Insurance_commercial liability policy--voluntary payments clause_summary judgment
incorrectly granted
Summary judgment should not have been granted for defendant-insurance company for
breach of a voluntary payments clause where plaintiff began to install a roof on a school, the
temporary seal leaked, plaintiff hired a company to clean up the water damage, and defendant
denied coverage. Even assuming a breach of the voluntary payments clause, defendant is not
entitled to summary judgment because it made no showing of prejudice.
Law Offices of J. Darren Byers, PA, by J. Darren Byers, for
plaintiff-appellant.
Wilson & Iseman, LLP, by G. Gray Wilson and David R.
Fothergill, for defendant-appellee.
ELMORE, Judge.
Bond/Tec, Inc. (plaintiff) appeals an order of summary
judgment entered in favor of Scottsdale Insurance Company
(defendant) on plaintiff's claim for breach of insurance contract.
Plaintiff entered into a contract with the Newton-Conover City
Schools for the re-roofing of Newton-Conover High School on or
about 11 June 2003. The contract price was $174,405.00, and
plaintiff was required to post a performance bond of $50,000.00,
which was to be held in escrow until completion of the work to
ensure plaintiff's “satisfactory and timely finishing of the
project.” As stated in plaintiff's complaint, the school incurredover $49,200.00 in property damage after temporary “tie-offs”
plaintiff used to seal the roof of the school at night failed and
rain water leaked into the school building. Plaintiff contacted
defendant in an effort to obtain coverage for the property damage.
On or about 9 July 2003, plaintiff's president, Joe Bond (Mr.
Bond), hired Servpro to clean up water damage caused by the leaking
roof at Newton-Conover High School. The Servpro invoice stated
that Mr. Bond had said “that he would pay for this [water] damage
out of his own pocket.” According to defendant, on 14 July 2003
defendant sent a letter to plaintiff and school administrators
denying coverage. In a letter dated 18 July 2003, the architect on
the job, Robert L. Clark, advised plaintiff to confer with
defendant “and get this settled A.S.A.P. since school starts again
the first week in August and students will have to occupy these
[damaged] rooms, use the computers, etc.” The letter went on to
remind plaintiff that the Newton-Conover School Board held
plaintiff's $50,000.00 certified check as security to ensure
satisfactory completion of the work.
In a letter dated 25 July 2003, the Superintendent of Newton-
Conover City Schools summarized the discussion between school
administrators and Mr. Bond that had occurred earlier that day.
The letter stated that Mr. Bond had verbally agreed to pay for the
full replacement cost of numerous items that were damaged by the
water leakage. Mr. Bond stated in an affidavit that he agreed to
pay the school system for the water damage in an effort to protect
the performance bond. Plaintiff commenced this action on 26 February 2004, alleging
that defendant breached the parties' commercial general liability
insurance policy (policy) and seeking recovery of at least
$49,000.00. Defendant filed a motion for summary judgment
contending, inter alia, that plaintiff “paid a claim for which it
was not responsible as a volunteer.” On 28 September 2004 Mr. Bond
submitted an affidavit in which he stated that he had hired Servpro
for the purpose of preventing mold and mildew damage and that he
“in no way agreed to pay Servpro or any other company or entity to
make any other repairs prior to the insurance claim being denied.”
On 4 October 2004 the trial court granted defendant's motion for
summary judgment, and on 13 October 2004 plaintiff filed notice of
appeal to this Court.
Plaintiff contends that the trial court erred in granting
defendant's motion for summary judgment because genuine issues of
material fact exist as to whether plaintiff's payment was
voluntary. When considering a motion for summary judgment, a trial
court must resolve all inferences against the moving party and
accept as true the facts asserted by the nonmovant. See Holley v.
Burroughs Welcome Co., 318 N.C. 352, 356, 348 S.E.2d 772, 774
(1986). A moving party can meet its burden under N.C.R. Civ. P.
56(c) “(1) by showing that an essential element of the opposing
party's claim is nonexistent; or (2) demonstrating that the
opposing party cannot produce evidence sufficient to support an
essential element of the claim or overcome an affirmative defense
which would work to bar his claim.” Wilhelm v. City ofFayetteville, 121 N.C. App. 87, 89, 464 S.E.2d 299, 300 (1995).
Defendant asks this Court to affirm the order of summary
judgment on the basis that plaintiff breached the voluntary
payments clause of the parties' policy and thus defendant has no
obligation to reimburse plaintiff. The policy provides in
pertinent part as follows:
c. You and any other involved insured must:
. . .
(3) Cooperate with us in the investigation or
settlement of the claim or defense against the
“suit”[.]
. . .
d. No insured will, except at that insured's
own cost, voluntarily make a payment, assume
any obligation, or incur any expense, other
than for first aid, without our consent.
