Opinion
No. 5:99-CV-164-BR-3.
September 18, 2000
ORDER
Third-party plaintiff The Travelers Insurance Company's motion for summary judgment against the Hartford Fire Insurance Company is before the court.
On 9 March 1999, plaintiffs St. Paul Fire and Marine Insurance Company (St. Paul), Hardin Construction Group, Inc., Hardin Investment Associates XI, Ltd., Hardin Capital, LLC, and RDU Hotel Partners, LLC (collectively "Hardin" or "the Hardin plaintiffs") filed a complaint alleging breach of contract and seeking declaratory judgment with respect to The Travelers Insurance Company's (Travelers) duty to defend Hardin in a personal injury suit pending in Wake County Superior Court. On 21 April 1999, defendant Travelers answered the complaint. On 28 April 1999, Travelers filed a third-party complaint against The Hartford Fire Insurance Company (Hartford). Hartford filed an answer on 30 June 1999.
On 18 February 2000, this court denied the Hardin plaintiffs' 5 November 1999 motion for partial summary judgment with respect to Count II of their complaint, concluding that the additional insured endorsement to the insurance policy issued to JA Mechanical by defendant Travelers did not impose upon defendant Travelers a duty to defend the Hardin plaintiffs. As a result of that Order, Travelers was dismissed from this action as a defendant. On 19 April 2000, all parties filed a stipulation agreeing to the dismissal of all claims against The Hanover Insurance Company (Hanover). As of that date, the Hardin plaintiffs were dismissed from the action and, as of 20 April 2000, Hanover was dismissed. Only the third-party claims remain in this case.
On 12 May 2000, Travelers filed a motion for summary judgment on its third-party claims against Hartford with a supporting memorandum asking the court to determine that Hartford has the primary obligation to defend and indemnify JA Mechanical in the pending state lawsuit filed by Billy Joe Durham. Hartford filed a response on 5 June 2000 with a supporting memorandum and affidavit. Travelers filed a reply on 19 June 2000. The motion is ripe for review.
I. Facts
On 6 October 1997, while descending from 3½ foot scaffolding adjacent to an uncovered, unguarded, empty pool, Billy Joe Durham fell head first into the pool and sustained major injuries. At the time, Durham was employed by Herin Company (Herin), a secondary subcontractor performing duct work for JA Mechanical, the primary subcontractor in charge of heating, ventilation and air conditioning (HVAC) for the construction project at Hilton Garden Inn in Cary, North Carolina. (Stip. of Facts Nos. 1 and 3.) JA Mechanical provided the HVAC work pursuant to a contract with Hardin Construction Group, Inc., the general contractor for the project. (Stip. of Facts No. 1.) Herin, in turn, performed the duct work, air distribution and accessories for the Hilton Garden Inn pursuant to a contract with JA Mechanical dated 18 June 1997. (Stip. of Facts No. 2.) JA Mechanical is insured by third-party plaintiff Travelers, and Herin is insured by defendant Hartford.
Travelers insured JA Mechanical under policy number DT-CO-336K2462-IND-97, effective from 1 September 1997 through 1 September 1998. Limits of liability were $1,000,000 per occurrence and $2,000,000 general aggregate. (Stip. of Facts No. 5.)
Hartford insured Herin under policy number 20 SBA EL3387, effective from 1 March 1997 through 1 March 1998. Limits of liability were $1,000,000 per occurrence and $2,000,000 general aggregate. (Stip. of Facts No. 10.)
On 12 May 1998, several months after his fall, Durham filed suit against JA Mechanical and the Hardin plaintiffs, among others, in Wake County Superior Court. Herin is not a defendant in that action. The Hardin plaintiffs filed a cross-complaint for indemnity against JA Mechanical in that action. (Stip. of Facts No. 4.) The Durham action is awaiting a retrial (following a mistrial) against Hardin. Durham's claims against JA Mechanical were settled for $300,000. Travelers paid $150,000 of that settlement, and Hartford paid the remaining $150,000. In doing so, neither party waived, and both parties expressly left open, all claims asserted in this action. (Stip. of Facts No. 7.) The indemnity claim by Hardin against JA Mechanical was voluntarily dismissed on or about 19 May 2000. (Hartford's Br. at 3.) Hartford did not participate in the defense of JA Mechanical in the Durham action. (Stip. of Facts Nos. 8, 9.)
Trial of the personal injury suit was conducted by the Honorable Stafford Bullock on 1 and 2 November 1999, but ended in mistrial as a result of jurors' complaints of inability to serve for the duration of the trial.
Pursuant to the contract between JA Mechanical and Herin, Herin was required to provide coverage for JA Mechanical as an additional insured on its commercial general liability policy. (Resp. at 3.) Herin's Hartford policy provides that Hartford will defend and indemnify additional insureds against any claims "with respect to" Herin's work. (Id.) Travelers alleges that JA Mechanical is an additional insured under Herin's Hartford policy and that Hartford has the primary obligation to defend JA Mechanical and to indemnify Travelers for amounts paid in the defense and settlement of the Durham action. Hartford argues that JA Mechanical is not an insured under the Hartford policy and that, in any event, Hartford has no duty to defend under the terms of its policy.
The court notes that, currently, there are no claims pending against JA Mechanical in the Durham action. Consequently, Travelers' request that this court order Hartford to assume the defense of JA Mechanical and to pay all future defense costs is now moot. The court must still determine whether Hartford had a duty to defend JA Mechanical, however, to determine whether Hartford must reimburse Travelers for the costs associated with defending JA Mechanical during the pendency of the Durham action. Hartford's duty to indemnify Travelers with respect to the settlement of the JA Mechanical claims is also properly before the court.
