Colony Insurance Company v. Charles Peterson , 582 F. App'x 156 ( 2014 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1033
COLONY INSURANCE COMPANY,
Plaintiff - Appellant,
v.
CHARLES A. PETERSON; EVERGREEN COMPOSITE TECHNOLOGY, LLC;
RANDOLPH BANK AND TRUST COMPANY,
Defendants - Appellees,
v.
EDWARD L. CLAYTON, JR.; HPB INSURANCE GROUP INCORPORATED,
Third Party Defendants - Appellees.
Appeal from the United States District Court for the Middle
District of North Carolina, at Greensboro. William L. Osteen,
Jr., Chief District Judge. (1:10-cv-00581-WO-LPA)
Argued: May 15, 2014 Decided: August 25, 2014
Before KING, WYNN, and FLOYD, Circuit Judges.
Affirmed by unpublished opinion. Judge Wynn wrote the majority
opinion, in which Judge King joined. Judge Floyd wrote a
dissenting opinion.
ARGUED: Reid C. Adams, Jr., WOMBLE CARLYLE SANDRIDGE & RICE,
LLP, Winston-Salem, North Carolina, for Appellant. Patrick
Michael Kane, SMITH MOORE LEATHERWOOD LLP, Greensboro, North
Carolina; James W. Bryan, NEXSEN PRUET, PLLC, Greensboro, North
Carolina; Stephen G. Teague, TEAGUE, ROTENSTREICH, STANALAND,
FOX & HOLT, PLLC, Greensboro, North Carolina, for Appellees. ON
BRIEF: James R. Morgan, Jr., Jonathan R. Reich, WOMBLE CARLYLE
SANDRIDGE & RICE, LLP, Winston-Salem, North Carolina, for
Appellant. M. Jay Devaney, NEXSEN PRUET, PLLC, Greensboro,
North Carolina, for Appellee Randolph Bank and Trust Company.
Manning A. Connors, SMITH MOORE LEATHERWOOD LLP, Greensboro,
North Carolina, for Appellees Evergreen Composite Technology,
LLC and Charles A. Peterson. Lyn K. Broom, TEAGUE,
ROTENSTREICH, STANALAND, FOX & HOLT, PLLC, Greensboro, North
Carolina, for Appellees Edward L. Clayton, Jr. and HPB Insurance
Group, Incorporated.
Unpublished opinions are not binding precedent in this circuit.
2
WYNN, Circuit Judge:
Plaintiff Colony Insurance Company (“Colony”) appeals from
a final judgment entered upon a jury verdict awarding $2,369,000
to Defendants Charles A. Peterson (“Peterson”), Evergreen
Composite Technology, LLC (“Evergreen”), and Randolph Bank and
Trust Company (“Randolph Bank”) (collectively “Defendants”) on
their insurance claim. The jury found that Colony waived its
right to rescind a commercial property policy issued to
Defendants and was estopped from denying coverage for loss after
a fire damaged a building covered by the policy. On appeal,
Colony contends that the district court erred in denying its
motion for judgment as a matter of law. For the reasons below,
we affirm.
I.
In reviewing the denial of a motion for judgment as a
matter of law, we must view and recite the evidence in the light
most favorable to the non-movants. Ocheltree v. Scollon Prods.,
Inc., 335 F.3d 325, 331 (4th Cir. 2003).
Effective March 16, 2010, Colony, a Virginia insurance
company, issued a commercial property policy insuring a 95,000-
square-foot vacant building located at 501 Hamilton Road,
Montezuma, Georgia (“the 501 building”). The policy named
Evergreen, a Georgia corporation headquartered in North
3
Carolina, and its owner, Peterson, a North Carolina resident, as
the insured. The policy also listed Randolph Bank, a community
bank in Randolph County, North Carolina, as a mortgage holder
and loss payee under the policy. The policy provided coverage
limits of up to $1 million for the 501 building and $3.5 million
for the business-related personal property on the site.
Peterson had obtained loans from Randolph Bank to launch
Evergreen, which manufactured composite wood products used in
residential decking, fencing, and railings. As collateral for
its loans, Randolph Bank held a deed of trust on the 501
property and perfected a security interest in the equipment
located there. By late 2009, Evergreen had suspended its
operations and was in default on its loans from Randolph Bank.
In February 2010, a fire, caused by arson, damaged a nearby
building also owned by Evergreen (“the 261 building”).
Thereafter, upon learning that the insurance on both buildings
had lapsed, Randolph Bank engaged third-party defendant Edward
Clayton (“Clayton”), an insurance agent with HPB Insurance
Group, to assist in obtaining insurance coverage for the 501
building. The policy issued by Colony insured the 501 building
against, among other things, risk of loss caused by fire. To
mitigate this risk, the policy contained an endorsement
requiring certain fire protective safeguards.
4
Specifically, the fire protective safeguards endorsement
required Evergreen and Peterson to maintain an automatic
sprinkler system, fire extinguishers, and functioning utilities
at the 501 building. The fire protective safeguards endorsement
stated that Colony would “not pay for loss or damage caused by
or resulting from fire if, prior to the fire,” the named insured
“[f]ailed to maintain any protective safeguard . . . in complete
working order” or “[k]new of any suspension, malfunction or
impairment in any protective safeguard” and failed to notify
Colony. J.A. 114.
On the same day that Colony issued the policy, it retained
an independent vendor, Safety Resources, to inspect the 501
building. Colony charged Defendants a $250 non-refundable
inspection fee, which was separate from the $18,000 policy
premium. According to the policy, the inspection “relate[d]
only to insurability and the premiums to be charged.” J.A. 75.
The inspection provided Colony “the chance to independently look
at the risk that it [was] insuring.” J.A. 454. By paying the
$250 fee, Defendants expected Colony “to notify [them] if
problems were identified by the inspection” so that they could
remedy them. J.A. 1376.
