McDaniel&Anderson, LLP - Attorneys at Law

I.   FUNDAMENTALS OF COVERAGE
     A.   Choice of Law
     B.   Interpretation is Based on Policy Terms
     C.   Rules of Construction
     D.   Effect of Statutes
     E.   Recovery Based on Theories Other Than Policy Terms
1.   Estoppel/Waiver
2.   Modification of Contract
3.   Negligent Misrepresentation (by insurer)
          4.   Negligence in Handling Claim
          5.   Reformation
          6.   Fiduciary Duty

II. TYPICAL COVERAGE PROVISIONS
A.   Specific Coverage Provisions
          1.   Occurrence
              a.   “Occurrence” in construction cases
          2.   Property Damage or Bodily Injury
          3.   Damages
              a.   Property Damage in Construction Cases
          4.   Legally Obligated to Pay
          5.   Whether the Damages Occurred Within the Policy Period
          6.   Personal and Advertising Injury
          7.   “Insured” and related terms
          8.   Limits
B.   Exclusions
          1.   Intentional Act Exclusion
          a.   Personal Injury Coverage
          2.   Care, Custody and Control
3.   Real Property (ongoing operations)
          4.   “business risk” exclusions
              a.   Repairs due to incorrect work
              b.   Damage to Insured’s Product
              c.   Damage to Insured’s Work
              d.   Impaired property
          5.   employee exclusion
     6.   Contractual Liability
              a.   Claim for Insured’s Breach of Contract
              b.   Liability Assumed in a Contract
          7.   Pollution Exclusion
          8.   business pursuits
C.   Other Insurance clauses
     1.   Umbrella and True Excess Policies
D.   Standing/Privity issues
     E.   Other defenses
          1.   Misrepresentation on policy application.
          2.   Violating policy provision.
          3.   Late notice.
          4.   Non-payment of premium / Cancellation

III. DUTY TO DEFEND
     A.   Basic Test
          1.   Significance of Conflict
          2.   Policy Defenses Affecting Duty to Defend
B.   Defending under Reservation of Rights
     C. Wrongful Refusal to Defend
1.   waiver of consent-to-settle clause
          2.   waiver of other coverage issues
          3.   Attorneys Fees in pursuing insurer
     D.   Selection of Counsel
     E.   Claims for Reimbursement of Defense and Settlement Costs
          1.   Cases by Insured
          2.   Cases by Another Insurer
              a.   By Insurer with No Duty to Defend
          b.   By Insurer with Duty to Defend
     F.   Whether Excess Insurer has Duty to Defend
     G.   Insurer’s Right to Withdraw Defense

IV. EXTRA-CONTRACTUAL LIABILITY
     A.   Unfair and Deceptive Acts
          1.   Evidence Sufficient
              a.   Sufficient to survive Directed Verdict
              b.   Sufficient to survive Summary Judgment
              c.   Sufficient to survive Motion to Dismiss
          2.   Evidence Insufficient
              a.   Insufficiently to survive DV
b.   Insufficiently to survive SJ
              c.   Insufficiently pled
          3.   Treble damages; computation of same
          4.   Attorneys Fees
          5.   Reliance
          6.   Standing
          7.   Statute of Limitations
     B.   Bad Faith
          1.   Evidence Sufficient
              a.   Sufficient to survive DV
              b.   Sufficient to survive SJ
              c.   Sufficient to survive Motion to Dismiss
          2.   Evidence Insufficient
              a.   Insufficient to survive DV
              b.   Insufficient to survive SJ
              c.   Insufficient to survive Motion to Dismiss
          3.   Damages
          4.   Attorneys fees and expenses
          5.   Bad Faith failure to settle (third party)
          6.   Bad Faith Breach of Duty to Defend
          7.   Failure to Preserve Limits
          8.   Settling Insured’s Deductible
          9.   Not Assignable
          10. Standing
          11. Discovery Issues

The initial inquiry in any coverage dispute is whether the claim asserted is “covered” by the terms of the insurance policy. This requires a good understanding of the facts and of the applicable policy provisions. There are several principles or rules of construction that the courts employ to interpret policy provisions, and there are several cases addressing specific provisions.

In addition to the terms of the policy, the case law, which is founded primarily on contract law, recognizes arguments by both the insurer and the insured to create, or negate, coverage, or liability on other theories, based on other doctrines, such as negligence and waiver.

Coverage issues arise under all types of policies. The most common policies are automobile policies (including personal auto policies, business auto policies, commercial auto policies, garage policies), homeowner’s policies, general liability policies, professional policies (claims made or errors and omissions policies), medical expenses coverage (personal health coverage or “medical payments”). Regardless of the policy, the same rules of construction apply.

This article addresses doctrines and cases occurring in many types of insurance policies. The focus, however, is on liability policies, and further on the comprehensive general liability (CGL) policy.

If the claim or the insurance policy originated in any significant manner outside North Carolina, then attention must be given to the applicable choice of law. G.S. § 58-3-1 states, “All contracts of insurance on property, lives, or interests in this State shall be deemed to be made therein, and all contracts of insurance the applications for which are taken within the State shall be deemed to have been made within this State and are subject to the laws thereof.” In situations where this statute is inapplicable (i.e. where the policy is not “on property, lives, or interests” in North Carolina), then the common law rule of lex loci contractus applies.

Most of the cases addressing this issue arise in the context of an automobile accident. With respect to an automobile case, “the general rule is that an automobile insurance contract should be interpreted and the rights and liabilities of the parties thereto determined in accordance with the laws of the state where the contract was entered even if the liability of the insured arose out of an accident in North Carolina.” Fortune Ins. Co. v. Owens, 351 N.C. 424, 428 (2000) (“The mere presence of the insured interests in this State at the time of an accident does not constitute a sufficient connection to warrant application of North Carolina law.”; where “the only contact between the Fortune policy and North Carolina is that ‘the automobile accident on January 29, 1990, occurred in North Carolina and following the accident Gary Edgar Owens provided the officer with a temporary North Carolina address.’,” Florida law applies). This case is typical of many cases addressing choice of law issues; they often focus on traditional notions of lex loci contractus, rather than initially determining whether G.S. § 55-3-1 applies.

Our Supreme Court has held that where there are more substantial connections with North Carolina, North Carolina law applies. Collins & Aikman Corp. v. Hartford Accident & Indem. Co., 335 N.C. 91 (1993) (even though policy was originally delivered to broker in California, and was later sent to the insured’s office in Charlotte, where insured owned numerous trucks which were predominately titled in North Carolina, and insured’s transportation division is located in Albemarle, and auto accident occurred in North Carolina, “The policy in this case protects the interest of plaintiff against having to pay damages for the wrongful acts of its agents. The insurance contract is deemed to have been made in North Carolina.”). See also Cont'l Cas. Co. v. Physicians Weight Loss Ctrs. of Am., 61 Fed. Appx. 841 (4th Cir. 2003) (duty to defend under professional liability policy determined by North Carolina law where underlying suit was brought in North Carolina, and insured had fifty businesses (at issue in the suit) in North Carolina, and 50,000 North Carolina citizens were customers of the insured; North Carolina had much more than a casual connection with the substance of the insurance policy).

A case decided a century ago held that a choice-of-law provision is invalid. Blackwell v. Life Ass'n, 141 N.C. 117, 53 S.E. 833 (1906) (provision in policy stating "This contract shall be governed by, subject to, and construed only according to the laws of the State of New York, the home office of said association" is void). This case has never been expressly overturned, but modern cases are more prone to enforcing such provisions. Perkins v. CCH Computax, Inc., 333 N.C. 140, 146 (1992) (“the North Carolina rule . . . recognizes the validity and enforceability of choice of law and consent to jurisdiction provisions”).

Even where North Carolina law applies, it should be noted that when there is no North Carolina authority directly on point, our courts often look to the law of other jurisdictions. Reference to these sources is especially appropriate in insurance disputes because of the fairly standardized policy language. This article focuses on cases from North Carolina and cases applying North Carolina law, but it cites to cases from other jurisdictions for general principles of insurance law, especially where there is scant North Carolina authority on the issue.

