AUTO POLICY BASICS AND SUBSTANTIVE AUTO LIABILITY COVERAGE

Copyright ) 2000 J. DAVID STRADLEY

RALEIGH, NORTH CAROLINA

Intradocument Links
I. Introduction
II. Insurance Basics
III. Finding Auto Liability Coverage: Persons Insured
IV. Finding Coverage: Is The Activity Covered
V. What To Do With The Coverage Once You Find It
VI. A Couple of Tidbits On The Financial Responsibility Act
VII. Miscellaneous Topics
VIII. Conclusion

I. Introduction

A. Why start with Auto Liability Insurance?

Personal injury plaintiffs attorneys deal with auto liability insurance far more frequently than any other type of insurance. Since auto cases make up a large part of most personal injury practice, and since North Carolina requires liability insurance, auto liability insurance can scarcely be avoided. Additionally, many concepts from auto liability insurance are common to other types of insurance. Thus, it makes sense to start any introductory insurance seminar with auto liability insurance.

B. Why is Auto Liability Coverage important to my practice and my clients?

The first reason Auto Liability Coverage matters is obvious: this insurance pays your clients damages. In the absence of liability coverage and uninsured motorist coverage, your clients damages will go uncompensated.

The second reason may not be as clear. Say you have a client who is severely injured, but who has plenty of uninsured (UM) and underinsured (UIM) motorist coverage. You may be inclined not to care how much liability coverage the tortfeasor has. However, this is a mistake because the underinsured carrier will get a credit for all the liability coverage, whether you collect the liability money or not. Thus, it is important to explore the issue of liability coverage, even when there are additional sources of compensation for your client.

II. Insurance Basics

Before diving into auto liability coverage headlong, lets look at some basic terms and concepts which arise frequently in insurance law and policies generally.

A. Vocabulary

First some vocabulary terms you probably didnt learn in law school. The importance of these terms may not be obvious; however, it will become clear as we go along. This is certainly not an exhaustive list of important terms, but here are few key terms:

1. Declarations Page

This is the page (usually computer generated) attached to the front of the pre-printed policy which contains the name and address of the insurance company, the name of the named insured and lists the coverage provided and the deductibles and policy limits for each type of coverage.

2. Named insured

The named insured is the person to whom the policy is issued. This person, firm, corporation, etc. is always listed on the declarations page. The named insured is not the only person insured by the policy; however, frequently the term insured (see infra) is defined in terms of some relation to the named insured. In personal auto policies, the named insured is almost always the registered owner of the vehicle or vehicles on which the policy is issued.

3. Insured

This is the key term for all insurance policies. Only persons within a policys definition of insured are entitled to coverage under that policy. In the case of auto liability coverage, your client can only collect damages under a policy if the person or persons liable for your clients damages is within the definition of insured.

4. Statutory Coverage

In North Carolina, some types of insurance are required by statute. Auto liability insurance is one of these types of insurance. The fact that a particular type of insurance is statutory means two important things. First, everyone within the purview of the statute is required to have the coverage. Second, the statute is written into the policy, i.e., the language of the statute will be read into the policy by a court interpreting the policy. Any language in the policy which is inconsistent with the statute will be stricken.

5. Primary and Excess Coverage

Where more than one policy applies to a given situation, one must determine which policy pays first. The policy that pays first is the primary policy. All other policies are excess.

6. Resident

The term resident might seem an odd term to be defined in an insurance paper; however, resident often forms a key part of the definition of insured, as where all resident relatives of the named insured are covered. In general, a resident of a household is a person who lives there regularly, at least part of the time, and intends to continue doing so, at least for the time being. It is important to remember that a person can have more than one residence. Key examples are children of separated or divorced parents who have a joint custody arrangement and children away at college or in the military.

7. Relative

This term is defined by the basic personal auto policy. It means a person related by blood or marriage to the named insured or his spouse. Thus, the named insureds wifes third cousin once removed is a relative.

B. Basic tenets of construction for insurance policies

A very few words on policy interpretation are appropriate at the beginning of our examination of liability insurance. Much of the coverage litigation is decided based on these three rules.

1. Provisions expanding coverage are construed liberally and exclusions are construed narrowly.

Since insurance companies draft policies, the courts take the view that the policy will generally be construed against the insurer. Thus, provisions which grant or extend coverage are construed broadly. State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 78 N.C. App. 542, 337 S.E.2d 866 (1985). Conversely, provisions excluding coverage are construed narrowly against the insurer. Id.

