Danby of North America, Inc. v. Travelers Insurance , 25 F. App'x 186 ( 2002 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
DANBY OF NORTH AMERICA, 
INCORPORATED,
Plaintiff-Appellant,
v.
TRAVELERS INSURANCE COMPANY;  No. 01-1523
TRAVELERS INDEMNITY COMPANY OF
CONNECTICUT; CHARTER OAK FIRE
INSURANCE COMPANY,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of North Carolina, at Raleigh.
Terrence W. Boyle, Chief District Judge.
(CA-99-336-5-BO)
Argued: October 30, 2001
Decided: January 18, 2002
Before WIDENER, TRAXLER, and KING, Circuit Judges.
Affirmed by unpublished per curiam opinion.
COUNSEL
ARGUED: John Lester Sarratt, KENNEDY, COVINGTON, LOB-
DELL & HICKMAN, L.L.P., Raleigh, North Carolina, for Appellant.
Kenneth E. Ryan, DRINKER, BIDDLE & REATH, L.L.P., Washing-
ton, D.C., for Appellees. ON BRIEF: William T. Corbett, Jr.,
2 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
DRINKER, BIDDLE & SHANLEY, L.L.P., Florham Park, New Jer-
sey; Stephen B. Brown, KIRSCHBAUM, NANNEY, BROWN &
KEENAN, P.A., Raleigh, North Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
This appeal arises from a dispute between Danby of North Amer-
ica, Incorporated ("Danby") and three insurance companies, Travelers
Insurance Company, Travelers Indemnity Company of Connecticut,
and Charter Oak Fire Insurance Company (collectively "Travelers")
over the scope of an insurance policy (the "Policy") Danby purchased
from Travelers.1 After successfully concluding an arbitration proceed-
ing in 1998 against the Rondeau Bay Construction Corporation
("Rondeau Bay"), Danby filed a claim with Travelers for the costs
and expenses of its defense, asserting that Travelers had been obli-
gated to defend Danby in the arbitration proceedings. When Travelers
denied Danby’s claim, Danby responded by initiating this lawsuit. On
March 8, 2001, the district court awarded summary judgment to Trav-
elers. For the reasons explained below, we affirm.
I.
In the late 1980s, Danby Propriety Ltd., an Australian corporation,
developed a system for re-lining and restoring underground pipes (the
"Danby System"). Danby Propriety granted Danby exclusive author-
ity to use and to grant licenses for the Danby System in the United
States, Canada, and Mexico. In 1989, Danby entered into a licensing
agreement (the "Agreement") with Cinco Construction, Inc.
1
The Policy, according to the Answer filed by Travelers, was actually
issued by Charter Oak Fire Insurance Company.
DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO. 3
("Cinco"), Rondeau Bay’s corporate predecessor, under which Cinco
was given a non-exclusive license to market the Danby System in the
United States, Canada, and Mexico, and also given an exclusive
license to market the system in California. The Agreement contained
a termination clause under which Danby could terminate the licenses
if Cinco failed to meet certain performance goals. The Agreement
also contained an arbitration clause which required that "[a]ny contro-
versy or dispute arising out of or relating to this Agreement shall be
resolved in accordance with the rules and procedures of the American
Arbitration Association." On September 13, 1996, Danby terminated
the licenses, then held by Rondeau Bay as successor to Cinco, for fail-
ure of Rondeau Bay to meet its minimum performance obligations. In
response, Rondeau Bay, on June 3, 1997, filed with the American
Arbitration Association (the "AAA") a Demand for Arbitration of its
dispute with Danby.
In early December 1997, Rondeau Bay filed its arbitration com-
plaint with the AAA, alleging that the termination of its licenses was
unjust because Danby had breached the Agreement in eleven respects.
