Opinion
No. 1:02CV4-T
July 31, 2002
MEMORANDUM AND RECOMMENDATION
THIS MATTER is before the court upon plaintiffs' Motion for Summary Judgment and defendant's cross Motion for Summary Judgment. Having carefully considered those motions and reviewed the pleadings, the undersigned enters the following findings, conclusions, and recommendation.
FINDINGS AND CONCLUSIONS I. Background
In this action, plaintiffs seek declaratory relief in the form of a determination that certain policies of insurance issued by defendant provide coverage for damages plaintiffs contend they sustained as a result of the alleged negligent hiring of Alfred Owen by Dennis Allen and the alleged negligent supervision of such employee by Calvin Morgan, all of whom are state employees. Such civil action, brought under the North Carolina Defense of State Employees Act, is pending in the North Carolina General Court of Justice, Transylvania County Superior Court Division.
Policies numbered NYA839720B and NXG342053B.
To summarize the alleged facts in the underlying case, Mrs. Crabtree and her daughter Erin were severely injured when a heavy truck and trailer combination vehicle, owned by the State of North Carolina and operated by state employee Owen, lost control on a steep grade on United States Highway 64 in Transylvania County and collided with plaintiffs' vehicle. It is plaintiffs' contention in the underlying action that Owen did not possess the training, qualifications, or license to operate a "Class A" combination, Allen knew that when he hired Owen, and Morgan also knew it when he ordered Owen to operate the heavy truck-trailer combination on the day of the accident.
Defendant admits that both Allen and Morgan are covered by the policies; however, it contends that no coverage is available for these particular claims, inasmuch as they represent a
loss arising out of the ownership, maintenance, use, loading or unloading of any (a) automobile, watercraft or aircraft owned or operated by or rented or loaned to the Insured (b) or to any automobile, watercraft or aircraft operated by any person in the course of his employment by the insured.
Answer, at 2.
II. Standards Applicable to Removed Actions Seeking Declaratory Relief A. Diversity Jurisdiction
This action was brought under the North Carolina Declaratory Relief Act, N.C. Gen. Stat. § 1-253, but removed to this court by defendant in accordance with 28, United States Code, Section 1446, upon an assertion of this court's diversity jurisdiction under 28, United States Code, Section 1332. Finding that plaintiffs are residents of the State of North Carolina, defendant is an Ohio corporation with its principal place of business in Connecticut, and the amount in controversy well exceeds $75,000, this court has diversity jurisdiction over the controversy.
B. Case or Controversy
While defendant removed this state statutory action from a state forum, federal standards govern resolution of the petition for declaratory relief. In White v. National Union Fire Ins. Co. of Pittsburgh, Pa., 913 F.2d 165 (4th Cir. 1990), the Court of Appeals for the Fourth Circuit held in a similar removed action for declaratory relief, as follows:
[F]ederal standards guide the inquiry as to the propriety of declaratory relief in federal courts, even when the case is under the court's diversity jurisdiction. The Declaratory Judgment Act provides that "[i]n a case of actual controversy . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought."
In essence, for a district court to have jurisdiction to issue a declaratory judgment, two conditions must be satisfied. First, the dispute must be a "case or controversy" within the confines of Article III of the United States Constitution — the "constitutional" inquiry. Second, the trial court, in its discretion, must be satisfied that declaratory relief is appropriate — the "prudential" inquiry.
* * *
The fact that White has not obtained a judgment against Peace does not make the action any less definite and concrete, nor does it vitiate the adversity of the parties' interests.
Yet still, a district court may, in its discretion, refuse to issue a declaratory judgment. Two questions should be asked when a court makes such a prudential decision: "(1) whether the judgment will `serve a useful purpose in clarifying the legal relations in issue'; or (2) whether the judgment will `terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.'"
In the present case, the judgment of the district court will terminate the controversy surrounding the extent of Manville's UM coverage with National Union. Furthermore, it will serve a useful purpose by giving guidance to White as to the amount of insurance available to her if, as she expects, she obtains a judgment against Peace that will not be satisfied by Peace's insurance. In addition, it is important to note that the federal court proceeding is not duplicative; the state court is addressing only the tort issues and is not addressing insurance coverage issues. Thus, the concerns for judicial economy argue for, instead of against, issuance of a declaratory judgment. Finally, the fact that National Union did not object below to the propriety of the declaratory judgment is relevant in assessing whether the district court imprudently issued a declaratory judgment.
