Great American Ins. Co. v. C. G. Tate Const. Co.

• Decision Date: 08 July 1981
• Docket Number: No. 9,9
• Citation: 303 N.C. 387,279 S.E.2d 769
• Court: North Carolina Supreme Court
• Parties: GREAT AMERICAN INSURANCE COMPANY v. C. G. TATE CONSTRUCTION COMPANY.

Page 769

279 S.E.2d 769

303 N.C. 387

GREAT AMERICAN INSURANCE COMPANY v. C. G. TATE CONSTRUCTION COMPANY.

No. 9.

Supreme Court of North Carolina.

July 8, 1981.

Johnson, Patterson, Dilthey & Clay by Robert M. Clay, Robert W. Sumner and Sanford W. Thompson IV, Raleigh, for plaintiff-appellant.

Nye, Mitchell, Jarvis & Bugg by Charles B. Nye, Durham, for defendant-appellee.

CARLTON, Justice.

I.

Appellant, Great American Insurance Company (Great American), brought this declaratory judgment action to determine its obligations under a liability insurance contract with the defendant-appellee. This dispute arose out of an automobile accident the facts of which are bitterly disputed. This much is certain: On 6 April 1976 defendant C. G. Tate Construction Company (Tate) was engaged in a highway project on U. S. Highway 221 north of Spartanburg, South Carolina. Tate's job was to widen the existing two-lane road to four lanes. The job required the use of numerous pieces of heavy equipment to grade the shoulders, to fill in low spots and to haul away excess dirt. At about three o'clock that afternoon a gasoline tanker owned by State Petroleum, Inc., and driven by Robert Allen Thomas collided with a car driven by Norma Jean Pegg. Shortly after the collision the gasoline in the tanker caught fire and exploded. Both drivers escaped before the explosion and, although seriously injured, survived the accident.

The controversy concerning the accident centers around its cause and the directions in which the vehicles were traveling. Pegg, Thomas and another motorist who witnessed the accident claim that Pegg was traveling south and Thomas north when Tate's front-end loader backed out onto the road in the northbound lane causing Thomas to swerve to the left and collide head-on with Pegg's car. Several Tate employees and an eyewitness who viewed the accident from her patio testified that both vehicles were traveling north, that the car slowed or stopped, and that the tanker braked sharply, jackknifed and rolled over the car. According to these witnesses, the front-end loader was parked about ten feet from the edge of the highway and was not involved in the accident.

Officers of Tate testified that they did not notify Great American, its liability carrier, of the accident because its employees who saw the accident said that Tate was not involved. The local news media, however, ran stories attributing fault to Tate, and the investigating policeman testified that on the evening of the accident he told Tate foreman A. G. Foster that Pegg's version of the accident differed considerably from the version given by Tate employees and that she claimed that a piece of Tate's equipment backed into the road causing the tanker to swerve and collide head-on with her car. Foster denied that he had been informed of Pegg's claims but admitted that he knew that the local news media had assigned fault to Tate.

Tate never reported the accident to Great American. Great American did not learn of Tate's potential involvement in the accident until 3 May 1978, some twenty-seven days after it occurred, by way of a letter from Space Petroleum Company, Thomas' employer, and by way of a telephone call from Thomas' lawyer. Great American is the workers' compensation carrier for Space Petroleum and the 3 May 1978 communications involved a workers' compensation claim for injuries sustained by Thomas in the accident.

Plaintiff Great American initiated this action for declaratory relief seeking a judgment that it has no obligation to defend or indemnify Tate in any suit arising out of this accident because Tate failed to notify Great American of the incident "as soon as practicable." In its answer Tate alleged that it did not notify the plaintiff of the accident because all the information received by its officers and directors indicated that Tate was not involved and that it knew of no potential involvement until contacted by the plaintiff.

The matter was heard on depositions and live testimony in the Superior Court, Wake County by Judge Bailey who sat without a jury. At the conclusion of the evidence Judge Bailey found, inter alia, that Tate knew or should have known of its potential involvement in the accident shortly after it occurred and that its failure to notify the plaintiff was unjustified. Based on his findings of fact Judge Bailey concluded that:

Defendant's unjustified and inexcusable failure to give plaintiff notice of the accident on April 6, 1978 "as soon as practicable" constituted a violation of a condition precedent to coverage under plaintiff's policy of insurance, and, as such, releases plaintiff from its obligation under the policy for the accident on April 6, 1978.