II. Summary Judgment
Summary judgment is appropriate in those cases in which there is no genuine dispute as to a material fact, and in which it appears that the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Haavistola v. Community Fire Co. of Rising Sun, Inc., 6 F.3d 211, 214 (4th Cir. 1993). Summary judgment should be granted in those cases "in which it is perfectly clear that no genuine issue of material fact remains unresolved and inquiry into the facts is unnecessary to clarify the application of the law." Id. In making this determination, the court draws all permissible inferences from the underlying facts in the light most favorable to the party opposing the motion. "[W]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, disposition by summary judgment is appropriate."Teamsters Joint Council No. 83 v. Centra, Inc., 947 F.2d 115, 119 (4th Cir. 1991).
Before turning to the merits of this action, the court must determine which state's substantive law governs. The court originally exercised jurisdiction over this action based on the diversity of the parties. Because only the third-party claims remain, diversity no longer exists. (Travelers Mem. at 2, n. 1.) The court may continue to exercise jurisdiction in this matter based on principles of pendent jurisdiction. See 28 U.S.C. § 1367. Hartford has not contested this court's exercise of jurisdiction. In a diversity action, the court must apply the choice of law rules of the state in which it sits, in this case, North Carolina. Because this third-party claim is pendent to a claim that was originally permitted based on the diversity of the parties, the court will continue to apply North Carolina's law.
North Carolina General Statute § 58-3-1 provides: "All contracts of insurance on property, lives, or interests in this State shall be deemed to be made therein . . . and are subject to the laws thereof." The insurance policy issued by Hartford to Herin protects Herin's interest against having to pay damages for injuries or damage to property arising out of its work. The work in question is the duct work at the Hilton Garden Inn in Cary, North Carolina. Pursuant to § 58-3-1, this contract is deemed to have been made in North Carolina, and North Carolina law applies.
III. Duty to Defend
A. Applicable Law re Duty to Defend
"Generally speaking, the insurer's duty to defend the insured is broader than its obligation to pay damages incurred by events covered by a particular policy." Waste Management v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986); Patti v. Continental Casualty Co., 126 N.C. App. 643, 644, 486 S.E.2d 233, 234, writ denied, 347 N.C. 401, 494 S.E.2d 417 (1997). Indeed, an insurer has an obligation to provide a defense to an insured whenever there are facts alleged that potentially would be covered by the policy. Waste Management, 315 N.C. at 691, 340 S.E.2d at 377. Questions regarding the extent of an insurer's duty to defend and the scope of a particular insurance policy require the interpretation of the policy in light of the claims asserted against the insured. See Patti, 126 N.C. App. at 644, 486 S.E.2d at 234 ("duty to defend against plaintiffs' claims is determined by the allegations found in [the] complaint"); andWaste Management, 315 N.C. at 691, 340 S.E.2d at 377 (applying the "comparison test," the "pleadings are read side-by-side with the policy to determine whether the events as alleged are covered or excluded").
With respect to the interpretation of the policy language at issue, the North Carolina Supreme Court has recently reiterated the applicable principles of law.
We begin by noting the well-established principle that "an insurance policy is a contract and its provisions govern the rights and duties of the parties thereto." . . . The rules of construction for insurance policies are likewise familiar: As with all contracts, the goal of construction is to arrive at the intent of the parties when the policy was issued. Where a policy defines a term, that definition is to be used. If no definition is given, non-technical words are to be given their meaning in ordinary speech, unless the context clearly indicates another meaning was intended. The various terms of the policy are to be harmoniously construed, and if possible, every word and every provision is to be given effect. If, however, the meaning of words or the effect of provisions is uncertain or capable of several reasonable interpretations, the doubts will be resolved against the insurance company and in favor of the policyholder. Whereas, if the meaning of the policy is clear and only one reasonable interpretation exists, the courts must enforce the contract as written; they may not, under the guise of construing an ambiguous term, rewrite the contract or impose liabilities on the parties not bargained for and found therein.Gaston County Dyeing Machine Co. v. Northfield Insurance Co., 351 N.C. 293, 299-300, 524 S.E.2d 558, 563 (2000) (citations omitted). See also Allstate Insurance Co. v. Runyon Chatterton, 135 N.C. App. 92, 94-95, 518 S.E.2d 814, 816 (2000) (a policy is subject to judicial construction only where the language used in the policy is ambiguous and reasonably susceptible to more than one interpretation and, in such cases, the policy must be construed in favor of coverage and against the insurer), review denied, 351 N.C. 350, ___ S.E.2d ___ (2000);Waste Management, 315 N.C. at 694, 340 S.E.2d at 379 ("`[n]o ambiguity . . . 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'") (quotations omitted). First then, the court must determine whether the language in the Hartford policy is clear and unambiguous. "The test in deciding whether the language is plain or ambiguous is what a reasonable person in the position of the insured would have understood it to mean, and not what the insurer intended." Washington Housing Authority v. North Carolina Housing Authorities Risk Retention Pool, 130 N.C. App. 279, 284, 502 S.E.2d 626, 630, review denied, 526 S.E.2d 477 (1998).
B. Policy Language
JA Mechanical's contract with Herin required Herin to add JA Mechanical as an "insured" on Herin's insurance policies. Article 13 of the JA Mechanical-Herin contract provides:
13.1 The Subcontractor shall purchase and maintain insurance of the following types of coverage and limits of liability:
13.1.2 General Liability: $500,000 per occurrence
13.1.4 Excess Liability: $1,000,000 per occurrence (Umbrella).
13.3 Coverages of insurance acceptable to the Contractor shall be filed with the Contractor prior to commencement of the Subcontractor's work. . . .Certificates must list JA Mechanical, Inc. as additional insured. . . .