Safety Resources inspected the 501 building on April 13,
2010 and prepared a written report, which noted that the
utilities for the 501 building were off and that there was no
5
heat. This contradicted information provided to Colony during
the insurance application process. Specifically, Clayton had
submitted a “Specialty Property Vacant Supplement” form that
indicated that the power and heat would remain on at the 501
building during vacancy. Colony received the inspection report
on April 21, 2010, but the underwriter at Colony did not review
the report until June 18, 2010. Nevertheless, Colony issued a
mortgagee endorsement on April 22, 2010, and a loss payee
endorsement on May 6, 2010, both with retroactive effect as of
March 16, 2010, and naming Randolph Bank as a mortgagee and loss
payee on the policy.
On May 18, 2010, a fire damaged the 501 building and its
contents. Firefighters discovered that the two valves
controlling the sprinkler system had been turned off. Evidence
at the scene indicated that the valves had likely been “tampered
with and vandalized.” J.A. 761.
Colony subsequently denied coverage for the loss and sought
a declaratory judgment regarding its indemnity obligations under
the policy. Colony argued that material misrepresentations on
the insurance application rendered the policy void and that
breach of the fire protective safeguards endorsement precluded
coverage. Defendants counterclaimed for breach of contract.
Evergreen and Peterson also asserted a cross-claim against
6
Randolph Bank and filed a third-party complaint against Clayton
and HPB Insurance Group.
All parties sought summary judgment, which the district
court denied. Regarding Colony’s claims, the district court
held that genuine issues existed “as to whether the doctrines of
waiver/estoppel prevent Colony from contesting coverage under
the [p]olicy.” J.A. 355. Accordingly, the case proceeded to
trial.
At trial, Defendants introduced deposition testimony by
Roseanne Gauthier, the senior underwriter at Colony responsible
for determining whether the conditions of insurance for the 501
building were met. In her testimony, Gauthier acknowledged that
she received the inspection report from Safety Resources on
April 21, 2010, but that she “just did not get to the inspection
by the time the loss occurred.” J.A. 1051. Gauthier stated
that had she reviewed the inspection report when she received
it, she would have “immediately” taken steps to cancel the
policy. J.A. 1053.
Defendants also presented evidence of other Colony
underwriting files in which discrepancies appeared between some
of the representations made on insurance applications and the
conditions revealed by Colony’s inspections. Regarding those
files, Colony did not seek to rescind, and policyholders
remedied the conditions or paid higher premiums.
7
At the conclusion of the evidence, Colony moved for
judgment as a matter of law. The district court took the motion
under advisement and allowed the case to go to the jury. The
jury returned a verdict in favor of Defendants, finding that
although a material misrepresentation appeared on the insurance
application and that a condition of the fire protective
safeguards endorsement requiring functioning utilities to remain
on had been breached, Colony had nonetheless waived its right to
rescind the policy and was estopped from denying coverage.
Further, the jury determined that Randolph Bank was not
responsible for the misrepresentation on the application. The
jury awarded Defendants $2,369,000 on their counterclaim for
coverage under the policy, and the court awarded pre-judgment
interest.
On December 3, 2012, the district court denied Colony’s
motion for judgment as a matter of law and subsequently entered
final judgment in favor of Defendants. This appeal followed.
II.
Colony argues that the district court erred in denying its
motion for judgment as a matter of law. “We review de novo the
grant or denial of a motion for judgment as a matter of law[,]”
Anderson v. Russell, 247 F.3d 125, 129 (4th Cir. 2001), to
determine whether “a reasonable jury would not have a legally
8
sufficient evidentiary basis to find for the [non-moving]
party[.]” Fed. R. Civ. P. 50(a)(1). 1 “If, viewing the facts in
the light most favorable to the non-moving party, there is
sufficient evidence for a reasonable jury to have found in [the
non-moving party’s] favor, we are constrained to affirm the jury
verdict.” Lack v. Wal-Mart Stores, Inc., 240 F.3d 255, 259 (4th
Cir. 2001).
We note that North Carolina law governs our analysis of
this diversity case. See Erie R.R. Co. v. Tompkins, 304 U.S.
64, 78 (1938). Thus, we first look to see if the Supreme Court
of North Carolina has spoken on this issue; if not, we must
predict how that court would rule on it. Twin City Fire Ins.
Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., 433 F.3d 365,
369 (4th Cir. 2005). 2 In forming that prediction, we may
consider opinions from the North Carolina Court of Appeals,
teachings of treatises, and practices of other states. Id.
1
Colony did not pursue any post-verdict motions under Rule
50(b) or Rule 59. As a result, Colony may not challenge the
sufficiency of the evidence supporting the jury’s verdict.
Belk, Inc. v. Meyer Corp., 679 F.3d 146, 154-55 (4th Cir. 2012).
2
Unlike other states within our circuit, there is no
mechanism for certifying questions to the Supreme Court of North
Carolina. See SunTrust Bank, N.A. v. Macky, 669 F.3d 177, 182
n.* (4th Cir. 2012).
9
A.
Colony contends that the district court should have granted
judgment as a matter of law because the jury determined that
Peterson or Evergreen breached the fire protective safeguards
endorsement. Colony asserts that maintaining functioning
utilities, as required by the fire protective safeguards
endorsement, was a condition of coverage immune to waiver, and
that the district court therefore erred in denying judgment as a
matter of law.
Under North Carolina law, an insurer may waive “a provision
or condition in an insurance policy which is for its own
benefit.” Brandon v. Nationwide Mut. Fire Ins. Co., 271 S.E.2d
380, 383 (N.C. 1980). North Carolina courts have long held that
the breach of any condition in [an insurance] policy,
as against an increase of risk or by keeping of
certain hazardous goods . . . or, indeed, the
violation of any of the conditions of the policy, may
be waived by the insurer; and a waiver may be implied
from the acts and conduct of the insurer after
knowledge that such conditions have been broken.