Two of these allegations were that Danby had breached the Agree-
ment by: (1) actively discouraging potential users from using the
Danby System; and (2) actively and inaccurately disparaging Ron-
deau Bay to existing and prospective users of sewer pipe liners. Ron-
deau Bay further claimed that Danby’s breaches of contract were
tortious in nature, entitling it to punitive damages.
On December 23, 1997, Danby replied to Rondeau Bay’s arbitra-
tion complaint and denied liability. It then counter claimed against
Rondeau Bay for breach of contract, breach of the covenant of good
faith and fair dealing, and negligence. On April 27, 1998, Rondeau
Bay filed its arbitration brief with the AAA, and contended therein
that Danby had breached the Agreement by failing to provide a pipe-
lining system that would work in small diameter pipes (i.e., pipes of
less than twenty-four inches in diameter). Rondeau Bay maintained
that, in addition to its failure to deliver such a product, Danby had
also breached the Agreement by representing to others that the Danby
System was inappropriate for small diameter pipes. Rondeau Bay
maintained that these earlier breaches of the Agreement by Danby
barred it from exercising the Agreement’s termination clause, and that
4 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
Danby’s attempted termination of the Agreement was therefore
unjust.
In late April and early May of 1998, arbitration proceedings were
conducted in San Francisco, California, before a single arbitrator.
Thereafter, on June 25, 1998, the arbitrator rendered an award in
favor of Danby, concluding that Rondeau Bay’s claims were without
merit. Danby, as the prevailing party in arbitration, therefore owed no
damages to Rondeau Bay, and its costs of arbitration consisted of the
legal costs and expenses it had incurred in defending the proceedings
(the "defense costs").
Two weeks later, on July 7, 1998, Danby first informed Travelers
that it intended to seek reimbursement under the Policy for the
defense costs. The Policy, a commercial general liability policy, had
been issued by Travelers on October 9, 1996, and was in effect from
November 3, 1996 to November 3, 1997. Pursuant to Section I.B.1.
of the Policy, Danby was insured, inter alia, against damages for
which it became liable because of "advertising injury" caused in the
course of advertising its goods, products, or services. Danby asserted
to Travelers that the harm alleged in Rondeau Bay’s arbitration com-
plaint constituted an "advertising injury" within the meaning of the
Policy, and that Travelers had a duty to defend Danby in Rondeau
Bay’s arbitration proceeding. Danby therefore contended that Travel-
ers was obligated to reimburse it for its defense costs. In early
November 1998, Travelers denied Danby’s claim on the Policy and,
on November 17, 1998, Danby acknowledged the claim’s denial and
requested that it be reconsidered. On January 4, 1999, Travelers reaf-
firmed its denial of Danby’s claim.
Danby initiated this litigation against Travelers in North Carolina
state court on April 21, 1999, alleging, in three counts, breach of the
terms of the Policy, breach of the implied covenant of good faith and
fair dealing, and violation of the North Carolina Deceptive Trade
Practices Act. Travelers promptly removed the proceeding to the
Eastern District of North Carolina and, on April 4, 2000, the parties
filed cross-motions for summary judgment. On March 8, 2001, the
district court awarded summary judgment to Travelers, concluding
that Rondeau Bay’s claim against Danby was not covered by the Pol-
icy, and also concluding that Rondeau Bay’s claim was barred by the
DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO. 5
Policy’s exclusion, found in Section I.B.2.b.(1), for breach of contract
claims.2 Danby appeals the district court’s summary judgment award,
and we possess jurisdiction pursuant to 28 U.S.C. § 1291.3II.
There are two preliminary matters to be considered before we
examine the merits of Danby’s appeal. First, our standard of review
of an award of summary judgment by a district court is de novo. Shaw
v. Stroud, 13 F.3d 791, 798 (4th Cir. 1994). In analyzing this appeal,
we stand in the same position as the district court, and we will uphold
an award of summary judgment only "if the pleadings, depositions,
answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any mate-
rial fact and that the moving party is entitled to a judgment as a matter
of law." Fed. R. Civ. P. 56(c). Second, because we are sitting in diver-
sity, we apply North Carolina choice-of-law principles. Klaxon Co. v.
Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). In North Carolina,
the rule of lex loci contractus, i.e., the law of the place where the con-
tract was made, controls its interpretation. Fast v. Gulley, 155 S.E.2d
507, 509-10 (N.C. 1967). Because the Policy was formed in North
Carolina, the legal principles of that state are to be applied.
2
Although the district court did not address the issue, Travelers also
asserted, and it raises on appeal, the contention that any obligation it
might have had to defend Danby was barred due to Danby’s failure to
timely notify Travelers of its claim. Travelers contends that, under North
Carolina law, see Great Am. Ins. Co. v. C.G. Tate Constr. Co., 279
S.E.2d 769 (N.C. 1981) ("Great American I"), and Great Am. Ins. Co. v.
C.G. Tate Constr. Co., 340 S.E.2d 743 (N.C. 1986) ("Great American
II"), Danby’s failure to file its claim with Travelers until after the com-
pletion of the arbitration proceedings frustrated Travelers’s ability to
defend; consequently, any duty to defend was discharged. Great Ameri-
can I, 279 S.E.2d at 775 ("[If] the purpose of protecting the insurer’s
ability to defend has been frustrated, the insurer has no duty under the
contract."). This claim is hardly frivolous, but because we conclude that
Travelers possessed no duty under the Policy to defend Danby in the first
place, we need not address its merits.
3
Danby has not appealed the summary judgment ruling on its claim
under the North Carolina Deceptive Trade Practices Act.
6 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
III.
A.
Danby maintains on appeal that the district court erred in conclud-
ing that the Rondeau Bay claims, as litigated in arbitration, were not
within the scope of the Policy. In support of this contention, Danby
asserts that Travelers was obligated to defend it whenever the plead-
ings disclosed the possibility that covered claims were raised against
Danby. In North Carolina, the duty to defend is "broader than [the]
obligation to pay damages incurred by events covered by a particular
policy," Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340
S.E.2d 374, 377 (N.C. 1986), and the duty to defend "arises when the
claim against the insured sets forth facts representing a risk covered
by the policy." Wm. C. Vick Constr. Co. v. Pa. Nat’l Mut. Cas. Ins.
Co., 52 F. Supp. 2d 569, 578 (E.D.N.C. 1999) (Britt, J.). In order to
determine whether a duty to defend arises under a particular insurance
policy, North Carolina employs what is known as the "comparison
test": "the pleadings are read side-by-side with the policy to determine
whether the events as alleged are covered or excluded" and "[a]ny
doubt as to coverage [is] resolved in favor of the insured." Waste
Mgmt., 340 S.E.2d at 378.4 If, however, the facts alleged "are not even
arguably covered by the policy, then the insurer has no duty to
defend." Id. Thus, if the facts alleged by Rondeau Bay in its arbitra-
tion complaint could possibly implicate coverage under the Policy,
Travelers possessed a duty to defend Danby.
The rules of construction for insurance policies in North Carolina
are well established. In construing an insurance contract, "[i]f the pol-
icy language is clear and unambiguous, the policy must be interpreted
according to its plain meaning." Vick Constr., 52 F. Supp. 2d at 581.
See also Nationwide Mut. Fire Ins. Co. v. Grady, 502 S.E.2d 648, 651
(N.C. App. 1998). Moreover, as with other contracts, "the objective
of construction of terms in the insurance policy is to arrive at the
4
The North Carolina courts have not specifically decided the issue of
whether claims made in arbitration are analogous to those made in a judi-
cial context. As the district court noted in its Vick Construction decision,
however, "logic dictates" that the comparison test is equally applicable
to arbitration proceedings. Vick Constr., 52 F. Supp. 2d at 578-79.
DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO. 7
insurance coverage intended by the parties when the policy was
issued." Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 172
S.E.2d 518, 522 (N.C. 1970). Therefore, as the Supreme Court of
North Carolina observed in Wachovia,
[If an insurance contract] contains a definition of a term
used in it, this is the meaning which must be given to that
term wherever it appears in the policy, unless the context
requires otherwise. . . . In the absence of such a definition,
nontechnical words are to be given a meaning consistent
with the sense in which they are used in ordinary speech,
unless the context clearly requires otherwise.
Id. Furthermore, if "the immediate context in which the words are
used is not clearly indicative of the meaning intended, resort may be
had to other portions of the policy and all clauses of it are to be con-
strued, if possible, so as to bring them into harmony." Id. To the
extent that, after applying these rules of construction, an ambiguity
nonetheless exists, it must be resolved in favor of the insured. Vick
Constr., 52 F. Supp. 2d at 581; Wachovia, 172 S.E.2d at 522. The
mere assertion of ambiguity by an insured, however, is insufficient to
establish that a term is ambiguous; "[n]o ambiguity . . . exists unless,
in the opinion of the court, the language of the policy is fairly and rea-
sonably susceptible to either of the constructions for which the parties
contend." Wachovia, 172 S.E.2d at 522.
These rules of construction clearly indicate the types of claims
which could give rise to Travelers’s duty to defend Danby under the
Policy. Pursuant to the Policy’s Section I.B.1.a. and b.(2), advertising
injuries caused by Danby are covered if "caused by an offense com-
mitted in the course of advertising [Danby’s] goods, products or ser-
vices."5 In the commercial context, advertising is generally defined as
5
The relevant portions of Section I.B.1. of the Policy provide as fol-
lows:
a. We will pay those sums that the insured becomes legally
obligated to pay as damages because of "personal injury" or
"advertising injury" to which this insurance applies. We will
have the right and duty to defend any "suit" seeking those
damages.
8 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
"[a]ny oral, written, or graphic statement made by the seller in any
manner in connection with the solicitation of business[.]" Black’s
Law Dictionary 54 (6th ed. 1990).6 Thus, if we accord these provi-
sions of the Policy their plain meaning, only those advertising injuries
caused by Danby in the course of attempting to sell its goods, prod-
ucts, or services are covered. With respect to the meaning we accord
to the term "advertising injury," Section V.1. of the Policy defines an
"advertising injury" as an injury "arising out of" one of four "of-
fenses" listed therein, each of which has a well-established legal mean-
ing.7 Under North Carolina’s Wachovia decision, we must defer to the
...
b. This insurance applies to:
...
(2) "Advertising injury" caused by an offense committed in
the course of advertising your goods, products or ser-
vices[.]
6
Advertising does have an alternative meaning in the non-commercial
context, "[t]o advise, announce, apprise, command, give notice of,
inform, make known, [or] publish," e.g., to advertise one’s position on
an issue. Black’s Law Dictionary, supra, at 54. Danby urges us to adopt
this definition of advertising, asserting that, as there are two potential
meanings for advertising, any ambiguity in the Policy must be resolved
in its favor. Wachovia, 172 S.E.2d at 522. We employ the rule of resolv-
ing ambiguity in favor of insured, however, only if "the language of the
policy is fairly and reasonably susceptible to either of the constructions
for which the parties contend." Id. In this case, the Policy is a commer-
cial general liability policy, and provides coverage for commercial risks;
therefore, the language of the Policy is only "reasonably susceptible" to
the commercial definition of advertising. Moreover, as the other provi-
sions of the Policy provide coverage for commercial risks, employing the
non-commercial definition urged by Danby would be inconsistent with
the general structure of the Policy. Thus, although we recognize that
there is an alternative definition for advertising, only the commercial def-
inition is relevant to our analysis of the Policy’s coverage.