(Ex. A to Stip. of Facts) (emphasis added). The Hartford policy issued to Herin provides that Hartford will provide a defense to "an insured" for claims covered by the policy.
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury," "property damage," "personal injury," or "advertising injury" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages.
(Ex. E to Stip. of Facts.) Travelers maintains that, pursuant to its policy, the Hartford policy, and the JA Mechanical-Herin contract, JA Mechanical is an "additional insured" covered by the Hartford policy.
At issue in this motion for summary judgment is the scope of the additional insured language included in the commercial general liability insurance policy issued to Herin by Hartford. The "Who is an Insured" clause of the Hartford policy provides as follows:
Section C WHO IS AN INSURED
2.f. Additional Insureds by Contract, Agreement, or Permit.
Any person or organization with whom you agreed, because of written contract or agreement or permit, to provide insurance such as is afforded under this Business Liability Coverage Form, but only with respect to your operations, "your work" or facilities owned or used by you.
Section 2.f. goes on to say that the described coverage does not apply
"(1) Unless the written contract or agreement was executed or permit has been issued prior to the "bodily injury," "property damage," "personal injury," or "advertising injury."
(2) To any person or organization included as an insured under provision g. (Broad Form Vendors)
(3) To any other person or organization shown in the Declarations as an Additional Insured."
(Trav.s' Mem. at 5.) Hartford does not contend that any of these enumerated exclusions apply.
This language is to be distinguished from the language in the Traveler's policy which was at issue in this court's Order dated 17 February 2000. That endorsement modified insurance as follows:
Commercial General Liability Coverage Part
1. WHO IS AN INSURED (Section II) is amended to include any person or organization you are required by written contract to include as an insured, but only with respect to liability arising out of "your work." This coverage does not include liability arising out of the independent acts or omissions of such person or organization. The written contract must be executed prior to the occurrence of any loss.
2. Where required by contract, this insurance is primary and noncontributing as respects the person or organization included as an insured under this endorsement and any other insurance available to any such person or organization shall be excess and noncontributing with this insurance. . . .
(17 Feb. 2000 Order at 5) (emphasis added).
In accordance with the prevailing law, the court will examine the language of the Hartford policy and the allegations in the Durham complaint to determine whether Hartford has a duty to defend JA Mechanical in the Durham action. The court finds, as an initial matter, that JA Mechanical and Herin intended, per the JA Mechanical contract, to add JA Mechanical as an additional insured to the Hartford policy. Whether coverage is available to JA Mechanical in this case depends on the facts and circumstances alleged in the Durham action. In other words, JA Mechanical is an additional insured only "with respect to" Herin's operations, Herin's work, or facilities owned or used by Herin.
In its brief in opposition to Travelers' motion for summary judgment, defendant states: "This Court in this very case has ruled as a matter of law that Hardin was not an additional insured on Travelers policy because the claims against Hardin were based solely on Hardin's conduct and not on any vicarious liability for the conduct of another." (Resp. at 5.) In fact, this court specifically held that Hardin was an additional insured under JA Mechanical's policy with Travelers. (17 Feb. 2000 Order at 6, n. 5.) Indeed, the court went so far as to say that it "finds unpersuasive Hartford's argument that JA Mechanical is not an "insured" within the meaning of the policy, and finds the points made in support of that argument more appropriately advanced with respect to liability or coverage issues." (Id.)
C. Comparison of Policy Language and Durham Complaint
Travelers argues that JA Mechanical is an "insured" under the plain language of the Hartford policy. In support of its contention that Durham's claim against JA Mechanical for failure to provide a safe worksite for Herin's employees is "with respect to" Herin's work, Herin's operations, or facilities used by Herin, Travelers emphasizes Durham's allegations that he was injured while performing work for Herin at facilities used by Herin. Defendant argues, on the other hand, that JA Mechanical is not an "insured" within the meaning of the Hartford policy because the only exposure JA Mechanical had in the Durham lawsuit was premised entirely on JA's own acts and omissions and was not based on Herin's conduct. Hartford also contends that this court's 17 February 2000 Order regarding the Travelers policy and Traveler's duty to defend the Hardin plaintiffs resolves the issues currently before the court.
Hartford also argues that JA is not an additional insured because there is no valid contractual agreement calling for it to be a named insured. Contrary to Hartford's characterization of this court's 17 February 2000 Order regarding the Travelers policy, however, this court did not hold that the agreement requiring JA Mechanical to make Hardin an additional insured was void. Rather, the court noted (in a footnote supporting a decision based on other grounds) that "an agreement between a general contractor and a subcontractor that required the subcontractor to provide insurance for the general contractor against its own negligent acts would be void as against public policy in North Carolina because, [pursuant to N.C. Gen Stat. § 22B-1,] a general contractor cannot require a subcontractor to insure it against its own negligent acts. . . . See also City of Wilmington v. N.C. Natural Gas Corp., 117 N.C. App. 244, 450 S.E.2d 573 (1994) ("[c]ourts do not favor indemnity contracts that relieve the indemnitee from liability for its own negligence")." (17 Feb. 2000 Order at 8, n. 7.)
The court's decision here that the "with respect to" language in the Hartford policy is ambiguous and must be construed in favor of the insured when determining Hartford's duty to defend does not, in any respect, imply, depend upon, or necessitate the existence of a JA Mechanical/Herin contract requiring Herin to provide insurance for JA mechanical against JA Mechanical's own negligent acts. The two issues are not related given the policy language at issue in this case.
