Pulte Home v. American Southern Ins. Co.

• Decision Date: 07 August 2007
• Docket Number: No. COA06-747.,COA06-747.
• Citation: 647 S.E.2d 614
• Parties: PULTE HOME CORPORATION, Plaintiff, v. AMERICAN SOUTHERN INSURANCE COMPANY and Transamerica Investment, L.L.C., Defendants.
• Court: North Carolina Court of Appeals

647 S.E.2d 614

PULTE HOME CORPORATION, Plaintiff, v. AMERICAN SOUTHERN INSURANCE COMPANY and Transamerica Investment, L.L.C., Defendants.

No. COA06-747.

Court of Appeals of North Carolina.

August 7, 2007.

Appeal by plaintiff and defendant from order entered 8 December 2005 by Judge Narley L. Cashwell in Wake County Superior Court. Heard in the Court of Appeals 25 January 2007.

Taylor, Penry, Rash & Riemann, PLLC, by Neil A. Riemann, Raleigh, for plaintiff-appellant.

Smyth & Cioffi, LLP, by Theodore B. Smyth, Raleigh, for Transamerica Investment, L.L.C., defendant-appellant.

Mabry & McClelland, LLP, by Robert M. Darroch, Atlanta, GA; and Brown, Crump, Vanore & Tierney, L.L.P., by O. Craig Tierney, Jr., Raleigh, for American Southern Insurance Company, defendant-appellee.

GEER, Judge.

Plaintiff Pulte Home Corporation and defendant TransAmerica Investment, L.L.C. appeal from an order denying their motions for summary judgment against defendant American Southern Insurance Company and granting American Southern's motion for summary judgment. This appeal is resolved by the principle, well-established in North Carolina, that an insurer who unjustifiably refuses to provide an insured with a defense is liable for the amount and costs of a reasonable settlement entered into by the insured. See Ames v. Cont'l Cas. Co., 79 N.C.App. 530, 538, 340 S.E.2d 479, 485, disc. review denied, 316 N.C. 730, 345 S.E.2d 385 (1986).

As this Court has previously pointed out, an insurer undertakes a substantial risk when it chooses not to provide a defense. Pa. Nat'l Mut. Cas. Ins. Co. v. Associated Scaffolders & Equip. Co., 157 N.C.App. 555, 559, 579 S.E.2d 404, 407 (2003) ("We note that any insurer who denies a defense takes a significant risk that he is breaching his duty to defend."). Although in Pennsylvania National, we concluded the risk was "well-taken," id. at 560, 579 S.E.2d at 408, the same cannot be said in this appeal. Because we have determined that the policy language covered the claims asserted against Pulte, American Southern unjustifiably refused to defend Pulte and is now liable for the settlement and Pulte's defense costs. Accordingly, we reverse and remand for entry of judgment in Pulte's and TransAmerica's favor.

Facts and Procedural History

Pulte is a home-building company doing business in North Carolina. In the course of its business, Pulte, acting as a general contractor, hired TransAmerica, as a subcontractor, to frame houses in a residential subdivision in Wake County called Breckenridge. The contract between TransAmerica and Pulte required TransAmerica to have Pulte named as an additional insured under the subcontractor's commercial general liability coverage. To comply with this requirement, TransAmerica obtained an additional insured endorsement to its policy with American Southern. That endorsement provided that Pulte was covered "as an insured but only with respect to liability arising out of [TransAmerica's] operations or premises owned by or rented to [TransAmerica]."

In August 2002, Pulte, TransAmerica, and a third company, Morlando Enterprises, L.L.C., were sued by Marcos Antonio Mejia, who had worked at the Breckenridge site for a TransAmerica subcontractor named Rudolfo Sanchez. Mejia alleged that Sanchez "worked under the immediate direction, supervision, and control of [TransAmerica]" and, further, that Pulte "oversaw and directed the work of [TransAmerica] and other contractors at the work site, including the workers employed by Rudolfo Sanchez." Mejia's complaint alleged that, in October 2001, he was instructed to help install trusses on the houses.

Mejia claimed that, during the installation of the trusses, he was required to "work well above the floor level of the house [and] he was not provided any safety devices or means of fall protection." According to the complaint, a crane operator working for Morlando Enterprises was moving trusses from the ground to the roof when the crane knocked Mejia from the roof, causing him to fall to the ground and suffer severe, permanent injuries, including paraplegia.

In March 2003, approximately 7 months after the filing of the Mejia action, Pulte tendered the Mejia claims to American Southern, seeking legal defense and indemnity under the TransAmerica policy. In June 2003, American Southern rejected Pulte's tender and denied any obligation under the insurance policy to defend or indemnify Pulte in connection with the Mejia action. Pulte ultimately paid $700,000.00 to settle Mejia's claims and incurred approximately $105,000.00 in legal fees, expenses, and expert costs.

