Subsequent Litigation

Estes’s widow, individually and as a representative of her late husband’s estate (collectively, the Estate), filed a wrongful death suit against Ortez, including allegations of “reckless, willful, and wanton conduct.” She did not, however, name Kitchen and Lighting as a defendant. Ortez did not request a defense from either Kitchen and Lighting or Penn National. The trial court found Ortez partially liable for Estes’s death. The Estate subsequently filed a motion for summary judgment regarding damages, serving a copy on both Ortez and Penn National.

One Friday shortly before a hearing on the damages, the Estate offered to settle with Penn National as follows: the Estate would not enforce the judgment against Ortez in exchange for a $30,000 check delivered no later than 3 p.m. on Monday, the day before the hearing. Penn National accepted the settlement but informed the Estate that the check could not be delivered until Tuesday morning, less than 24 hours after the requested date. The settlement offer was immediately withdrawn. The hearing on damages was held as scheduled, and the court awarded damages against Ortez to the tune of $9.5 million, plus interest and costs.

Ortez and the Estate sued Penn National, claiming the insurer had breached both the duty of defense and the duty of settlement. The suit also alleged Penn National had violated the state Unfair and Deceptive Trade Practices Act.

Ortez sought judgment on the pleadings from the trial court. His motion was granted, and Penn National was ordered to compensate Ortez for more than $9.65 million. The trial court took it one step further and ordered treble damages in favor of Ortez, which added up to almost $29 million. Penn National appealed.

Fellow Employee Exclusion

An insurer’s duty to defend its insureds against a lawsuit is only triggered when a complaint alleges facts that could lead to coverage. The insuring agreement in the Penn National policy stated the insurer would cover damages arising out of an accident involving an insured auto, with a specific exclusion for injuries inflicted on one employee by a co-employee when the injurious actions “ar[ose] out of and in the course of the fellow ‘employee's’ employment or while performing” tasks related to the employment (the fellow employee exclusion).

Since Ortez was driving an auto specifically insured by the Penn National at the time of injury, there wasn’t a question of his status as an “insured” within the meaning of his employer’s commercial auto policy. However, Penn National argued the Estate’s lawsuit specifically stated it was bringing a Pleasant claim against Ortez. Under the rule of Pleasant v. Johnson, 325 S.E.2d 244 (N.C. 1985), an employee who was injured by the “willful, wanton and reckless negligence” of a fellow employee could both receive workers compensation benefits and recover from the tortfeasor co-employee in a separate lawsuit. Since a Pleasant claim was, by definition, a suit filed between employees, it was precluded by the fellow employee exclusion in the Penn National policy.

The court agreed. The judges stated the fellow employee exclusion was meant to protect employers and insurers from liability for claims involving “extreme recklessness or willful misconduct” by otherwise covered employees. North Carolina workers compensation law may cover injuries due to “the ordinary negligence of a co-employee,” but it did not extend to the “willful, wanton and reckless negligence” inherent to a Pleasant claim.

Duty to Settle and Unfair Trade Practices

Regarding the “duty to settle” and Penn National’s alleged violation of the North Carolina Unfair Trade Practices Act for breaching that duty, there wasn’t one. Both the Penn National policy and state law allowed insurers the right to settle, which Ortez and the Estate had conflated with a duty to settle. Under Alford v. Textile Ins. Co., 103 S.E.2d 8 (N.C. 1958), an insurer "owes a duty to its insured to act deligently [sic] and in good faith in effecting settlements within policy limits, and if necessary to accomplish that purpose, to pay the full amount of the policy” (emphasis added).

Acting diligently and in good faith did not necessarily require Penn National to fulfill or even accept any settlement according to the terms on which it was offered. The court pointed out that Penn National had actually agreed to pay the $30,000 settlement offer from the Estate, albeit one day later than requested. When Penn National said it could deliver the requested check for the requested amount Tuesday, rather than Monday, the settlement offer was withdrawn.

The judges noted that the settlement offer had been received during the work day on Friday, and the Estate had demanded the payment be made by 3 p.m. on the coming Monday; when considering the weekend, the Estate had requested payment be made within roughly one business day of the demand. According to the court, Penn National “asking for a one-day extension to deliver payment to a demanded less-than-one-business-day turnaround” (emphasis added) did not amount to a breach of Penn National’s duty to act in good faith when negotiating a settlement.

Conclusion

The appellate court agreed with Penn National. The suit against Ortez was precluded by the “fellow employee” exclusion; the company’s request for one extra business day to fulfill the Estate’s settlement demand did not amount to a violation of North Carolina unfair trade practices law. The trial court’s verdict was reversed.

Editor’s Note: When exercising its right to settle, an insurer is required to balance its own interests with those of the insured on whose behalf settlement is sought. However, if an insurer were required to conduct a settlement between two of its own insureds, the very exercise of the right to settle would force the insurer to act contrary to the interests of an insured.

As stated above, there was no question that Ortez was an “insured” within the meaning of his employer’s commercial auto policy because he was driving an auto covered by the policy at the time of the accident. The suit that had been filed against Ortez had been filed by the Estate of his co-worker, who would also be considered an “insured” under the Penn National policy because he was riding in a covered auto at the time of the accident. If Penn National were required to mount a defense for Ortez, then it would have to act against the Estate’s interest in order to fulfill its duty to Ortez.

Read More:

Duty to Defend Not Triggered in Absence of Potential Covered Claims

Business Auto Coverage Form - Liability Coverage

Workers Comp and Wrongful Death Claim