North Carolina Court Issues Important Guidance on Extrinsic Evidence in Duty to Defend
The Western District of North Carolina issued important guidance to insurers evaluating the duty to defend and allowed an insurer to consider extrinsic evidence to disclaim that duty.
In Gifford, the court considered the application of a specialty insurance policy covering gig economy contractors engaged in active delivery on a food delivery app. The policy covered contractors only from the time they accepted an order through the platform until the time they completed the delivery. The accident at issue occurred after the contractor had completed a delivery, but had not accepted another. The underlying plaintiff initially alleged that the contractor was active on the app at the time of the collision, but later amended the underlying complaint to remove any allegation of app activity at the time of the accident. Based on the plaintiff’s allegation in the original complaint, the carrier agreed to defend the contractor against the suit, subject to reservation of rights.
As an initial matter, the court determined that under North Carolina’s comparison test for evaluating a duty to defend, the operative version of the complaint governed rather than the plaintiff’s original complaint. That rule applies in many jurisdictions, but no North Carolina court had expressly considered the issue. In ruling that the operative complaint governed the duty to defend analysis, the court expressly aligned North Carolina with the majority rule.
The court then considered the effect that extrinsic evidence – that outside of the complaint itself – had on the insurer’s duty to defend. In this matter, the insurer investigated the facts of the collision as required under North Carolina law, but its investigation revealed the accident to be outside of the policy’s coverage provisions. Both authenticated records from the delivery platform and deposition testimony from the contractor confirmed that at the time of the collision, the contractor had recently completed a delivery and not accepted another assignment through the app. The court concluded that once the plaintiff filed the amended complaint removing the allegation of delivery activities, the insurer was relieved of its duty to defend the contractor because there was no allegation of a claim even arguably covered by the policy and no extrinsic evidence showed the potential for a covered claim. In fact, found the court, the evidence showed the opposite.
The court reaffirmed that the insurer was required to defend, even in spite of this evidence, before the amended complaint was filed and the original complaint made explicit allegations bringing the suit within the policy’s insuring agreement. In other words, an insurer in North Carolina is not permitted to consider evidence that contradicts the allegations in a complaint to disclaim a duty to defend. In that situation, a carrier should defend under reservation of rights and file a declaratory relief action to attempt to relieve itself of the duty.
The court confirmed that the insurer owed no duty to settle a claim that is not covered by its policy, an issue previously not reached in North Carolina case law. The court relied on a treatise and decisions from other jurisdictions and found that an insurer owes no duty to settle under North Carolina law where the claim is not subject to coverage, reasoning that to require an insurer to settle claims that are outside of coverage would expand coverage beyond what was agreed in the policy. Finally, the court determined that because the complaint did not allege facts within the policy’s scope, that there was no possibility that facts subject to coverage would be proved at trial, such that the insurer had no duty to indemnify.
This case provides some important, if limited, guidance to insurers evaluating duty to defend issues. The court’s finding that a complaint silent on the issue upon which coverage turned – whether or not the contractor was performing delivery activities – did “not allege facts arguably covered by the policy” appears to give insurers some leeway to consider extrinsic evidence where the allegations in a complaint do not explicitly bring a claim within the ambit of a policy.
North Carolina strictly applies the comparison test and deems the duty to defend “absolute” where a complaint arguably alleges facts covered by the policy. The Gifford decision seems to chip away at that rule and may require underlying plaintiffs to more directly plead facts suggesting coverage in order to trigger a defense. Based on Gifford, a plaintiff’s failure to allege facts that expressly implicate a policy’s insuring agreement may allow a carrier to look beyond the complaint to disclaim a duty to defend if the true state of the facts shows a non-covered claim. Still, a carrier seeking to rely on an exclusion to disclaim a defense likely will not be able to avail itself of extrinsic evidence under Gifford because the wording of the decision appears to allow a carrier to consider other evidence only where the complaint’s allegations do not bring the claim within coverage.
Please contact Christy Maple, Robert Whitney or any member of the Phelps Insurance Team for questions on this matter or if you need advice or guidance.
