COUNTRY CLUB v. US Fidelity & Guar. Co., COA01-726.

Citation150 NC App. 231,563 S.E.2d 269
Decision Date21 May 2002
Docket NumberNo. COA01-726.,COA01-726.
CourtCourt of Appeal of North Carolina (US)

563 S.E.2d 269
150 NC App.


No. COA01-726.

Court of Appeals of North Carolina.

May 21, 2002.

563 S.E.2d 271
W. Brian Howell, P.A. by W. Brian Howell and T. Cooper Howell, Raleigh; Armstrong & Armstrong, P.A. by L. Lamar Armstrong, Jr., Smithfield, for plaintiff-appellee

Wilson & Iseman by G. Gray Wilson and Kevin B. Cartledge, Winston-Salem, for defendant-appellant.

HUNTER, Judge.

Defendant-appellant Unites States Fidelity and Guaranty Company ("USF & G") appeals the entry of judgment based upon a jury verdict concluding that USF & G committed an unfair and deceptive act or practice in violation of N.C. Gen.Stat. § 75-1.1 (1999), and awarding treble damages, and orders denying its motions and awarding costs and attorney's fees. For reasons stated herein, we hold the trial court did not err in denying USF & G's motions and in concluding that USF & G's actions as found by the jury amounted to a violation of N.C. Gen.Stat. § 75-1.1.

This is the fourth appeal to this Court involving these parties and stemming from an incident which occurred 18 October 1991. On that date, a member of plaintiff-appellee The County Club of Johnston County, Inc. ("the Club") consumed several alcoholic beverages at the Club following a golf tournament. While driving home, the member struck another vehicle, killing its driver and seriously injuring a passenger. On the date of the accident, the Club was insured by USF & G under a master insurance policy including commercial general liability coverage ("the policy"). In May 1993, the family of the decedent instituted an action against the member and the Club in Wake County Superior Court. See Sanders, et al. v. Upton, 93 CVS 4415 ("Sanders"). USF & G defended the Club in Sanders under a reservation of rights regarding coverage, and the case was ultimately settled.

In July 1993, USF & G filed a declaratory judgment action seeking a determination that the policy afforded no coverage to the Club for the damages alleged in Sanders because

563 S.E.2d 272
of a liquor liability exclusion in the policy (hereinafter "Exclusion C").1 The Club filed an answer and a counterclaim alleging USF & G negligently failed to provide an extension of its coverage despite knowledge of the Club's alcohol practices. While an appeal to this Court was pending, the Club voluntarily dismissed its counterclaim without prejudice and instituted the present action on 23 January 1995. The amended complaint alleged, among other things, claims against USF & G for bad faith and unfair and deceptive practices in violation of N.C. Gen.Stat. § 75-1.1

In July 1995, this Court rendered an opinion in USF & G's declaratory judgment action. See U.S. Fidelity & Guaranty Co. v. Country Club of Johnston County, 119 N.C.App. 365, 458 S.E.2d 734, disc. review denied, 341 N.C. 656, 462 S.E.2d 527 (1995) ("USF & G I"). In USF & G I, we reversed the trial court's entry of summary judgment in favor of USF & G, holding that although the policy contained a liquor liability coverage exclusion, there remained genuine issues of material fact as to whether USF & G was precluded from denying coverage under the doctrines of estoppel and waiver. Id. at 374-75, 458 S.E.2d at 740-41. On remand, the trial court granted summary judgment in favor of the Club, finding that USF & G waived its right to enforce Exclusion C as a matter of law. In June 1997, this Court affirmed that judgment, and the Supreme Court denied review, thereby establishing that the Club was entitled to coverage. See U.S. Fidelity and Guaranty Co. v. Country Club of Johnston Co., 126 N.C.App. 633, 491 S.E.2d 569 (unpublished opinion), disc. review denied, 347 N.C. 141, 492 S.E.2d 38 (1997) ("USF & G II").

Following our decision in USF & G II, in November 1997, USF & G filed a motion to dismiss the Club's complaint in the present case under N.C. Gen.Stat. § 1A-1, Rule 12(b)(1) and (6) (1999). The motion was denied, and USF & G filed an appeal with this Court, which we dismissed as interlocutory. See Country Club of Johnston County, Inc. v. U.S. Fidelity and Guar. Co., 135 N.C.App. 159, 519 S.E.2d 540 (1999), disc. review denied, 351 N.C. 352, 542 S.E.2d 207 (2000) ("Country Club I"). The Club's claims proceeded to trial.