Based on the allegations in the Durham complaint, the court must conclude that JA Mechanical could well be an insured "with respect to" Herin's operations, Herin's work, or facilities used by Herin. As Travelers has pointed out, Durham's complaint clearly states that he was working as a Herin employee at the time of his injury, that he fell off of scaffolding that he, as a Herin employee, helped to erect, and that he was injured as he descended onto a littered ledge surrounding an empty concrete pool, an area in which Herin had been conducting its operations for JA Mechanical. Accordingly, Durham's action could be characterized as one "with respect to" Herin's work, Herin's operations and facilities used by Herin. The court draws this conclusion despite the fact that Durham has not sued Herin in the underlying action.
In its attempt to defeat Travelers' motion for summary judgment, Hartford likens its argument to that made by Travelers in the motion for summary judgment filed by the Hardin plaintiffs in this action. Hartford is correct that this court held that Travelers did not have a duty to defend the Hardin plaintiffs. The basis for that decision, however, was the specific language at issue in the Travelers policy. The Travelers policy provided coverage "only with respect to liability arising out of [the subcontractor's] work" and specifically excluded coverage for liability arising out of the independent acts or omissions of the general contractor. In its 17 February 2000 Order, this court wrote that it agreed "with defendant that, to give meaning to the "independent acts" provision of the endorsement, the court must construe the "arising out of [the subcontractor's work]" provision as one providing coverage in cases where the alleged liability is vicarious." [CITE]
Unlike the Travelers policy at issue in the 17 February 2000 Order, the Hartford policy at issue in this motion does not explicitly exclude coverage for liability arising from independent acts or omissions of the additional insured. Consequently, the language of the "Who is an Insured" paragraph need not be interpreted as limiting the available coverage to coverage for vicarious liability, i.e., liability imposed upon the primary contractor as a result of the secondary contractor's acts and not as a result of the primary contractor's own acts or failure to act. It is also important to understand that the "Who Is an Insured" provision in the Hartford policy, unlike the parallel provision in the Travelers policy, does not define the coverage available to additional insureds in terms of liability. The Travelers policy provided coverage to additional insureds "but only with respect to liability arising out of" the subcontractor's work. The Hartford policy, in contrast, merely provides coverage "with respect to" the subcontractor's work. Consequently, in the context of the Hartford policy, "with respect to" may refer to the bodily injury at issue and/or the relationship between the parties. The fact that Durham's injury may have arisen from the subcontractor's work and that it occurred while he was performing work required by the subcontractor are therefore relevant to the analysis of the Hartford policy although they were not particularly relevant to the analysis of the Travelers policy.
Although the court has not located (and defendant has not offered) a North Carolina case exactly on point, similar cases from other jurisdictions provide guidance on this issue. In J.A. Jones Construction Co. v.Hartford Fire Insurance, 269 Ill. App.3d 148, 150, 645 N.E.2d 980, 982, appeal denied, 162 Ill.2d 568, 65 N.E.2d 342 (1995), for example, the policy at issue, like the Hartford policy in this case, provided that an insured included an organization with whom the named insured had agreed by contract to provide insurance "but only with respect to [the subcontractor's] operations, `[the subcontractor's] work,' or facilities owned or used by [the subcontractor]." Id. (emphasis added.) The Jones court found that, at the time of his injury, the employee who had sued the general contractor for negligence was an employee of the subcontractor performing work that the subcontractor had been hired to do and concluded that the above-described endorsement regarding additional insureds did not limit coverage to injuries attributable to the subcontractor's negligence. Indeed, theJones court specifically rejected the argument by the subcontractor's insurer, Hartford, that the additional insured endorsement limited coverage to injuries attributable to the subcontractor's negligence. In other words, the fact that the injured employee did not sue his immediate employer (the subcontractor) in his personal injury action and the fact that the employee's allegations were premised upon the alleged negligence of the general contractor did not relieve the subcontractor's insurer from the obligation of defending the general contractor in the action. The Jones court, therefore, did not interpret the "with respect to" language as language limiting the coverage to cases in which vicarious liability is alleged against the primary contractor based on the acts of the subcontractor. See also Saavedra v. Murphy Oil U.S.A., Inc., 930 F.2d 1104 (5th Cir. 1991) (where insurer's policy with subcontractor provided that "additional insureds are covered under this policy as required by written contract, but only with respect to operations performed by or for the named insured" and the injured employee sued regarding an accident that was directly related to the subcontractor's work, the clause was satisfied and the policy extended insured status to the general contractor); and United States Fire Insurance Co. v. Aetna Life and Casualty, 291 Ill. App. 3d 991, 684 N.E.2d 956 (1997) (where policy provided coverage for additional insureds "but only with respect to acts or omissions of the named insured in connection with the named insured's operations at the applicable location designated" and the employee who sued the general contractor was employed by the subcontractor, the named insured, and was performing tasks required of him in connection with the named insured's operations when he was injured, subcontractor's insurer had the duty to defend general contractor), appeal denied, 176 Ill.2d 593, 690 S.E.2d 1388 (1998).
The analyses provided by the courts in Jones, Saavedra andAetna Life show that Hartford's proposed interpretation of the policy language at issue, limiting coverage to vicarious liability, is not the only reasonable interpretation of that language. Indeed, the construction offered by the foregoing courts is equally plausible. See Brown v. Lumberman's Mutual Casualty Co., 326 N.C. 387, 392, 390 S.E.2d 150, 153 (1990) (noting that a "difference of judicial opinion regarding proper construction of policy language is some evidence calling for application [of rule resolving ambiguities against insurance company and in favor of insured]"). Because Durham was employed by Herin at the time of his injury, performing work for Herin as required by JA Mechanical, it is not unreasonable to conclude that coverage is applicable because JA Mechanical is insured "with respect to" Herin's work. At the very least, the court must conclude that the policy language at issue is ambiguous. "If . . . the meaning of words or the effect of provisions is uncertain or capable of several reasonable interpretations, the doubts will be resolved against the insurance company and in favor of the policyholder." Gaston County, 351 N.C. at 299-300, 524 S.E.2d at 563. Consequently, the court must construe the language against the insurer, Hartford, and in favor of the insured, JA Mechanical, and hold that Hartford did have a duty to defend JA Mechanical in this case based on the potentiality that the facts alleged by Durham would be covered by the Hartford policy.
