Kubit v. MAG Mutual Insurance. (Lawyers Weekly No. 11-07-0273, 41 pp.) (Martha Geer , J.) Appealed from Cumberland County Superior Court. (E. Lynn Johnson, J.) N.C. App. Click here for the full text of the opinion.
Holdings: The duty to defend arises when an insurer receives actual notice of the underlying action.
Since a doctor’s complaint against individual anesthesiologists contained a number of allegations suggesting that they were acting to allow their employer, Cumberland Anesthesia, to gain influence and control at the hospital, we hold that MAG Mutual and American’s argument that the individual anesthesiologists were not “insureds” was not a proper basis for granting summary judgment to those carriers.
The doctor’s complaint alleged a systematic and intentional course of conduct with the ultimate goal of having a doctor removed from the hospital’s medical staff. Thus, no duty to defend arose because the facts alleged in the doctor’s complaint fell under the intentional injury exclusion.
The doctor’s complaint alleged that individual anesthesiologists’ actions were ongoing, so Cincinnati, the carrier, was not exempted from its duty to defend on the ground that the conduct of which the doctor complained predated the coverage date. Cincinnati had a duty to defend based on the defamation cause of action notwithstanding the prior publication exclusion.
Since MAG Mutual could, with a proper inquiry, have learned through reasonable investigation that the actions of the individual anesthesiologists were “for the betterment of health care services and patient safety at the hospital, relating to a complainant doctor,” we hold that MAG Mutual could reasonably have ascertained facts that, if proven, would be covered by its policy. Consequently, it had a duty to defend the anesthesiologists even though the complaint alleged purposes for their actions that would appear to be outside coverage.
Since the anesthesiologists have apparently never made any argument that they did not knowingly and purposefully fail to notify Travelers of the Welsher complaint, they cannot demonstrate that the delay in giving notice to Travelers was in good faith. Thus, the burden does not shift to Travelers to show that its ability to investigate and defend was materially prejudiced by the delay. Travelers, we conclude, did not have a duty to defend the anesthesiologists against the doctor’s complaint.
Summary judgment for the defendant-insurers is affirmed in part and reversed in part.
Dr. Welsher, a cardiothoracic and vascular surgeon at Cape Fear Valley Medical Center, filed suit against several members of Cumberland Anesthesia and Dr. Viren Desai, alleging defamation, tortious interference with contract, tortious interference with prospective economic advantage, intentional or negligent infliction of emotional distress and unfair and deceptive trade practices.
Welsher alleged that, after the individual anesthesiologists joined Cumberland Anesthesia in 2001, they instituted new rules of operation at the hospital regarding the provision of anesthesia services and retaliated against him when he opposed the rules as being contrary to patient safety. Welsher further alleged that the individual anesthesiologists tried to persuade or intimidate other hospital staff members to join them in their efforts to have him removed from the hospital.
As a result of the individual anesthesiologists filing “patently erroneous and hostile” and “false and malicious” complaints, Welsher alleged, the hospital suspended his privileges for a period of 30 days. The individual anesthesiologists’ actions, Welsher alleged, caused irreparable harm to his reputation and practice.
The individual anesthesiologists alleged that MAG Mutual, Cincinnati, Travelers and American received notice of Welsher’s complaint. Cincinnati and American challenged the timing and sufficiency of the notice.
Upon receiving notice of the action, Travelers agreed to provide a defense to the individual anesthesiologists and paid all of the attorney’s fees and costs charged by the law firm that represented the anesthesiologists.
Welsher voluntarily dismissed his action without prejudice and did not subsequently re-file his complaint.
The anesthesiologists filed an action against MAG Mutual, Cincinnati, American, Travelers, Federal Insurance Company and Desai alleging breach of contract based on the carriers’ failure to provide a defense or indemnify them for defense costs they incurred defending against Welsher’s suit. Cumberland Anesthesia sought to recover damages from Desai for breaching his agreement to pay a portion of the total defense costs.
MAG Mutual, Cincinnati and American filed motions for summary judgment seeking a declaratory judgment that MAG Mutual had no duty to defend Welsher’s complaint. The anesthesiologists moved for summary judgment, arguing that the companies did have a duty to defend them against Welsher’s suit.