On appeal, the Court of Appeals reversed and held that in order to escape its duty to defend and indemnify an insurer must show not only unjustified delay in giving notice but also that it suffered prejudice because of the delay. Because no findings had been made on the issue of prejudice, the Court of Appeals remanded the case to the trial court for consideration of that issue.

We denied plaintiff's original petition for discretionary review on 15 August 1980. However, on 4 November 1980 we allowed plaintiff's petition for reconsideration and granted discretionary review.

II.

A.

The sole issue with which we are confronted on this appeal is the effect to be given the provision in the policy insuring defendant requiring that written notice be given the insurer "as soon as practicable." More precisely, we must decide whether to continue to apply traditional contract principles and hold that failure to comply strictly with this condition precedent releases the insurer from its obligation to defend and indemnify or to reject the traditional approach and embrace the modern view that this provision, although denominated by the policy as a condition precedent, should be construed in accord with its purpose and with the reasonable expectations of the parties. For the reasons discussed below we adopt the modern view and construe this provision according to the reasonable expectations of the parties. Accordingly, we hold that an unexcused delay by the insured in giving notice to the insurer of an accident does not relieve the insurer of its obligation to defend and indemnify unless the delay operates materially to prejudice the insurer's ability to investigate and defend.

In its briefs and arguments before both appellate courts, plaintiff correctly argued that prior decisions of this Court dictate a contrary result. Notice provisions in a liability insurance contract were first considered by this Court in Peeler v. United States Casualty Co., 197 N.C. 286, 148 S.E. 261 (1929). In Peeler plaintiff sought satisfaction of a judgment rendered against defendant's insured by claiming a right to enforce the insured's policy with defendant as a third party beneficiary. The policy in question required that notice of an accident be given to the insurer "as soon as practicable." Defendant-insurer did not receive notice of the accident until after the trial of Peeler's action against its insured had begun, approximately a year-and-a-half after the accident. Although there was no provision in the policy which made the notice provision a condition precedent, this Court held that the notification provision was of the essence of the contract and, thus, a condition precedent to coverage. Therefore, we held that plaintiff's claim was barred as a matter of contract law.

We again employed the strict contractual approach to construction of notice provisions in Muncie v. Travelers Insurance Co., 253 N.C. 74, 116 S.E.2d 474 (1960). The facts in Muncie were similar to those in Peeler. The plaintiff in Muncie was involved in an automobile accident with defendant's insured against whom she secured a judgment. She sued the defendant-insurer to satisfy her judgment against its insured. The insurer did not receive notice from its insured until some eight months after the accident and plaintiff offered no evidence which explained or justified the delay. This Court held that the trial judge erred in instructing the jury that the burden of proof was on the insurer to show that notice had not been given within a reasonable time and that it was prejudiced by failure to give timely notice. In so holding, we employed the traditional contract analysis: Freedom of contract is constitutionally guaranteed and provisions in private contracts, unless contrary to public policy or prohibited by statute, must be enforced as written. Because the policy makes the giving of notice a condition precedent, the party seeking to enforce the contract has, under general common law contract principles, the burden of pleading and proving strict compliance. Since notice was given eight months after the accident and plaintiff presented no evidence to justify or explain the delay, notice was not given "as soon as practicable" as a matter of law:

Notice without explanation for the delay, given eight months after the happening of the accident, resulting in injuries as serious as depicted by plaintiff's judgment against Crosby, cannot be said to be given "as soon as practicable." Since plaintiff has failed to establish compliance with the conditions or to justify the delay, it follows that she has failed to establish her right to maintain the action.

Id. at 81, 116 S.E.2d at 479.

On the basis of this language the Court of Appeals distinguished Muncie as applying only when no explanation for the delay was given. Limiting Muncie strictly to its facts paved the way for the Court of Appeals to adopt a new rule for cases in which some explanation was offered. We cannot agree with that court's reasoning. The reasoning in Muncie, summarized above, allows no consideration of prejudice. The language relied on by the Court of Appeals merely amounts to a statement of when the question of timely notice becomes one of law properly decided by...