Unlike the Travelers policy at issue in this court's 17 February 2000 Order, the Hartford policy simply does not require the court to premise its decision on the basis for liability asserted against JA Mechanical. Nor does the policy make an explicit distinction between claims arising from the subcontractor's work and the independent acts of the general contractor.
IV. Hartford's Tender of Defense Argument
Hartford has argued that, even if this court finds that JA Mechanical is an "additional insured" under the Hartford policy and entitled to a defense on that basis, Hartford was not required to provide a defense for JA Mechanical based on JA Mechanical's alleged failure to tender the defense to Hartford. (Resp. at 8-10.) In other words, "[w]hile JA Mechanical may have a right to a defense under the Hartford policy, [Hartford contends], [JA Mechanical] is not required to avail itself of this right and cannot complain unless it tenders the defense to Hartford." (Resp. at 10.) In the alternative, Hartford argues that the defense was not tendered by JA Mechanical until on or about 1 November 1999, at which time Hartford offered to defend, and that Hartford accordingly cannot be held liable for pre-tender defense costs based on the provision in the Hartford policy prohibiting voluntary payments made without the consent of the insurer. (Id. at 10.)
A. JA Mechanical's Tender of Defense
1. Direct Tender of Defense
Hartford claims that it is undisputed that "neither JA [Mechanical], nor any agent or attorney on behalf of JA [Mechanical], demanded or tendered" the defense of the Durham action to Hartford directly. (Resp. at 9.) Travelers claims that there were numerous requests that Hartford participate in the defense, and that Hartford was aware of the claims against JA Mechanical early on in the Durham proceedings. (Reply at 5.) First and foremost, Travelers notes that David C. Edwards, a Project Manager for JA Mechanical, wrote to Herin on 3 December 1997 notifying Herin of the letter JA Mechanical had received from Hardin regarding Durham's accident and stating that JA Mechanical would
look to Herin Company and your insurance company, Hartford Fire Insurance Co., to indemnify and defend us in accordance with Section 4.6 of your subcontract with JA Mechanical. If you have not already done so, we recommend that you notify your insurance carrier immediately concerning both our position and Hardin's position regarding this accident.
(Nenon Aff. ¶ 4; Carruthers Aff. ¶ 6. and Ex. 1.) Travelers also cites the following documents, circumstances, and occurrences as evidence that Hartford knew of JA Mechanical's demand for a defense in this matter: 1) Hartford was the workers' compensation insurer paying for Durham's injuries; 2) JA Mechanical asserted a claim against Herin, Hartford's insured, on 3 November 1998; 3) a written inquiry regarding Hartford's coverage of JA Mechanical as an additional insured on the Hartford policy was made on or about 18 January 1999; 4) there were verbal requests by JA Mechanical's counsel to Herin's counsel (who was retained by Hartford (Gallimore Aff. ¶ 8)) regarding Hartford's defense obligation to JA Mechanical; and 5) Travelers filed this third party complaint against Hartford on 28 April 1999, and Hartford was served in this action on 7 May 1999. (Reply at 5.)
While Hartford disputes the fact that any of the foregoing communications constituted tender, Hartford does acknowledge that it received two letters from attorney Joseph Carruthers on behalf of JA Mechanical in late October 1999. In those letters, Carruthers informed J. Reed Johnston, attorney for Hartford, that Durham v. JA Mechanical was set for trial beginning 1 November 1999, and he demanded that Hartford "try and settle this case within its policy limits as primary carrier for JA Mechanical." (Carruthers Letter to Johnston dated 28 October 1999). In response, Hartford wrote Carruthers a letter stating that it would "take [those] letters as a demand for defense as an additional insured by contract." (White Letter to Carruthers dated 1 November 1999.) At that time, Hartford offered to provide a defense with certain reservations of rights. According to Hartford, Travelers did not accept the offer. (Resp. at 8.) Although Travelers allegedly rejected Hartford's offer to defend, Hartford nevertheless became involved in the settlement of the Durham action on behalf of JA mechanical because Hartford ultimately paid $150,000 of the $300,000 settlement.
As a factual matter, based on Hartford's characterization of the October 28 letters from Carruthers as a tender of defense, the court rejects Hartford's argument that JA mechanical never tendered the defense of the Durham action to Hartford. Moreover, as a legal matter, the court agrees with Travelers' assertion that JA mechanical was not required to tender the defense to Hartford directly under the terms of the Hartford policy. Travelers has pointed out that there is no requirement in the Hartford policy, or in any reported North Carolina case, that an insurer's defense obligation is contingent upon an insured's explicit request, made directly to the insurer's that the insurer provide a defense. See, e.g., Bibb v. Dairyland Ins. Co., 44 Mich. App. 440, 205 N.W.2d 495 (1973) (citing Supreme Court of Michigan case in which court determined that insurance companies would not be prejudiced if they received adequate and timely information about an accident or the institution of an action for the recovery of damages regardless of the source of its information and "defendant insurance company was not permitted to ignore notice of suit against it by plaintiff's attorney and then rely upon the insured's failure to give notice as a defense"). Travelers argues that the defense obligation is determined solely by the coverage provision of the contract. Brown, 326 N.C. at 392, 390 S.E.2d at 153. (Reply at 6.) Travelers is correct that Hartford has not pointed out to the court any provision of the Hartford policy that requires an additional insured such as JA mechanical to tender to the insurer directly the defense of a given action. Accordingly, Hartford's exceedingly technical argument is unpersuasive.