The trial court entered summary judgment in favor of MAG Mutual, Travelers and Cincinnati and denied the anesthesiologists’ motion. The anesthesiologists appealed.
An insurer’s duty to defend the insured is broader than its obligation to pay damages incurred by events covered by a particular policy. When the pleadings state facts demonstrating that the alleged injury is covered by the policy, then the insurer has a duty to defend whether or not the insured is ultimately liable. An insurer is excused from its duty to defend only if the facts are not even arguably covered by the policy.
In order to answer the question whether an insurer has a duty to defend, we apply the “comparison test,” reading the policies and the complaint side by side to determine whether the events as alleged are covered or excluded.
In performing this test, the facts as alleged in the complaint are to be taken as true and compared to the language of the insurance policy. If the insurance policy provides coverage for the facts as alleged, then the insurer has a duty to defend.
If the pleadings allege multiple claims, some of which may be covered by the insurer and some of which may not, the mere possibility the insured is liable, and that the potential liability is covered, may suffice to impose a duty to defend.
Under Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, LLC, 364 N.C. 1 (2010), the duty to defend is broader than the duty to indemnify only in the sense that an unsubstantiated allegation requires an insurer to defend against it so long as the allegation is of a covered injury; however, even a meritorious allegation cannot obligate an insurer to defend if the alleged injury is not within, or is excluded from, the coverage provided by the insurance policy.
Although the insurer’s duty to defend an action is generally determined by the pleadings, facts learned from the insured and facts discoverable by reasonable investigation may also be considered.
We ruled in Duke Univ. v. St. Paul Fire & Marine Ins. Co., 96 N.C. App. 635 (1990), that affidavits filed by the plaintiff explaining what actually occurred during an accident — contrary to allegations in the underlying complaint — were relevant to the determination of an insurer’s duty to defend.
Qualification as ‘Insureds’
MAG Mutual and American contend that the individual anesthesiologists were not insureds under the policy. Each of the policies identified Cumberland Anesthesia as the only named insured.
The anesthesiologists presented evidence in an affidavit that each of them was both a director of and employed by Cumberland Anesthesia. The question is, therefore, whether the actions that formed a basis for the complaint (1) involved their duties as directors, (2) were within the scope of their employment, or (3) occurred while they were performing duties related to the conduct of Cumberland Anesthesia’s business.
Cumberland Anesthesia provided anesthesia and related services at the hospital. Welsher’s complaint challenged new rules promulgated by Cumberland Anesthesia and actions taken by the individual anesthesiologists relating to their provision of anesthesia services. The anesthesiologists argued that all of those actions were undertaken under the auspices of Cumberland Anesthesia.
Since the activities undertaken by the anesthesiologists that formed the basis of Welsher’s complaint fell within the definition of an insured employee, we need not address whether the alleged conduct involved the individual anesthesiologists’ duties as directors.
Where an employee’s actions conceivably are within the scope of employment and in furtherance of the employer’s business, the question is one for the jury. However, in Medlin v. Bass, 327 N.C. 587 (1990), the Supreme Court concluded that, for purposes of res judicata, a principal was not acting within the scope of his employment when he sexually assaulted a student because the principal could only be advancing a completely personal objective.
But we cannot conclude that the allegations in the Welsher complaint are analogous to a school employee’s sexual assault. The allegations do not establish that the individual anesthesiologists were acting to advance purely personal objectives as opposed to objectives related to their employment with Cumberland Anesthesia. The alleged actions could conceivably advance a purpose of Cumberland Anesthesia.
The complaint contains a number of allegations suggesting that the individual anesthesiologists were acting to allow Cumberland Anesthesia to gain influence and control at the hospital. Accordingly, we hold that MAG Mutual and American’s argument that the individual plaintiffs were not insureds was not a proper basis for granting summary judgment to those carriers.
Coverage of Alleged Acts
The anesthesiologists argued that the carriers had a duty to defend because the acts alleged in the Welsher complaint fell within the policies’ coverage for “bodily injury,” “personal injury” and quality assurance activities.
The insured has the burden of bringing itself within the insuring language of the policy. Once it has been determined that the insuring language embraces the particular claim or injury, the burden then shifts to the insurer to prove that a policy exclusion excepts the particular injury from coverage.