Defendant contends that plaintiff made a voluntary payment to
the school for its loss and that this action breached the voluntary
payments clause of the parties' contract. Specifically, defendant
asserts that plaintiff's decision to reimburse the school for its
loss was unilaterally undertaken before defendant informed
plaintiff on 14 July 2003 of the denial of the claim. However, the
record is lacking of evidence beyond factual dispute to establish
plaintiff's voluntary payment or agreement to pay prior to the
denial of the claim. A claims representative for defendant stated
in an affidavit that defendant sent a letter on 14 July 2003
denying coverage. The only undisputed evidence of payment or
agreement to pay by plaintiff is the 25 July 2003 letter from the
Superintendent of Newton-Conover schools. Plaintiff's agreement inthis letter, and any subsequent payment in accordance with the
agreement, occurred after defendant denied coverage on 14 July
2003.
(See footnote 1)
The evidence regarding plaintiff's agreement to pay in the
Servpro invoice dated 9 July 2003 is in dispute. Defendant
contends that the invoice establishes an agreement by plaintiff to
pay the school for its damages. In contrast, plaintiff argues that
it did not agree in this invoice to pay for any repairs beyond
those handled by Servpro. The total amount listed on the Servpro
invoice was $9,630.57. The notation on the invoice merely stated
that plaintiff's president “would pay for this damage out of his
own pocket.” If plaintiff did in fact agree to pay all Servpro
repairs at its own cost, then plaintiff did not assume an
obligation in violation of the voluntary payments clause. As the
trial court must resolve all inferences against the moving party,
see Holley, 318 N.C. at 355-56, 348 S.E.2d at 774, summary judgment
could not be properly granted to defendant based upon plaintiff's
agreement with Servpro. Moreover, assuming arguendo that plaintiff did breach the
voluntary payments clause, defendant would not automatically be
relieved of its obligation to reimburse plaintiff. In Henderson v.
Insurance Co., 254 N.C. 329, 118 S.E.2d 885 (1961), our Supreme
Court determined that insurance contract provisions which are
conditions to liability under the contract would be interpreted
consistent with the purpose underlying them:
The provisions are to be given a reasonable
interpretation to accomplish the purpose
intended, that is, to put insurer on notice
and afford it an opportunity to make such
investigation as it may deem necessary to
properly defend or settle claims which may be
asserted, and to cooperate fairly and honestly
with the insurer in the defense of any action
which may be brought against insured,
and upon
compliance with these provisions to protect
and indemnify within the policy limits the
insured from the result of his negligent acts.
An insurer will not be relieved of its
obligation because of an immaterial or mere
technical failure to comply with the policy
provisions. The failure must be material and
prejudicial.
Henderson, 254 N.C. at 332, 118 S.E.2d at 887 (emphasis added).
Henderson involved the insured's alleged breach of the cooperation
clause of an insurance contract. See id. This Court has not
addressed whether a breach of a voluntary payments clause by an
insured relieves the insurer of liability. However, in Branch v.
The Travelers Indemnity Co., 90 N.C. App. 116, 119, 367 S.E.2d 369,
371 (1988), aff'd, 324 N.C. 430, 378 S.E.2d 748 (1989), the Court
stated that the failure of an insured to comply with the “consent
to settle” provision of an insurance contract does not relieve the
insurer of its obligation to pay underinsured motorist coverage. Also, this Court has stated that where an insured fails to give
timely notice of a suit against the insured, the insurer must show
material prejudice in order to be relieved of its obligation to pay
the claim. See, e.g., Nationwide Mut. Ins. Co. v. State Farm Mut.
Auto. Ins. Co., 122 N.C. App. 449, 452-53, 470 S.E.2d 556, 558
(1996) (where notice was given as soon as practicable or insured
shows good faith for delay, insurer must show that its ability to
investigate and defend was materially prejudiced).
Thus, in North Carolina an insurer may not rely upon the
breach of consent-to-settlement, notice, or cooperation provisions
in order to relieve itself of liability to pay the claim; the
insurer must demonstrate prejudice to its ability to investigate or
defend the claim. By analogy, we conclude an insurer must show
prejudice where the insured has breached the voluntary payments
clause of the parties' insurance contract. Defendant has not
demonstrated that plaintiff's actions prevented defendant from
investigating or litigating the claim. Cf. South Carolina Ins. Co.
v. Hallmark Enterprises, 88 N.C. App. 642, 649-50, 364 S.E.2d 678,
682 (insurer prejudiced by insured's breach of notice provision
where insured entered into valid and enforceable default judgment
before giving notice of suit; insurer prevented from investigating
or litigating the action), disc. review denied, 322 N.C. 482, 370
S.E.2d 228 (1988); Augat, Inc. v. Liberty Mut. Ins. Co., 571 N.E.2d
357, 361 (Mass. 1991) (insurer prejudiced by insured's breach of
voluntary payment clause where insured entered into consent
judgment); Liberty Mut. Ins. Co. v. Cruz, 883 S.W.2d 164, 166 (Tex.1993) (insurer prejudiced as a matter of law where insurer not
notified of suit until after default judgment became final). As
defendant has made no showing of how it was prejudiced by plaintiff
agreeing to pay for a portion of the repairs, it is not entitled to
summary judgment on the basis of plaintiff's violation of the
voluntary payments clause. In sum, we determine that
the trial court erred in entering summary judgment for defendant
because there is a genuine issue of material fact as to whether
plaintiff breached the voluntary payments clause and because
defendant has not shown prejudice as a result of any breach.
Reversed and remanded.
Judges CALABRIA and GEER concur.
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