2. Defined terms are given the defined meaning.

If a term is given a special definition in an insurance policy, and the meaning of the term is not ambiguous, see infra, the term will be given its defined meaning by a court interpreting the policy. Nationwide Mut. Ins. Co. v. Mabe, 342 N.C. 482, 467 S.E.2d 34 (1996). This is true even if the defined term has a different meaning in ordinary usage. Id.

3. Undefined terms given ordinary usage.

If no definition is provided for a term within the policy, the term will be given its ordinary usage. Basically, this means a court will consult the dictionary regarding the meaning of terms not specifically defined in the policy. Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 172 S.E.2d 518 (1970)

4. Ambiguities are construed against the insurance company.

If a policy is ambiguous, it will be construed against the insurer. Henderson v. U.S. Fidelity & Guar. Co., 346 N.C. 741, 488 S.E.2d 234 (1997). A policy is ambiguous where the language is fairly and reasonably susceptible to either of the constructions for which the parties contend. Id. There is no requirement that the plaintiff demonstrate that she relied on the meaning for which she argues.

C. Analysis of a coverage problem

Before looking at liability insurance in particular, it may be helpful to state a general framework for analysis of insurance issues. Generally, coverage questions can be analyzed in the same basic framework. While particular issues within that framework can be thorny, the basic analysis consists of just a few steps:

1. Is the tortfeasor covered?

In all liability policies, whether auto, homeowners, professional liability, commercial liability, etc., the insurer agrees to pay damages for which an insured becomes legally liable or some language to this effect. Thus, it is of paramount importance to find out if the person whom you have sued is an insured. This question is generally answered by answering the following two questions:

(a) Was tortfeasor engaged in a covered activity? and

(b) Is tortfeasor a covered individual/entity?

a) Was tortfeasor engaged in a covered activity?

Generally, each policy only covers certain types of injuries and activities. Personal auto policies cover damages which result from an auto accident. Thus, they dont cover airplane crashes. Professional liability policies cover professional negligence, but they dont cover sexual harassment.

Further, all policies are limited in the time they cover. The period covered or the policy period is stated on the declarations page of the policy. Occurrence policies cover all incidents of the covered type which occur during the policy period. Claims made policies cover claims which are first made or reported during the policy period. The North Carolina Personal Auto Policy is an Occurrence policy.

b) Is tortfeasor a covered individual/entity?

The answer to this question is determined by whether the tortfeasor falls within the definition of an insured under the policy. The policy with go into substantial detail in defining who is an insured.

2. Does an exclusion apply?

Once the policy has stated in general terms what is covered, it will invariably turn around and exclude certain things from coverage. These are the exclusions. Obviously, to get coverage, you want your situation to be within the general statement of what is covered, but not within an exclusion.

3. Is there an exception to the exclusion?

Sometimes, after taking coverage away (in an exclusion) the insurer will turn right back around and give the coverage back in an exception to the exclusion. Thus, if your facts fall squarely within an exclusion, you need to see if you can get them to squeeze inside an exception in order to get coverage.

III. Finding Auto Liability Coverage: Persons Insured

Now that we have looked at a few insurance basics, lets turn to the task of finding auto liability coverage. There are a number of likely sources of auto liability insurance. We will examine each in turn.

A. The car involved: lawful possession or reasonable belief.

If the car the tortfeasor was driving was insured at the time of the accident, the policy covering that car will generally provide coverage. The only exception will be if some exclusion applies based on the activity in which the tortfeasor was involved at the time of the accident. See infra. The policy on the vehicle involved will almost always be the primary coverage.

In order for a personal auto policy to provide any coverage, the tortfeasor must have, at a minimum, had lawful possession of the car.

1. Lawful possession

In order for the policy on the car the tortfeasor was operating to provide any coverage, the tortfeasor must have been in lawful possession of the car. Lawful possession essentially means that the car was not stolen. However, the lawful possession requirement is written into the policy by the insurance statute, N.C. Gen. Stat. ' 20-179.21(b)(2). Thus, it applies only up to the insurance required by the statute. N.C. Gen. Stat. ' 20-279.21(g). Thus, showing that the tortfeasor was in lawful possession only gets you limits of $30,000 per person/$60,000 per accident.

2. Reasonable belief

The standard auto policy language states that there is no coverage for any person operating a vehicle without a reasonable belief that he was entitled to do so. Thus, so long as you can show that the tortfeasor had a reasonable belief that he was entitled to use the vehicle, you have access to the full limits of the policy, whatever those may be.

