Continental Casualty Co. v. Physicians Weight Loss Centers of America, Inc. , 61 F. App'x 841 ( 2003 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
CONTINENTAL CASUALTY COMPANY, 
Plaintiff-Appellee,
v.
PHYSICIANS WEIGHT LOSS CENTERS OF
AMERICA, INCORPORATED; CHARLES E.
SEKERES; CECILE HOLDEN; JOHN D.
SIDERIS; CELINK, INCORPORATED; PAUL
C. HUNT; PCH TODAY,  No. 02-2123
INCORPORATED; COOKIE PARKER; P. A.
PARKER; HEALTHY WEIGH,
INCORPORATED,
Defendants-Appellants,
and
KELLY K. SUGGS,
Defendant.

2 CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS
CONTINENTAL CASUALTY COMPANY, 
Plaintiff-Appellee,
v.
KELLY K. SUGGS,
Defendant-Appellant,
and
PHYSICIANS WEIGHT LOSS CENTERS OF
AMERICA, INCORPORATED; CHARLES E.
 No. 02-2124
SEKERES; CECILE HOLDEN; JOHN D.
SIDERIS; CELINK, INCORPORATED; PAUL
C. HUNT; PCH TODAY,
INCORPORATED; COOKIE PARKER; P. A.
PARKER; HEALTHY WEIGH,
INCORPORATED,
Defendants.

Appeals from the United States District Court
for the Eastern District of North Carolina, at Wilmington.
James C. Fox, Senior District Judge.
(CA-01-116-7-F-1)
Argued: February 28, 2003
Decided: March 31, 2003
Before WILKINSON, NIEMEYER, and MOTZ, Circuit Judges.
Reversed by unpublished per curiam opinion.
COUNSEL
ARGUED: Theodore Blackburn Smyth, THOMPSON, SMYTH &
CIOFFI, L.L.P., Raleigh, North Carolina; John Francis Bloss, Sr.,
CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS 3
CLARK & BLOSS, P.L.L.C., Greensboro, North Carolina, for Appel-
lants. Richard Thell Boyette, CRANFILL, SUMNER & HARTZOG,
L.L.P., Raleigh, North Carolina, for Appellee. ON BRIEF: Frederick
L. Berry, BARRON & BERRY, L.L.P., Greensboro, North Carolina,
for Appellant Suggs. George L. Simpson, IV, CRANFILL, SUMNER
& HARTZOG, L.L.P., Raleigh, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
Continental Casualty Company filed suit in district court requesting
a declaration that it has no duty to defend Physicians Weight Loss
Centers of America, Inc. ("PWLC") against charges brought by Kelly
Suggs in a separate state court lawsuit. The district court held that,
while PWLC does have a valid commercial insurance policy with
Continental, any liability for Suggs’ claims against PWLC would not
be covered by that policy. It therefore issued a declaratory judgment
in Continental’s favor, absolving Continental from liability for any
judgment against PWLC and authorizing Continental to withdraw its
defense in the state court action. For the reasons that follow, we
reverse.
I.
PWLC is an Ohio-based corporation that has developed a number
of proprietary weight loss programs that it licenses to approved fran-
chisees located throughout parts of the midwestern and southern
United States. Prospective PWLC clients are required to undergo sev-
eral medical examinations and tests — including blood work, EKGs,
a physical examination, and a thorough review of their medical his-
tory — in order to determine whether they are healthy enough to par-
ticipate in a PWLC weight loss program. Each PWLC franchise hires
4 CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS
doctors to perform these examinations in accordance with mandatory
protocols and procedures set forth in a corporate manual.
PWLC doctors also prescribe weight loss drugs for clients who are
participating in weight loss programs that include the monitored use
of prescription medicine. PWLC requires that clients purchase such
drugs directly through the PWLC franchises rather than filling the
prescriptions themselves at independent local pharmacies. At least as
practiced at the PWLC franchise in Greensboro, North Carolina, this
process is fairly straightforward. A PWLC doctor writes and signs a
prescription, which the client never actually sees. The client makes a
direct payment to the PWLC franchise for the medication. The fran-
chise faxes the prescription to a central pharmacy in Ohio, which fills
the order after receiving credit card payment from the PWLC fran-
chise. The pharmacy then mails the medication directly to the client.
These prescriptions are approved in two-week increments, requiring
frequent return visits to the PWLC franchise by the client. These fre-
quent visits function in part as a management and monitoring mecha-
nism for each individual’s weight loss program.