The policy is essentially a contract, and as a general matter a coverage dispute should be decided based on the actual language of the policy at issue. “Language in a policy of insurance is the determining factor in resolving coverage questions unless that language is in conflict with applicable statutory provisions governing such coverage.” Lanning v. Allstate Ins. Co., 332 N.C. 309, 312 (1992) (where policy expressly provided that med-pay could not be stacked, prior cases with ambiguous policy provisions was not controlling).

Thus, in determining coverage, it is important to have the actual policy, as the terms of different policies may be different.

There are, however some instances where the court will seemingly analyze coverage by considering issues beyond the mere terms of the policy.

Some cases address the insured’s “reasonable expectations.” W & J Rives, Inc. v. Kemper Ins. Group, 92 N.C. App. 313, 317 (1988) (“Rives had not agreed with Polo, at the time of the theft, to provide insurance for the Polo materials and goods. Thus it would seem that a reasonable person in the position of Rives would have understood that the Polo goods were covered by Aetna's policy. The exclusion clause, therefore, does not apply to the Polo claim.”). North Carolina has not, however, widely embraced the doctrine of the insured’s “reasonable expectations” in construing a policy. The court may sometimes employ equitable or policy considerations in construing an insurance policy.

The cases sometimes recognize that a provision contrary to public policy will not be enforced. For example, a choice-of-law provision has been held to be against public policy and void. Blackwell v. Life Ass'n, 141 N.C. 117, 53 S.E. 833 (1906). It is difficult for the Insurer to overcome coverage by relying on public policy. For example, an argument that coverage would result in a double recovery, or a windfall, to the insured has been rejected. An argument that coverage for punitive damages is contrary to public policy has been rejected. An insured’s argument that an appraisal provision is contrary to public policy has been rejected.

Some decisions refuse to construe a policy so as to render it worthless. One case, however, allows the policy to be construed to as to provide “illusory coverage.” Davidson v. Knauff Ins. Agency, Inc., 93 N.C. App. 20, 23 (1989) (“As plaintiff's uninsured motorist coverage already insured against motorists with less than the statutorily required minimum liability coverage of $25,000, we noted plaintiff's contention that ‘there are no circumstances under which he can collect on his underinsured coverage [of $ 25,000] and he has paid his premium for this coverage in exchange for nothing.’ It appears that the plaintiff is correct in this argument but it does not justify our rewriting the policy.").

Our courts have developed several rules of construction to determine whether an insurance policy covers a claim. As shown in Section I.B., the policy is the primary focus in any coverage analysis.

As with all contracts, the goal of construction is to arrive at the intent of the parties when the policy was issued. Where a policy defines a term, that definition is to be used. If no definition is given, non-technical words are to be given their meaning in ordinary speech, unless the context clearly indicates another meaning was intended. The various terms of the policy are to be harmoniously construed, and if possible, every word and every provision is to be given effect. If, however, the meaning of words or the effect of provisions is uncertain or capable of several reasonable interpretations, the doubts will be resolved against the insurance company and in favor of the policyholder. Whereas, if the meaning of the policy is clear and only one reasonable interpretation exists, the courts must enforce the contract as written; they may not, under the guise of construing an ambiguous term, rewrite the contract or impose liabilities on the parties not bargained for and found therein.

Woods v. Nationwide Mut. Ins. Co., 295 N.C. 500, 505-506 (1978).

“If a policy defines a term, then that meaning is to be applied ‘regardless of whether a broader or narrower meaning is customarily given to the term, the parties being free, apart from statutory limitations, to make their contract for themselves and to give words therein the meaning they see fit.’” Nationwide Mut. Ins. Co. v. Mabe, 342 N.C. 482 (1996). “[A]ll parts of an insurance policy are to be construed harmoniously so as to give effect to each of the policy's provisions. Id. The policy should be construed to give meaning to each provision.

“Where the insurance contract does not limit the definition of the word, this Court certainly should not step in to do so. Any ambiguity in the contract must, in fact, be construed against Nationwide, the drafter of the contract.” Baxley v. Nationwide Mut. Ins. Co., 334 N.C. 1, 7 (1993).

In determining whether there is coverage, “A party seeking benefits under an insurance contract has the burden of showing coverage. Until a prima facie case of coverage is shown, the insurer has no burden to prove a policy exclusion.” Fortune Ins. Co. v. Owens, 351 N.C. 424, 430 (2000).

A provision from one portion of the policy will not necessarily apply to a different portion of the policy. The insurer generally cannot rely on manuals or other documents to limit coverage.

There are a couple of statutes pertaining to the form and language of insurance policies. One statute provides that the policy should be “readable.” G.S. § 58-38-5.

The failure of an insurer to comply with a statutory requirement for the policy may result in the court construing that portion of the policy against the insurer. For example, a form which purported to reject coverage, but which did not conform to the statutory requirements was invalid, and the policy was held to afford coverage.

Further, policies must be approved by the Commissioner of Insurance. G.S. § 58-38-30. The effect of using a form without approval from the Commissioner is somewhat unclear.

“[T]here exists in North Carolina a duty for the insured to read the terms of the insurance policy.” Kirk v. R. Stanford Webb Agency, Inc., 75 N.C. App. 148, 151, 330 S.E.2d 262, 264, disc. review denied, 314 N.C. 541, 335 S.E.2d 18 (1985). The insurance agent does not have a duty to explain the policy to the insured.

Where a statute addresses a particular coverage issue, that provision will prevail over any contradictory provision sin the policy.

There are, for example, extensive statutory requirements for automobile and fire insurance policies. See N.C.G.S. Sec. 58-44-15.

As discussed in Section II.A.7., where the statutory insurance is for the benefit of third person (i.e. other than the insured), then liability imposed on the insurer solely by virtue of statute, and not by the policy terms, may create a right of indemnity by the insurer against its insured.

An insured can attempt to obtain recovery against the insurer on alternative theories or claims, where the policy language does not otherwise provide for recovery against the insurer, or where an exclusion would otherwise apply to defeat coverage. The courts recognize several alternative means of recover to an insured (or putative insured).

The courts sometimes find that the insurer is estopped from denying coverage, or from raising an exclusion or other policy provision as a defense to coverage, or that the insurer has waived some coverage issues or defenses, by its conduct.

For example, “By denying liability or refusing to settle claims against insured, which are covered by the automobile indemnity policy, the insurance company commits a breach of the policy contract and thereby waives the provisions defining the duties and obligations of the insured.” Blue Bird Cab Co. v. American Fidelity & Casualty Co., 219 N.C. 788, 796-797 (1941).

It is well settled that conditions going to the coverage or scope of the policy, as distinguished from those furnishing a ground for forfeiture, may not be waived by implication from conduct or action, without an express agreement to that effect supported by a new consideration. This rule may be, as it often is, otherwise stated that the doctrine of waiver may not be applied to bring within the coverage of the policy risks not covered by its terms, or risks expressly excluded therefrom.

Hunter v. Jefferson Standard Life Ins. Co., 241 N.C. 593, 595 (1955); Pearce v. American Defender Life Ins. Co., 74 N.C. App. 620, 626-627 (1985) (where policy “expressly exempts from coverage death resulting from an accident involving an aircraft on which the insured serves as a crew member,” and insured was erroneously informed that it would be covered during such activities, “We think it clear that application of the doctrines of waiver or estoppel on these facts would essentially rewrite the policy, extending coverage to a risk expressly excluded therefrom, and obligating defendant to pay a loss for which it charged no premium. This we cannot do.”). Stated otherwise:

[W]aiver and estoppel cannot be used to create coverage which is nonexistent or expressly excluded from a policy. The essential question which must be answered when an issue of waiver or estoppel is raised is whether the contested provision is a matter of forfeiture, to which the principles [of waiver and estoppel] apply, or a matter of coverage, where any change in terms must be by express agreement supported by new consideration.