Id., at 167-69 (extensive citations omitted). Having conducted the review outlined in White, the undersigned has determined that even though a judgment has not issued on the pending tort claims, there is an actual controversy pending that is scheduled for trial on September 3, 2002. Further, resolution of the issues of whether the claims are covered under the policies and whether the carrier must provide a defense thereto are important to all parties to such action. The undersigned determines, therefore, that the action presented to this court represents, within the confines of Article III, a present case or controversy, the resolution of which would be highly appropriate, inasmuch as it would alleviate concerns and uncertainty surrounding "the amount of insurance available to [plaintiffs] if, as [they expect, they obtain] a judgment. . . ." Id. Finding that jurisdiction has been properly asserted under Section 1332 and that an actual case or controversy exists among these parties, the undersigned finds that this court has jurisdiction to resolve the issue presented.
III. Discussion A. Applicable Law
While even removed state claims for declaratory relief are governed by federal standards, White v. National Union Fire Ins. Co. of Pittsburgh, Pa., supra, the construction and interpretation of insurance policies are determined by reference to state law. Fried v. North River Ins. Co., 710 F.2d 1022 (4th Cir. 1982). While a dispute exists as to which line of case law to apply, no party disputes that North Carolina law governs these particular contracts of insurance.
On a motion for summary judgment, the moving party has the burden of production to show that there are no genuine issues for trial. Upon the moving party's meeting that burden, the nonmoving party has the burden of persuasion to establish that there is a genuine issue for trial.
When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts. In the language of the Rule, the nonmoving party must come forward with "specific facts showing that there is a genuine issue for trial." Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving [sic], there is no "genuine issue for trial."
Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted; emphasis in the original) (quoting Fed.R.Civ.P. 56). When resolution of issues of fact depends upon a determination of credibility, summary judgment is improper. Davis v. Zahradnick, 600 F.2d 458 (4th Cir. 1979). Inasmuch as cross motions for summary judgment have been filed, the undersigned determines that no genuine issue of material fact remains for trial and that the issues may be resolved as a matter of law.
B. Construction of Insurance Policies
Unlike the staid rules governing the interpretation of contracts, courts have universally held that insurance policies are "contracts of adhesion," 43 Am.Jur.2d Insurance § 159 (1982), which are governed by "special rules of interpretation." Longobardi v. Chubb Ins. Co. of New Jersey, 121 N.J. 530, 537 (1990). As the North Carolina courts have held:
Nationwide Mut. Ins. Co. v. Edwards, 67 N.C. App. 1, 11 (1984) (dissent).
[T]he rules of construction which govern the interpretation of insurance policy provisions extending coverage to the insured differ from the rules of construction governing policy provisions which exclude coverage. Those provisions in an insurance policy which extend coverage to the insured must be construed liberally so as to afford coverage whenever possible by reasonable construction. However, the converse is true when interpreting the exclusionary provisions of a policy; exclusionary provisions are not favored and, if ambiguous, will be construed against the insurer and in favor of the insured.
North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697, 702 (1992) (citations omitted; emphasis added).
Defendant argues that, based upon the auto-use exclusion, the policies provide no coverage for the claims made; liberal construction usually applied to insurance policies is inapplicable because sovereign immunity requires application of ordinary principles typically applied in homeowners' cases; and the use of a vehicle was the proximate cause of plaintiffs' injuries, which is specifically excluded. Because these arguments are compound, the undersigned has attempted to break them down into their constituent parts and will attempt to address these concerns seriatim.
C. Sovereign Immunity
Defendant's first argument — that the policies should be strictly construed because the defendants in the underlying case are "protected entities under the doctrine of sovereign immunity," (see defendant's Memorandum in Support, at 4) — is unavailing, inasmuch as the state court, in the underlying action, has already determined that Allen and Morgan were "state employees" rather than "state officials," and, therefore, not entitled to public-official immunity from simple negligence suits. The argument is barred, first, by collateral estoppel and, second, by an independent reading of current case law.