B. The tortfeasor and his relatives: the family owned exclusion

Some attorneys only look for liability coverage on the car involved in the accident. If this is your practice, you can miss a policy. That is to say, you can settle a claim and your client will get less money than she deserved because you didnt look in all the right places. Where the tortfeasor is not the registered owner of the vehicle, you need to look to the following sources for coverage:

1. The tortfeasor and his spouse.

If the tortfeasor or his spouse owns a vehicle which has liability insurance, he has coverage. This is because the named insured and his spouse are insured under that policy for any vehicle, not just the vehicle listed on the policy. However, see the Family Owned Auto Exclusion below.

Example: Don Driver is driving Otis Owners car when he negligently runs over Paul Pedestrian. Pedestrian sues Driver. Driver has his own car with its own liability policy. Driver is covered by both the policy on his vehicle and the policy on Owners vehicle.

2. The tortfeasors relatives who live with him.

The standard auto policy also provides that all relatives of the named insured or his spouse who live in the same household as the named insured are covered as well. Example: John Doe, Jr. lives with his parents John, Sr. and Jane Doe. John, Sr. owns a car which is insured with State Farm with John, Sr. as the named insured. John, Jr. goes to a party with Lewis Lush, in Lewiss car. Lewiss care is insured by Allstate. When it comes time to leave, Lewis is too drunk to drive, so has asks John, Jr. to drive, and John, Jr. agrees. Unfortunately, John, Jr. rear-ends Polly Pegram on the way home. Pegram sues. Is John, Jr. covered by the Allstate policy, the State Farm policy, or both? Answer: Both policies. John, Jr. is covered by Lewiss policy because it covers any person operating Lewiss car with permission (which John, Jr. clearly had). John, Jr. is covered by his parents policy with State Farm because he is related to his parents by blood and he lives in their household.

3. The Family Owned Auto Exclusion: the exception to the rule.

There is an exception to the rule we have been examining: it is the Family Owned Auto Exclusion. This exclusion is written into liability, UM and UIM policies. However, it is only valid in liability policies, so this is the only context in which you have to worry about it.

The exclusion is easier to understand if you understand its purpose. The purpose is to prevent a person who owns several cars from insuring only one car and getting insurance on all of his cars. Here is how it works. Generally, liability policies cover the named insured and his resident relatives for any vehicle. If this were not limited in some way, a person who owned several vehicles could insure only one vehicle (and pay a premium for only one vehicle) and have coverage for himself and his resident relative for all of her vehicles. This is clearly unfair to the insurer.

To prevent this abuse, insurers have inserted the Family-Owned Auto Exclusion. The exclusion has two parts. One part applies to the named insured and his spouse. The other applies to family members of the named insured and his spouse who live with them.

As to the named insured and her spouse, they are not insured for any vehicle which either of them owns which is not listed on the declarations page. In other words, the named insured and spouse are covered for all vehicles, except vehicles they own which are not listed on the policy.

For example, take John and Jane Doe, husband and wife, who own a Lumina, an Ford Pickup, and a Jeep. The Lumina and the Ford Pickup are insured with State Farm on one policy. The Jeep is insured with Integon. Jane is the named insured on both policies. Jane wrecks the Jeep by running over Billy Pye, a pedestrian, injuring Pye severely. Question: Is Jane covered by both the State Farm and the Integon policy or just the Integon policy? Answer: Just the Integon policy. Reason: Family-Owned Auto Exclusion is valid; State Farm didnt get a premium for the Jeep, so it is unfair to make State Farm provide coverage for the Jeep.

Now on to the second part of the family owned auto exclusion. As to resident relatives of the named insured or his spouse, the policy is a bit more restrictive. Such an individual is not covered for any vehicle not listed on the policy owned by (a) him; (b) the named insured or her spouse; or (c) any resident relative of the named insured or her spouse. Thus, to return to the Does, suppose John and Jane have a son, Igor, who owns a Neon, which is not insured. Igor, while driving the Neon under the influence of alcohol, crossed the center line and kills Boris Patterson. Boriss estate sues.

Question 1: Is Igor covered by either the State Farm or Integon policies?

Answer: No. Igor is a resident family member of a named insured. He is not covered for a vehicle owned by him which is not listed on the policy.

Question 2: Suppose Jane had been the negligent driver of the Neon instead of Igor. Is she covered by either the State Farm or the Integon policy?

Answer: Jane is covered by both policies. She is covered for any vehicle, so long as neither she nor her spouse owns the vehicle.