Blue Bird Cab Co. v. Am. Fid. & Cas. Co., 15 S.E.2d 295, 301
(N.C. 1941) (alteration in original) (quotation marks omitted).
Similarly, an insurer may be estopped from denying coverage
under an insurance policy. Estoppel arises if the insurer’s
“actions or silence when [it] ought to have spoken,
intentionally or through culpable negligence, induce[s] [the
insured] to believe . . . coverage exist[s]” and the insured
10
relies upon such belief to his or her detriment. United States
Fid. & Guar. Co. v. Country Club of Johnston Cnty., Inc., 458
S.E.2d 734, 740 (N.C. App. 1995).
The Supreme Court of North Carolina has not spoken directly
on the precise issue in this matter, but the decisions of that
state’s second highest court, the North Carolina Court of
Appeals, provide us with guidance. See Twin City Fire Ins. Co.,
433 F.3d at 369. In that regard, we find Durham v. Cox
particularly illuminating. 310 S.E.2d 371 (N.C. App. 1984).
In Durham, the North Carolina Court of Appeals determined
that material issues of fact existed as to whether the defendant
insurance company waived its right to deny coverage under a
homeowner’s policy for loss following a fire. 310 S.E.2d at
376-77. The policy stated that “[t]his coverage excludes
structures used in whole or part for business purposes.” Id. at
373. In breach of this provision, the insured plaintiff used
the building, a garage, in connection with his furniture
upholstery business, but asserted that such use was known to the
insurer, resulting in waiver. Id. at 373-74. The insurer
argued that the policy exclusion was a “matter of coverage” that
could not be expanded by waiver or estoppel as a matter of law.
Id. at 374.
On appeal from summary judgment in favor of the insurer,
the North Carolina Court of Appeals reasoned that waiver and
11
estoppel “properly apply” to the business use exclusion “since
the property itself, an appurtenant structure, and the risk,
loss due to fire, [were] already within the coverage of the
policy.” Durham, 310 S.E.2d at 376. Thus, the risk of loss to
the covered property due to fire was an “accepted risk” subject
to forfeiture, rather than an “excepted risk” immune from
waiver:
The distinction between an accepted risk to be
defeated by conditions set forth in the policy and an
excepted risk is clear, and it is logical to hold that
it takes a new contract to cover an excepted risk. By
way of illustration: A. has a plantation on which
there are 10 buildings. All are covered by a policy
of insurance, but the policy provides that, in case A.
shall store certain inflammable materials in any of
the houses, then the insurance on that building shall
instantly cease. That is an assumed risk, which will
be void upon a condition subsequent. B. has a
plantation upon which there are 10 buildings; 9 of
them are covered by a policy of insurance. Building
No. 10 is excluded from the policy. It is entirely
logical to hold that it takes a new contract to
include insurance on B.’s No. 10, but not on A.’s No.
10.
Id. (citation omitted); accord United States Fid. & Guar. Co.,
458 S.E.2d at 739.
Applying this distinction between accepted and excepted
risk, the North Carolina Court of Appeals determined that using
the garage for business purposes did not create an entirely new
risk. Rather, such use “enhance[d] a risk already assumed by
the insurer”—namely, the risk of fire destroying a covered
structure. Durham, 310 S.E.2d at 376. Moreover, observed the
12
court, “conditions regarding permissible or prohibited uses to
which the property may be put are clearly inserted in the policy
for the benefit of the insurer and therefore may properly be
waived by it or its authorized agent.” Id. at 376-77.
Accordingly, the court held that the insurer could waive the
policy provision excluding coverage for business use. Id. at
377.
Turning to the facts at issue here, the relevant part of
the fire protective safeguards endorsement states:
A. The following is added to the COMMERCIAL PROPERTY
CONDITIONS:
PROTECTIVE SAFEGUARDS
1. As a condition of this insurance, you are
required to maintain the protective devices or
services listed in the [s]chedule above.
J.A. 113. The protective safeguards schedule specifies that
“ALL UTILITIES MUST REMAIN ON AND FUNCTIONING.” J.A. 113.
Further, the fire protective safeguards endorsement adds the
following language to the exclusions section of the policy:
We will not pay for loss or damage caused by or
resulting from fire if, prior to the fire, you:
1. Knew of any suspension, malfunction or
impairment in any protective safeguard listed in the
[s]chedule above and failed to notify [Colony] of that
fact;
2. Failed to maintain any protective safeguard
listed in the [s]chedule above in complete working
order[.]
J.A. 114.
13
There is no dispute that the policy issued by Colony
expressly insured the 501 building against the risk of loss due
to fire. As such, the loss that occurred was contemplated by
the parties and encompassed by the policy. See Durham, 310
S.E.2d at 376 (broadly viewing the risk of loss to property by
fire as covered, notwithstanding a business use exclusion). By
requiring Defendants to maintain functioning utilities, the fire
protective safeguards endorsement limited Colony’s exposure to
risk it had already “accepted”—namely, risk of loss to the 501
building posed by fire. Id.
Consequently, we agree with the district court that
“applying the doctrines of waiver/estoppel to the conditions at
issue in this case would not expand the [p]olicy to cover risks
not currently contemplated by that agreement–i.e., that fire may
destroy the subject property.” J.A. 323. Accordingly, the
district court did not err by submitting the issues of waiver
and estoppel to the jury. And Colony’s arguments to the
contrary are unavailing.
Colony also argues that, under United Capitol Ins. Co. v.
Kapiloff, waiver did not apply as a matter of law because
insufficient time had passed between Colony’s receipt of the
inspection report and the fire. Again, we disagree.