Exclusionary clauses are interpreted narrowly while coverage clauses are interpreted broadly to provide the greatest possible protection to the insured.
Bodily Injury Coverage
The anesthesiologists argued that the Welsher complaint’s claim for negligent misrepresentation falls within the policies’ bodily injury coverage.
The policies all provided coverage for “bodily injury” arising out of an “occurrence.” The policies generally define “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The policies also excluded coverage for “bodily injury” expected or intended from the standpoint of the insured.
MAG Mutual, American and Cincinnati all argued that no duty to defend existed because either the Welsher complaint did not allege an “occurrence” or the allegations fell within the exclusion for intended/expected injuries.
“Accident” is construed to include injury resulting from an intentional act, if the injury is not intentional or substantially certain to be the result of the intentional act. If an intentional act is either intended to cause injury or substantially certain to result in injury, it is not an occurrence under the policy definitions, and no coverage is provided. An intent to injure may be inferred where the act is substantially certain to result in injury.
The Welsher complaint alleged a systematic and intentional course of conduct with the ultimate goal of having Welsher removed from the hospital’s medical staff. Welsher’s allegations refer only to intentional conduct, which leads to one conclusion: that the anesthesiologists intended to injure Welsher.
The mere fact that the tort complaint recast the intentional acts into a claim for negligence did not trigger coverage or a duty to defend. Thus, no duty to defend arose from the claim of bodily injury, because the facts alleged in the Welsher complaint fell under the intentional injury exclusion.
We further conclude that the Welsher complaint did not allege an occurrence. The injuries alleged in this case were substantially certain to result from the individual plaintiffs’ intentional acts; therefore, the duty to defend was not triggered under the policies.
The anesthesiologists argued that the carriers had a duty to defend based on the Welsher complaint’s defamation claim for relief because the claim falls within the coverage for personal injury.
Each of carriers’ liability and umbrella policies provided coverage for “personal and advertising injury” arising out of one or more of the following offenses: “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”
MAG Mutual and American, however argued that “personal injury” coverage is unavailable because of the policies’ exclusion for damages “caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury” and for damages “arising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity.”
The central question as to the exclusions at issue is whether the Welsher complaint alleges any facts permitting the conclusion that the individual anesthesiologists did not know that their statements regarding Welsher were false and did not know that they were violating Welsher’s rights and inflicting “personal and advertising injury,” which is defined as including slandering or libeling a person or disparaging the person’s services.
The Welsher complaint contains a number of allegations regarding false statements that could have been made negligently or with reckless disregard as to the truth of the statements. Although the Welsher complaint contained numerous allegations that fell within the exclusions, it also contained allegations supportive of the defamation claim that arguably did not fall within the exclusions. As a result, the Welsher complaint includes allegations supporting its defamation claim that are covered and not excluded by the policies, so MAG Mutual and American had a duty to defend the defamation claim.
Cincinnati argued that the Welsher complaint failed to allege slander that occurred within its policy period or that any claim would fall within its policy’s prior publication exclusion. The Welsher complaint did not include allegations regarding any distinctly identified statements made within Cincinnati’s policy period. But the Welsher complaint alleged that the anesthesiologists’ actions were ongoing, so Cincinnati was not exempted from its duty to defend on the ground that the conduct Welsher complained of predated the coverage date.
Cincinnati had a duty to defend based on the defamation cause of action notwithstanding the prior publication exclusion.
Quality Assurance Activities
The anesthesiologists argued that MAG Mutual had a duty to defend because the Welsher complaint’s factual allegations were based in part on the individual plaintiffs’ quality assurance activities.
First, the policy says that “we’ll cover you” for “quality assurance activities” for specified purposes. Second, the policy states that “we’ll cover you” for participation in certain capacities related to a formal credentialing, peer review, or quality assurance board or committee.
According to the Welsher complaint, the individual anesthesiologists peppered or littered Welsher’s peer-review file with complaints, which ultimately led to his suspension. These allegations refer to quality assurance activities relating to the quality of health-care services and patient safety. They do not, however, indicate that the actions were taken for the purposes specified in the coverage provision.
While the Welsher complaint alleges that these actions were undertaken to remove Welsher from the hospital and to retaliate against him, it is undisputed that Cumberland Anesthesia faxed MAG Mutual a copy of the Welsher complaint with a cover sheet stating that the Welsher lawsuit was “ultimately about a challenge to Welsher’s peer review file.”