Thus, the general rule is that a policy condition or requirement can be waived by the insurer, but the essential coverage and exclusionary terms cannot be waived. One case, however, held that estoppel and waiver applied to prevent the insurer from relying on an exclusion. United States Fidelity & Guar. Co. v. Country Club, 119 N.C. App. 365, 374 (1995) (even though policy did not cover insured’s liability arising from automobile accident, due to liquor exclusion, insured may be covered by doctrines of waiver and estoppel, where insurer knew that insured provided alcohol to guests); Country Club of Johnston County, Inc. v. United States Fid. & Guar. Co., 150 N.C. App. 231 (2002) (in determining whether insurer is estopped from denying coverage, court looks closely at notes and testimony of underwriter). This case, however, appears aberrational in view of Hunter, Brendle, et al.

A claim estoppel based on a statement by the insurer does not apply unless the insured relies on the misinformation.

The insured may also argue that the insurer, directly or through its agent, modified or changed the terms of the policy.

With regard to statements by the insurer prior to the issuance of the policy, the general rule is that such statements are inadmissible and do not bind the insurer. Such statements cannot “contradict or vary” the terms of the policy.

Statements made by the insurer, or its agent, made after the policy is issued may be deemed to modify the policy where the requisite elements are met. Pursuant to standard contract principles, the agent’s statements can bind the insurer only if he had actual or apparent authority to bind the principle. Where the insured relies on apparent authority, “It must be shown that a party was reasonable in believing that another had conferred authority to that party to act on its behalf." Capitol Funds, Inc. v. Royal Indem. Co., 119 N.C. App. 351, 357 (1995).

In Royal Indemnity, the defendant-insurer issued a fire insurance policy to the plaintiff-insured through the defendant's agent. The agent stated that a particular location was covered by the policy, when in fact that location was not listed in the policy, and thus not insured by the terms of the policy. The jury found that the agent had actual and apparent authority to act for the insurer, and the court of appeals affirmed because the "[e]vidence presented shows that defendant Royal had knowledge that Cummings LeGrand [agent] was the retail agent; that defendant Royal used Cummings LeGrand to do its bidding; and that it never informed Capitol Funds [insured] that Cumming LeGrand's authority was limited." Id. at 357.

Where the agent does not have authority, then it cannot bind the principal. Sasser v. Pilot Fire Ins. Co., 203 N.C. 232, 238 (1932).

Pursuant to ordinary contract law, a statement which is too vague is not binding.

Under the terms of may policies, a modification must be in writing, and the insured’s modification argument fails in the absence of the appropriate writing. Where, however, the policy does not specifically state that the modification must be in writing, then the agent may modify the policy.

Where the insurer or its agent makes a misrepresentation to the insured (or a third person) regarding the coverage under a policy, then the insured may have a claim for negligent misrepresentation if he can establish the elements for this offense. This is not a claim for coverage, but is instead a separate tort claim.

There is some authority that the agent may have a duty to speak, and his failure to do so constitutes a misrepresentation.

Where the insurer is held liable because of the negligence of the agent, there is authority that the insurer and the agent are joint-tortfeasors, entitled to contribution from each other. It is not clear that this result is correct. The general rule in most other jurisdictions is that the insurer is entitled to indemnification from the agent where the insurer’s liability is predicated upon the agent’s negligence or representation.

In order to have a claim for negligent misrepresentation, the insured must show that it reasonably relied on the insurer’s statements. Where reliance on the insurer's statements is unreasonable, the claim fails. The Supreme Court has held that where the policy expressly precludes the agent from binding the insurer, that the insured may not rely on the agent’s statements.

Contributory negligence should be a defense to a claim for negligent representation.

There are some areas where the insured may be able to sue the insurer for negligence in adjusting and defending the claim. The nature of this claim is not entirely clear. It may be viewed purely as a tort claim, arising from a contractual relationship. It may also be viewed as a claim for a breach of an implied contractual duty (e.g. a duty to adjust and defend the claim reasonably, or in good faith). The exact scope of this liability under this theory is not clear.

The insurer has these duties when it defends its insured. “When State Farm undertook the defense of Connor's action for damages, it owed its insured the duty to act diligently and in good faith.” Connor v. State Farm Mut. Auto. Ins. Co., 265 N.C. 188, 191 (1965). The breach of this duty gives the insured a claim against the insurer.

Many of the cases addressing breach of these duties are discussed in Section IV.B.5., pertaining to claims against the insurer for “bad faith” in claims handling. It is not clear, however, whether an insured must show mere negligence to prevail in a claim for compensatory damages arising from claims handling, or whether the insured must show “bad faith” in order to pursue these theories. Most of the cases, however, indicate that the insurer is held to a standard of reasonableness. When deciding whether an insurer handled a claim “reasonably,” the most persuasive evidence should be evidence of industry standards.

In one extraordinary case, the insurer was subject to liability for personal injuries resulting from negligence in adjusting the claim. Prince v. Wright, 141 N.C. App. 262 (2000) (where insurer adjuster fire loss at house arising from claim of insured-landlord, and insurer inspected house, insurer created duty toward plaintiff-tenant, and insurer could be liable to tenants for fire following inspection).

The insured may be able to reform the policy where there is “clear, cogent, and convincing evidence” that the policy as written did not accurately reflect the true intent of the parties regarding the coverage to be afforded.

Some cases appear to use the notion of reformation, without expressly using the doctrine. See, e.g. Stockton v. North Carolina Farm Bureau Mut. Ins. Co., 139 N.C. App. 196, 197 (2000) (where policy was issued to "Oak Farm," but this was non-existent entity, UIM coverage was extended to son of purchaser of policy; accepting Plaintiff’s argument that “the language in the UIM endorsement defining ‘insured’ to include family of the named insured mandates a finding that the Stocktons are also named insureds under the policy.”; affirming summary judgment for insured, because Oak Farm no legal existence complete in itself; court not expressly using doctrine of reformation); Ratliff v. Virginia Surety Co., 232 N.C. 166, 170 (1950) (allowing insured’s claim to proceed where there was an apparent error in VIN number on policy).

“While we have recognized that an insurance agent has a fiduciary duty to keep the insured correctly informed as to his insurance coverage, we have not held that an insurance company or an adjuster has a fiduciary duty to an insured with respect to settlement of claims.” Cash v. State Farm Mut. Auto. Ins. Co., 137 N.C. App. 192, 206 (2000). Thus, where the insurer negligent assured the insured that its telephone system was covered, the agent had a fiduciary duty to keep the insured correctly informed, and a judgment against the insurer will be upheld. R-Anell Homes, Inc. v. Alexander & Alexander, Inc., 62 N.C. App. 653 (1983).

Coverage will typically depend on applying the policy provisions to the facts underlying the claim. In each policy, there are crucial coverage terms, or criteria, and typically there are exclusions. Determining whether the claim is covered by the policy depends on an analysis of these coverage provisions and exclusions. The focus of this Section is on an analysis of coverage under liability policies, and especially CGL policies. Many of these coverage terms and concepts, however, apply to several types of policies.

A typical homeowner’s (HO) liability policy states, “If a claim is made or a suit is brought against an insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, we will . . . pay up to our limit of liability for the damages for which the insured is legally liable.” See, e,g., North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697, 700 (1992) (addressing case with this language in homeowner’s policy). A typical CGL policy states, “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies. . . . This insurance applies to "bodily injury" and "property damage" only if: The ‘bodily injury’ or ‘property damage’ is caused by an ‘occurrence’ that takes place in the ‘coverage territory.’” E.g. Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 300 (2000).

Thus, essential requirements are that there be an “occurrence” resulting in “property damage or bodily injury” during the policy, resulting in “damages” which the insured is “legally obligated to pay” (or is “legally liable”). See, e.g., Hobson Constr. Co. v. Great American Ins. Co., 71 N.C. App. 586, 590 (1984) (“If ‘property damage’ occurred while the policy was in effect, the insurer must pay the legal damages due to such ‘property damage’ absent some exclusion contained in the policy.”).

