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Going above and beyond: North Carolina insurers may seek settlement even when they have no duty

1/13/25

By: Shawn Bingham

A recent appellate case from North Carolina is a reminder that insurers sometimes go beyond what is required of them. In Luis Ortez and Theresa Beddard Estes v. Penn National Security Insurance Company et. al., No. COA24-169, the North Carolina Court of Appeals homed in on a linguistic nuance that is ubiquitous in casualty insurance policies but rarely noticed—the insurer’s right to settle. Relying in part on this policy provision, the court found that an insurer’s attempt to settle on behalf of its insured did not mean it had a duty to do so.  

Penn National issued a commercial automobile insurance policy to Kitchen & Lighting Designs, which employed both Luis Ortez and Darren Estes. The Penn National policy contained an exclusion for injuries caused by the acts of a fellow employee.  

Estes was killed in an accident while a passenger in an insured vehicle driven by Ortez. Both were within the scope of their employment. Estes’s widow, Theresa Estes, then filed, both individually and as administrator of his estate, a wrongful death lawsuit against Ortez. The lawsuit did not explicitly allege that Ortez and Estes were co-employees, but invoked a 1985 North Carolina Supreme Court case, Pleasant v. Johnson 312 N.C. 710 (1985), as the basis for the claim against Ortez. The Pleasant case held that an employee’s immunity for a co-employee’s injuries did not extend to claims resulting from the at-fault employee’s willful, wanton, or reckless acts. 

On March 27, 2019, Estes filed a motion for summary judgment on damages and noticed a hearing for April 9, 2019. Estes then made a settlement demand on Penn National requiring that a $30,000 check be delivered within one day. Penn National agreed to the demand but advised that it could not deliver the check by the deadline and asked for a one-day extension. As a result, Estes withdrew the demand. The trial court then entered judgment of $9,500,000 against Estes. Ortez had never asked Penn National to defend him in the lawsuit. 

Ortez and Estes then jointly filed a lawsuit against Penn National alleging, among other things, that it breached its duty to defend and settle under the insurance policy and violated North Carolina’s Unfair and Deceptive Trade Practices Act. On the plaintiffs’ motion, the trial court entered judgment against Penn National of $9,649,808.27 for breaching its duty to settle and then trebled the compensatory damages for violation of the statute, resulting in a total judgment against the insurer of $28,949,424.80. 

On appeal, the Court of Appeals reversed, holding that no duty to defend existed at the time of Estes’ demand because the policy did not cover the loss. Applying North Carolina’s so-called “comparison test,” which requires comparing the complaint’s allegations with the terms of the insurance policy to determine if the allegations bring the claim within coverage, the court found that the insurer had no obligation to defend Ortez. Because Pleasant applied only to the “limited, unique, and specific claim between fellow employees for alleged intentional torts,” the wrongful death complaint’s reference to Pleasant necessarily implied that Ortez and Estes were co-employees. Consequently, the policy exclusion for injuries to fellow servants unambiguously applied to Estes’ claims as alleged.  

In the absence of coverage, no duty to settle existed at the time of Estes’ demand and therefore no breach occurred. Nevertheless, Penn National had a right under the policy and applicable North Carolina law to seek settlement of the claim, and it exercised that right when it agreed to the terms of the demand except for the one-day payment deadline.  

Despite finding no duty to settle, the court suggested that an insurer owes duties under the Unfair and Deceptive Trade Practices Act when exercising its right to settle. Nonetheless, the court found as a matter of law that Penn National could not have violated the statute by requesting a one-day extension on a one-day deadline where it had otherwise agreed to the plaintiff’s terms of settlement.  

Ortez v. Penn National is a reminder that merely exercising the insurer’s right to settle, under the policy, should not result in a waiver of the insurer’s coverage defenses. Still, insurers are well advised, as always, to be aware of the law of the applicable jurisdiction, and, when in doubt, to reserve rights before engaging in settlement negotiations if coverage for the loss is in question. Insurers should also be mindful of those jurisdictions that may impose duties on the insurer when it enters settlement negotiations even if the insurer otherwise has no duty to settle under the policy or applicable law. 

For more information, please contact Shawn Bingham at shawn.bingham@fmglaw.com or your local FMG attorney.