Since MAG Mutual could, with a proper inquiry, have learned through reasonable investigation that the actions of the individual anesthesiologists were “for the betterment of health care services and patient safety at the hospital, relating to Dr. Welsher,” we hold that MAG Mutual could reasonably have ascertained facts that, if proven, would be covered by its policy.
Consequently, it had a duty to defend the anesthesiologists even though the Welsher complaint alleged purposes for their actions that would appear to be outside coverage.
Compliance With Notice Provision
Cincinnati, American and Travelers argued that, even if their policies provided coverage for factual allegations contained in the Welsher complaint, the anesthesiologists breached a policy provision requiring them to give notice as soon as practicable or as soon as possible as a precondition to coverage.
Cincinnati and American contended that they had no obligation to defend the anesthesiologists until they received actual notice, and they dispute when notice was received. Travelers argued that its duty to defend was completely excused by the failure to provide timely notice. The majority of jurisdictions hold that the duty to defend is triggered when the insurer receives notice of the underlying complaint.
In view of our courts’ repeated emphasis on the importance of an insurer’s ability to investigate and defend claims against its insured, we adopt the majority rule. Therefore, we hold that, in North Carolina, the duty to defend arises when an insurer receives actual notice of the underlying action.
The anesthesiologists alleged that they gave notice to an insurance agent for Cincinnati and American. Notice of a potential claim given to an insurance agent constitutes notice to the insurer. Therefore, Cincinnati and American’s duty to defend was triggered when notice was given to their agent.
Cumberland Anesthesia communicated information regarding the Welsher complaint with the insurance service center — Cincinnati and American’s agent — in its capacity as agent for Evanston Insurance Company in reference to a renewal of an insurance policy with Evanston.
The evidence does not support a finding that the agent was acting within the scope of any authority granted by Cincinnati or American. While general notice of the existence of a lawsuit to an insurance agency acting as an agent for multiple carriers might be sufficient to provide notice to the various carriers, we need not resolve that question because that fact pattern is not present here.
We hold that under the circumstances of this case, Cumberland Anesthesia’s communication to an agent in the context of a renewal application with another insurer did not provide notice of the Welsher action to Cincinnati and American. Since the anesthesiologists present no other evidence of an earlier notice date, we hold that Cincinnati’s duty to defend was not triggered until much later than the anesthesiologists allege.
With respect to Travelers’ argument that it is relieved of its duty to defend due to breach of the notice requirement, an unexcused delay by the insured in giving notice to the insurer of an accident does not relieve the insurer of its obligation to defend and indemnify unless the delay operates materially to prejudice the insurer’s ability to investigate and defend.
Our Supreme Court established a three-prong test for determining when a delay in providing notice relieves an insurer of its duty to defend and indemnify.
The trier of fact must first decide whether the notice was given as soon as practicable. If not, the trier of fact must decide whether the insured has shown that he acted in good faith, that he had no actual knowledge that a claim might be filed against him. If the good faith test is met, the burden then shifts to the insurer to show that its ability to investigate and defend was materially prejudiced by the delay.
The first prong is met by the fact that the insurer has introduced the issue to the court. Travelers thus met the first prong by raising the issue. As to step two, the test of lack of good faith involves a two-part inquiry: 1) was the insured aware of his possible fault, and 2) did the insured purposefully and knowingly fail to notify the insurer?
Since the anesthesiologists have apparently never made any argument that they did not knowingly and purposefully fail to notify Travelers of the Welsher complaint, the good-faith test is not met.
Thus, the burden does not shift to Travelers to show that its ability to investigate and defend was materially prejudiced by the delay. Travelers did not have a duty to defend plaintiffs against the Welsher complaint.
We have concluded that MAG Mutual, American, and Cincinnati all had a duty to defend with respect to the Welsher complaint based on their policies’ “personal injury” coverage. MAG Mutual also had a duty to defend as a result of its quality assurance coverage. The anesthesiologists’ failure to provide Travelers with timely notice relieved Travelers of its duty to defend.
We affirm the trial court’s order as to Travelers, but reverse as to MAG Mutual, American and Cincinnati.
Affirmed in part; reversed in part.