Still dealing with the Doe family, now suppose Igor was driving a Gremlin owned by his brother Earl. Earl also lives with John and Jane. The Gremlin is insured by Nationwide. Igor negligently wrecks the Gremlin, killing Paul Passenger. Passenger sues. Which policies cover Igor?

Answer: Only the Nationwide policy (the policy on the Gremlin). Under the family owned exclusion, the State Farm and Integon policies do not provide coverage for autos owned by relatives which autos are not listed on the policy.

C. Beyond the tortfeasor and the car he was driving: Agency

1. Employers

When you have a case where the damages exceed the coverage on the vehicle, you always want to explore the issue of the defendants employment. This is important for two reasons. The more obvious reason is that the employer may be liable on an agency (respondeat superior) theory. If the employee was about his employers business at the time of the wreck, the employer should be liable on an agency theory.

The second reason to inquire about the tortfeasors employment is that the employers policy may provide coverage for the employees vehicle. This occurs primarily where the tortfeasor is an owner, officer, or high-level executive of the company. Often, the commercial policy will afford coverage for these individuals, whether they are working or not. While you may not come across this type of policy frequently, youve hit the jackpot when you do.

2. Other agency

Agency doesnt just occur in the employment context. The most frequent non-employment agent is the volunteer for a civic organization. Many clubs have commercial policies which protect their members from liability while involved in club activities.

3. Suing the owner of the vehicle the defendant was driving: A word to the wise.

Where the defendant driver is not the owner of the vehicle involved, most plaintiffs attorneys, as a matter of course, sue the owner of the vehicle. The theory of liability against the owner is agency, i.e., the driver is the owners agent. However, that means that the owner is not liable unless the plaintiff establishes that the driver is the agent of the owner. See Duckworth v. Metcalf, 268 N.C. 340, 150 S.E.2d 485 (1966). The plaintiff has the burden of proof on the issue of agency. Id. Agency can be established via the family purpose doctrine. Additionally, the plaintiff is assisted by N.C. Gen. Stat. ' 20-71.1 which provides that proof of ownership is prima facie proof of agency. Nonetheless, in the face of uncontradicted evidence from the owner that the defendant was not his agent, summary judgment or a directed verdict for the owner on the issue of agency may be appropriate. See Taylor v. Parks, 254 N.C. 266, 118 S.E.2d 779 (1961), Manning v. State Farm Mut. Auto. Ins. Co., 243 F.Supp. 619 (W.D.N.C. 1965).

I mention this because of an incident I witnessed with my own eyes at calendar call one Monday morning. Plaintiff had sued Defendant Driver and Defendant Owner. For some reason, Defendant Driver was never served with the summons and complaint nor was his deposition taken. The case was called for trial and Owners attorney advises the court that his motion for summary judgment on the issue of agency needed to be heard and should dispose of the case. According to Owners attorney, Driver and Owner were friends and Driver had borrowed Owners car. Owner submitted an affidavit stating that Driver was on a purely personal mission when the accident occurred. Plaintiffs attorney, oblivious to the fact that he was in the middle of a malpractice moment, had nothing to say, other than that Defendant Owner owned the vehicle. I didnt stick around to see what the judge did, but he seemed to be disposed to grant summary judgment for Owner.

The plaintiffs attorney went astray by confusing the requisites for coverage with the requisites for liability. To have coverage, the plaintiff merely needed to show permissive use. However, coverage merely entitles the plaintiff to paid on the judgment by the insurance company. Since the driver was never served, not judgment could be entered against him. Thus, the plaintiffs attorney then had to prove that the owner was liable for the acts of the driver. For this, the plaintiff had to show agency, not just permissive use. While he could prove permissive use, his evidence on agency was limited to the N.C. Gen. Stat. ' 20-71.1 presumption. This may not have been enough to survive summary judgment and almost surely was insufficient to survive a directed verdict motion.

The moral of the story is always sue and serve the driver. Dont let your liability case hang by the slender thread of agency. If agency turns out to be clear, and there is a compelling reason to drop the driver from the suit, you can always do that later.

D. Umbrella policies

The tortfeasor may be covered by an umbrella policy. An umbrella policy is essentially an excess insurance policy which takes up paying when the underlying primary policy is exhausted. In general, only people with a fair amount of assets to protect will invest in umbrella policies. Also, as a general rule, insurers will not write umbrella policies unless the underlying liability policy has limits of at least $100,000 per person/$300,000 per accident. Also, many small businesses will have policies, in the nature of umbrella policies, which insure the principals of the business and the principals immediate families.