On 9 September 2004, Pulte filed this action against TransAmerica and American Southern, asserting that both parties had breached a contractual agreement to defend and indemnify Pulte in the Mejia case and were, therefore, liable for any losses incurred by Pulte in that litigation. Following discovery, all three parties moved for summary judgment. By its motion, TransAmerica sought a declaration that the American Southern policy provided coverage for Pulte's costs of defense and settlement in the Mejia action. Pulte moved for summary judgment against only American Southern, seeking (1) a declaration that American Southern was obligated to pay its defense and settlement costs and (2) an award of damages totaling $804,925.14 together with prejudgment interest. American Southern, in its motion, sought a declaration that the insurance policy did not cover the allegations against Pulte in the Mejia litigation and that it therefore had no duty to defend or indemnify Pulte.

A hearing on the motions was held, and on 8 December 2005, Judge Narley L. Cashwell of the Wake County Superior Court entered an order granting summary judgment to American Southern and denying Pulte's and TransAmerica's motions for summary judgment. Following a voluntary dismissal without prejudice of Pulte's claims against TransAmerica, both Pulte and TransAmerica gave timely notice of appeal.

Discussion

It is well established in North Carolina that "[w]hen an insurer without justification refuses to defend its insured, the insurer is estopped from denying coverage and is obligated to pay the amount of any reasonable settlement made in good faith by the insured of the action brought against him by the injured party." Ames, 79 N.C.App. at 538, 340 S.E.2d at 485. See also Penske Truck Leasing Co. v. Republic W. Ins. Co., 407 F.Supp.2d 741, 753-54 (E.D.N.C.2006) (noting that "North Carolina cases consistently hold" that insurer who unjustifiably refuses to defend insured is obligated to pay amount of reasonable settlement and insured's attorneys' fees); Naddeo v. Allstate Ins. Co., 139 N.C.App. 311, 320, 533 S.E.2d 501, 507 (2000) (holding that when carrier "unjustifiably refused to provide a defense," it obligated itself to pay the amount and costs of reasonable settlement); Bruce-Terminix Co. v. Zurich Ins. Co., 130 N.C.App. 729, 735, 504 S.E.2d 574, 578 (1998) ("If a duty to defend could be found, then the trial court's granting of summary judgment for [the insured as to settlement and defense costs] is correct."); Duke Univ. v. St. Paul Fire & Marine Ins. Co., 96 N.C.App. 635, 637, 386 S.E.2d 762, 763 ("By refusing to defend the wrongful death action [where such a defense was required by the policy], defendant obligated itself to pay the amount and costs of a reasonable settlement if its refusal was unjustified."), disc. review denied, 326 N.C. 595, 393 S.E.2d 876 (1990).

The dispositive question in this case is whether American Southern unjustifiably refused to defend Pulte. It is undisputed that the American Southern policy contained a provision requiring the carrier to defend its insureds. Our Supreme Court has observed that "the insurer's duty to defend the insured is broader than its obligation to pay damages incurred by events covered by a particular policy." Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377 (1986). This duty to defend "is ordinarily measured by the facts as alleged in the pleadings ...." Id. "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." Id. An insurer is excused from its duty to defend only "if the facts are not even arguably covered by the policy." Id. at 692, 340 S.E.2d at 378. See also Builders Mut. Ins. Co. v. N. Main Constr., Ltd., 361 N.C. 85, 88, 637 S.E.2d 528, 530 (2006) (reaffirming principles set forth in Waste Management). Moreover, "[i]f the claim is within the coverage of the policy, the insurer's refusal to defend is unjustified even if it is based upon an honest but mistaken belief that the claim is not covered." Bruce-Terminix, 130 N.C.App. at 735, 504 S.E.2d at 578.

In support of its contention that it had no duty to defend, American Southern points to the policy endorsement naming Pulte as an additional insured. That provision specifies: "WHO IS AN INSURED (Section II) is amended to include as an insured [Pulte Home Corporation] but only with respect to liability arising out of [TransAmerica's] operations ...." American Southern construes this provision as meaning that it has insured Pulte only for vicarious liability based on the negligence of TransAmerica and not for any independent negligence of Pulte itself. American Southern then argues that the Mejia complaint only sues Pulte for its independent negligence and, therefore, does not assert claims within the scope of the policy's coverage. We disagree.

The proper construction of the additional insured endorsement turns on the phrase "arising out of." In the insurance context, this phrase frequently appears in policy provisions both extending and excluding coverage. When construing policies North Carolina applies the rule that "[w]hile policy provisions excluding coverage are strictly construed in favor of the insured, those...