In the context of its argument that JA Mechanical never explicitly tendered the defense of the Durham action directly to Hartford, Hartford acknowledges that it had notice of the Durham lawsuit by means from sources other than JA Mechanical. (Resp. at 8.) Hartford never clearly states in any of the documents submitted to the court, however, the date upon which Hartford became aware of the claims against JA Mechanical. Hartford instead clings tenaciously to the very technical argument that JA Mechanical failed to tender the defense directly to Hartford. Travelers, on the other hand, states that it did not conduct discovery to establish the date when Hartford or its agents became aware of the claims against JA Mechanical. (Reply at 5.) Given the circuitous manner in which both parties have addressed the notice issue, the court cannot determine when Hartford had actual notice of the claims against JA Mechanical and of its corresponding obligation to defend JA Mechanical.
2. Effect of Delayed Tender
Because Hartford has acknowledged that it construed the October 1999 letters mentioned above as a tender of the defense, however, the court will analyze whether the alleged delay in the tender of defense nullifies any obligation Hartford may have had to defend JA Mechanical in the Durham action. The North Carolina Supreme Court has explained that, when faced with a claim that notice was not timely given, a trier of fact must first decide whether notice was given as soon as practicable. That requirement is satisfied despite any delay in notifying the insurer so long as the delay is occasioned in good faith and the insurer is not materially prejudiced.Great American Insurance Co. v. C.G. Tate Construction Co., 315 N.C. 714, 719, 340 S.E.2d 743, 747 (1986). Here, as explained above, the record does not reveal whether notice was given as soon as practicable, so this court will assume, for purposes of this analysis, that notice was not so given. Presuming a delay in notice then, the court must consider the issues of good faith and prejudice.
With respect to good faith, the Great American court held that "`[a]nyone who knows that he may be at fault and that others have claimed he is at fault and who purposefully and knowingly fails to notify ought not to recover even if no prejudice results.'" Id. at 720, 340 S.E.2d at 747 (citations omitted). Here, as illustrated above, the evidence in the record shows that JA Mechanical knew that it may be held liable in the Durham action and notified Herin of that fact as well as its intent to rely upon Herin and Hartford for a defense as early as 3 December 1997. JA Mechanical specifically informed Herin that Herin should notify Hartford immediately. Even if JA Mechanical's December 1997 letter to Herin could not be construed as an official tender of defense to Hartford (an issue upon which this court does not pass judgment at this time), JA Mechanical cannot be said to have purposefully or knowingly failed to notify Herin or Hartford under these circumstances. It was clearly JA Mechanical's intent that Hartford be notified by its named insured as soon as possible. Because it cannot be said that JA Mechanical lacked good faith in these circumstances, the court will go on to consider the issue of prejudice. See Nationwide Mutual Ins. Co. v. State Farm Mutual Automobile Ins. Co., 122 N.C. App. 449, 453, 470 S.E.2d 556, 558 (1996) (when good faith is shown, burden shifts to insurer to prove that its ability to investigate and defend was materially prejudiced by the delay).
The Great American court explained clearly that the good faith test "is phrased in the conjunctive: both knowledge and the deliberate decision not to notify must be met for lack of good faith to be shown. If the insured can show that either does not apply, then the trial court must find that the insured acted in good faith." Great American, 315 N.C. at 720, 340 S.E.2d at 747.
Hartford has not attempted to demonstrate any prejudice resulting from JA Mechanical's alleged failure to tender the defense of the Durham action to Hartford in a timely manner. Indeed, in its brief, Hartford acknowledges that it had notice of the Durham lawsuit from sources other than JA Mechanical. Travelers assumed JA Mechanical's defense because Travelers provided excess insurance for JA Mechanical and arguably had an obligation to do so in the absence of other insurance coverage. Moreover, at the latest, JA Mechanical requested that Hartford attempt to settle the claims against JA Mechanical on 28 October 1999, prior to settlement and prior to trial. Consequently, Hartford had the opportunity to participate in the defense and in the settlement of the Durham action against JA Mechanical if it had chosen to do so. In the absence of a showing of prejudice, this court cannot conclude that JA Mechanical's failure to tender defense to Hartford as soon as was practicable relieved Hartford of its obligation to defend the insured. See Great American, 303 N.C. at 390, 279 S.E.2d at 771 (unexcused delay by insured in giving notice does not relieve insurer of duty to defend unless delay materially prejudices insurer's ability to investigate and defend); Nationwide Mutual, 122 N.C. App. at 452, 470 S.E.2d at 558 (holding Great American rule applies to dispute between two insurance companies where contract at issue in dispute was formed between one of the companies and an insured).
B. Pre-Tender Defense Costs
Hartford argues, in the alternative, that it cannot be held accountable for defense costs incurred before the date on which JA Mechanical tendered the defense based on the voluntary payments provision in the Hartford policy. The Hartford policy issued to Herin contains the following provision:
No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.
(Resp. at 4.) Hartford contends that pre-tender defense costs have been held not recoverable under an insurance policy that contains a voluntary payments provision like the one cited above. (Resp. at 10.) Travelers makes numerous and varied arguments in response. (Reply 3-6.) The court concludes that the issue of pre-tender costs raised by Hartford does preclude an award of summary judgment in favor of Travelers insofar as Travelers seeks reimbursement for defense costs incurred before 28 October 1999.
It appears to the court that Travelers has referred to the cited provision as a "cooperation clause" in its Reply brief. (Reply at 3.) Because Hartford has identified the provision as a "voluntary payments" provision, because there is a distinction between a voluntary payments provision and a cooperation clause, and because the court cannot locate an argument by Hartford pertaining to a "cooperation clause," the court will address the arguments on the pre-tender costs issue as arguments relating to the "voluntary payments" provision of the Hartford policy.