Other policies use some of these terms also. For example, a life insurance policy may condition benefits on an “accident.”

The court and the parties should carefully and literally apply these terms, and their relationship to each other. For example, in determining whether there is coverage in a CGL policy, the issue is not whether the damages awarded against insured represent “property damage” or “bodily injury,” but rather whether the insured’s liability is for damages which arise from bodily injury or property damage. Thus, a claim for punitive damages which arises from bodily injury is covered, even if the punitive damages are “awarded for the bad conduct of the plaintiff's agent and not for damages for bodily injury.” Collins & Aikman Corp. v. Hartford Accident & Indem. Co., 335 N.C. 91 (1993) (“Punitive damages were recovered because of the recovery for bodily injuries to the deceased persons. This recovery is covered by the policy.”).

          1.   Occurrence

     Most liability policies require an “occurrence” in order to have coverage. (See also Section II.A.7., addressing “personal and advertising injury,” which generally do not require an “occurrence.”) In the context of a CGL policy, the “occurrence” must result in property damage or bodily injury. It bears noting that the policy requires only that an occurrence lead to this damage or injury, and not that all causes of the damage or injury be an “occurrence.”

An “occurrence” is typically defined as an “accident,” or as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” was described by the North Carolina Supreme Court in Tayloe v. Hartford Accident & Indem. Co., 257 N.C. 626, 127 S.E.2d 238 (1962) as follows:

“Accident” is defined [by dictionary] as “an unforeseen event, occurring without the will or design of the person whose mere act causes it; an unexpected, unusual, or undesigned occurrence; the effect of an unknown cause, or, the cause being known, an unprecedented consequence of it; a casualty.”

The leading case from our Supreme Court on this term in a CGL policy is Stox. Stox held: “We conclude that where the term ‘accident’ is not specifically defined in an insurance policy, that term does include injury resulting from an intentional act, if the injury is not intentional or substantially certain to be the result of the intentional act.” North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697, 709 (1992) (where trial court found that insured did not intend to injure co-worker when he pushed her, there was an occurrence).

Many cases address whether there is an “occurrence.” In the following cases, the court found there was no “occurrence”:

Claim by police officer against his employer alleging improper training and that employer “knew or should have known that its action in instructing its officers how to use the radios [which resulted in shooting of plaintiff] was substantially certain to cause the death or serious injury of an officer.”
Torts of alienation of affection and criminal conversation are not “accidents.”
Where insured-vendor falsely represented that there were no prior water damages to property, there was no occurrence.
“A refusal to lease equipment to a newly-formed company after already allegedly agreeing to do so, even from the viewpoint of Holz-Her, was substantially certain to cause South Bay delays and other consequential business injuries.”
Where insured-city’s chief building inspector destroyed defendant’s greenhouses, possibly under erroneous interpretation of city building code, there was no accident or occurrence, as the decision did not happen by chance and was not unexpected, unusual or unforeseen.
Where insured sold lots in subdivision, with restrictive covenant limiting use to residential, and then insured built mini-warehouse facility, and insured was sued by other landowners for breach of covenant, injury was substantially certain to occur.
Intentional assault by the driver of an automobile was not covered by an automobile insurance policy covering accidental injury.
The following cases found an “occurrence”:
Where insured accumulated debris, resulting in damage to a stream, there was an “occurrence,” as insured intended accumulation but did not intend damage to stream.
“While plaintiff’s actions taken in an attempt to manage and maintain the property with plumbing, pest control and grounds keeping were intentional, the resulting damage to the property occasioned thereby was not.”
Where insured hired surveyor, who made mistake in determining property line, and cut down adjoining landowner’s trees under belief that they were his, the damage was “caused by an unexpected event or happening”; Court emphasized that insured obtained endorsement modifying coverage terms, providing coverage for damage “caused by an unexpected event or happening . . . which results . . . in injury to or destruction of property . . . provided the insured did not intend that injury . . . or destruction would result.”
Where insured intended to shoot stop sign but instead shot into bedroom window and injured occupant, his conduct did not rise to level requiring inferred intent to injure.
In a claim for negligent hiring, an assault by employee is an occurrence.
Many of the cases addressing whether there is an occurrence are coterminous with cases addressing the “intentional acts exclusion,” addressed later.
a. “Occurrence” in construction cases
In the construction context, there is a developing body of case law addressing whether various construction claims involve an “occurrence.” North Carolina state courts have scant authority on whether there is an “occurrence” when a contractor’s work has defects or fails. Federal courts applying North Carolina law, however, have addressed some of these issues.
Most of these cases involve the construction of a building which is accepted by the owner, and the owner later discovers construction defects, which may cause damage to other parts of the building or the contents. The typical insurance issue is whether the owner’s claim against the contractor is covered. Some cases address the coverage of a subcontractor.
In the leading case, it was held that “defective workmanship does not constitute an ‘occurrence.’” Wm. C. Vick Constr. Co. v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 52 F. Supp. 2d 569, 584, 585 (E.D.N.C. 1999). In Vick, the insured-builder was sued by the property owner for the cost of repairing a roof that leaked and a stucco wall that cracked. The court held that because the damage was the result of faulty or defective workmanship, the damage was not the result of an “occurrence” or “accident.” In determining that the faulty construction was not an “occurrence,” the court emphasized the foreseeability of the resulting conditions is critical to determining whether there is an occurrence. “The natural and ordinary consequences of improperly applying a waterproofing membrane and failing to apply fiberglass matting in stucco construction could very well be a leaky membrane and cracked walls.” The court thus blurred the line between determining whether the original cause (defective construction) is an “occurrence,” and determining whether the ultimate damage (or loss or consequence, such as leaks or cracks) is foreseeable (or the natural consequence of the faulty construction).
Most courts which have addressed this issue have held that defective construction is not an “occurrence,” even when it damages other parts of the construction. Further, the fact that the defective work was done by a subcontractor does not render defective work to be an occurrence.
Where the damage that results from defective workmanship causes bodily injury (e.g., if a defectively built ceiling fell on a person) or caused damage other property (e.g., if the same ceiling fell and caused damage of office furniture), that subsequent damage would be deemed to have resulted from an event deemed an “accident” because the damage to the person or office furniture was an unforeseen and unexpected event.
Cases decided in the wake of Vick have provided some clarification of these issues. The cases generally hold that when the loss or damage resulting from defective construction is to the construction itself, there is no occurrence. For example, defects in cabinets were the natural consequence of the poor workmanship, not the result of an “accident.”
Further, even where there is damage to other property, there is no “occurrence” where that subsequent damage is “customarily associated” with repairing the defective work. Where a sub-contractor was hired to replace stucco siding with a different siding, and the sub-contractor was sued alleging that "in installing the conventional hard-coat stucco, damaged [owner’s] property including damage to driveways, patios, chimneys, painted walls, stone walkways, slate roofs, air conditioners and landscaping," but the plaintiff made no allegations concerning how the damage occurred, and its counsel acknowledged at oral argument that part of sub-contractor’s work included the effort customarily associated with cleaning up a worksite following application of hard-coat stucco, and claimant did not show that such damage was not the expected consequence of defective or poor workmanship. Similarly, when defective cabinets must be replaced, the costs incurred in the replacement process (repair to drywall, repaint walls, reinstall sinks) is not an “accident.”
Where, however, the insured’s work damages other property (i.e. property not constructed by the insured), then there is an occurrence. Even if the damage to other property was foreseeable, it cannot be said that this resulting damage to other property was intended so as to disqualify the incident as an accident. Thus, where defectively installed windows cause water damage to the owner’s carpets, there is an "occurrence.” Similarly, another jurisdiction has held that where a pipe bursts and damages furniture, there is an occurrence.
One case applying North Carolina law has held that there may be an occurrence where the damage to the insured-subcontractor’s work or product may be due the errors of other sub-contractors, because the damage is not necessarily "foreseeable," "expected," or "intended" from the standpoint of the insured. It is difficult to reconcile this case with the other cases. This case appears to blur the distinction between the insured’s liability and coverage.
2. Property Damage or Bodily Injury
In order for there to be coverage, the “occurrence” must result in bodily injury or property damage. Many policies define “property damage” as:
(1) Physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or
(2) Loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.
Hobson Constr. Co. v. Great American Ins. Co., 71 N.C. App. 586, 590 (1984). See also Prod. Sys. v. Amerisure Ins. Co., 167 N.C. App. 601, 606 (2004) (policy defining term as “Physical injury to tangible property, including all resulting loss of use of that property.”).
The key element of “property damage” is a change in the condition of the property. The property must have been “previously undamaged.” Prod. Sys. v. Amerisure Ins. Co., 167 N.C. App. 601, 606 (2004).
Where the insured contaminates the soil and groundwater, this is “property damage.”
North Carolina state courts have not addressed whether certain “economic losses,” such as lost profits, are “property damage.” A federal case applying North Carolina has construed “property damage” to not include economic losses, and this is the majority approach.
In North Carolina it is not clear the extent to which a claim for “loss of use” constitutes “property damage,” even if the policy defines "property damage” to include loss of use. In Prod. Sys. v. Amerisure Ins. Co., 167 N.C. App. 601 (2004), the court held that a complaint which included claims for “loss of use” were not covered because they did not constitute “property damage.” In Amerisure, the insured was sued for improperly constructing conveyor belts, which damaged other parts of the system and necessitated repairs to the line and resulted in loss of use. As noted above, the case seems to hold that all losses arising from the insured’s improper work are not “property damage.” But see Wayne Bros., Inc. v. N. River Ins. Co., 2003 U.S. Dist. LEXIS 16838 (M.D.N.C. 2003) (where insured allegedly incorrectly installed concrete slab, resulting in delamination of slab, but claimant is seeking not only the costs of repair of the delamination, but also damages arising from its loss of use, business disruption and damage to its equipment, there is “property damage”).
The term “bodily injury” is typically defined as “bodily injury, sickness or disease sustained by any person which occurs during the policy period, including death at any time resulting therefrom." See Fieldcrest Cannon v. Fireman's Fund Ins. Co., 127 N.C. App. 729, 732 (1997). See also Holt v. Atlantic Cas. Ins. Co., 141 N.C. App. 139, 141 (2000) (policy stated, “’Bodily injury’ means bodily harm, sickness or disease, including death that results.”).
One issues which arises as to “bodily injury” is whether claims for emotional distress are claims for “bodily injury.” Cases have reached conflicting results on this issue.
a. Property Damage in Construction Cases
Cases against a contractor arising from its construction present distinct issues in determining whether there is “property damage.” There are a couple of North Carolina cases addressing this issue, as well as several federal cases.
The leading case held that costs to repair and complete a dam are not “property damage.” Hobson Constr. v. Great American Ins. Co., 71 N.C. App. 586 (1984), disc. review denied, 313 N.C. 329 (1985). The opinion does not clarify the nature of these “repairs.”
A subsequent case construed Hobson to mean that “property damage” does not include “the expense of repairing property or completing a project that was not done correctly or according to contract in the first instance.” Prod. Sys. v. Amerisure Ins. Co., 167 N.C. App. 601, 606 (2004).
The leading federal case held that, “A mere defect in construction is not “property damage.” Wm. C. Vick Constr. Co. v. Pennsylvania Nat'l Mut. Cas. Ins. Co., 52 F. Supp. 2d 569 (E.D.N.C. 1999) (relying heavily on Hobson).
Pursuant to Vick, where the claim against the insured-contractor is simply for deficient work, there is no “property damage.” This is true even where the original deficient work causes damage (or a change) to other parts of the work. For example, where the builder applied a roofing membrane upside-down, resulting in a pitted area, wrinkling, separation of the membrane from the slab, and water leaks, and where a stucco wall developed cracks (not necessarily the result of the leaks), the claims against the builder did not arise from “property damage.” Where the allegations are that “the subject property was never constructed properly in the first place,” there is no property damage. Other jurisdictions have generally taken this view.
Thus, the issue of whether there is “property damage” is determined not simply by whether the property has changed, but by whether those changes are to the insured’s work and are the result of the original defective construction. A change in the property caused solely by defective construction is not “property damage.”
Damage to property other than the insured’s work, however, is “property damage.” For example, where the contractor’s defective building causes damage to carpets furnished by the owner, there is property damage. The cost to correct the faulty workmanship, however, is not property damage and is not covered.
The state and federal cases applying North Carolina law have not addressed whether the damage of one subcontractor’s work caused by another subcontractor’s work is “property damage,” in a claim against the contractor. One case, applying Virginia law, distinguished Vick on this basis, and held that such damage is “property damage.”
One case has held that where the insured’s work may have failed not due to defective workmanship, but rather due to the actions of others, then there may be “property damage.” As noted in the previous section regarding “occurrences,” this case appears to have confused issues of liability and issues of coverage. It is therefore difficult to reconcile this case with other cases, which hold that damage to the insured’s work is not property damage.
As noted in the preceding section, it is not clear the extent to which a claim for “loss of use” constitutes “property damage,” even if the property so defines "property damage.” In Prod. Sys. v. Amerisure Ins. Co., 167 N.C. App. 601 (2004), the court held that a complaint which included claims for “loss of use” were not covered because they did not constitute “property damage.” In this case, the insured was sued for improperly constructing conveyor belts, which damaged other parts of the system and necessitated repairs to the line and resulted in loss of use. As noted above, the case seems to hold that all losses arising from the insured’s improper work are not “property damage.”
Federal authority prior to Amerisure held that where the claimant sought loss of use arising from the insured’s defect work, there was property damage and the claim was covered. Other jurisdictions to address the issue of whether loss of use is “property damage” are split as to whether there must also be other damage which constitutes “property damage”; i.e., some courts hold that loss of use alone is not sufficient to establish “property damage” and thus coverage.
3. Damages
In a CGL policy, the insurer is required to pay only for the insured’s liability to pay for “damages” arising from property damage or bodily injury.
“Damages” is not defined in most policies, but is generally understood to mean “money paid or ordered to be paid as compensation for injury or loss” and “the estimated money equivalent ‘for detriment or injury sustained.’” C.D. Spangler Constr. Co. v. Industrial Crankshaft and Eng’g, Inc., 326 N.C. 133 (1990).
“Damages” does not include purely injunctive relief. Where, however, the insured must expend sums to comply with an injunctive order, those expenses are damages and are covered.
4. Legally Obligated to Pay
The policy does not require payment (i.e. “indemnity”) unless and until the insured is “legally obligated to pay” damages.
Where the claimant has settled with the insured, but has agreed to not seek recovery from the insured, there is no coverage because the insured is not legally obligated to pay damages. A further limitation is that a consent judgment does not obligate the insurer to pay, where the insurer was not a party to the action.
It should also be noted that even once there is a judgment, the insurer can raise coverage issues, and can raise fraud or collusion.
5. Whether the Damages Occurred Within the Policy Period
Most insurance policies provide a time period during which some event (e.g. an accident, property damage, or a claim) must occur in order to create coverage. Under most CGL policies, which are “occurrence-based,” the policy provides coverage only if the property damage or bodily injury occurs during the policy period (even if, e.g., suit is not filed until much later). A typical policy states, “This insurance applies to ‘bodily injury’ and ‘property damage’ only if: . . . The ‘bodily injury’ or ‘property damage’ occurs during the policy period.” See Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 300 (2000).