7
There are four offenses enumerated in Section V.1. of the Policy as
specifically constituting "advertising injury." Only one of those four
offenses, set forth in Section V.1.a., is pertinent here, and it provides that
an injury arising out of the "[o]ral or written publication of material that
slanders or libels a person or organization or disparages a person’s or
organization’s goods, products or services" constitutes "advertising
injury."
DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO. 9
Policy’s definition of "advertising injury," and we can thus consider
only those injuries arising out of the enumerated offenses as constitut-
ing "advertising injury" within the meaning of the Policy. Moreover,
such an interpretation of "advertising injury" is consistent with North
Carolina’s jurisprudence with respect to similar insurance policy pro-
visions. In Russ v. Great Am. Ins. Cos., the North Carolina Court of
Appeals held that "personal injury policy provisions" that provided
coverage for certain enumerated torts should be read as providing
coverage for those torts exclusively. 464 S.E.2d 723, 727 (N.C. App.
1995). Therefore, we must conclude that the Policy covers only those
advertising injuries arising out of the four enumerated "offenses"
listed in its Section V.1.
Under North Carolina law, Danby bears the burden of showing that
the claims made against it, and for which coverage is sought, fall
within the Policy’s coverage. Hobson Constr. Co., Inc. v. Great Am.
Ins. Co., 322 S.E.2d 632, 635 (N.C. App. 1984). In attempting to
carry this burden, Danby maintains that the allegations in Rondeau
Bay’s arbitration complaint, i.e., that Danby had disparaged it to
potential customers, could be construed as a claim for product dispar-
agement. Danby points out that, under Section V.1.a. of the Policy,
an "advertising injury" includes "[o]ral or written publication of mate-
rial that . . . disparages a person’s or organization’s goods, products
or services," and that Rondeau Bay asserted in its arbitration com-
plaint that Danby committed oral disparagement in a tortious manner.
Danby therefore contends that, applying the comparison test, Rondeau
Bay’s allegations that Danby orally disparaged it to potential custom-
ers sufficiently raises a potentially covered claim to invoke Travel-
ers’s duty to defend.
Danby’s contention, however, misconstrues the nature of the duty
to defend in North Carolina. Put simply, the test we must apply is
whether the alleged injury, assuming Rondeau Bay had proven its
claim, would be covered by the Policy. See Waste Mgmt., 340 S.E.2d
at 377. ("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."). In this case,
the injury alleged by Rondeau Bay in its arbitration complaint was
derived from an alleged breach of contract. Although Rondeau Bay
asserted that Danby had advised potential customers that the Danby
10 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
System was inappropriate for small diameter pipe, it did so as a justi-
fication for its failure to perform under the Agreement. Rondeau Bay
did not, however, assert any injuries incurred by it as a result of
Danby’s statements to potential customers regarding the use of the
Danby System on small diameter pipe; Rondeau Bay sought remedy
for injuries it had suffered as a result of Danby’s termination of the
Agreement. Under the comparison test, there is no doubt that such
injuries are not covered by the Policy; thus, if Rondeau Bay had pre-
vailed in arbitration, any damages owed by Danby would not have
been covered. As such, Rondeau Bay’s claim does not give rise to any
duty on the part of Travelers to defend Danby under the Policy.
Moreover, even if the injury alleged by Rondeau Bay in its arbitra-
tion complaint fell within the Policy’s definition of "advertising
injury," i.e., if Rondeau Bay sought a remedy for an injury caused by
one of the four enumerated "offenses" in Section V.1. of the Policy,
Rondeau Bay’s claim in arbitration would not give rise to any duty
on the part of Travelers to defend Danby. In order for such a duty to
arise under the Policy, three conditions must exist: (1) Danby must
have committed one of the four enumerated offenses found in Section
V.1. of the Policy; (2) the offense must have been the source of the
injury for which Rondeau Bay is claiming redress; and (3) the offense
must have been "committed in the course of [Danby’s] advertising".
Even if Danby committed one of the four offenses enumerated in Sec-
tion V.1., and even if that offense was the source of Rondeau Bay’s
injury, it would be covered by the Policy only if it was committed in
the course of Danby’s advertising.
