N.C. Farm Bureau Mut. Ins. Co. v. Phillips , 255 N.C. App. 758 ( 2017 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA16-620
Filed: 3 October 2017
Wake County, No. 15 CVS 4738
NORTH CAROLINA FARM BUREAU MUTUAL INSURANCE COMPANY, INC.,
Plaintiff,
v.
BEVERLY LEE PHILLIPS, VICTORIA PHILLIPS, and JOHN DOE 236,
Defendants.
Appeal by plaintiff from judgment entered 12 April 2016 by Judge G. Bryan
Collins, Jr. in Superior Court, Wake County. Heard in the Court of Appeals 16
November 2016.
Young Moore and Henderson P.A., by Walter E. Brock, Jr. and Andrew P. Flynt,
for plaintiff-appellant.
Batch, Poore & Williams, PC, by J. Patrick Williams, for defendant-appellee
Beverly Lee Phillips and Victoria Phillips.
Jeff Anderson & Associates, P.A., by Gregg Meyers, pro hac vice, and Copeley
Johnson & Groninger PLLC, by Leto Copeley, for defendant-appellee John Doe
236.
STROUD, Judge.
Plaintiff North Carolina Farm Bureau Mutual Insurance Company, Inc.
appeals a judgment ordering it to defend and indemnify defendants Beverly Lee
Phillips and Victoria Phillips under the insurance policy plaintiff issued to them. We
reverse and remand.
NC FARM BUREAU MUT. INS. CO., INC. V. PHILLIPS
Opinion of the Court
I. Background
The background of this case is provided by the trial court’s judgment and is not
at issue on appeal:
1. Farm Bureau issued policy FO 1051463 to
Beverly Lee Phillips and Vicki O. Phillips as named
insureds effective January 11, 2008. The policy has been
renewed annually and amended from time to time through
January 11, 2016.
....
5. Beverly Lee Phillips was charged with
various sexual offenses which occurred over a period of
time against the minor child of John Doe 236, referred to
in this order as KGK.
6. From those various charges, Beverly Lee
Phillips agreed to plead guilty to two counts of taking
indecent liberties with KGK (a violation of N.C.G.S. 14-
202.1) and two counts of sexual activity by a substitute
parent (a violation of N.C.G.S. 14-27.7[a]).
7. The date of the offenses pertinent to the plea
were within the 2008 policy year: May 1, 2008 and August
7, 2008. The date on which the cause of action for John Doe
236 arose was in the 2012 policy year, when he learned of
the abuse of KGK.
8. John Doe 236 is a pseudonym for the father of
KGK. John Doe 236 filed a civil action in Chatham County
Superior Court against Beverly Lee Phillips and Victoria
Phillips: John Doe 236 v. Beverly Lee Phillips and Victoria
Phillips, 14 CVS 885, Chatham County Superior Court (the
Chatham County Action). That complaint alleges one cause
of action for negligence and one cause of action for loss of
services.
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Opinion of the Court
9. The Chatham County Action alleges in its
statement of the “Nature of the Wrongdoing” that “Beverly
Phillips was convicted of indecent liberty with [John Doe
236’s] minor child;” that “Beverly Lee Phillips was charged
and convicted for the sexual battery of the [John Doe 236’s]
minor child;” and that “[t]his case is about sexual battery
made against [John Doe 236’s] child by Beverly Lee
Phillips, and the negligence of Victoria Phillips to entrust
that minor with Beverly Lee Phillips.”
10. The First Cause of Action of the Chatham
County Action alleges in pertinent part that “Defendant
Victoria Phillips was negligent in failing to properly
supervise Beverly Lee Phillips, or warn [John Doe 236]
about the assailant;” that “as a result of the conduct of the
Defendants, [John Doe 236’s] child suffered damage, and
that damage also impeded the relationship between [John
Doe 236] and his child and caused independent injury to
[John Doe 236].”
11. The Second Cause of Action of the Chatham
County Action alleges in pertinent part that “[a]s a direct
and proximate result of the assault and battery by Beverly
Lee Phillips, and the negligence of Victoria Phillips, [John
Doe 236’s] child was affected” and that “Defendants’
actions and inactions which resulted in the damage to
[John Doe 236’s] child created difficulty between, parent
and child, and loss of services of the child to the father.”
12. The First Cause of Action and Second Cause
of Action conclude that “Defendants’ conduct was willful,
wanton, and committed with knowledge that it was likely
to cause damage to [John Doe 236] and his minor child.
Therefore, [John Doe 236] is entitled to an award of
punitive damages.” As noted above, the parties agree that
punitive damages is not at issue under the policy, and in
oral argument counsel for Farm Bureau agreed that
viewing the pleading as a whole, that Victoria Phillips is
entitled to this allegation being read as a recklessness
standard.
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Opinion of the Court
13. Beverly Lee Phillips admits that the
Transcript of Plea is a true and accurate copy of that plea
entered in State v. Beverly Lee Phillips, 09 CRS 315,
Chatham County Superior Court; that he initialed the plea
arrangement in the Transcript of Plea; and that he signed
the Transcript of Plea. By way of explanation, Beverly Lee
Phillips asserts in his answers to interrogatories that “I
entered a plea in this matter because I was facing
significant time if convicted and the plea was in my best
interest. However, I maintain now as I did at the time of
the plea that I did not sexually assault or harm in any way
KGK.”