In the foregoing section, this court concluded that Hartford had not shown any prejudice resulting from JA Mechanical's alleged delay in tendering the defense to Hartford and that Hartford consequently could not escape its over-arching contractual obligation to defend JA Mechanical in the Durham action. For purposes of that discussion, the court relied upon Hartford's characterization of the October 1999 letters from Carruthers as a demand for a defense in the Durham action. While such an assumption was appropriate in that context, such an assumption cannot substitute for a factual finding as to the actual date of tender (or notice to Hartford) in the voluntary payments context. As noted earlier, Hartford has not set forth the date upon which it became aware of the claims against JA Mechanical and of the corresponding possibility that those claims would be covered by the Hartford policy. Likewise, Travelers has stated that it did not conduct discovery to establish the date when Hartford or its agents became aware of the claims against JA Mechanical because Hartford failed to plead the voluntary payments clause as an affirmative defense in its answer to Travelers' third-party complaint. (Reply at 5.) Because the court cannot discern from the record the actual date upon which tender was made or the date on which Hartford became aware that JA Mechanical could be entitled to a defense under the terms of the Hartford policy, a disputed issue of material fact precludes an award of summary judgment as to those defense costs incurred before the date of tender or, alternatively, notice. Summary judgment is inappropriate with respect to defense costs incurred before 28 October 1999 because the court cannot examine the prejudice suffered by Hartford as a result of JA Mechanical's alleged breach of the voluntary payments provision of its contract with Hartford, i.e., the amount of payments made by or on behalf of JA Mechanical in the defense of the Durham action, without reference to the underlying facts pertaining to the date Hartford learned of its potential obligation to JA Mechanical. While Travelers argues that Hartford has made no showing, or even a suggestion that it has been prejudiced by a delay in receiving a request for a defense, and while that argument is viable and persuasive in the context of Travelers' argument that Hartford is not relieved from its overarching duty to defend based on an untimely tender of defense, that argument is not persuasive in the context of Hartford's argument pertaining to the voluntary payments provision. Here, Hartford's assertion of prejudice, i.e., the fact that payments were possibly made on JA Mechanical's behalf during 1997, 1995 and 1999 pertaining to the Durham defense as to which Hartford had no input, is implicit in the argument that the voluntary payments clause was breached. The extent of the prejudice, as a factual matter, depends on when tender was made and/or when Hartford had sufficient notice that JA Mechanical could have been entitled to a defense under the terms of the Hartford policy. In sum, the court will deny Travelers' motion for summary judgment to the extent Travelers seeks reimbursement of defense costs incurred before 28 October 1999.
While Hartford did not explicitly refer to the voluntary payments clause in its answer to Travelers' complaint, Hartford included the following defense in its Third-Party Answer: "The Hartford Fire Insurance Company has no defense or indemnity obligation to the third-party plaintiff for the underlying lawsuit based on the terms, provisions, limitations, conditions and exclusions in the policy." (Third-Party Answer at 3.) The voluntary payments provision in the Hartford policy may be described as a condition of that policy and thus comes within the ambit of Hartford's "Fourth Further Defense" quoted above. Travelers has never made a motion to strike Hartford's Fourth Defense for lack of specificity. Moreover, Travelers has not argued, nor has it provided adequate support for the contention that Hartford failed to allege the defense at issue with sufficient specificity. The court therefore rejects Travelers' argument that Hartford is precluded from relying upon the pre-tender costs defense based on Hartford's alleged failure to assert the affirmative defense in its answer.
Even if this court were to analyze Hartford's argument that Travelers is not entitled to pre-tender defense costs under equitable as opposed to contractual principles as suggested by the Ninth Circuit in Northern Insurance Co. of New York v.Allied Mutual Insurance Co., 955 F.2d 1353, 1360 (9th Cir. 1992), cert. denied, 505 U.S. 1221 (1992), the court would still be unable to examine the prejudice allegedly suffered by Hartford as a result of JA Mechanical's violation of the voluntary payments clause, a prejudice which should weigh against reimbursement, without access to the underlying facts, including the actual date of tender or the date of notice.
V. Duty to Indemnify
In its motion for summary judgment, Travelers has requested that this court order Hartford to indemnify it for the amount Travelers paid in settlement of the claims against JA Mechanical. As noted above, however, the duty to indemnify is more narrow than the duty to defend, and a defendant's obligation to indemnify a plaintiff requires a discrete analysis. Under North Carolina law,
[w]hen an insurer without justification refuses to defend its insured, the insurer is estopped from denying coverage and is obligated to pay the amount of any reasonable settlement made in good faith by the insured of the action brought against him by the injured party. . . . By denying liability and refusing to defend claims covered by the insurance policy, the insurance company commits a breach of the policy contract and thereby waives the provisions defining the duties and obligations of the insured.Ames v. Continental Casualty Co., 79 N.C. App. 530, 538, 340 S.E.2d 479, 485, review denied, 316 N.C. 730, 345 S.E.2d 385 (1986). See also Duke University v. St. Paul Fire Marine Ins. Co., 96 N.C. App. 635, 386 S.E.2d 762, review denied, 326 N.C. 595, 398 S.E.2d (1990); and Bruce-Terminix Co. v. Zurich Ins. Co., 130 N.C. App. 729, 735, 504 S.E.2d 574, 579 (1998) (noting that Duke University established that if a duty to defend is found and the defendant has refused to provide a defense, the defendant has "obligated itself to pay the amount and costs of a reasonable settlement if its refusal was unjustified."). In St. Paul Fire Marine Ins. Co. v.Vigilant Ins. Co., 919 F.2d 235, 239-240 (4th Cir. 1990), the Fourth Circuit applied Ames to require a defendant that had breached its duty to defend to pay its requisite share of the settlement entered into by an insurance company that had elected to defend the insured. In that case, defendant Vigilant argued that, even if it had breached its duty to defend, it should subsequently have had the opportunity to contest the fact that the alleged damage occurred within the policy period. Relying onAmes, the Fourth Circuit held that, by breaching its duty to defend, Vigilant had relinquished any right to litigate coverage issues. In accordance with Ames and St. Paul, this court concludes that Hartford's breach of its policy by failing to defend JA Mechanical in the Durham action precludes Hartford from arguing, in the context of its duty to indemnify, that the Durham claim against JA Mechanical is not covered by its policy. Hartford is obligated to pay the amount of any reasonable settlement made in good faith by the insured.