Collateral estoppel precludes relitigation of legal issues actually litigated and necessary to the outcome of the first action, Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979); and mutuality is no longer required for the defensive use of collateral estoppel, Blonder-Tongue Labs., Inc. v. University of Ill. Found., 402 U.S. 313 (1971). Determination of whether state employees enjoy immunity from suit is not only necessary to the state-court litigation, but a threshold consideration by any court of whether it has subject-matter jurisdiction.
Even if the state superior court had not earlier decided this issue of law, the undersigned would have come to the same conclusion through conducting an independent analysis. In Price v. Davis, 132 N.C. App. 556 (1999), the North Carolina Court of Appeals held, as follows:
The essence of the doctrine of public official immunity is that public officials engaged in the performance of their governmental duties involving the exercise of judgment and discretion, and acting within the scope of their authority, may not be held liable for such actions, in the absence of malice or corruption.
Id., at 562. Public employees, however, may be sued in their individual capacities for injuries proximately caused by their negligence. Harwood v. Johnson, 92 N.C. App. 306, 309, aff'd in part, rev'd in part on other grounds, 326 N.C. 231 (1990). In contrast, public officials cannot be sued individually for simple negligence, only for malicious conduct. Davis v. Messer, 119 N.C. App. 44 (1995). Clearly, Department of Transportation supervisors like Allen and Morgan perform ministerial, sometimes labor-intensive duties, and are not delegated the sovereign discretion and judgment of the state. To the extent that defendant has argued that strict construction is applicable because Allen and Morgan are state officials, the undersigned cannot agree, inasmuch as the issue has already been resolved, and such state employees sued in their individual capacities do not enjoy sovereign immunity from suit for simple negligence.
D. Construing Policy Terms
Defendant next argues that the cases relied upon by plaintiffs for liberal construction of coverage and strict construction of exclusions should be ignored in favor of more traditional notions of contract interpretation, because the cases plaintiffs have relied upon involve homeowners. While understanding the nature of the defendant's argument, which is that the average consumer-homeowner is not a sophisticated party and, therefore, should not be held to the commercial standards exacted in contract, the undersigned cannot agree with defendant's reading of the case law.
As reviewed below, North Carolina case law has not created a discrete classification for those holding homeowners' policies; rather the cases the undersigned has found cut across the spectrum of insurance, ranging from automotive to public-employee liability, and consistently read coverage and exclusions in a manner that favors the "insured" where the policy language provides ambiguity.
The words used in the policy having been selected by the insurance company, any ambiguity or uncertainty as to their meaning must be resolved in favor of the policyholder, or the beneficiary, and against the company.
Wachovia Bank Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 354 (1970) (citations omitted).
Insurance policies are construed liberally so as to provide coverage whenever possible by reasonable construction, State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 538 (1986); and exclusions are to be construed strictly so as to provide coverage which would otherwise be afforded by the policy, Wachovia Bank Trust Co. v. Westchester Fire Ins. Co., supra. Defendant's point is well-taken, inasmuch as such liberality is typically found in the context of homeowners' policies. Although private automobile and homeowner policies will be the basis of most reported judicial decisions on insurance, to simply conclude that liberal construction only applies to individuals in the context of homeowners' policies would be a reading not supported by the case law. See State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534 (1986) (applying liberal construction to the coverage of an automobile insurance policy). Houpe v. City of Statesville, 128 N.C. App. 334 (1998) (strict construction of exclusionary provision in action by city worker in employment claims against city); McNally v. Allstate Ins. Co., 142 N.C. App. 680 (2001) (terms of policy liberally construed in favor of motorist); City of Greenville v. Haywood, 130 N.C. App. 271 (1998) (liberal construction applied to policy obtained by city for benefit of law-enforcement officers sued for torts). Not only is no distinction made by the cases, the case closest on point, City of Greenville v. Haywood, supra, is inapposite. City of Greenville was not a homeowner's case; instead, it involved a contract of insurance purchased by a government entity for the benefit of its employees sued for torts. Even though the policy did not involve homeowners' insurance and the city was also one of the named insureds, the court did not hesitate to use principles of liberal construction. Because they are contracts of adhesion, the undersigned concludes that North Carolina courts, where ambiguity is found, consistently construe coverage and exclusions terms in a manner favorable to the insured, regardless of the nature of the policy. In fact, the North Carolina courts applied such method of construction in City of Greenville v. Haywood, which is nearly identical to the case before this court.