As we noted previously, advertising, in the commercial context,
means statements made in the solicitation of business; thus, the only
covered injuries would be those caused by Danby through the com-
mission of an enumerated offense in the course of attempting to sell
its goods, products, or services. Therefore, in order for Travelers’s
duty to defend to attach, Rondeau Bay had to allege facts indicating
that it had been harmed by oral or written disparaging statements
made by Danby in the course of its efforts to sell its goods, products,
or services. Rondeau Bay’s arbitration complaint, however, failed to
make any such allegations. Indeed, the complaint did not assert that
any of the injuries to Rondeau Bay related to Danby’s advertising.
Therefore, even if Rondeau Bay had alleged a covered injury, the req-
DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO. 11
uisite nexus between the alleged offense and Danby’s advertising is
not present.
B.
Furthermore, if Danby had sustained its burden of showing Ron-
deau Bay’s arbitration claim to be within the terms of the Policy, the
breach of contract exclusion in its Section I.B.2.b.(1) nevertheless
would be applicable.8 In determining the applicability of an exclusion
in a particular case, the insurer bears the burden of proof. Hobson,
322 S.E.2d at 635. In attempting to sustain that burden, Travelers
maintains that the Policy exempts advertising injuries arising out of
breach of contract, and that Rondeau Bay only alleged injuries arising
out of Danby’s "unjust" termination of the Agreement.
In North Carolina, policy exclusions "are to be construed strictly
so as to provide the coverage, which would otherwise be afforded by
the policy." Wachovia, 172 S.E.2d at 523. Even construing the breach
of contract exclusion narrowly, it is applicable in this situation.
Advertising injuries that "arise out of" breach of contract are not cov-
ered by the Policy. For an injury to arise out of an event, it must
"spring up, originate" from that event. Black’s Law Dictionary, supra,
at 108. The injuries alleged by Rondeau Bay in its arbitration com-
plaint derive from what Rondeau Bay regards as an unjust termination
of the Agreement, i.e., from Danby’s breach of the Agreement. Thus,
even if these injuries constituted an "advertising injury," they must
have arisen out of a breach of contract. Because this exclusion is
applicable, Rondeau Bay did not make any claim in arbitration that
potentially implicates the coverage afforded to Danby under the Pol-
8
The Exclusion in Section I.B.2.b.(1) of the Policy provides, in rele-
vant part, as follows:
2. Exclusions
This insurance does not apply to:
...
b. "Advertising injury" arising out of:
(1) Breach of contract, other than misappropriation of
advertising ideas under an implied contract[.]
12 DANBY OF NORTH AMERICA v. TRAVELERS INSURANCE CO.
icy, and Rondeau Bay’s arbitration complaint did not give rise to
Travelers’s duty to defend.9
IV.
For the foregoing reasons, we affirm the judgment of the district
court in favor of Travelers.
AFFIRMED
9
Danby also appeals the district court’s ruling that Travelers did not
breach its implied covenant of good faith and fair dealing by denying
Danby’s request for reimbursement. In North Carolina, a denial of cover-
age in bad faith means that the denial was "not based on honest disagree-
ment or innocent mistake." Lovell v. Nationwide Mut. Ins. Co., 424
S.E.2d 181, 185 (N.C. App. 1993). Danby has made no showing that
Travelers’s adoption of its legal position on the scope of coverage, and
its denial of Danby’s claim, were not the product of an honest disagree-
ment over the Policy’s reach; instead, Danby bases its contention on the
ground that the Policy so clearly requires coverage that any denial must
have been in bad faith. Even if we were inclined to adopt Danby’s posi-
tion on the scope of coverage, Travelers’s position could plainly be the
product of an honest disagreement over the scope of the Policy. There-
fore, Travelers did not violate its implied covenant of good faith and fair
dealing in its denial of Danby’s claim.