See also Warfield-Dorsey Co., Inc. v. Travelers Casualty Surety Co. of Illinois, 66 F.Supp.2d 681, 686-687(D. Md. 1999) (applying Maryland law to hold that, "[i]n order to recover the amount of the settlement from the insurer, the insured need not establish actual liability to the party [with] whom it has settled "so long as a potential liability on the facts known to the [insured is] shown to exist, culminating in a settlement in an amount reasonable in view of the size of the possible recovery and degree of probability of claimant's success against the [insured].") (citing Luria Brothers Co., Inc. v.Alliance Assurance Co., Ltd. 780 F.2d 1082, 1091 (2nd Cir. 1986)).
Here, Hartford and Travelers have each paid $150,000 of a $300,000 settlement on behalf of JA Mechanical. It is unclear to this court why Hartford paid any amount of the settlement given Hartford's position that it has no duties or obligations with respect to JA Mechanical. In any event, Hartford has not suggested or explicitly claimed that the settlement of the Durham claims against JA Mechanical was unreasonable. In Duke University, 96 N.C. App. at 637, 386 S.E.2d at 763, the North Carolina Court of Appeals found it unnecessary to address the reasonableness issue where the defendant in the case failed to challenge the reasonableness of the settlement. Relying upon the state court's treatment of the issue, this court, likewise, will decline to address the reasonableness issue in light of the fact that Hartford has not argued that the amount of the settlement was unreasonable. Accordingly, the court will require Hartford to reimburse Travelers the $150,000 Travelers paid Durham in settlement of his claims against JA Mechanical, including interest from the date of payment, up to the limits of the Hartford policy.
As Travelers has asserted, Hartford's insurance is primary and Travelers is excess under these circumstances. The Travelers policy contains a specific endorsement regarding excess insurance that describes the insurance provided by Travelers as excess over any other insurance that "is valid and collectible insurance available to you as an additional insured under a policy issued to: a contractor performing work for you. . . ." (Ex. D. to Stip. of Facts.) The Hartford policy provides that Hartford "will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury," "property damage," "personal injury," or "advertising injury" to which this insurance applies." (Ex. E. to Stip. of Facts.) The Hartford policy also provides as follows:
Section E. Liability and Medical Expenses General Conditions.
7. Other Insurance — Primary Additional Insured
If the written contract or agreement or permit requires this insurance to be primary for any person or organization with whom you agree to include in WHO IS AN INSURED, this Other Insurance Provision is applicable. If other valid and collectible insurance is available for a loss we cover under this Business Liability Coverage Form, our obligations are limited as follows:
a. Primary Insurance
This insurance is primary. We will not seek contributions from other insurance available to the person or organization with whom you agree to include in WHO IS AN INSURED, except when b. applies.
b. Excess Insurance
This insurance is excess over any of the other insurance whether primary, excess, contingent or on any other basis;
(1) That is Fire, Extended Coverage, Builder's Risk, Installation Risk or similar coverage for "your work,"
(2) That is Fire, lightning or explosion insurance for premises rented to you; or temporarily occupied by you with permission of the owner; or
(3) If the loss arises out of the maintenance or use of aircraft, "auto" or watercraft to the extent not subject to Exclusion g. of this Business Liability Coverage Form. (Section #1).
As Travelers has noted, Hartford has not contested the assertion that its insurance, if applicable, is primary and that Travelers' insurance is excess.
Based on the foregoing discussion and the language in the Hartford and Travelers policies, the court concludes that Hartford has a duty to indemnify Travelers and that Hartford's insurance is primary and Travelers is excess with respect to the Durham action.
VI. Conclusion
For the foregoing reasons, Travelers' motion for summary judgment is ALLOWED in part and DENIED in part. It is hereby ORDERED, ADJUDGED and DECREED that defendant Hartford did have the duty to defend JA Mechanical. Because the Durham action is no longer pending against JA Mechanical, Hartford is not required to assume JA Mechanical's defense in that action. Hartford is hereby ORDERED, however, to reimburse Travelers for the costs of defending JA Mechanical in the Durham action to the extent those costs were incurred after 28 October 1999. Summary judgment is DENIED to the extent that Travelers seeks reimbursement of defense costs incurred before 28 October 1999, and this issue remains for disposition at trial.
It is further ORDERED, ADJUDGED, and DECREED that Hartford does have the duty to indemnify Travelers. Hartford is hereby ORDERED to pay Travelers $150,000, which amount was expended by Travelers to settle the Durham action, to the extent that this payment does not exceed the limits of the Hartford policy. In addition, Hartford is ORDERED to pay Travelers interest on the $150,000 award from the date Travelers made the payment at issue through the date of this Order at a rate of 8% in accordance with N.C. Gen. Stat. § 24-1. Hartford is also ORDERED to pay Travelers post-judgment interest on the $150,000 award, from the date of the entry of this Order until the date the required payment is made, at a rate of 6.241%.