Duke University v. St. Paul Mercury Ins. Co.

• Decision Date: 03 October 1989
• Docket Number: No. 8814SC947,8814SC947
• Citation: 384 S.E.2d 36,95 N.C.App. 663
• Court: North Carolina Court of Appeals
• Parties: , 56 Ed. Law Rep. 340 DUKE UNIVERSITY v. The ST. PAUL MERCURY INSURANCE COMPANY and Continental Casualty Company.

Page 36

384 S.E.2d 36

95 N.C.App. 663, 56 Ed. Law Rep. 340

DUKE UNIVERSITY v. The ST. PAUL MERCURY INSURANCE COMPANY and Continental

Casualty Company.

No. 8814SC947.

Court of Appeals of North Carolina.

Oct. 3, 1989.

Maxwell, Martin, Freeman and Beason, P.A. by James B. Maxwell and Alice Neece Moseley, Durham, for plaintiff Duke University.

Patterson, Dilthey, Clay, Cranfill, Sumner & Hartzog by Robert M. Clay and Theodore B. Smyth, Raleigh, for defendant St. Paul Mercury Ins. Co.

GREENE, Judge.

This appeal arises from a declaratory judgment action brought by Duke University ("Duke") against its general liability insurer, St. Paul Mercury Insurance Company ("St. Paul") and its "errors and omissions" insurer, Continental Casualty Company ("CCC"). Duke originally sued both defendants to recover a total of $51,477.99 in attorney's fees Duke incurred as a defendant in a lawsuit involving a psychiatric hospital owned by Duke (the "underlying action"). The underlying action arose from Duke's proposed sale of the psychiatric hospital to a third party, and the disbursement of various funds and accounts among the two plaintiffs, Duke, and nineteen other defendants who had a financial involvement or interest in the hospital. In the underlying action, Duke counterclaimed against the two doctor-plaintiffs for intentional torts including defamation, interference with contract, and unfair trade practices. Under Duke's policy with CCC, Duke would retain counsel acceptable to CCC, and CCC would reimburse Duke for the legal expenses incurred after the matter was concluded. Duke initially believed the underlying suit would be covered by its insurance policy with CCC. Duke therefore engaged the legal services of Powe, Porter, Alphin and Whichard, P.A. (now Moore and Van Allen) to represent Duke in the underlying action.

The underlying action progressed in federal court from July 1980 through June 1981. At that time, the senior claim representative for CCC informed Duke that its general liability policy with St. Paul could possibly obligate St. Paul to provide a defense of the underlying suit. The CCC claim representative's letter was turned over to Jeffrey Potter, an attorney in the office of the Duke University counsel generally responsible for matters involving insurance claims. Mr. Potter's office procedure typically called for quarterly reports to Duke's insurance carriers. On 18 September 1981 (the next quarterly period for reporting), Mr. Potter officially notified St. Paul about the underlying action and requested St. Paul's assistance. At that time, Duke had already incurred approximately $29,000 in legal fees in the underlying action. On 24 September 1981, St. Paul sent Duke a letter reserving its rights based on the possible lack of coverage and Duke's late notice; however, St. Paul proceeded with its investigation of the underlying claim. On 19 October 1981, St. Paul informed Duke it had no coverage, and thus St. Paul refused to provide legal defense in the underlying suit.

The underlying suit was resolved on 16 July 1982, and all legal matters relating to settlement were concluded in January 1983. CCC and St. Paul both refused to pay Duke's legal expenses incurred in the underlying action. St. Paul contended it had no duty because its policy did not cover the claims and counterclaims pled in the underlying action, and Duke had breached the policy by not immediately notifying St. Paul of the underlying action. CCC contended it did not have primary coverage, and it was St. Paul's obligation to defend the lawsuit. Therefore CCC had only limited liability for certain other claims alleged in the underlying action. On 3 August 1984, St. Paul proposed a compromise to Duke by tendering fifty percent of the legal expenses incurred by Duke after September, 1981 which totaled approximately $11,000. Duke rejected that settlement offer and ultimately instituted this action on 12 July 1985 to collect its full legal fees of over $51,000. Prior to trial, Duke reached a settlement with CCC whereby Duke released CCC from financial responsibility in return for a compromise payment of $20,000.