A word to the wise about umbrella policies: Often, insurers are less than eager to tell you that there is an umbrella policy. In a big case, they may try to get you to settle for their liability limits, without accessing the umbrella coverage. If your case is big enough and you think the defendant may have an umbrella policy, you probably will have to file suit and depose the defendant to find out whether there is an umbrella.

E. When to stop looking

So youve looked for liability insurance on the car the tortfeasor was driving and you have found no coverage or very little coverage. When can you stop looking?

Unfortunately, there is no hard and fast rule. This question must be answered case by case. You have to balance the likelihood that you will find additional coverage and collect it against the costs and delays caused by the continuing search for coverage. Thus, in a case which you value at $30,000, where the defendant was driving his own car which had $25,000 of coverage, you can probably safely settle the case for $25,000 when it is tendered. At the opposite extreme, where your client crippled when she is hit by a drunk doctor driving his attorney-friends car, you probably dont want to settle for the $100,000 policy limits on the car.

IV. Finding Coverage: Is the activity covered?

Equally as important as whether a person is insured is whether the activity in which the person was engaged is covered. In general, the personal auto policy covers the ownership, maintenance or use of an automobile. But just what does that mean?

A. Kinds of vehicles.

First of all, what is an automobile? This will vary depending on whether the policy is a personal auto policy or some other type, e.g., business. Under the standard personal auto policy, the following definitions apply:

1. Generally: private passenger autos or station wagons and vans and pickups with GVW less than 10,000 lbs. are automobiles.

2. Trailers are automobiles.

3. Motorcycles are not automobiles. See Hunter v. Michigan Mut. Liab. Co., 41 N.C. App. 396 255 S.E.2d 206 (1979).

Thus, you cant use an auto policy as excess liability coverage for a motorcycle accident.

4. Substitute autos: an auto used while the insured auto is in the shop is covered.

5. A newly acquired vehicle is covered if the insured asks the insurer to cover the vehicle during the policy period or within 30 days after acquiring the vehicle.

B. Types of activities

As stated in the standard policy, the ownership, maintenance or use of a auto is covered. The test generally cited by the courts is whether there was a causal connection between the use [of the automobile] and the injury. Hartford Fire Ins. Co. v. Pierce, 127 N.C. App. 123, 489 S.E.2d 179 (1997). This is a lower standard that proximate cause as foreseeability of the harm is not required for there to be a causal connection. Id. Clearly that covers that ordinary situation: driving the car. But what else is covered?

1. Negligently allowing a child to get out of a vehicle.

This is covered as it is using a vehicle. Nationwide Mut. Ins. Co. v. Davis, 118 N.C. App. 494, 455 S.E.2d 892 (1995). In Davis, the defendant grandmother parked her van across a one-lane street from a store. Grandmother got out of the van and walked toward the store, crossing a one-lane street. As Grandmother was walking toward the store, Plaintiff Granddaughter called to Grandmother and asked if she could get out of the van and go into the store to get some ice cream. Grandmother consented. As Granddaughter crossed the street, she was hit by a truck. The court held that Grandmothers negligence involved the use of an automobile, therefore Grandmothers auto policy provided coverage.

2. Shooting associated with the vehicle: The Bubba Rule.

Where injury has resulted from gunshots, the courts have seized upon a rather odd distinction: whether the car was routinely used to transport firearms. I call it the Bubba Rule. Where guns were routinely hauled around, the courts have found coverage. See Reliance Ins. Co. v. Walker, 33 N.C. App. 15, 234 S.E.2d 206 and Pierce, supra. Where, on the other hand, guns were present on an ad hoc basis, i.e., where the defendant was chasing the plaintiff with a vehicle and shot the plaintiff for good measure, the courts have declined to extend coverage. See Scales v. State Farm Mut. Auto. Ins. Co., 119 N.C. App. 787, 460 S.E.2d 201 (1995) and Nationwide Mut. Ins. co. v. Knight, 34 N.C. App. 96, 237 S.E.2d 341 (1977).

According to the courts, if guns are routinely carried in a vehicle, then injury from the firing of the gun is connected with the use of the automobile. Bottom line: Bubba, from Buies Creek, has coverage; Charles, from Chapel Hill, does not. However, see Subtext, infra.

3. Throwing beer can: No coverage.

In Providence Washington Ins. Co. v. Locklear by Smith, 115 N.C. App. 490, 445 S.E.2d 418 (1994), the court of appeals held that a defendant who threw a beer can out of a moving car and hit a pedestrian was not entitled to coverage. The court held that throwing beer cans at pedestrians was not a use to which automobiles are normally put. Therefore, the accident did not arise out of the use of an automobile. It did not help that the plaintiffs case that the defendant pled guilty to an assault charge.

