On April 18, 2022, the Fourth Circuit Court of Appeals reviewed an insured’s claim against its own property insurer for violation of the North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”) in a rare published opinion addressing the duties pursuant to the North Carolina Unfair Claims Settlement Practices Act and the measurement of damages. In DENC, LLC v. Philadelphia Indemnity Ins. Co., ___ F.4th ___, 2022 WL 1132150, NO. 20-1640, No. 20-1644 (4th Cir. Apr. 18, 2022), the breezeway at an apartment complex owned by the insured, DENC, collapsed during a party. Days after the collapse, the insurer sent a letter to the insured stating it was conducting an investigation under a reservation of rights. Two days later, the insurer sent a second letter stating “[w]e have issued, or will be issuing payment to you, or on your behalf, for damages or injuries sustained” for the claim and that the insurer would “be looking to those parties responsible for the damages sustained and we will be seeking reimbursement of all monies paid under the policy.”
After having the breezeway assessed by a structural engineer, the insurer sent a third letter to the insured denying coverage “because the damage [was] reportedly the result of long-term water intrusion and deteriorated wood framing.” The denial letter did not mention the insurer’s earlier letter saying it would be issuing payment. According to the opinion, the denial letter repeated several pages of policy excerpts without explaining how they applied to the facts, included provisions which were not part of the policy, quoted provisions that clearly did not apply to the collapse at issue and failed to address a provision of a Collapse Endorsement under which the Court ultimately found there was coverage.
DENC sued its insurer alleging claims for breach of contract and violation of the UDTPA. On summary judgment, the United States District Court for the Middle District of North Carolina held the insurer breached the provisions of the insurance policy. It also held the insurer’s denial of coverage letter failed to reasonably explain the “basis in the insurance policy in relation to the facts” in violation of N.C. Gen. Stat. § 58-63-15(11)(n), a subsection of North Carolina’s Unfair Claim Settlement Practices Act. Despite this finding, the trial court denied the insured’s claim for treble damages under the UDTPA because the insured failed to show the insurer’s violation of the UDTPA proximately caused any injury. The court awarded the insured only nominal damages and also attorneys’ fees for its UDTPA claim.
On appeal, the insurer argued the district court erred in granting DENC’s motion for summary judgment on its breach of contract and UDTPA claims. In turn, the insured argued the trial court erroneously denied its claim for treble damages under the UDTPA. The Fourth Circuit affirmed the district court’s ruling as to the breach of contract claim on the finding of a covered collapse. More importantly, the court agreed with the district court’s holding that the insurer violated the UDTPA but held that such violation entitled DENC to treble its breach of contract damages. In doing so, the court explained “a two-sentence summary of the facts that [the insurer] had recited in greater detail earlier in the letter to support its denial of coverage” was insufficient to meet the requirements of N.C. Gen. Stat. § 58-63-15(11)(n). In the court’s view, that statute “requires that insurers do more than list all potentially applicable policy terms alongside the facts”, and while insurers are not required to write “a sophisticated legal memorandum”, the court found the insurer “made no attempt to bridge the gap between policy and fact.”
Additionally, the court found the insurer referenced exclusions in the policy that were not even “potentially applicable” based on admissions by the insurer’s employees that certain cited provisions had nothing to do with DENC’s claim. Contrary to the insurer’s argument, the appellate court held DENC did not have to show that the insurer’s reference to these exclusions actually deceived DENC. Rather, it was sufficient that the citation to the exclusions had the “capacity to mislead.” According to the court, “[t]he denial letter and its context had that capacity” because “DENC might have believed that the inapplicable policy provisions in the denial letter barred coverage when left to connect the dots between [the insurer’s] investigation and the policy language.”
Having found that the insurer violated § 58-63-15(11(n), the court next addressed whether DENC was entitled to treble damages under the UDTPA. The court acknowledged that under North Carolina Supreme Court precedent, treble damages under the UDTPA are limited to “ ‘damages proximately caused by a UDTPA violation,’ not damages on every claim that happens to arise in a case involving a UDTPA violation.’ ” Even so, the court noted that when the “same course of conduct” supports both a breach of contract and a UDTPA violation, the plaintiff is entitled to treble damages.
