Policy Exclusions for “Knowing” Violations of Statute in Limbo After NC Ruling

Under a decision handed down by the North Carolina Supreme Court on March 22, it is now unclear whether a “knowing” violation of a statute constitutes a “willful” violation of a statute for purposes of determining whether a policy exclusion applies.

The North Carolina Court of Appeals had previously held that an insurer could rely on evidence that a claimant’s counsel knowingly violated the Driver’s Privacy Protection Act of 1994 (the DPPA) by soliciting clients using identifying information from DMV accident report data purchased from a third party, a criminal offense under certain circumstances. The policy in question contained an exclusion from coverage for willful violation of a penal statute. The Court of Appeals reasoned that while the policy did not define the term “willfully,” “knowingly” and “willfully” had an equivalent meaning under the law. Thus, the Court of Appeals reasoned, a policy exclusion for willful violations of a penal statute was met by a knowing violation of the DPPA. The Court of Appeals therefore affirmed a trial court’s award of summary judgment in favor of an insurer that denied coverage based on an exclusion for willful violation of a penal statute.

On March 22, the North Carolina Supreme Court upheld the result reached by the Court of Appeals. The vote, however, was split evenly between affirmance and reversal. As a result, while the Court of Appeals decision has been left standing, it no longer has any precedential value. Thus, going forward, it is an open question whether a “knowing” violation of a statute will be found to constitute a “willful” violation for purposes of applying an insurance policy exclusion.

Please contact Giles Rhodenhiser or any member of Phelps’ Insurance team if you have questions or need advice or guidance.