In March 1998, Kelly Suggs signed up for PWLC’s weight loss
program at a PWLC franchise in Greensboro, North Carolina. After
undergoing the required medical evaluation, Suggs was assigned to a
weight loss program, one component of which included a prescription
weight loss drug called Meridia. As required by the program, Suggs
purchased Meridia directly from PWLC for approximately $115 per
two-week supply. Shortly after receiving her first prescription in the
mail, however, Suggs discovered that she could purchase the same
two-week supply of Meridia from a local pharmacy for $43. She
therefore spoke with her PWLC physician and requested that he write
a prescription and give it directly to her. The doctor refused to give
her a separate written prescription, because he was forbidden to do so
by the local franchise and by PWLC corporate regulations.
Suggs then filed a class action suit against PWLC in North Caro-
lina state court, seeking both compensatory and punitive damages.
She alleged violations of a wide variety of North Carolina laws,
including the Unfair and Deceptive Trade Practices Act, N.C. Gen.
Stat. § 75-1.1 (2003), the Pharmacy Practice Act, N.C. Gen. Stat.
§ 90-85.2 (2003), the Controlled Substances Act, N.C. Gen. Stat.
CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS 5
§§ 90-95(a)(1), 90-108(a)(10),(13) (2003), the North Carolina RICO
Act, N.C. Gen. Stat. § 75D-1 (2003), and § 58-51-37 of North Caroli-
na’s health insurance regulations. Suggs also alleged intentional inter-
ference with fiduciary duty as well as both constructive and actual
fraud.
At the time Suggs’ state court action was filed, PWLC was covered
by a professional liability policy issued by Continental Casualty. In
relevant part, that policy provides "coverage against professional lia-
bility claims brought against [PWLC] resulting from professional ser-
vices provided by [PWLC]." Continental will thus cover any damages
PWLC might become legally obligated to pay as a result of the "pro-
viding or withholding of professional services" either by PWLC
directly or "by anyone for whose acts [PWLC is] legally responsible."
The policy further provides that "[p]rofessional services are those
health care or medical services [PWLC] normally provide[s] as a
[weight loss program center]." The policy is limited by two relevant
exclusions. It does not cover "liability arising out of the violation . . .
of any law or regulation imposing criminal penalties." And it does not
cover "[f]ines, penalties, [or] the return or withdrawal of fees or gov-
ernmental payments."
Continental initially informed PWLC that it would provide a
defense in the North Carolina action, but that it was reserving the
right to challenge its purported duties to defend PWLC and cover any
liability that might arise out of Suggs’ lawsuit. Continental then filed
the present action in federal court, naming most of the parties to
Suggs’ lawsuit as defendants and seeking a declaration of Continen-
tal’s own rights and duties under the professional liability insurance
policy. On cross motions for summary judgment, the district court
held that the liability policy did not provide coverage for any of
Suggs’ claims and that Continental was entitled to withdraw its
defense in the underlying action. This appeal ensued.
II.
We review the district court’s ruling on summary judgment de
novo. Gallagher v. Reliance Standard Life Ins. Co., 305 F.3d 264,
268 (4th Cir. 2002). Summary judgment is appropriate only if "there
is no genuine issue as to any material fact." Fed. R. Civ. P. 56(c). In
6 CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS
determining both grants and denials of summary judgment, we view
all evidence in the light most favorable to the nonmoving party. Gold-
stein v. Chestnut Ridge Volunteer Fire Co., 218 F.3d 337, 341 (4th
Cir. 2000).
III.
The district court held that Ohio law governed its analysis of the
parties’ contractual rights under the insurance policy.1 In North Caro-
lina, it is a "general rule" that "the principle of lex loci contractus
mandates that the substantive law of the state where the last act to
make a binding contract occurred, usually delivery of the policy, con-
trols the interpretation" of an insurance policy. Fortune Ins. Co. v.
Owens, 526 S.E.2d 463, 466 (N.C. 2000). The district court observed
that the policy in this case was delivered to PWLC in Ohio; it further
noted that PWLC is an Ohio corporation and that the policy was
negotiated in Ohio with an Ohio-based insurance agency. The district
court therefore held that Ohio law controlled the case.
As appellants point out, however, North Carolina has created a stat-
utory "exception to [the] general rule" of lex loci contractus. Id.Under that exception, "[a]ll contracts of insurance on property, lives,
or interests in this State shall be deemed to be made therein." N.C.
Gen Stat. § 58-3-1 (2003). Because of constitutional concerns,2 appli-
cation of this provision has been limited to situations where there is
a "close connection" between North Carolina and the interests insured
by the policy. Collins & Aikman, 436 S.E.2d at 246. Where such a
connection exists, however, North Carolina law controls the interpre-
tation of an insurance policy.