The evidence presented at trial tended to show that in April 1991, USF & G directed its underwriters to attach to the policies of insureds who serve alcohol an amendment further restricting coverage for liquor liability. The amendment, called CG-2150, amended Exclusion C, the policy's general liquor liability coverage exclusion, which excluded coverage for insureds "in the business of" selling or furnishing alcohol. The CG-2150 amendment was intended to clarify that, as to insureds who regularly serve alcohol, the general liability coverage under their policy would not be enough to provide coverage for their alcohol practices, and that they would be required to pay an additional premium if they wished to have coverage for such practices. Under the CG-2150 amendment, the exclusion would also apply to insureds who "[s]erve or furnish alcoholic beverages without a charge, if a license is required for such activity."

In August 1991, shortly before the accident, senior USF & G underwriter Catherine Davis reviewed the Club's underwriting report which contained details regarding its alcohol practices, including that the Club had a brown-bagging alcohol license. Davis made handwritten notes on the report indicating that because the Club had an alcohol license, the CG-2150 endorsement must be applied to its policy to inform the Club that it would be required to procure additional insurance if it desired coverage for its alcohol practices. Despite Davis' notation that CG-2150 should attach to the Club's policy due to its liquor license, the Club maintained that it was not informed by USF & G that its general policy did not provide coverage for its alcohol activities or that it would be required to purchase additional coverage. The Club produced Davis' notes from a September 1991 telephone conversation with USF & G agent David Grady, also a member of the Club, wherein Grady informed Davis that

563 S.E.2d 273
Club members only "brown bag" approximately six times per year. Thus, Davis concluded that the Club did not "appear to be a large exposure," and that she was "going to delete CG-2150." Davis later maintained that Grady had failed to inform her, and that she was unaware, that Club members could also purchase beer at the Club. Following the accident, Davis sent a letter to the Club informing it that USF & G would now be attaching the CG-2150 amendment to its policy

The Club also presented evidence establishing that when the claim was made, the matter was examined by claims supervisor Douglas Funk, who determined that Exclusion C, the original liquor liability coverage exclusion, did not bar coverage. Funk testified that according to his notes dated 19 November 1991, he recommended that USF & G not send a reservation of rights letter on the basis that Exclusion C applied, and noted that the Club did not appear to be in the business of serving or furnishing alcohol. On 20 November 1991, USF & G did send a reservation of rights letter stating that USF & G believed Exclusion C might apply to bar coverage, and that the matter would be further investigated. The following day, 21 November 1991, a USF & G home office claims examiner concluded that "we are going to take the position of no coverage."

Don Roinestad, who testified as an insurance expert in the fields of underwriting and claims handling, concluded that USF & G had failed to follow "acceptable claims practices" throughout the handling of the Club's claim. He testified that by failing to attach the CG-2150 amendment further restricting liquor liability coverage, Davis, and as a result USF & G, automatically accepted that there was coverage under the policy as it existed. He further testified that the sending of a reservation of rights letter in part based upon the applicability of Exclusion C was "totally inappropriate" because "the claims people ... already knew at th[at] time that Cathy Davis and the agent [David Grady] agreed to provide this coverage for the insured." Roinestad also testified that USF & G failed to properly document its claims process, observing that key conversations regarding the Club's claim were never documented and placed in its file.

On 15 August 2000, the jury returned a verdict in favor of the Club as to damages and proximate cause, answering the following four special interrogatories in the affirmative:

a. Did USF & G prematurely and improperly determine that it was going to deny coverage prior to conducting a meaningful investigation?
b. Did USF & G misrepresent that it was investigating the application of Exclusion C when USF & G had determined that it was going to deny coverage?
c. Did USF & G solicit an opinion letter from counsel after having already made a decision to deny coverage?
d. Did USF & G unfairly or improperly send a "reservation of rights" letter on 11/20/91 citing Exclusion C, without having an adequate or documented basis to reverse Mr. Funk's position to not reserve rights as to Exclusion C documented on 11/19/91?

The jury answered the remaining two interrogatories in favor of USF & G, declining to find the insurer responsible for its attorney's conduct of removing Davis' handwritten notes regarding the CG-2150 amendment from the copy of USF & G's underwriting report provided to the Club during discovery in the declaratory judgment action:

e. Did USF & G participate in an unfair or deceptive alteration of Cathy Davis' handwritten notes on page two of the underwriting report?
f. Did USF & G participate in an unfair or deceptive use of the underwriting report that had been altered by the deletion of Cathy Davis' handwritten notes?


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