First and foremost, Kapiloff, on which Colony’s argument
heavily relies, required us to apply Maryland, not North
14
Carolina, law. 155 F.3d 488 (4th Cir. 1998). “No one doubts
that a federal court called upon to adjudicate a state law claim
in the diversity jurisdiction must apply the relevant state law
in determining the substantive rights and duties of the parties
. . . .” Auer v. Kawasaki Motors Corp., U.S.A., 830 F.2d 535,
537 (4th Cir. 1987) (en banc). Here, that relevant state law is
North Carolina’s. 3
Turning, then, to North Carolina law, “[w]aiver by an
insurer of a forfeiture provision in an insurance policy
requires (1) ‘knowledge on the part of the insurer of the
pertinent facts,’. . . , and (2)‘conduct thereafter inconsistent
with an intention to enforce the condition’. . . .” Mabry v.
Nationwide Mut. Fire Ins. Co., 422 S.E.2d 332, 334 (N.C. App.
1992) (quoting Gouldin v. Inter-Ocean Ins. Co., 102 S.E.2d 846,
849 (N.C. 1958)). “When the evidence is sufficient to justify,
but not require, a finding of waiver on the part of the insurer,
then the issue of waiver is one to be determined by the jury.”
Id. (citing Gouldin, 102 S.E.2d at 851 (because the evidence of
3
The dissenting opinion, too, focuses on Kapiloff.
Undoubtedly, that opinion includes some broad statements and few
citations, as the dissent notes. Those stylistic choices do
not, however, change the fact that “[t]here is no federal
general common law[,]” Erie, 304 U.S. at 78, and that North
Carolina law governs this dispute.
15
waiver was “susceptible of diverse inferences, it is improper
for the presiding judge to give the jury a peremptory
instruction”); and Brandon, 271 S.E.2d at 385 (noting that “the
evidence in this case is sufficient to permit, but not compel, a
jury to find that defendant, by words or conduct, waived the
requirement of proofs of loss [and] [t]he defendant’s evidence
does not, as a matter of law, compel a contrary conclusion” and
thus “hold[ing] that the issue of waiver should have been
submitted to the jury”)).
Here, sufficient evidence existed for a reasonable jury to
determine that Colony had “‘knowledge . . . of the pertinent
facts.’” Mabry, 422 S.E.2d at 334 (quoting Gouldin, 102 S.E.2d
at 849). The inspection paid for by Defendants and conducted by
Colony’s independent vendor revealed that the utilities were off
at the 501 building, in contravention of the fire protective
safeguards endorsement. Colony received this information from
Safety Resources on April 21, 2010, approximately four weeks
before the May 18, 2010 fire. And in North Carolina, “an
insurance company is presumed to be cognizant of data in the
official files of the company[.]” Gouldin, 102 S.E.2d at 849.
Further, sufficient evidence existed for a reasonable jury
to determine that Colony engaged in “‘conduct thereafter
inconsistent with an intention to enforce the condition.’”
Mabry, 422 S.E.2d at 334 (quoting Gouldin, 102 S.E.2d at 849).
16
Although Colony knew for weeks that the utilities were off, it
neither informed Defendants of the violation nor took steps to
cancel the policy. See Faircloth v. Ohio Farmers Ins. Co., 117
S.E.2d 404, 408-09 (N.C. 1960) (“Equitably, if [the insurer] did
not desire to carry the risk longer, because of the [breach of
the policy conditions], it ought, in fair dealing, to have
returned the unearned premium, and rescinded the insurance
contract, so that plaintiff could have known he no longer was
protected thereby and would have been afforded an opportunity to
obtain a new policy from another agent.”). Instead, Colony
confirmed coverage by issuing a mortgagee endorsement on April
22, 2010, and a loss payee endorsement on May 6, 2010, naming
Randolph Bank as a mortgagee and loss payee on the policy. 4
Moreover, testimony by Colony’s underwriter, Roseanne
Gauthier, contradicts Colony’s assertion that the time period
between receipt of the inspection report and the fire was
inadequate to permit a finding of waiver. Gauthier testified
4
The dissent cites Nelson v. Hartford Underwriters Ins.
Co., 630 S.E.2d 221 (N.C. App. 2006), for the notion that “only
a few weeks” provides an insurer with little time to affirm or
deny coverage. Id. at 233. Notably, however, at issue in
Nelson was whether the insurer’s failure to make a coverage
determination within nineteen days of receiving a re-
investigation report of a previously-denied claim constituted an
unfair and deceptive trade practice. Id. The facts and issues
in play in Nelson have little in common with, and shed little
light on, those before us here.
17
that if she had reviewed the inspection report on April 21,
2010, when she received it, she would have “immediately” taken
steps to cancel the policy. J.A. 1053.
North Carolina’s highest court has underscored that
forfeiture “is not imposed as a penalty for making a false
statement, which the insurer may invoke at his pleasure at any
time, regardless of its own antecedent conduct. It is based on
the principle that the insurer has been misled to its damage.”
Hicks v. Home Sec. Life Ins. Co., 39 S.E.2d 914, 916 (N.C.
1946). Crucially, however, an insurer “is not misled when it
knows the facts; and when that knowledge exists or is acquired,
it becomes the right and the duty of the insurer” to act. Id.
at 916-17. And a failure to do so “will operate as a waiver.”
Id. 5
Based on the proffered evidence and the pertinent North
Carolina law, a reasonable jury could determine that Colony was
not misled because it knew the facts, and that Colony had the
right and the duty to act but failed to do so. Accordingly, we
must agree with the district court that we “cannot say that the
5
We concern ourselves neither with homogenizing state laws
for fear that insurance companies will otherwise need to
“operate drastically differently across state lines” nor with
“the day-to-day realities of the business.” Post at 32.
Instead, we stick to our business, which is using North Carolina
substantive law to decide the issues presented by this appeal.
18
27 days between the time Colony received the inspection report
and the fire was insufficient, as a matter of law, for Colony to
take action on the inspection as provided—especially in light of
testimony that had the inspection been reviewed, immediate
action would have occurred.” J.A. 323. The district court
therefore properly submitted the waiver issue to the jury and
did not err in instructing the jury that it could find waiver.