4. Extending coverage: the Subtext

In all of the cases in which the plaintiff is seeking to expand coverage to an activity which is not clearly related to an automobile, one factor is present in the sub-text: whether the defendants act was intentional. Where the act was intentional, even if not so pled by the plaintiff, the courts are reluctant to extend coverage. The courts will use strained distinctions in order to deny coverage where it appears that the defendants act was intentional, as opposed to being a mere accident. See Bubba Rule, supra. Thus, if you have one of these cases, you may want to do your best to dress the case up as a negligence claim. For example, you might not want the defendant to plead guilty to an assault charge in criminal court.

C. Intentional injury: Minimum limits only

Both the standard policy and the statute spell out that intentional injuries are covered only up to the minimum coverage required by law. Thus, even if the your clients ex-spouse ran him off the road with the avowed intent of killing him, if you plead an intentional act, your client will only be entitled to minimum coverage from the tortfeasor. You can plead recklessness, willful and wanton negligence, and gross negligence, just dont plead intent.

D. Business Use Exclusion

There is a Business Use Exclusion in the personal auto policy. However, it rarely applies, and it is rather complex. Hence, the Business Use Exclusion is beyond the scope of this paper.

E. Employee of tortfeasor cant recover under the policy.

If the plaintiff is an employee of the tortfeasor, there is no coverage. This would only arise where there was no workers compensation preemption.

V. What to Do with the Coverage Once You Find It.

Once you have found all the liability coverage that there is or that your case needs, there are a number of rules and guidelines which should be followed.

A. Facility policies

Under North Carolina law, insurance companies can assign policies for certain bad risks to the North Carolina Reinsurance Facility. If the tortfeasors policy has been assigned to the Facility, you may not take a default judgment against the driver unless you have given served the summons and complaint on the insurer. See N.C. Gen. Stat. ' 20-279.21(f)(1). The insurer has 30 days in which to file a motion to intervene.

B. Primary and excess coverage

Whenever more than one policy of the same type applies to a situation, a question arises as to which policy provides primary coverage and which policy provides excess coverage. This question is of primary importance to insurance companies, because the company providing primary coverage must pay first and generally has the duty to defend. However, the primary-excess issue is occasionally important to plaintiffs, so we visit it briefly.

1. Determining whether a policy is primary or excess

Generally, whether a policy provides primary or excess coverage is controlled by the language of the policies. Where one policy says it is primary and the other policy says it is excess, the policy language governs. Generally, with auto liability policies, the policy covering the car involved in the wreck will be primary. The standard policy so provides.

A problem arises when both policies claim to be excess. Generally, where both policies have conflicting excess provisions, the provisions will cancel one another and both policies will provide primary coverage in proportion to the total insurance available. Onley v. Nationwide Mut. Ins. Co.8 118 N.C. App. 868, 456 S.E.2d 882 (1995). Allstate v. Shelby Mutual, 269 N.C. 341, 152 S.E.2d 436 (1967).

2. Super-escape clauses

Super-escape clauses are rather complex; however, they are appearing in policies with increasing frequency. Thus, they are worth a brief look.

Where a car owned by one person is to be driven regularly by a non-owner, you will frequently see super-escape clauses. These are frequently found in policies covering car dealerships and car rental companies. These clauses take a form similar to the following: This policy provides coverage only if no other valid and collectible automobile liability insurance, either primary or excess, with limits of liability at least equal to the minimum limits specified by the Financial Responsibility Law of the state in which the automobile is principally garaged, is available.

The super-escape clause allows the owner of the vehicle to satisfy the compulsory insurance requirement of the Financial Responsibility Act, but at a minimum expense. A policy with the super-escape clause is just a safety net policy, one that kicks in only if there is no other coverage. Thus, suppose Hertz Rental Cars has a policy with a super-escape clause. When a Hertz customer is involved in a wreck, the customers personal insurance provides coverage and Hertzs insurer is off if the hook, provided the customer has insurance. When the customer has no insurance, the Hertz policy provides minimum limits.

For a fuller explanation of escape and super-escape clauses, see Allstate v. Shelby Mutual, 269 N.C. 341, 152 S.E.2d 436 (1967) and Horace Mann Ins. Co. v. Continental Cas. Co., 54 N.C. App. 551, 284 S.E.2d 211 (1981). If an insurer contends that it has a super-escape clause, read these cases carefully, and be sure that the clause is indeed a super-escape clause, not just a plain old escape clause.