According to the court, the insurer’s “deceptive letter and related conduct” could not be divorced from its breach of the policy because “[t]he letter was [the insurer’s] sole communication denying coverage before DENC sued, despite DENC’s attempt at informal resolution. The letter was the denial, and so it was the breach.” Based on the evidence presented, the court held the insurer’s UDTPA violation was aggravating conduct accompanying its breach of contract and that DENC’s breach of contract damages could be trebled under the UDTPA.
Next, the court addressed the district court’s award of DENC’s attorneys’ fees for the insurer’s UDTPA violation. It noted that under North Carolina law, a court may award attorneys’ fees against the losing party in a suit alleging a violation of the UDTPA. In order to do so, however, the court must find (1) willfulness on the part of the party committing the violation, and (2) that the offending party engaged in an unwarranted refusal to resolve the matter which forms the basis of the lawsuit.
The Fourth Circuit affirmed the district court’s determination that the insurer’s UDTPA violation was willful because it sent the denial letter “intentionally and not accidentally or by mistake.” On appeal, the insurer claimed the letter merely showed an “honest disagreement” with DENC regarding coverage and that there was no evidence of fraud, malice or gross negligence to support an award of attorneys’ fees. The court held DENC was not required to show the insurer’s conduct was fraudulent, malicious or grossly negligent in order to be “willful.” Rather, according to the court, “[i]t’s enough that a party engaged in a deceptive trade practice intentionally, rather than by accident or mistake.” Therefore, the court held the district court did not abuse its discretion in finding the insurer “willfully” sent the deceptive denial letter.
Finally, the court agreed with the district court’s determination that the insurer engaged in an unwarranted refusal to settle until its first “reasonable offer” following the granting of summary judgment for DENC on its breach of contract and UDTPA claims. It found DENC’s alleged refusal to negotiate below three times its contract damages was not sufficient to overturn the district court’s ruling, noting that “DENC’s unyielding negotiating position doesn’t excuse [the insurer’s] failure to make a reasonable settlement offer.”
The Fourth Circuit’s decision in DENC is significant in that it addresses the important issue of exactly what damages are trebled pursuant to the UDTPA. This issue has been the subject of some debate within North Carolina jurisprudence. The court found that under the particular facts before it the evidence established that the beach of the contract to pay the covered damages was the measurement for the trebling of those damages by violating N.C. Gen. Stat. § 58-63-15(11)(n), because the improper conduct was directly tied to this sum of money. The court distinguished the result in Gray v. N.C. Ins. Underwriting Assn., 352 N.C. 61, 529 S.E.2d 676 (2000) because in that case, the finding of a UDTPA violation was not specifically tied directly to the failure to pay the property loss contract claim. This case will undoubtedly add to the ongoing discussion of the proper measurement of the sum that is trebled pursuant to the UDTPA. See generally Guessford v. Penn. Nat’l Mut. Cas. Ins. Co., 983 F.Supp.2d 652, 666-70 (M.D.N.C. 2013) (discussion of the calculation of the measurement of the remedy pursuant to N.C. Gen. Stat. § 75-16).
Notably, the decision does not address whether an insured must show that a denial letter which violates the Unfair Claims Settlement Practices Act proximately caused injury to the insured in order to recover damages under the UDTPA since that issue was not raised on appeal. The court noted this remains an open question under North Carolina law.
While the decision should have limited application in cases in which when there is an honest disagreement regarding coverage and the insurer’s denial of coverage carefully lays out the basis for the denial, it nevertheless serves as an important reminder that insurers should draft denial letters with great caution and detail and not act “willfully” to the contrary. This includes explaining how the policy provisions being relied upon relate to the specific facts of the matter at hand, as well as making sure that only potentially applicable provisions are cited and that they are cited correctly.