The court takes judicial notice that the vast majority of policies written — and necessarily litigated — are homeowner and automobile, most of which are held by private individuals.
E. Ambiguity
While North Carolina courts apply to insurance policies the method of construction discussed above, they only do so when there exists an ambiguity in the language of the agreement. In Wachovia Bank Trust Co. v. Westchester Fire Ins. Co., supra, the North Carolina Court held, as follows:
No ambiguity, calling the above rule of construction into play, exists unless, in the opinion of the court, the language of the policy is fairly and reasonably susceptible to either of the constructions for which the parties contend. If it is not, the court must enforce the contract as the parties have made it and may not, under the guise of interpreting an ambiguous provision, remake the contract and impose liability upon the company which it did not assume and for which the policyholder did not pay.
Id. The policies at issue here contain the following provision, which excludes from coverage any
loss arising out of the ownership, maintenance, use, loading or unloading of any (a) automobile, watercraft or aircraft owned or operated by or rented or loaned to the Insured (b) or to any automobile, watercraft or aircraft operated by any person in the course of his employment by the insured.
Such provision is ambiguous, for it is silent as to the torts of negligent hiring and supervision. Applying rules of strict construction to such exclusion, defendant failed to specifically exclude negligent hiring and supervision of those entrusted to drive motor vehicles.
F. Proximate Cause
Defendant also argues that coverage should not be found because the actual and proximate cause of the injuries in this case was the negligent operation of the motor vehicle by Owen, a cause that its policies specifically exclude.
If the cause before this court were one of negligent operation of a vehicle by Owen, the undersigned would agree with defendant. Plaintiffs, however, have brought claims separate and distinct from such a cause and have apparently alleged in the state proceeding that the negligence of Allen and Morgan in their hiring and supervision of Owen was a proximate cause of plaintiffs' injuries. North Carolina courts are clear on how exclusionary clauses must be read when multiple causes are in play:
[H]omeowners policies provide coverage for injuries so long as a non-excluded cause is either the sole or concurrent cause of the injury giving rise to liability. Stating the second principle in reverse, the sources of liability which are excluded from homeowners policy coverage must be the sole cause of the injury in order to exclude coverage under the policy.
Erie Ins. Exchange v. Bledsoe, 141 N.C. App. 331, 335-36 (2000). Plaintiffs have alleged that Owen's negligence was not the sole cause of their injuries and that the negligence of Allen and Morgan were also proximate causes. While it is a matter for the state court, it does not appear that such claims are contrived, but provide a theory of at least some of the proximate causes of plaintiffs' injuries.
G. Conclusion
Plaintiffs have primarily relied on Nationwide Mut Ins. Co. v. Davis, 118 N.C. App. 494 (1995), wherein a child was injured when she exited a van being driven by her grandmother. The appellate court found coverage for a claim by the child and against the grandmother under her homeowner's policy, even though the policy excluded claims for automotive use (in an exclusionary provision almost identical to the one at issue here). In doing so, it found that coverage will be extended even where one of the causes of the injury is excluded. When Davis is considered with the other cases herein cited, it is apparent to the undersigned that a North Carolina court would find coverage. The undersigned, therefore, is compelled to recommend that defendant's Motion for Summary Judgment be denied, plaintiffs' Motion for Summary Judgment be granted, and declaratory relief issue, in which the court declares that the policies at issue provide coverage for the claims asserted.
RECOMMENDATION
IT IS, THEREFORE, RESPECTFULLY RECOMMENDED that plaintiffs' Motion for Summary Judgment (#8) be GRANTED, defendant's cross Motion for Summary Judgment (#6) be DENIED, and declaratory relief issue, in which the court declares that the policies at issue provide coverage for the claims asserted. The parties are hereby advised that, pursuant to 28, United States Code, Section 636(b)(1)(C), written objections to the findings of fact, conclusions of law, and recommendation contained herein must be filed within ten (10) days of service of same. Failure to file objections to this Memorandum and Recommendation with the district court will preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140 (1985), reh'g denied, 474 U.S. 1111 (1986); United States v. Schronce, 727 F.2d 91 (4th Cir.), cert. denied, 467 U.S. 1208 (1984).