And “we are constrained to affirm the jury verdict.” Lack, 240
F.3d at 259.
In sum, we conclude, based on North Carolina law, that the
fire protective safeguards endorsement set forth in Colony’s
policy is a provision of forfeiture subject to waiver and
estoppel, that the issue was properly submitted to the jury, and
that there existed “sufficient evidence for a reasonable jury to
have found in [Defendants’] favor, [such that] we are
constrained to affirm the jury verdict.” Lack, 240 F.3d at 259.
B.
Next, Colony contends that it is entitled to judgment as a
matter of law because the jury determined that there was a
material misrepresentation on the insurance application
regarding whether heat and power would be on at the 501
building. Although Colony correctly notes that a material
misrepresentation on an insurance application may forfeit
19
coverage, see Gore v. Assurance Co. of Am., 704 S.E.2d 6, 12
(N.C. App. 2010), waiver and estoppel may overcome a material
misrepresentation, and such a question is for a jury to resolve.
See, e.g., Cullen v. Valley Forge Life Ins. Co., 589 S.E.2d 423,
428 (N.C. App. 2003). Accordingly, the district court did not
err in allowing the jury to decide whether Colony had waived its
right to rescind the policy, notwithstanding the
misrepresentation on the application. 6
III.
We have reviewed and summarily reject all of Colony’s
arguments. The judgment of the district court is therefore
AFFIRMED.
6
Not least given our resolution of the issues above, we
reject Colony’s arguments as regards Randolph Bank, including
Randolph Bank’s status as an innocent mortgagee.
20
FLOYD, Circuit Judge, dissenting:
I agree with the majority that prolonged inaction by an
insurer can amount to a waiver of rights under an insurance
policy if the insurer has received notice of a breach of a
requirement and takes no steps to notify the insured of the
breach within a reasonable time. However, in this case, and as
a matter of law, Colony could not be said to have waived the
endorsement provision of the insurance policy on account of its
inaction during the twenty-seven days between its receipt of the
inspection report on April 21, 2010, and the burning of the
501 building on May 18, 2010. Accordingly, I think that the
district court erred by submitting to the jury Issues 4 and 5
regarding waiver and estoppel in the first instance, and I
therefore would reverse the district court’s denial of Colony’s
Rule 50(a) motion and respectfully dissent to the majority’s
contrary conclusion. I would also remand this case for trial on
the sole issue of whether Randolph Bank had knowledge that the
utilities were off and failed to notify Colony pursuant to the
policy.
I.
It has long been the law in North Carolina that “[u]pon
being informed of [a breach], [an insurer] should within a
reasonable time . . . notif[y] the insured of its determination
21
to cancel the policy[.]” Horton v. Home Ins. Co., 29 S.E. 944,
946 (N.C. 1898) (emphasis added); see also Dailey v. Integon
Gen. Ins. Corp., 331 S.E.2d 148, 154–55 (N.C. Ct. App. 1985)
(insurer’s responsiveness assessed for reasonableness). It is
also well established that “time . . . may be so short or so
long that the court will declare it to be reasonable or
unreasonable as a matter of law.” Claus-Shear Co. v. E. Lee
Hardware House, 53 S.E. 433, 434 (N.C. 1906). Although Claus-
Shear Co. was a contractual dispute pertaining to the delivery
of goods, the principle regarding temporal reasonableness as a
matter of law has been applied widely by North Carolina courts.
See, e.g., Harris v. Lamar Co., 563 S.E.2d 642, 2002 WL 1013571,
at *4 (N.C. Ct. App. May 21, 2002) (unpublished table decision)
(opinion by Wynn, J.) (quoting the above text from Claus-Shear
Co. in a property case presenting the question of whether a
billboard should be considered “abandoned”). Thus, I see no
reason to limit its import in this case.
The North Carolina Supreme Court has not spoken regarding
what time period is reasonable for an insurer to receive an
inspection report and to process that report and notify the
insured of any deficient conditions or breaches. Therefore, we
must look to secondary indicia to try to predict how the North
Carolina Supreme Court would rule in such a case, including,
inter alia, opinions from the North Carolina Court of Appeals
22
and the practices of other states. Twin City Fire Ins. Co. v.
Ben Arnold-Sunbelt Beverage Co. of S.C., 433 F.3d 365, 369 (4th
Cir. 2005). As between these two secondary sources, North
Carolina’s “intermediate appellate court decisions constitute
the next best indicia of what state law is, although such
decisions may be disregarded if the federal court is convinced
by other persuasive data that the highest court of the state
would decide otherwise.” Liberty Mut. Ins. Co. v. Triangle
Indus., Inc., 957 F.2d 1153, 1156 (4th Cir. 1992) (citation
omitted) (internal quotation marks omitted). For the reasons
that follow, both North Carolina appellate decisions and the
practices of other states, together and separately, yield the
conclusion that, as a matter of law, Colony could not have
waived the endorsement provision of the insurance policy.
A. North Carolina Law
As the majority notes, waiver requires “(1) knowledge on
the part of the insurer of the pertinent facts” and “(2) conduct
thereafter inconsistent with an intention to enforce the
condition which leads the insured to believe that he is still
protected by the policy.” Mabry v. Nationwide Mut. Fire Ins.
Co., 422 S.E.2d 332, 334 (N.C. Ct. App. 1992) (citation omitted)
(internal quotation marks omitted). As to the first criterion,
the majority claims that Colony had knowledge of the utilities
23
being off at the 501 building simply by virtue of Colony’s
receipt of the inspection report on April 21, 2010. See ante
at 17 (citing Gouldin v. Inter-Ocean Ins. Co., 102 S.E.2d 846,
849 (N.C. 1958) (“[A]n insurance company is presumed to be
cognizant of data in the official files of the company, received
in formal dealing with the insured.” 1)). But surely, the
majority does not mean to extract from Gouldin the notion that
an insurer has no time whatsoever after receiving an inspection
report to process that report and run it up the corporate
flagpole to be reviewed by the appropriate personnel and
decision-makers. Indeed, North Carolina’s appellate courts
appear to recognize that some time period is necessary between
receipt of information and action on that information.
