Westchester Fire Ins. Co. v. Johnson

• Decision Date: 27 June 2002
• Docket Number: No. 98CV00715.,98CV00715.
• Court: U.S. District Court — Middle District of North Carolina
• Parties: WESTCHESTER FIRE INSURANCE COMPANY, Plaintiff, v. Carl W. JOHNSON; Carl W. Johnson Family Trust, d/b/a The Cotton Mill Square; Landin Ltd; and Joseph Baldwin, Defendants.

221 F.Supp.2d 637

WESTCHESTER FIRE INSURANCE COMPANY, Plaintiff, v. Carl W. JOHNSON; Carl W. Johnson Family Trust, d/b/a The Cotton Mill Square; Landin Ltd; and Joseph Baldwin, Defendants.

No. 98CV00715.

United States District Court, M.D. North Carolina.

June 27, 2002.

Derek J. Allen, James Conrad Adams, II, Brooks Pierce McLendon Humphrey & Leonard, Greensboro, NC, C. Michael Johnson, Henry M. Quillian, III, Brad S. Kalter, Fellows Johnson & La Briola, LLP, Atlanta, GA, for Plaintiff.

James H. Kelly, Jr., Kilpatrick Stockton, L.L.P., H. Brent Helms, Robinson & Lawing, Winston-Salem, NC, William L. Hill, Moss Mason & Hill, Greensboro, NC, for Defendants.

MEMORANDUM OPINION

BEATY, District Judge.

This case comes before the Court upon the United States Court of Appeals for the Fourth Circuit's February 28, 2001 remand of the Court's January 6, 2000 Memorandum Opinion and Order and Judgment granting partial summary judgment to Plaintiff Westchester Fire Insurance Company ("Westchester" or "Plaintiff"). The Fourth Circuit remanded the case in order for the Court to re-evaluate its January 6, 2000 decision granting partial summary judgment to Plaintiff as to Defendants Carl W. Johnson ("Johnson"), Carl W. Johnson Family Trust, d/b/a The Cotton Mill Square, and Landin Limited's (together, "Defendants")¹ counterclaim under the Unfair and Deceptive Trade Practices Act (UDTPA), N.C.Gen.Stat. § 75-1.1, in light of the North Carolina Supreme Court's decision in Gray v. N.C. Ins. Underwriting Ass'n, 352 N.C. 61, 529 S.E.2d 676 (2000). For the following reasons, the Court now holds that Plaintiff's Motion for Summary Judgment as to Defendants' unfair and deceptive trade practices counterclaim is GRANTED.

I. FACTUAL AND PROCEDURAL BACKGROUND

Defendants' counterclaim arises from an insurance policy ("the Policy") issued by Westchester insuring Cotton Mill Square ("Cotton Mill"), a shopping center in Greensboro, North Carolina. Defendants are the named insureds listed on the Cotton Mill policy. The policy provides $300,000.00 coverage for "loss of business income (rents)" and $5,930,000.00 blanket coverage for losses to the Cotton Mill building itself and to certain covered items of business personal property. As the facts giving rise to this lawsuit are explained in greater detail in its January 6, 2000 Memorandum Opinion, the Court will at this time only briefly summarize the relevant background necessary for the counterclaim currently before the Court.

On February 3, 1996, an ice storm caused Cotton Mill to lose power. Defendants hired an electrician, Joseph Baldwin, to restore power to the building but, in the course of the electrician's work, a fire started that destroyed a circuit panel. As a result of the fire, Cotton Mill was without heat, electricity, and lights for six days until generators were procured that provided temporary power to Cotton Mill. This limited temporary generator power was insufficient to heat the entire shopping center, and Cotton Mill remained closed to the public.

After the fire, Johnson notified Plaintiff of the incident and began investigating how to repair the damaged circuit panel and restore power to Cotton Mill.² On February 16, 1996, Johnson received a ninety-day temporary permit from the City's Department of Inspection approving the use of a fuse link system as a temporary power supply. However, the fuse link system was designed and approved only to provide a limited amount of power to Cotton Mill. Consequently, Cotton Mill remained closed to the public while Defendants and Plaintiff investigated methods to restore permanent power to the mall.

After considering several options, Defendants and Plaintiff ultimately agreed on a proposal, submitted by Bowman Electric ("Bowman") on March 27, 1996, to repair the circuit panel by replacing the damaged switch gear system with a rebuilt switch gear system. The repairs were estimated to take a minimum of one month. However, because many Cotton Mill tenants had vacated the property, Defendant Johnson elected in early April of 1996 to neither repair nor reopen Cotton Mill. (Dep.Ex. 41, April 9, 1996 Letter from Carl Johnson to Artistic Impressions.)