The typical policy language is thus clear that the date of the existence of property damage is the critical issue in determining whether a particular policy covers a loss. By way of distinction, the policy does not state or suggest that the existence of the underlying cause or defect leading to the damage, or that the discovery of the damage, is the event which “triggers” coverage. Nevertheless, cases from North Carolina and elsewhere have struggled with determining the appropriate “trigger” rule.
North Carolina generally follows the rule that the policy in effect when the property damage occurs provides coverage; this is known as the “injury-in-fact” rule. Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 303 (2000). Accord Imperial Casualty & Indem. Co. v. Radiator Specialty Co., 862 F. Supp. 1437 (E.D.N.C. 1994) (“the court has concluded that the courts of this state would not adopt the manifestation rule in asbestos-related injury cases”; policy in effect on first exposure to injury-causing conditions provides coverage). This is clearly the rule when the date of loss can be determined with certainty.
One case has held that where the construction defects that caused the water damage were built outside the policy period, then the claim is not covered. This case can be read to suggest that the triggering event is not the actual property damage, but rather the underlying construction defect which ultimately leads to the property damage. The case, however, suggests, and may be read to infer a presumption that, the property damage, consisting of leaking water, began on the date of the faulty construction. It is not clear whether the result in this case would have been different if the insured had presented evidence that the damage, consisting of leaking water, had not occurred until a later date.
In a claim for alienation of affections, there is authority that the damage does not occur at the time of the affair, but when the claimant learns of the affair. It is not clear whether the court was applying a manifestation rule, or whether it was holding that the damage did not occur until the affair was discovered.
Where the date of injury is not known, it is not clear whether North Carolina has a manifestation date of discovery, or another rule (e.g. continuous trigger). A previous case from the Court of Appeals held that “The ‘general’ rule is that, for insurance purposes, property damage ‘occurs’ when it is manifested or discovered.” West American Ins. Co. v. Tufco Flooring East, Inc., 104 N.C. App. 312, 317 (1991). Gaston Dye overruled Tufco for cases where the date of damage can be ascertained, but it did not clearly overrule the Tufco rule for cases where the date of loss cannot be ascertained.
Nevertheless, the Tufco reasoning (that property damage “occurs” upon manifestation or discovery and not upon actual injury) has been applied in other cases, leaving the validity of those holdings uncertain. Bruce-Terminix Co. v. Zurich Ins. Co., 130 N.C. App. 729, 733-734 (1998) (applying Tufco discovery rule in case against termite company; “While there may have been indications of termites in Gibson's home prior to March 1993, termite damage did not manifest itself to her, as stated in her deposition, until March 1993, and therefore, as supported by Tufco, that date is the date of discovery.”).
North Carolina has apparently rejected any notion of a “continuous trigger.” I.e., even where the property damage occurs over multiple policy periods, only the first policy’s coverage is invoked. This is true even though the insured does not discover the damage until later. Further, coverage under the first policy is provided for the entire loss. These issues were decided in Gaston Dye. The facts and holding of Gaston Dye are instructive.
In Gaston Dye, a “pressure vessel” leaked, causing damage to products being made by Sterling Pharmaceuticals on Date A (June 21, 1992). The damage continued until it was discovered on Date B (August 31, 1992). One insurer provided coverage on the date of the first injury (Date A); another insurer provided coverage on the date of subsequent injuries and on date of discovery (Date B). The Court held that only the first insurer provided coverage, as follows:
Under the insurance policies at issue in this case, coverage is triggered by "property damage" when the property damage is caused by an "occurrence" and when the property damage occurs during the policy period. The property damage alleged in this case was the contamination of sixty tons of Iohexol, a contrast media dye used for diagnostic medical imaging, valued in excess of $20 million. . . .
. . . Stated differently, the "injury-in-fact" in this case can be determined with certainty because the cause of the property damage occurred and property damage resulted on 21 June 1992. Therefore, the 1 July 1991 to 1 July 1992 policy period is triggered, even though the contamination continued until discovery of the leak on 31 August 1992. . . .
. . . [W]here the date of the injury-in-fact can be known with certainty, the insurance policy or policies on the risk on that date are triggered.
Gaston County Dyeing Machine Co. v. Northfield Ins. Co., 351 N.C. 293, 303 (2000). A prior case, applying the discovery rule, rejected a “continuous trigger” doctrine, invoking several policies for a loss. Bruce-Terminix Co. v. Zurich Ins. Co., 130 N.C. App. 729, 733-734 (1998) (“there can only be one date” of discovery).
In addition to the occurrence-based policies, some policies are “claims made” policies. They cover claims made (not accidents occurring) during the policy period.
6. Personal and Advertising Injury
Many CGL and other policies also provide coverage for “Advertising and Personal Injury.” A policy may cover “personal injury” claims defined as:
(1) false arrest, false imprisonment, wrongful eviction, wrongful detention, malicious prosecution or humiliation;
(2) libel, slander, defamation of character, invasion of rights of privacy, discrimination or violation of Civil Rights, or assault and battery;
(3) erroneous service of civil process or papers;
(4) bodily injury as hereinabove defined.
Graham v. James F. Jackson Associates, Inc., 84 N.C. App. 427, 429-430 (1987) (citing policy with these provisions). Other policies may describe the covered offenses as follows:
(a) False arrest, detention or imprisonment;
(b) Malicious prosecution;
(c) The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor;
(d) Oral or written publication of material that slanders or libels a person or organization. . . .
(e) Oral or written publication of material that violates a person's right of privacy.
Whiteville Oil Co. v. Federated Mut. Ins. Co., 889 F. Supp. 241, 245 (E.D.N.C. 1995) (citing policy with these provisions).
Under these provisions, coverage is afforded only for the enumerated claims. The courts find coverage only if the allegations match a covered offense. The covered offenses will generally be construed in accordance with recognized tort claims.
Generally there is no need for an “occurrence” in these policies. But see Henderson v. United States Fid. & Guar. Co., 346 N.C. 741 (1997) (“The Court of Appeals also held that plaintiffs' damages did not arise out of an ‘occurrence’ as required for coverage under both policies and that there is no coverage under USF&G's policy for ‘personal injury.’ We agree with the Court of Appeals' decision and affirm on these issues as well.”).
7. “Insured” and related terms
Most policies describe their coverage with respect to particular “insured.” The policy usually has a “named insured,” as indicated on the declarations page. In addition, there may be other insureds, or “additional insureds.” First party policies may refer to other parties with distinct rights, such as “loss payees.” Sometimes the application of this terminology, and determining the identity of the “insured,” is critical to determining the insurer’s obligation.
When addressing issues of the identity of the “named insured,” our courts have predictably ruled in favor of finding coverage. For example, where there are two insureds, one of whom owns a vehicle, the court may conclude that the vehicle was “not owned by the Named Insured,” where it results in coverage.
Similarly, where a policy covered “family members” of Oak Farm, which generally referred to a farm but was technically a non-existent entity, the court held that a member of the family living on the farm was insured. Stockton v. North Carolina Farm Bureau Mut. Ins. Co., 139 N.C. App. 196, disc. review denied, 352 N.C. 683 (2000).
On the other hand, where there is no ambiguity in the identity of the named insured, that term will be construed literally. For example, where the policy insures family members of the named insured, who is a corporation, there are no persons meeting this definition of insured, because a corporation does not have family members.
Many policies insure other persons as “additional insureds” or “omnibus insureds.” This can potentially raise an ambiguity when a provision refers to “the insured,” when there are multiple insureds. In one case, the Court addressed the issue of whether a wife’s claim under a HO policy for fire damage to the house was barred because her husband, also an insured, burned the house intentionally. The Court adopted the “innocent spouse” rule and held that the wife’s claim was not barred, but that she could only recover one-half of the amount remaining after payment of the mortgage.
In another case, the insurer insured a municipality its employee, who assaulted the claimant. The policy covered only claims for damages not intended by the “insured.” The insurer argued that the municipality was not entitled to coverage because its employee, also an “insured,” intended the injury. The court ruled in favor of the municipality, stating:
The language of the policy clearly provides that the expectations or intent are to be viewed from the standpoint of the insured, as opposed to that of the injured party. The City argues that because Akion was covered as an additional insured under the endorsement, the event should be viewed from his standpoint, and that because plaintiff contends Akion intentionally assaulted her, his actions were outside the coverage of the policy. We do not agree. The City is the named insured. It certainly did not expect or intend that its employees would assault a third party. As to the City, the acts of Akion were an "occurrence" under the terms of the insurance policy.
The use of the term "insured" in this context is ambiguous.
Edwards v. Akion, 52 N.C. App. 688, 692 (1981), aff’d, 304 N.C. 585 (1981). See also Newell v. Nationwide Mut. Ins. Co., 334 N.C. 391 1993 (rejecting argument that term “any person” does not include named insured).
An “additional insured” may have rights less than those of the named insured.
Conversely, in the context of first party coverage, some persons may have rights greater than the named insured. For example, a loss payee with a “mortgage” clause has benefits which are not negated by the insured’s misrepresentations to the insurer in applying for the insurance.
An ordinary loss payee clause, however, has no rights greater than the insured.
There may also be different categories of insured, with different liabilities to the insurer. For example, where a person is an “insured” only because the insurer is required to cover that person by a statute aimed at the protection of third persons, the insurer may obtain reimbursement from that insured. The insurer could not otherwise, however, seek indemnity from its insured.
8. Limits
Many policies, such as a liability policy, homeowner’s policy, or health insurance policy, have a maximum “limit” of insurance provided. Other policies, such as a life insurance policy, have a relatively fixed payment in the event of loss.
As a general rule, the insurer cannot be liable to the insured (or the claimant) for more than its policy limit. The limits are not applicable, however, to “extra-contractual” exposure, addressed in Section IV.
Some policies have a “per person,” “per occurrence,” or “aggregate” limit, and have different limits for different coverages. These are ideally clearly stated in the policy, but may sometimes be noted in industry terminology.
Policies may also have a “deductible,” which may be denominated a “self insured retention.”
In some cases the court must determine the number of occurrences, either for determining the amount to be paid per occurrence, or to determine the number of applicable deductibles. For example, where an employee embezzles funds by writing multiple checks, this may constitute only one “occurrence,” significantly limiting the amount recoverable by the insured. Where the insured is an automobile accident involving several impacts occurring in rapid succession, he is subject to only one deductible.
B. Exclusions
If there are one or more claims which meet the basic criteria for coverage (e.g. an “occurrence” resulting in “property damage” resulting in the damages which the insured is legally obligated to pay), then the insurer may nevertheless not have to pay the claim if there is an applicable exclusion.
Most policies have a series of exclusions for various conditions or causes of the loss. In general, the courts will uphold exclusions.
Exclusions are generally construed very narrowly, as opposed to coverage terms which are construed broadly. As stated by one court:
Those provisions in an insurance policy which extend coverage to the insured must be construed liberally so as to afford coverage whenever possible by reasonable construction. However, the converse is true when interpreting the exclusionary provisions of a policy; exclusionary provisions are not favored and, if ambiguous, will be construed against the insurer and in favor of the insured.
North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697, 700 (1992).
In State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 536 (1986), the injured party (tort victim) began to exit the truck, and insured’s hand came in contact with the rifle in the vehicle and it discharged, causing a bullet to strike the victim in the leg. The HO policy excluded injury “arising out of the ownership, maintenance, use, loading or unloading of” a vehicle owned by the insured. The automobile policy provided coverage only to liability arising out of the use of an automobile. The Court held that both policies provided coverage, stating:
[E]ven when language in two insurance policies is similar, the rules of construction applied to an exclusionary clause are substantially different from the rules of construction applied to a coverage clause. Exclusionary clauses are interpreted narrowly while coverage clauses are interpreted broadly to provide the greatest possible protection to the insured. Since the terms of the policy must be construed against the insurance company, the same language in two different policies can have different meanings.
State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 543 (1986) (under HO policy, claim did not arise out of use of automobile; under auto policy, claim arose from use of vehicle).
Numerous cases construe exclusionary provisions narrowly.
In order for an exclusion to bar coverage, it must be a proximate cause of the injuries. Further, an exclusion which negates coverage for damage “arising out of” a given event applies only if there is no other proximate cause of the damage. One case addressed a provision excluding injuries arising out of the use of an automobile, and held that “the ambiguous 'arising out of' language in a homeowner’s policy exclusion is one of proximate cause." State Capital, 318 N.C. at 547, 350 S.E.2d at 74. The Court further held that the exclusionary language "should be interpreted as excluding accidents for which the sole proximate cause involves the use of an automobile. If there is any non-automobile proximate cause, then the automobile use exclusion does not apply." In State Capital, the claimant was injured by a gun which accidentally discharged from a vehicle, and the court held that the exclusion did not apply.
Where several proximate causes of an injury all arise out of an excluded activity, the exclusion applies. A claim for negligent hiring arising from an automobile accident is excluded. Even though the focus of the claim is negligent hiring, the damage arises out of the use of an automobile.
1. Intentional Act Exclusion
Most policies have some sort of “intentional acts” exclusion. This exclusion is rooted in the idea that insurance is designed to cover “risks,” or contingencies, as opposed to liability directly within the control of the insured. This exclusion typically states that the policy does not cover “bodily injury or property damage . . . which is expected or intended by the insured.”
Examples of conduct triggering this exclusion are:
Homeowner's intentional act of concealing a video camera in his bathroom and filming the claimant.
Termination from employment.
Firing multiple shots from a rifle at night in the direction of a prowler who is approximately fifty feet away.
Sexual harassment against an employee.
Assault done in self defense.