For example, in Nelson v. Hartford Underwriters Insurance
Co., an insurer received an inspection report regarding the
condition of the insured property on July 17, 2002, but on
August 5, 2002—nineteen days later and “before [the insurer] had
made its determination of whether the . . . claim was covered by
the policy”—“plaintiffs’ counsel sent [to the insurer] a letter
directing it to have no further contact with plaintiffs[.]” 630
1
I note that Colony did not receive the inspection report
from Peterson and Evergreen (the insured), but rather from an
independent third party (Safety Resources). Nonetheless, I
assume, argudendo, that this difference is immaterial here.
24
S.E.2d 221, 233 (N.C. Ct. App. 2006). Plaintiffs then sued the
insurer for failing to affirm or deny coverage “within a
reasonable time.” Id. In holding that the insurer did not act
unreasonably for not having responded to plaintiffs on or before
August 5, the court noted that “[t]he report . . . was provided
to [the insurer] only a few weeks before [the insurer] was
warned not to have any contact with plaintiffs, providing little
time for [the insurer] to determine whether it should cover a
claim it had previously denied.” Id. Although nineteen days is
fewer than twenty-seven days, the court’s use of “only a few
weeks” (emphasis added), and the description of nineteen days as
“little time,” certainly indicates that the insurer would have
been allowed additional time to respond. 2 See also Meadlock v.
Am. Family Life Assurance Co., 729 S.E.2d 127, 2012 WL 2891079,
at *7 (N.C. Ct. App. July 17, 2012) (unpublished table decision)
(in light of a lack of evidence or authority to the contrary,
2
The majority attempts to discount Nelson by splitting the
finest of hairs based on the facts, see ante at 18 n.4, but
provides no case-to-case analyses of its own for its cited
cases. Rather, the majority opinion is long on statements of
law and instances in which waiver was found, see id. at 16, but
devoid of application of that law and the facts of the cited
cases to the facts here. Absent guidance from the North
Carolina Supreme Court as to what time period is “reasonable”
for an insurer to respond under these circumstances, and absent
a case with more similar facts and arriving at an alternative
outcome, Nelson actually provides an excellent analogy from
which much can be gleaned. Any other characterization of Nelson
is, quite simply, disingenuous.
25
insurer’s delay of four months was not unreasonable); cf. N.C.
Gen. Stat. § 20-279.21(b)(3)(a.) (“Suit may not be instituted
against the insurer in less than 60 days from the posting of the
first notice of the injury or accident to the insurer[.]”).
As to the second waiver criterion, the majority asserts
that Colony’s inaction during the twenty-seven days after
receiving the inspection report provides the requisite evidence
of conduct that is “inconsistent with an intention to enforce
the condition,” Mabry, 422 S.E.2d at 334. But this argument is
built upon the false premise that Colony had “knowledge” of the
condition in the first instance. Neither the majority nor
Peterson and Evergreen dispute the accuracy or execution of
Colony’s internal review procedure upon receipt of an inspection
report. Specifically, Colony describes, at pages 18–19 of its
brief, its internal review procedure as follows:
The initial review [by an assistant underwriter] is
simply to determine if the inspector has made any
recommendations, and to direct the underwriter’s
attention to those recommendations. It [is] not the
underwriting assistant’s responsibility to compare the
inspection results against the conditions of coverage,
or to confirm that all conditions of coverage had been
met. . . . [T]he underwriting assistant . . . reviewed
the ‘recommendations’ portion of the Inspection report
on April 21, 2010, and then passed them on to the
underwriter . . . . The ‘Recommendations Section’ of
the report . . . said nothing about the utilities in
the 501 building.
(Paragraph break omitted.)
26
In view of the above-described (and uncontested) practice
at Colony, the majority’s argument that waiver must be found
because Colony’s underwriter testified that she would have
“immediately” taken steps to cancel the policy had she reviewed
the pertinent part of the inspection report is a red herring.
In essence, the relevant portion of the inspection report had
not been reviewed, and thus, Colony cannot be imputed with
knowledge of the information contained in the “recommendations”
section of the report until the appropriate personnel—Colony’s
underwriter—had reviewed that section. Moreover, neither the
majority nor Peterson and Evergreen argue that the internal
review procedures at Colony are unreasonable and/or out of the
ordinary for the insurance business, and to hold that knowledge
was imputed on April 21, 2010, simply because Colony’s assistant
underwriter reviewed the inspection report would be to impute
knowledge on any individual at Colony who handled the report.
In sum, notwithstanding the majority’s statements of pure
law, when North Carolina law—most pertinently Nelson—is applied
to the facts of this case, it is unquestionable that North
Carolina’s appellate decisions counsel in favor of providing to
insurance companies a grace period for processing documents
during which waiver cannot be found as a matter of law.
27
B. Practices of Other States
When looking to the practices of other states, my principal
reason for positing that Colony could not have waived the
endorsement provision is this Court’s ruling in United Capitol
Insurance Co. v. Kapiloff, 155 F.3d 488 (4th Cir. 1998). In
Kapiloff, this Court held that an insurer was not considered to
have waived a condition/requirement of building occupancy that
the insured failed to meet prior to a fire destroying the
subject property, even though the insurer had knowledge of the
insured’s noncompliance via a property inspection and did not
inform the insured about the inspection results. Id. at 497.