1
We hold as a preliminary matter that the district court did not err in
refusing to transfer or dismiss this case on the grounds of improper
venue.
2
The North Carolina Supreme Court noted that states may not apply
their own law to interpret a contract if "the interest of the forum has but
slight connection with the substance of the contract obligations." Collins
& Aikman Corp. v. Hartford Acc. & Indem. Co., 436 S.E.2d 243, 245
(N.C. 1993) (citing Hartford Acc. & Indem. Co. v. Delta & Pine Land
Co., 292 U.S. 143, 150 (1934)). Appellants have not raised the constitu-
tional issue, and we do not address it here.
CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS 7
In this case, there is a sufficiently close connection between the
interests insured by the policy and the state of North Carolina to man-
date the application of North Carolina law in this case. At the time
of trial, four of PWLC’s roughly fifty franchises were located in
North Carolina. Each of the North Carolina franchises serviced a
great many North Carolina citizens: Suggs’ second amended com-
plaint alleges that there were roughly 5,000 PWLC customers in
North Carolina between June 1995 and June 2000, and Continental
itself estimates that there were at least 2,000. In light of these facts,
North Carolina has "much more than a casual connection with the
substance of the insurance policy," and N.C. Gen. Stat. § 58-3-1requires that we interpret the insurance policy under North Carolina
law. Id. at 245; see also Martin v. Cont’l Ins. Co., 474 S.E.2d 146,
149-50 (N.C. App. 1996) (holding that the registration of 1,479 auto-
mobiles — 18% of the insured’s fleet — in North Carolina created
a sufficiently "close connection" to justify applying North Carolina
law to an insurance contract dispute).3
IV.
Under North Carolina law, an insurer’s duty to defend is "measured
by the facts as alleged in the pleadings" in the underlying lawsuit.
Waste Mg’t of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374,
377 (N.C. 1986). If the pleadings state facts that, were they proven,
would "demonstrat[e] that the alleged injury is covered by the policy,
then the insurer has a duty to defend, whether or not the insured is
ultimately liable." Id. This duty is broader than the duty to indemnify,
such that even "pleadings that disclose a mere possibility that the
insured is liable (and that the potential liability is covered) suffice to
impose a duty to defend upon the insure[r]." Id. at 377 n.2 (emphasis
added). In interpreting the scope of the policy itself, all ambiguities
are "strictly construed against the insurer and in favor of the insured."
State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 350 S.E.2d 66, 73
(N.C. 1986). Thus, "policy provisions which extend coverage are con-
strued liberally in favor of coverage." Spangler Constr. Co. v. Indus.
Crankshaft and Eng’g Co., 388 S.E.2d 557, 563 (N.C. 1990).
3
As Continental itself acknowledges, this renders moot Ohio law’s pol-
icy against insuring intentional torts.
8 CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS
PWLC argues that the "professional services" provision of the
insurance policy requires Continental to cover any liability that might
arise from Suggs’ complaint. The policy defines "professional ser-
vices" as "those health care or medical services [PWLC] normally
provide[s] as a [weight loss program center]." As further guidance in
interpreting that brief definition, North Carolina courts have inter-
preted the term "professional services" as covering "those services
where a professional relationship exists between plaintiff and defen-
dant — such as a physician-patient or attorney-client relationship."
Barger v. McCoy Hillard & Parks, 488 S.E.2d 215, 223 (N.C. 1997)
(construing N.C. statute). In the context of insurance policy exclu-
sions clauses, North Carolina courts have held that a "professional
service" is generally defined as "one arising out of a vocation or occu-
pation involving specialized knowledge or skills, and [one in which]
the skills are mental as opposed to manual." Duke Univ. v. St. Paul
Fire and Marine Ins. Co., 386 S.E.2d 762, 765 (N.C. 1990) (constru-
ing the term "professional service" narrowly because it was in an
exclusion clause rather than in a coverage clause). And the determina-
tion of what constitutes a professional service "depends upon the
nature of the activity rather than the position of the person responsible
for the act or omissions." Id.Continental argues that this is not a case about professional ser-
vices, but rather a "mere dispute over pricing." In particular, Conti-
nental emphasizes that as a substantive matter, Suggs was pleased
with the clinical care she was receiving and only objected to the high
payments for Meridia. This is a mischaracterization of Suggs’ charges
in the underlying action. Suggs’ complaint clearly alleges that her
PWLC doctor had "violated his fiduciary duty to Suggs" when he "re-
fused to give Suggs her prescription." It also alleges that Suggs’ doc-
tor was "acting pursuant to a contract [with PWLC] which controlled
[his] actions and the exercise of [his] medical and professional judg-
ment," and was therefore acting as "PWLC’s agent when he treated
Suggs." It further alleges that the actions of all the PWLC defendants
were "pursuant to express and implied agreements among themselves
and constitute[ ] a conspiracy."
