A U.S. District Court decision issued 11/25/2020 is a good illustration of the rule that if a Complaint implicates the possibility of coverage, the insurer’s duty to defend cannot be eliminated by extrinsic evidence that demonstrates no coverage, and if it is determined that the insurer’s refusal to defend was unjustified, it will be obligated to pay the underlying judgment. In Craige v. Gov’t Employees Ins. Co., 503 F. Supp. 3d 365 (M.D.N.C. 2020), two insurers that refused to defend based on their investigation that the defendant driver did not qualify as an insured of the policies because he was not a resident of the named insureds’ household are stuck with paying a judgment against the driver because the Complaint and available evidence put the insurers on notice of a possibility of coverage.
On 9/21/2013 Rigsbee, while driving a vehicle owned by Wilson and insured by Peak Insurance, caused a collision that injured Craige and Thomas (“Plaintiffs”) and other claimants. The accident report listed Rigsbee’s address as 2734 Weldon Terrace, Durham, NC. Earlier on the day of the collision, Rigsbee was issued a citation for driving while license revoked and displaying an expired registration plate. The citation listed Rigsbee’s address as 108 East Edgewood Drive, Durham, NC. The Edgewood Drive address was the named insureds’ address of a GEICO policy issued to Rigsbee’s mother and stepfather and a Nationwide policy issued to Rigsbee’s brother. Rigsbee was charged with multiple offenses as a result of the collision, including driving left of center, DWI and DWLR. On 10/29/2013 Rigsbee signed an Affidavit of Indigency and listed his address as 108 East Edgewood Drive, Durham, NC.
Plaintiffs’ counsel informed Nationwide and GEICO (“Defendants”), on or before 3/2/2015, that Plaintiffs were seeking coverage from the Nationwide and GEICO policies issued to Rigsbee’s mother/stepfather and brother. Defendants conducted independent investigations and determined that Rigsbee did not qualify as an insured of their respective policies because he was not a resident of their respective named insureds’ household at 108 East Edgewood Drive.
Plaintiffs filed a Complaint on 6/2/2016 in Durham County Superior Court against Rigsbee and Wilson. Peak filed a Motion to Intervene to defend in the name of Rigsbee. GEICO and Nationwide were served with the Summons and Complaint on 3/31/2017. GEICO and Nationwide denied coverage and did not defend Rigsbee. Peake paid its per accident limit to all claimants and its motion to be relieved from Rigsbee’s defense was granted. On 6/13/2018, after a trial which Rigsbee did not attend, the court awarded Craige $206,750 and Thomas $61,500 in compensatory and punitive damages against Rigsbee.
Plaintiffs filed a declaratory judgment action against Defendants in State Court. Defendants removed the case to the Middle District. Plaintiffs and Defendants filed summary judgment motions. Plaintiffs’ summary judgment evidence included the Complaint in the underlying action, which did not allege Rigsbee resided at the Edgewood address but attached and incorporated his citation listing 108 E. Edgewood Drive as his address, and the summons directed to him at the Edgewood address. Plaintiffs also submitted evidence that they provided defendants, by March 2015, Rigsbee’s Affidavit of Indigency and a North Carolina identification card issued 11/22/2013 showing 108 Edgewood Drive as his address. “Defendants were demonstrably aware of the possibility of Rigsbee’s resident status as early as 2015, as evidenced by their decisions to independently investigate that possibility.” Defendants submitted multiple affidavits indicating that Rigsbee was not a resident of the Edgewood address at the time of the accident. He was a drug addict without a stable residence and had not been welcome at the Edgewood household of his mother, stepfather and brother since 2009. He used the Edgewood address solely as an occasional mailing address.
Regarding the duty to defend, Judge Schroeder reviewed established North Carolina case law, that even where a Complaint fails to assert a claim within the policy’s coverage, a duty to defend may exist if the insurer knows, or could ascertain, facts that, if proven, would be covered by the policy, and that if a Complaint implicates the possibility of coverage, extrinsic evidence may not be used to eliminate the duty to defend. “Defendants’ evidence of non-coverage is of no consequence. The facts here created the possibility of coverage, Defendants were aware that Rigsbee was potentially an ‘insured’ under the relevant policies, and even though Defendants may have been convinced that their evidence was far more persuasive, Defendants retained a duty to defend Rigsbee in the underlying suit.”
Defendants argued, alternatively, that their duty to defend Rigsbee was not activated because the Other Insurance clause of their policies stated “any insurance we provide for a vehicle you do not own shall be excess over any other collectible insurance”, Peak’s coverage was primary because it insured the vehicle Rigsbee was driving and neither Peak nor Rigsbee ever asked GEICO or Nationwide to defend Rigsbee. The Court rejected this argument for two reasons. First, the Other Insurance clauses of the policies refer only to the duty to indemnify. The Court, therefore, concluded that the Other Insurance clauses did not modify Defendants’ duty to defend. Second, Defendants’ policies are not true excess policies that might provide a lesser duty to defend but, rather, they are primary policies that cover specific vehicles and include duties to defend and indemnify but provide excess liability coverage for the claim in question only because of the operation of the Other Insurance clause. “The fact that other primary insurance was available through Peak does not serve to transform Defendants’ policies into excess insurance with a lesser duty to defend.”
The Court also rejected Defendants’ argument that their duty to defend Rigsbee did not attach because they were not given timely notice that Peak was no longer defending Rigsbee. First, Defendants were primary insurers and their duty to defend attached when they were notified of the underlying action in March 2017, notwithstanding Peak’s defense of Rigsbee. Although this notice was given 9 months after the underlying action was filed, it was 15 months before trial and Defendants did not provide any evidence or argument that the late notice prejudiced their ability to investigate and defend. Second, North Carolina case law provides that an unjustified refusal to defend on the ground that the claim is outside the policy’s coverage deprives the insurer of the right to insist on compliance with a policy condition. Defendants denied coverage in 2015 and indicated all along they had no duty to defend because Rigsbee was not an insured. “As such, any claim that Defendants’ respective duties to defend were excused due to lack of timely notice are considered waived.”
Finally, the Court concluded that because Defendants’ refusal to defend was unjustified as a matter of law, they are obligated to pay the judgment against Rigsbee in the underlying action. The Court stated in a footnote that if Defendants had defended Rigsbee, they probably would not have been required to indemnify him because their evidence showed that Rigsbee had not been welcome at the Edgewood Drive address since 2009 and he used that address solely as an occasional mailing address.
There is case law from other states that extrinsic evidence may be used to avoid a duty to defend if the extrinsic evidence demonstrates that the defendant is not an insured but, rather, a stranger to the contract. See e.g., Williams v. Community Drive-In Theatre, Inc., 3 Kan. App. 2d 352, 595 P.2d 724 (1979). The facts in Craige v. GEICO are not uncommon and would provide a good opportunity for the North Carolina Court of Appeals or Supreme Court to consider a possible exception to the strict “four-corners” rule for extrinsic evidence that the party seeking coverage does not even qualify as an insured of the policy.