Specifically, the building inspection took place in January and
the losses occurred in February and March of the same year. The
insurer, however, did not deny coverage to the insured until
December of that year. Id. at 491. In holding that the
occupancy requirement was not waived, this Court stated the
following:
[T]he amount of time it took for [the insurer] to
determine that the [insured’s] properties were not in
compliance with the policy would not, as a matter of
law, be long enough in any event to constitute a
waiver of any right under the policy. . . . In making
coverage decisions, an insurance company must be
entitled to a sufficient time to collect the facts,
evaluate them, and make legal determinations with
respect to those facts. These activities require not
only field work but also an internal evaluation with a
review by appropriate personnel. The one or two months
urged by the [the insured] as supporting the finding
of waiver or estoppel would hardly provide an
28
insurance company with adequate time to make this kind
of a decision, particularly when its liability for a
wrongful decision could expose it to the risk of bad
faith.
Id. at 497.
As noted above, the fire at the 501 building occurred just
twenty-seven days after Colony received the inspection report.
That amount of time is shorter than the lower end of the at
least “one or two months” contemplated in Kapiloff, during which
an insurer is permitted to timely process information regarding
the conditions of an insured property. Nonetheless, Peterson,
Evergreen, and the majority assert that such a grace period does
not apply to Colony merely because Kapiloff is a Maryland case.
In the absence of more on-point case law from North Carolina,
however, Kapiloff provides strong and logical guidance, given
its factual similarity to this case.
Kapiloff was indeed a case arising out of the District of
Maryland and applying Maryland law based upon jurisdiction
pursuant to 28 U.S.C. § 1332(a), but the relevant portion of the
opinion is in no way Maryland-specific. In the entirety of
Part V of the Kapiloff opinion, which discusses the grace period
before waiver occurs, this Court cited to Maryland law in three
different instances. First, this Court cited A/C Electric Co.
v. Aetna Insurance Co., 247 A.2d 708, 713 (Md. Ct. App. 1968),
and McFarland v. Farm Bureau Mutual Automobile Insurance Co., 93
29
A.2d 551, 554 (Md. 1953), for the proposition that “an insurance
company may waive a condition of its policy by its conduct when
it induces an honest belief that the condition is not required,
when the insured is duly misled, and when no extension of
coverage results from the waiver.” Kapiloff, 155 F.3d at 497.
North Carolina follows a similar scheme. See Brendle v.
Shenandoah Life Ins. Co., 332 S.E.2d 515, 518 (N.C. Ct. App.
1985) (“An insurer may be found to have waived a provision or
condition in an insurance policy which is for its own benefit.
Implied waiver occurs when the insurer acts in a manner
inconsistent with an intention to enforce strict compliance of
the contested provision, and the insured is naturally led to
believe that the right has been intentionally given up.”
(citations omitted)). Second, this Court cited Prudential
Insurance Co. v. Brookman, 175 A. 838, 840 (Md. Ct. App. 1934),
for the proposition that “waiver or estoppel may occur only when
it does not create new coverage; an extension of coverage may
only be created by a new contract.” Kapiloff, 155 F.3d at 497.
Again, North Carolina follows the same rule. See Gore v.
Assurance Co. of Am., 704 S.E.2d 6, 10 (N.C. Ct. App. 2010) (“In
North Carolina, the doctrines of waiver and estoppel are not
available to broaden the coverage of a policy so as to protect
the insured against risks not included therein or expressly
30
excluded from coverage.” (citation omitted) (internal quotation
marks omitted)).
Finally—and most relevant here, as it immediately precedes
the above block quote from Kapiloff—this Court cited Monumental
Life Insurance Co. v. U.S. Fidelity & Guaranty Co., 617 A.2d
1163, 1181 (Md. Ct. Spec. App. 1993), for the proposition that
“an insurance company that denies coverage or rescinds the
policy in bad faith risks liability for that action.” Kapiloff,
155 F.3d at 497. Once again, North Carolina adheres to a nearly
identical rule. See Robinson v. N.C. Farm Bureau Ins. Co., 356
S.E.2d 392, 395 (N.C. Ct. App. 1987) (vacating summary judgment
for the defendant insurer and stating, “An insurance company is
expected to deal fairly and in good faith with its
policyholders. . . . Th[e] evidence is sufficient to establish a
tortious bad faith refusal to settle in a timely manner.”
(paragraph break omitted)); see also Thomas v. Ray, 317 S.E.2d
53, 57 (N.C. Ct. App. 1984) (“We are aware that insurance
companies have wrongfully denied coverage in some cases in which
bad faith or careless business practices might reasonably be
imputed to them.”). In sum, nothing about the relevant portion
of our decision in Kapiloff is unique to Maryland law; quite the
opposite, North Carolina has the same guidelines to resolve the
same types of issues, and thus this Court should ipso facto
reach the same result.
31
Kapiloff, rather than announcing a Maryland-specific rule,
provides a much-needed yardstick for assessing reasonableness in
a factual scenario identical to the one at play here. It is
curious, given their rejection of Kapiloff’s at least “one or
two months” time period, that Peterson and Evergreen do not
advocate for any standard of their own regarding what amount of
time would have been reasonable for Colony to respond; on the
contrary, they simply contend that North Carolina does not have
a hard-and-fast sixty-day rule. Similarly, while not disputing
that reasonableness is the sine qua non of whether Colony waived
the endorsement provision, the majority does not put forth any
amount of time that it believes would be reasonable for Colony
to process the information and send notice to Peterson and
Evergreen, nor does the majority cite any authority for the idea
that twenty-seven days is, as a matter of law, unreasonable and
that an insurer should necessarily process information in a more
timely fashion.
By casting aside the rule from Kapiloff—and thus ignoring
one of the two criteria that we should consider when trying to
predict how the North Carolina Supreme court would rule in this
case—the majority appears to think that insurance companies
operate drastically differently across state lines, thus
ignoring the day-to-day realities of the business and the fact
that North Carolina, like Maryland, also holds insurers liable
32
for wrongfully denying coverage or rescinding a policy in bad
faith. Compare Monumental Life Ins. Co., 617 A.2d at 1181, with
Robinson, 356 S.E.2d at 395, and Thomas, 317 S.E.2d at 57.
