed from potentially being reimbursed by Nautilus for the amount it paid Afterdisaster for its remediation efforts, as the invoice provided by Afterdisaster may be the measure of damages to the physical property of the school. See Nat'l Union Fire Ins. Co. of Pittsburgh, PA v. Ready Pac Foods, Inc., 782 F.Supp.2d 1047, 1056 (C.D.Cal.2011) (noting that intangible losses are recoverable if they provide a measure of damages to the physical property). If the facts established in this litigation show that the property damage was caused in whole or in part by Associated Steel and the costs to remediate the interior of the school are damages covered under the Nautilus policy, then Nautilus could have a duty to indemnify Westfield, as Poole's assignee, for such damages. The Court therefore denies Nautilus's motion, in part, to the extent it seeks summary judgment that it had no duty to indemnify Westfield, as Poole's assignee.
For the reasons outlined herein, the Court finds that Nautilus did not have a duty to defend Poole in the underlying state action; however, genuine issues of material fact remain with respect to whether Nautilus must indemnify Westfield, Poole's assignee. Westfield's motion is denied, and Nautilus's motion is granted to the extent that it seeks summary judgment regarding its duty to defend.
IT IS THEREFORE ORDERED that Westfield's Motion for Summary Judgment is DENIED (ECF No. 17) and Nautilus's Motion for Summary Judgment (ECF No. 21) is GRANTED to the extent it involves the duty to defend and DENIED to the extent that it seeks summary judgment on the duty to indemnify.