By the time Defendant Johnson made the decision to not reopen Cotton Mill, Johnson estimates that he had spent more than $118,000 on repairs and necessary security related to the fire. By June of 1996, Defendants' adjustor submitted partial sworn proofs of loss for $100,000 of repair costs, and Plaintiff reimbursed Defendants for $100,000, pursuant to the Policy.³ In addition to these claims under the property damage policy, Defendants indicated to Plaintiff that they also intended to file a claim for lost business income. The parties began discussing the claim under the business income policy through their adjustors in December of 1996, at which time Defendants' adjustor informed Plaintiff that he would file a sworn statement in proof of loss for the business income claim after Defendants had collected the needed financial documents. (Foster Dep. at 114.) In March of 1997, Defendants, through their attorney, wrote Plaintiff informing it that they were making a demand under the business income policy for $300,000, which was the business income policy's limit.

The parties continued discussions and exchanged documents regarding Defendants' claims. These communications included Plaintiff's examination of Defendant Johnson under oath on November 7, 1997, and Johnson's March 16, 1998 sworn statement in proof of loss, submitted to Plaintiff in April of 1998,⁴ that asserted additional losses under the Policy's business income and property coverage provisions. As the March 16, 1998 sworn statement in proof of loss included claims that were markedly higher than earlier estimates, Plaintiff asked Defendants for permission to conduct an additional examination of Defendant Johnson under oath before issuing its determination of loss as to the business income policy. Defendants agreed to the examination under oath and also agreed to give Plaintiff an extension of fifteen days after the examination under oath to provide Defendants with its interpretation of coverage. Despite this agreement, the parties were unable to arrange a mutually acceptable time for the second examination under oath. On July 24, 1998, Defendants' counsel indicated to Plaintiff that Defendants were no longer willing to grant the extension and asked for Plaintiff's response to Defendants' claim for business income coverage within fifteen days. In lieu of a response, Plaintiff filed the Complaint in this action on August 14, 1998, alleging one count of intentional misrepresentation and one count of reimbursement for moneys paid to Defendants. In the alternative, Plaintiff's Complaint requested a declaratory judgment establishing its obligations under the Policy. Defendants counterclaimed by asserting that Plaintiff violated UDTPA and breached its contract in bad faith.

On January 6, 2000, the Court issued a Memorandum Opinion [Document # 100] and Order and Judgment [Document # 101] as to Plaintiff's Motion for Summary Judgment or in the alternative for Partial Summary Judgment (hereinafter "Plaintiff's Motion for Partial Summary Judgment") [Document # 72] and Defendants' Motion for Partial Summary Judgment [Document # 75]. In the portion of its decision relevant to the current issue, the Court granted Plaintiff's Motion for Partial Summary Judgment as to Defendants' counterclaim that Plaintiff violated UDTPA.⁵ The Court's discussion on this point considered the two alternative methods available under the existing law at the time through which Defendants could have demonstrated their counterclaim: either by establishing a violation of UDTPA itself, or by establishing that Plaintiff violated North Carolina's insurance law that regulates claim settlement practices, N.C.Gen.Stat. § 58-63-15(11).⁶ Pearce v. Am. Defender Life Ins. Co., 316 N.C. 461, 470, 343 S.E.2d 174, 179 (1986). In discussing the latter method, the Court relied in part on a North Carolina Court of Appeals case, Gray v. N.C. Ins. Underwriting Ass'n (hereinafter "Gray I"), 132 N.C.App. 63, 510 S.E.2d 396 (1999), that held that a § 75-1.1 claim based on a violation of § 58-63-15(11) required a demonstration that the insurance company engaged in the prohibited conduct "with such frequency as to indicate a general business practice." Gray I, 132 N.C.App. at 68, 510 S.E.2d at 400 (quoting N.C.Gen. Stat. § 58-63-15(11)). As Defendants had not proffered any evidence that Plaintiff's conduct was part of a general business practice, the Court concluded that Defendants could not demonstrate the element of frequency and therefore had not presented proof of any § 58-63-15(11) violation that could serve as the basis for a § 75-1.1 violation. Proceeding then to review Defendants' other arguments supporting their UDTPA counterclaim, the Court ultimately found that Defendants' counterclaim asserting a § 75-1.1 violation could not survive summary judgment.

Shortly after the Court issued its January 6, 2000 Order and Judgment and while Defendants were appealing the Court's decision on other grounds, the North Carolina Supreme Court reversed the North Carolina Court of Appeals's Gray I decision in Gray v. N.C. Ins. Underwriting Ass'n, 352 N.C. 61, 529 S.E.2d 676 (2000) (hereinafter "Gray II"). In Gray II, the North Carolina Supreme Court determined that the unfair claim settlement practice described in one lettered subsection of § 58-63-15(11), that is, § 58-63-15(11)(f), violates § 75-1.1 even without any additional demonstration of frequency. Defendants thereafter argued to the Fourth Circuit Court of Appeals that they could now survive summary judgment on their § 75-1.1 counterclaim based on the new standard presented in Gray II. More specifically, Defendants asserted that they could demonstrate that Plaintiff performed the conduct prohibited under § 58-63-15(11)(a), (f), (l),...