The claimant cannot create coverage by denominating intentional conduct as “negligence.”

Where the insured intends the injury, the exclusion applies. A more difficult situation is presented if a person other than the insured seeking coverage intended the injury. Even if the policy states that the exclusion is to be determined from the standpoint of the “insured,” there may be multiple insureds for a particular event. In such a case, the court should determine coverage based on the perspective of the person seeking coverage. Thus, an assailant is not covered for his assault, but his employer may be covered for the same assault.

In some policies, coverage is limited to an “accident resulting in bodily injury or property damage neither intended nor expected from the standpoint of the insured.” This coverage language embodies language similar to the “intentional acts exclusion.” For all practical purposes, this definition of “occurrence” has the same effect as the intentional acts exclusion with respect to precluding coverage for damages caused intentionally by the insured.

Within the personal and advertising injury coverages, the intentional acts exclusions are sometimes held ambiguous and unenforceable.

Other policies have a similar exclusion for person injury “Caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’” These are probably likewise not enforceable in a personal injury policy.

Many CGL policies have exclusions for “’Property damage’ to Personal property in your care, custody or control.”

These provisions are narrowly construed. Two cases have held that this language is unenforceable, and that it applies only if the insured is in sole possession of the property. One of these cases further holds that the provision applies only if the insured is in sole possession of the property. There are, however, cases which uphold these provisions, and which do not require that the property be in the sole possession of the insured.

The CGL policy typically excludes property damage to “That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the ‘property damage’ arises out of those operations.”

The critical issues for this exclusion are that it applies only to “real property” and that it applies only to damage which occurs during work (“operations”) of the insured or its subcontractor. The word “performing” connotes ongoing activity. Further, the exclusion is limited to “that particular part” of the real property where these operations are ongoing. North Carolina has no cases addressing these provisions.

Where the damage occurs contemporaneously with construction, the exclusion applies. Where the damage occurs after the work is complete, then the exclusion does not apply.

Cases from other jurisdictions have struggled with determining whether the damage to the real property occurred to “that particular part” of the property where the operations were occurring.

Many cases from other jurisdictions have used this exclusion to exclude claims for defective construction.

There is some law from another jurisdiction to the effect that where the work is done by a subcontractor hired by the owner, over which sub the insured has no control, the exclusion is inapplicable.

Some policies, including the CGL policy, have several exclusions which are often referred to as “business risk” exclusions. There are several ideas behind these related exclusions. Some are premised on the notion that some risks should remain with the insured, especially those that are inherent to the insured’s business or are due to factors within the insured’s control. Some are premised on the availability of other insurance better designed to cover the risk (e.g. an inland marine policy, or a builder’s risk policy).