Given that Kapiloff is directly on point and is a published
decision of this Court, and that there is not any North Carolina
authority to the contrary to even suggest that twenty-seven days
is an unreasonable time to respond (but there is authority to
suggest that twenty-seven days is not unreasonable, see Nelson,
630 S.E.2d at 233), I would follow Kapiloff’s guidance and logic
in this case. Accordingly, I do not think that Colony was
required to have notified Peterson and Evergreen that the
utilities were off at the time that the 501 building burned.
C.
Peterson and Evergreen also contend that Colony should not
be permitted to avail itself to a grace period because, at other
times, Colony acted more quickly—at times on the same day—to
contact policyholders after receiving inspection reports.
Specifically, Peterson and Evergreen included in their brief a
table showing that Colony had, at other times, responded in a
more timely fashion following receipt of an inspection report.
Among these examples is an instance from 2009 in which Colony’s
underwriter reviewed an inspection report and took action
twenty-two days after the assistant underwriter received the
33
report. Based on Peterson and Evergreen’s implication that this
time period was reasonable, Peterson and Evergreen would
apparently draw the reasonableness line somewhere between day
twenty-two and day twenty-seven. Perhaps at day twenty-four.
Or maybe day twenty-six, thus leaving Colony on the outside
looking in by just twenty-four hours.
The problem with this approach is readily evident: if we
were to use a company’s own prior response times as the
benchmark for what is reasonable, companies might begin dragging
their feet in responding to reports to establish a record of
slower response times, thus creating an environment in which
prolonged delays become the new business norm—and are even
encouraged—due to the fear of future litigation. This would
have the opposite effect of ensuring that insurance companies
provide timely notice to policyholders of defects or breaches.
II.
The majority did not reach the issue of whether Randolph
Bank can recover from Colony because it held that Colony’s
purported waiver trumps any alleged knowledge of a material
misrepresentation. But because I do not think that Colony
waived its rights, as explained above, I would reach the merits
of Colony’s defenses to Randolph Bank’s counterclaims.
34
There are two possible ways for Randolph Bank to recover
payments/benefits under the policy: as Peterson and Evergreen’s
loss payee or as mortgagee of the 501 building. As a loss
payee, however, Randolph Bank stands in the same shoes as
Peterson and Evergreen and its rights are coterminous with those
of Peterson and Evergreen; thus any successful defense by Colony
against Peterson and Evergreen also works as against Randolph
Bank. See Wells Fargo Equip. & Fin., Inc. v. State Farm Fire &
Cas. Co., 805 F. Supp. 2d 213, 218–19 (E.D. Va. 2011) (citing
Sydincate Ins. Co. v. Bohn, 65 F. 165, 173 (8th Cir. 1894)),
aff’d, 494 F. App’x 394 (4th Cir. 2012). Because Colony has a
successful defense against Peterson and Evergreen pursuant to
Kapiloff, Randolph Bank is precluded from recovery under the
loss-payee theory.
Colony further argues that Randolph Bank cannot recover as
an innocent mortgagee of the 501 building because Randolph Bank
is responsible for, and/or had knowledge of, Peterson and
Evergreen’s noncompliance with the endorsement provision.
Colony advances two theories. First, Colony claims that
Clayton—whom Randolph Bank engaged to procure the policy—was
Randolph Bank’s agent. Colony reasons that because Clayton
filled out the insurance application containing the material
misrepresentations regarding the status of the utilities, those
misrepresentations can be imputed to Randolph Bank and the
35
policy is void as to Randolph Bank. See In re McCrary, 435
S.E.2d 359, 364 (N.C. Ct. App. 1993) (“Under [the relevant state
statute], an insurer may avoid the policy if the insured makes a
representation which is both (1) false and (2) material; the
misrepresentation need not be fraudulent.” (emphasis deleted)).
Although sound in principle, this argument by Colony fails in
light of the jury’s finding that Randolph Bank was not
responsible for the representations made in the application for
insurance. Insofar as Colony failed to file a Rule 50(b) motion
after trial, it cannot now challenge the sufficiency of the
evidence and the jury’s findings; thus, the agency theory fails.
Second, Colony argues that Randolph Bank itself had actual
knowledge of the misrepresentations in the application for
insurance that substantially increased the risk of loss but
never informed Colony of that knowledge. The jury passed on the
question of whether Randolph had actual knowledge based on its
conclusion that Colony had waived and/or was estopped from
rescinding the endorsement provision. The policy states, in
relevant part, as follows:
If we [Colony] deny your [Peterson and Evergreen]
claim because of your acts or because you have failed
to comply with the terms of this Coverage Part, the
mortgageholder [Randolph Bank] will still have the
right to receive loss payment if the mortgageholder:
. . . (3) has notified us of any change in ownership,
occupancy or substantial change in risk known to the
mortgageholder.
36
Randolph Bank and Colony have a material factual dispute
regarding communications between Peterson and representatives of
Randolph Bank as to whether Randolph Bank had knowledge that the
utilities at the 501 building were off. 3 In particular, Colony
claims that Randolph Bank was told, via telephone, that the
utilities were off at the 501 building; Randolph Bank, on the
other hand, claims that it specifically required that a letter
be sent to it confirming the state of the utilities at the 501
building and that it never received such letter. Because the
jury did not reach this issue, and because this issue is
determinative of whether Colony must pay benefits to Randolph
Bank, I would remand the case for trial on the sole issue of
whether Randolph Bank had knowledge that the utilities were off
and failed to notify Colony pursuant to the policy.
III.
For the reasons set forth above, I would reverse the
district court’s denial of Colony’s Rule 50(a) motion as to
waiver of the endorsement provision and remand the case for
trial as to whether Randolph Bank had knowledge that utilities
3
Randolph Bank does not appear to contend that the
utilities being off constitutes a “substantial change in risk”
for purposes of the policy, but argues only that it did not have
any such knowledge.
37
at the 501 building were off. Therefore, I very respectfully
dissent.
38