3. Dont settle with the primary carrier without settling with the excess carrier.

By far, the biggest danger for plaintiffs attorneys in the primary-excess area is the danger of settling with the primary carrier and giving a covenant not to enforce a judgment against the tortfeasor. If you give the tortfeasor a covenant not to enforce, you effectively release the excess carrier. This is not the same as underinsured motorist coverage (UIM). See Lida Mfg. Co., Inc. v. U.S. Fire Ins. Co., 116 N.C. App. 592, 448 S.E.2d 854 (1994).

The rationale is that the tortfeasors liability is a condition precedent to the liability of the excess carrier. It would be unfair to the excess liability carrier to make them defend a case where the tortfeasor has been released, because the tortfeasor has no incentive to cooperate. The same rationale does not come into play in UIM, because the insurer agreed to the risk of the tortfeasors non-cooperation when it wrote the policy.

What is worse, in the event you have UIM coverage, the UIM is entitled to a credit for all applicable liability coverage, not just what you are able to collect. So, if you lose the excess liability, your client is out that money and it will be your fault. Bottom line: No matter how badly your client needs money, do not settle with the primary liability carrier unless you intend to settle the whole case.

VI. A Couple of Tidbits on the Financial Responsibility Act

A. Minimum limits increased

All liability policies issued after July 1, 2000 must provide coverage of at least $30,000 per person/$60,000 per accident. See N.C. Gen. Stat. ' 20-279.1(11).

B. Which vehicles are covered by financial responsibility act?

Only vehicles registered in North Carolina are required to the comply with the Financial Responsibility Act. Thus, if a Florida vehicle is involved in a wreck in North Carolina, there may be no liability coverage, even if the Florida vehicle is insured. Florida is a PIP (Personal Injury Protection) state and liability coverage is not required. If a foreign vehicle has no liability coverage, this is not a violation of North Carolina law. One should note that most policies which provide liability coverage provide that where the laws of the state where the accident occurs require more coverage than afforded by the policy, the policy will be automatically increased to provide the minimum coverage. However, if the policy does not provide for the increase, North Carolinas courts will not read it in. See Guin v. Guin, No. COA96-1059 (N.C. Ct. App., July 15, 1997) (unpublished decision).

VII. Miscellaneous Topics

A. Single limit for loss of consortium and parents claims for injuries to minor child.

Suppose you have a client who is severely injured and you decide to bring a loss of consortium claim for his wife as well. The tortfeasors policy provides coverage of $100,000 per person/$300,000 per accident. Can you access a separate $100,000 limit for the consortium claim, or are you limited to $100,000 total coverage for both claims? Answer: Since the consortium claim is derivative of the personal injury claim, only one per-person limit applies, so there is only $100,000 of coverage. See South Carolina Ins. Co. v. White, 100 N.C. App. 96, 345 S.E.2d 414 (1990).

Where a child suffers injury, the parent has a claim for the childs medical expenses and the loss of the childs services and wages during the childs minority. The courts have held this claim to be derivative in nature, like a loss of consortium claim, and, therefore, a single per-person limit applies. Howard v. Travelers Ins. Cos., 115 N.C. App. 458, 445 S.E.2d 66 (1994).

B. Punitive damages are covered by the Standard Auto Policy.

You should note that while punitive damages are often excluded from coverage in insurance policies, the standard auto policy provides coverage for punitive damages. See New South Ins. Co. v. Kidd, 114 N.C. App. 749, 443 S.E.2d 85 (1994). The Financial Responsibility Act does not require punitive damages to be covered. One wonders why insurers accept this responsibility voluntarily. To quote Tennyson, Ours is not to reason why.

C. Interest and costs

The obligation of the insurer to pay interest and costs are governed by the policy language. Thus, you always need to read the policy on this issue. However, the standard personal auto policy provides that the insurer will pay pre-judgment interest, but this amount counts toward the policy limits. Nationwide Mut. Ins. Co. v. Mabe, 342 N.C. 482, 467 S.E.2d 34 (1996). Post-judgment interest and costs are paid in addition to the limits. See Standard Personal Auto Policy, Supplementary Payments.