In Western World Ins. Co. v. Carrington, 90 N.C. App. 520 (1988), the court faced an exclusion for “to property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” The insured had been sued for costs incurred in replacing an allegedly defective waterproofing system installed by the insured. Regarding this provision, the court said:

Exclusion (o) is one of several "work product" exclusions found in standardized liability insurance policies. Since the quality of the insured's work is a "business risk" which is solely within his own control, liability insurance generally does not provide coverage for claims arising out of the failure of the insured's product or work to meet the quality or specifications for which the insured may be liable as a matter of contract. The cases interpreting this kind of exclusion recognize, as we do, that liability insurance policies are not intended to be performance bonds. Consequently, courts have uniformly held that the language of exclusion (o) excludes damages sought for the cost of repairing or replacing the insured's own work or product. Here, the record shows that the damages sought against Carrington are those costs incurred in replacing his allegedly defective waterproofing system with an effective waterproofing system. Therefore, the claim is excluded from the policy's coverage.

Defendants contend that exclusion (o) does not apply and cite several cases, . . . . All of the cases cited by defendants, however, are readily distinguishable since they involve claims for damages other than costs for repairing or replacing the insured's defective work or product. . . . The exclusion has also been held inapplicable where the damages sought are for diminution in value of the property or product of which the insured's work or product is merely a part.

In all of those cases, the damages claimed were for damage to property other than that of the insured, which was caused either by the defective work or product, or the need to repair or replace that work or product. In this case, from the record before us it is clear that Clancy & Theys is not seeking damages for diminution in the structure's value, or costs for repairing the creaking in the concrete, or costs for any damage to its own property caused by the allegedly defective waterproofing. Clancy & Theys' only claim is for costs incurred in substituting or replacing the protective functions which Carrington's original waterproofing work should have provided. The damages sought are solely for bringing the quality of the insured's work up to the standard bargained for. Consequently, the policy provides no coverage for the claim.

The courts tend to recognize that the CGL and other liability policies are not intended to cover merely defective work as that is a “business risk”; they do, however, tend to cover resulting damages.

Our Supreme Court faced an exclusion for “faulty work you performed” in a garage policy in Barbee v. Hartford Mut. Ins. Co., 330 N.C. 100 (1991), in which the insured was sued for damage to a car engine caused by insured’s mechanic’s error in dropping a spark plug in a cylinder. The court held that the claim was excluded by the exclusion.

The general thrust of cases from other jurisdictions is, in accordance with Western World, that resulting damage is covered, but the defects in the insured’s work are not covered. The Barbee case is obviously to the contrary, but may be limited to an exclusion for “faulty work,” which typically does not appear in a CGL policy.

At least one case, in a different context, has seemingly rejected the distinction between the insured’s work and resulting damage.

The following sections address specific “business risk” exclusions which appear in many modern CGL policies.

Most CGL policies also exclude property damage to “That particular part of any property that must be restored, repaired or replaced because ‘your work’ was incorrectly performed on it.” Pursuant to the policy, this exclusion generally “does not apply to ‘property damage’ included in the ‘products-completed operations hazard.’"

Understanding this exclusion requires an analysis of several terms. The phrase “your work” is typically defined as “any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by (1) you; (2) others trading under your name; or (3) a person or organization whose business or assets you have acquired.” The term “products-completed operations hazard” (or “PCOH”) is typically defined as: “includes all ‘bodily injury’ and ‘property damage’ occurring away from premises you own or rent and arising out of ‘your product’ or ‘your work’ except (1) products that are still in your physical possession ; or (2) work that has not yet been completed or abandoned. . . . .”

Thus, the thrust of this exclusion is that where the insured’s incorrect work, during operations, causes damage to the property on which the insured worked, the damage is excluded. If the damage occurs after the operations are completed, then this exclusion does not apply, but other exclusions may apply.

A similar exclusion was addressed in Western World Ins. Co. v. Carrington, 90 N.C. App. 520 (1988), for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” The Western World court held that pursuant to this provision, a claim to repair defective construction by the insured is excluded.

Where the language of the exclusion expressly excludes repairs due to faulty workmanship “by or on behalf of” the insured, the exclusion applies to work done by a sub-contractor. Where the policy does not have this language, then it is not clear in North Carolina whether the work of a subcontractor is “your work,” and thus whether this exclusion applies. A federal case holds that the “insured’s product” includes the product of a subcontractor, and hence this lends support to the argument that the work of a contractor-insured is “your work.”

If this exclusion is inapplicable because the damages are included in the PCOH, then this provision does not create coverage. If the damages are included in the PCOH, then it simply means that this exclusion is inapplicable; the court must look for the other coverage terms, and look at the other exclusions.

Cases from other jurisdictions have held that this exclusion does not apply where the insured’s building causes damage to other portions of the building after completion.

Many CGL policies have exclusions for "’Property damage’ to ‘your product’ arising out of it or any part of it.”

North Carolina does not have any cases applying this exclusion. The exclusion from Western World was similar, but pertained to “work” and not a “product.” Nevertheless, Western World Ins. Co. v. Carrington, 90 N.C. App. 520 (1988) should generally indicate that damages arising solely from damages to the insured’s product are excluded.

For the purpose of this exclusion, a federal court has held that a building is a “product.”

For this exclusion, the product of a sub-contractor is deemed to be the work of the contractor. Other jurisdictions have held that the entire building is the insured’s product, even if he used subcontractors. Thus, damage to one part of the structure caused by a defect in another part of the structure is not covered, even if the work is done by subcontractors.

Other jurisdictions have generally construed this exclusion to exclude a claim for the cost of repairing the defective work itself. The exclusion does not, however, apply to claims for resulting damage.

The CLG policy typically has an exclusion for “’Property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘Products-Completed Operations hazard.’ This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.”

This exclusion is similar to the exclusion addressed in Western World Ins. Co. v. Carrington, 90 N.C. App. 520 (1988), for “property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof, or out of materials, parts or equipment furnished in connection therewith.” The Western World court held that pursuant to this provision, a claim to repair defective construction by the insured is excluded. The Western World exclusion, however, did not have the exception for the work of a subcontractor.

The thrust of this exclusion is thus that damage to the insured’s work (and not a sub-contractor’s work) arising out of the insured’s work (and not a sub-contractor’s work), occurring after operations are completed, is excluded. Thus, for example, if the insured is a roofer who fails to properly flash the roof, and the roof leaks after construction resulting in water damage to the roof (e.g. sheathing), then the damage to the roof is excluded.

This exclusion excludes claims are based solely on repairing faulty workmanship. Where the insured erects a building with a defective roof (resulting in leaks) and with a stucco wall that cracks, the claims against the builder for repairing the roof and cracks is excluded by this provision.

This exclusion has been held to not apply if the true cause of the property damage is in doubt (i.e. if another sub-contractor’s errors may have caused the damage). As discussed in other sections, the precedential value of this case is not clear.

Cases from other jurisdictions are in conflict as to whether this exclusion essentially creates coverage for damage caused by the defective work of a sub-contractor.

Many cases hold that exclusion l. does not create coverage, where it does not otherwise exist. Some cases, however, seem to construe exclusion l as creating coverage for a sub-contractor’s defective work, as long as there is an occurrence and “property damage.” Several cases have followed these cases, seemingly allowing broad coverage for a sub-contractor’s defective work.

Cases from other jurisdictions generally hold that this exclusion applies to claims against the contractor for defective construction, at least for the cost of repairing the defective work.

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work", or

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms. (Exclusion m).

The term "impaired property" is defined as follows:

"Impaired property" means tangible property, other than "your product" or "your work", that cannot be used or is less useful because:

a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement;

if such property can be restored to use by:

a. The repair, replacement, adjustment or removal of "your product" or "your work"; or

b. Your fulfilling the terms of the contract or agreement.