A central focus of Suggs’ allegations, then, is that PWLC required
its agent (the physician) to deny Suggs a medically-indicated pre-
scription, and that PWLC then leveraged that refusal to force Suggs
CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS 9
to purchase the prescription from the central pharmacy. According to
Suggs, in other words, the professional service was the dispensation
of a necessary prescription, and the breach of the doctor’s fiduciary
duty in providing his medical services inhered in his refusal to dis-
pense that prescription. Continental does not dispute that this pre-
scription was medically indicated in Suggs’ case. Nor does
Continental dispute that writing medically-indicated prescriptions is
one of "those health care or medical services [PWLC] normally pro-
vide[s] as a [weight loss program center]." Nor does it dispute that
writing prescriptions is a paradigmatically professional service, one
which arises "out of a vocation or occupation involving specialized
knowledge or skills, [where] the skills are mental as opposed to man-
ual." St. Paul Fire and Marine, 386 S.E.2d at 765. Particularly since
"policy provisions which extend coverage are construed liberally in
favor of coverage," Spangler Constr., 388 S.E.2d at 563, we cannot
say that prescription writing is not a professional service, or that a
physician’s refusal to write a necessary prescription is not the
"witholding of [a] professional service[ ]" under the terms of the pol-
icy. The underlying state court action therefore triggers Continental’s
duty to defend.
V.
Continental next points to a clause in the insurance policy provid-
ing that "[t]his agreement does not cover . . . fines, penalties, the
return or withdrawal of fees or government payments." Continental
argues that because Suggs is seeking refunds for the amount she paid
for prescription drugs, she is in effect seeking a "return . . . of fees."
Continental therefore contends that it is absolved from any duty to
defend PWLC in the underlying state court action.
We disagree. In North Carolina, exclusions from coverage are con-
strued narrowly in favor of coverage. St. Paul Fire and Marine, 386
S.E.2d at 765. Particularly in light of this rule of construction, we can-
not say that the "return of fees" exception applies to the underlying
state court action.
To begin with, the plain language of the exception does not appear
to apply to payments for goods or physical items. Black’s Law Dictio-
nary defines "fee" as a charge for "an official or professional service,"
10 CONTINENTAL CASUALTY v. PHYSICIANS WEIGHT LOSS CENTERS
for "a particular act or service," for "labor," for "performance of ser-
vices or something done or to be done," for "services of public offi-
cers," or for "use of a privilege under control of government." Black’s
Law Dictionary (6th ed. 1990); see also Merriam-Webster’s Colle-
giate Dictionary (10th ed. 1999) ("a fixed charge" or "a sum paid or
charged for a service"). In common usage, in other words, "fee" refers
to the price for a service.4 But Suggs is seeking damages based on the
inflated purchase price of a good, not a service. Moreover, the context
of the exclusion suggests that it is limited to fees paid to the govern-
ment: the other excluded payments in the relevant clause are "[f]ines,"
"penalties," and "government payments" — all of which apply to pay-
ments paid to the government. Suggs is not seeking the return of any
fees made to the government. We therefore hold that the "return of
fees" exclusion does not absolve Continental from its duty to defend
PWLC in the underlying state court action.5
VI.
For the foregoing reasons, we reverse and remand with directions
to enter judgment for defendants.
REVERSED
4
Continental offers no authority to refute this proposition. The cases
cited by Continental on this point all deal with the payment of attorney’s
fees. See Hofing v. CNA Ins. Cos., 588 A.2d 864 (N.J. Super. App. Div.
1991), Cont’l Cas. Co. v. Brady, 907 P.2d 807 (Idaho 1995), Cont’l Cas.
Co. v. Black and Black, P.A., 674 So.2d 163 (Fla. App. 1996).
5
Continental also argues that the policy excludes coverage for criminal
penalties or liabilities that may arise from some of Suggs’ claims in the
underlying state court action. Continental does not argue, however, that
the "criminal penalties" exclusion applies to all of Suggs’ claims. This
exclusion therefore does not affect Continental’s duty to defend. If the
allegations of a single count trigger the insurer’s duty to defend, the
insurer is obligated to defend the entire action. E.g., Lambe Realty Inv.,
Inc. v. Allstate Ins. Co., 527 S.E.2d 328, 331 (N.C. App. 2000).