D. Dunkley v. Shoemate and Johnson v. Amethyst: the Missing Insured and Intervention.

Liability carriers, especially those, like Integon, who write large numbers of low-limits policies, have often been faced with the problem of the missing insured. By the time suit is filed, the insured defendant is long gone or refuses to cooperate in the defense of the case. Traditionally, insurers have simply gone ahead and filed an answer on the defendants behalf and in his name. The case proceeded in the defendants name, but with the insurer calling the shots. Two cases have called that procedure into question. They are Dunkley v. Shoemate8 515 S.E.2d 442 (N.C. 1999) and Johnson v. Amethyst Corp., 120 N.C. App. 529, 463 S.E.2d 397 (1995).

In Dunkley, the supreme court case, an employee of a hospital was accused of sexually assaulting a patient. The plaintiff sought to hold the employers liable for medical malpractice on an agency theory. The defendant employee refused to participate in the civil action, and the employers insurer retained an attorney to represent the employee in the suit. Plaintiffs counsel moved to disqualify the attorney representing the employee. The supreme court held that the attorney could not represent the employee without the employees consent. The court said that the proper procedure is for the insurer to intervene under Rule 24. Presumably, after the insurance company intervenes, it will be a party and its name will appear in the caption. At least two different schools of thought have developed regarding the impact of Dunkley and Amethyst in the auto liability context. The first theory is that where the driver disappears, the insurer must intervene and proceed in its own name. The second theory is that the insurance contract is itself authority to represent the plaintiffs interest. Proponents of the second theory distinguish Dunkley and Amethyst because those cases involved defendants who did not have a direct contract with the insurer. In the auto liability context, at least where the driver is the named insured, the insured has consented to allow the insurance company to represent him. Thus, under the second theory, the insurer has the right and duty to defend the missing tortfeasor. This problem has not yet been addressed by the appellate courts.

E. Getting the liability carrier to pay: Abernethy v. Utica Mutual.

Weve all had the experience where a liability insurer refuses to pay its policy limits, despite the fact that the case is clearly worth well more than those limits. Your first instinct is to sue the liability carrier for bad faith. Well, you cant. There is no third-party bad faith under North Carolina law. This means that you cant sue an insurer for bad faith unless you have a contract with that insurer. However, you do have one great weapon: Abernethy v. Utica Mutual Ins. Co., 373 F.2d 565 (4th Cir. 1967).

In Abernethy, the court held that an insurer has a duty to evaluate and pay claims as if it had unlimited coverage. In other words, the carrier cannot consider the fact that its obligation to pay ends when the damages exceed a certain amount.

Thus, when you offer to give a covenant not to enforce in wrongful death claim in exchange for the carriers $30,000 minimum limits, the carrier has to ask itself the following question: If we had unlimited coverage, i.e., if we had to pay the whole judgment, whatever it may be, would we settle this case for $30,000? If a reasonable person would settle, then the carrier is breaching its duty to the tortfeasor by declining the offer to settle. When you suggest to the carrier that they are breaching their fiduciary duty to their insured, you do two things. The first is that you make the adjuster mad. The second is that you get them thinking about having to pay more than their policy limits. I have never worked for an insurance company, but Ill bet the managers get pretty upset when they have to pay more indemnity than their policy limits.

VIII. Conclusion

While it may not be the most interesting topic, liability insurance pays the bulk of our clients damages. Thus, it is worthwhile to obtain a basic familiarity with its rules. I hope this paper will serve as a jumping off point for further study and/or research.

Footnotes

1. But see Super Escape Clauses, infra.

2. See Nationwide Mutual Ins. Co., 115 N.C. App. 193, 444 S.E.2d 664 (1994), affd 342 N.C. 482, 467 S.E.2d 34 (1996).

Additionally, such pickups and vans are within the definition of autos only if they are not used for the delivery or transportation of goods and materials unless such use is:

(a) incidental to your business or installing, maintaining or repairing furnishings or equipment; or

(b) for farming or ranching.

A super-escape clause should not be confused with an escape clause. An escape clause states that the policy provides coverage only if no other valid and collectible automobile liability insurance with limits of liability at least equal to the minimum limits specified by the Financial Responsibility Law of the state in which the automobile is principally garaged, is available. The key difference is the omission of the words either primary or excess after automobile liability coverage. Policies with escape clause are frequently held to provide primary coverage, rather than no coverage at all, as urged by the insurers. See Allstate v. Shelby Mutual, 269 N.C. 341, 152 S.E.2d 436 (1967).

Non-cooperation would be a defense under some insurance policies. However, the Financial Responsibility Act provides that non-cooperation may not be raised as a defense. See N.C. Gen. Stat. ' 20-279.21.

-- Anonymous, January 17, 2000