St. Paul moved to dismiss Duke's claim for attorney's fees on the grounds Duke was barred by limitations and had breached its policy with St. Paul by not "immediately" notifying St. Paul of the underlying suit as required by the policy. The trial court denied St. Paul's motion to dismiss, entered various findings reciting the facts stated above, and also found that, of the legal fees incurred from July 1980 through September 1981, $13,898.13 of those fees were incurred defending matters covered by the St. Paul policy. The trial court further found that, of the legal fees incurred between 10 October 1981 through January 1983, $8,990.70 were incurred in defending matters covered by the St. Paul policy. The trial court concluded:

1. This action is not barred by the statute of limitations.

2. St. Paul was not notified by Duke University of the underlying action until September 21, 1981, and there was a delay of 15 months from June 27, 1980, the date the underlying action was filed, until September 21, 1981 in notifying the insurance company.

3. Duke did not purposely and knowingly fail to notify St. Paul Mercury Insurance Company of the lawsuit filed against it on July 2, 1980 by Hal G Gillespie and Thomas A. Smith. Said underlying action involved complex legal issues and Duke reasonably believed the action, when initially filed, was not covered by the general liability policy issued by St. Paul. Duke was not aware of any possible fault for failure to notify St. Paul. The delay between the time the underlying action was filed and the time CNA suggested Duke contact St. Paul on June 1, 1981 was in good faith.

4. The delay between June 1, 1981 when a representative of CNA advised Duke that CNA believed there were allegations in the underlying lawsuit of Gillespie and Smith which could or might possibly be covered by St. Paul and the date Duke notified St. Paul on September 15, 1981 of the underlying action was also in good faith: there was no deliberate decision on behalf of Duke to not notify St. Paul, and Duke was not aware of possible fault for failure to notify during this time.

5. St. Paul was not prejudiced by the delay in notification of the underlying lawsuit until September, 1981. The results obtained in the underlying lawsuit were favorable to the insured, Duke University, and the legal representation by the law firm, Powe, Porter, Alphin and Whichard, P.A., which had been employed by Duke and was a firm that St. Paul itself had from time to time used, was effective.

6. St. Paul's duty to defend was unaffected by the delay in notifying St. Paul of the underlying action.

7. The legal fees rendered by Powe, Porter, Alphin and Whichard, P.A. to Duke University in regard to the lawsuit brought by Gillespie and Smith were reasonable and justified.

8. The St. Paul policy did offer coverage for certain claims alleged in the underlying lawsuit brought by Gillespie and Smith including allegations of wrongful eviction, defamation of character, and mental anguish.

9. As between The St. Paul Mercury Insurance Company and Continental Casualty Company, St. Paul was the primary insurer in the underlying action brought against Duke University by Gillespie and Smith.

10. St. Paul is not entitled to credit against any amount it owes Duke for the cost of defense of the underlying action for any payment Continental may have given Duke in order to settle Duke's claim against it and in order to be released from this action.

11. Between July 2, 1980 and January 1983, Duke University incurred legal fees and expenses of $51,460.73 which were reasonable and necessary for the cost of defense incurred in defending the lawsuit and in prosecuting Duke's counterclaims. Of that sum, $22,888.83 were reasonably incurred on behalf of Duke University in defense of claims in which St. Paul provided primary coverage under its policy of general liability insurance issued to Duke University.

NOW THEREFORE, it is hereby ordered, adjudged and decreed that Duke University shall be entitled to recover from the St. Paul Mercury Insurance Company the sum of $22,888.83 plus interest from July 16, 1982 to be assessed by the Clerk of the Court as provided by law.

Pursuant to the parties' agreement, the trial court subsequently amended its judgment under Rule 60(b) and additionally found that:

1. Of the total attorneys' fees paid by plaintiff in the underlying action, only $22,888.83 were incurred for the defense of that action, as distinguished from attorneys' fees incurred for the prosecution of counterclaims, temporary restraining orders, and protection of plaintiff's proprietary rights in the hospital in question and certain bank accounts and funds.

2. Of the $22,888.83 in defense costs incurred, plaintiff has recovered, by settlement with former defendant Continental Casualty Company, the sum of $20,000.00 in reimbursement for such defense costs.

3. Defendant is entitled to a credit or setoff against the verdict and judgment heretofore rendered, in the sum of $20,000.00. To rule otherwise would permit plaintiff to make a double recovery.

4. Interest on the judgment should run from February 9, 1983, rather than from July 16, 1982, as the plaintiff had not completed its payment of attorneys' fees to its counsel in the underlying action until February 9, 1983.

Based on these new findings, Duke's original award of $22,888.83 was reduced to $2,888.83. St. Paul and Duke both appeal.

___________

These facts present the following issues: I) whether the trial court (A) erroneously denied St. Paul's motion to dismiss based on limitations, and (B) whether St. Paul was equitably estopped to assert the defense of limitations; II) whether the trial court erroneously failed to dismiss Duke's claim based on St. Paul's "late notice" defense; and III) whether the...