14. Victoria Phillips admits the Transcript of
Plea, her husband’s initials on the plea arrangement and
her husband’s signature on the Transcript of Plea. By way
of explanation, Victoria Phillips asserts in her answers to
interrogatories that “we do not believe a sexual assault
occurred and my husband entered into plea because it was
in his best interests at the time.”
15. Due to his ex-wife abducting his child at age
one, and she and her family separating her from him, John
Doe 236 learned only in 2012 that his child had been
sexually assaulted.
In April of 2015, plaintiff North Carolina Farm Bureau Mutual Insurance
Company, Inc. (“Farm Bureau”) filed a complaint for declaratory relief “declaring that
the Farm Bureau policies do not apply to any claims in the Chatham County Action,
and that Farm Bureau does not have a duty to defend or indemnify Beverly Lee
Phillips or Victoria Phillips in the Chatham County Action[.]” The defendants
answered and requested that the complaint be dismissed. On 12 April 2016, the trial
court entered judgment and ordered that plaintiff “Farm Bureau has a duty to defend
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Opinion of the Court
and an obligation to indemnify each of Beverly Lee Phillips or Victoria O. Phillips in
the Chatham County Action.” Plaintiff Farm Bureau appeals.
II. Policy Coverage
Plaintiff Farm Bureau’s brief argues several reasons why it should not have
an obligation to defend in the Chatham County lawsuit, all based upon the policy
language. The parties have presented arguments regarding the meanings of several
defined terms and phrases under the policy and exclusions. But we will begin with
plaintiff Farm Bureau’s last argument first, since it addresses the first relevant
definition in the policy and is dispositive. Plaintiff Farm Bureau argues that “the
Chatham County claims do not seek damages for ‘bodily injury’ as defined by the
policies.” (Original in all caps.) We agree.
A. Standard of Review
Generally,
[t]he standard of review in declaratory judgment actions
where the trial court decides questions of fact is whether
the trial court’s findings are supported by any competent
evidence. Where the findings are supported by competent
evidence, the trial court’s findings of fact are conclusive on
appeal. Findings of fact not challenged on appeal are
binding on this Court. However, the trial court’s
conclusions of law are reviewable de novo.
Basmas v. Wells Fargo Bank Nat.’l Ass’n, 236 N.C. App. 508, 511, 763 S.E.2d 536,
538–39 (2014) (citations and quotation marks omitted). Because no issues are raised
as to the findings of fact in the judgment on appeal, the only question before this
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Opinion of the Court
Court is the legal issue of whether plaintiff Farm Bureau has a contractual obligation
to defend defendants Beverly and Victoria Phillips for the claims in the Chatham
County lawsuit.1
B. Comparison Test
In our Supreme Court’s most recent decision on the
duty to defend, the Court explained that in order to answer
the question whether an insurer has a duty to defend, we
apply the comparison test, reading the policies and the
complaint side-by-side to determine whether the events as
alleged are covered or excluded. In performing this test,
the facts as alleged in the complaint are to be taken as true
and compared to the language of the insurance policy. If
the insurance policy provides coverage for the facts as
alleged, then the insurer has a duty to defend.
Kubit v. MAG Mut. Ins. Co., 210 N.C. App. 273, 278, 708 S.E.2d 138, 144 (2011)
(citations, quotation marks, and ellipses omitted). Our Supreme Court has also noted
that the duty to defend exists unless the facts as alleged in the complaint “are not
even arguably covered by the policy.” Id. at 278, 708 S.E.2d at 144 (citation and
quotation marks omitted).
Our Supreme Court has observed that the insurer’s
duty to defend the insured is broader than its obligation to
pay damages incurred by events covered by a particular
policy. This duty to defend is ordinarily measured by the
facts as alleged in the pleadings. When the pleadings state
facts demonstrating 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. An insurer is
excused from its duty to defend only if the facts are not even
1 We take no position on the merits, if any, of the underlying Chatham County lawsuit, which
is not at issue in this case.
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arguably covered by the policy.
....
In addressing the duty to defend, the question
is not whether some interpretation of the facts
as alleged could possibly bring the injury
within the coverage provided by the insurance
policy; the question is, assuming the facts as
alleged to be true, whether the insurance
policy covers that injury. The manner in
which the duty to defend is broader than the
duty to indemnify is that the statements of
fact upon which the duty to defend is based
may not, in reality, be true. As we observed
in Waste Management, when the pleadings
state facts demonstrating 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.
Under Harleysville, the duty to defend is broader than the
duty to indemnify only in the sense that an
unsubstantiated allegation requires an insurer to defend
against it so long as the allegation is of a covered injury;
however, even a meritorious allegation cannot obligate an
insurer to defend if the alleged injury is not within, or is
excluded from, the coverage provided by the insurance
policy.
Harleysville does not specifically address and
nothing in its language appears to revisit the following
caveat to the comparison test set out in Waste Management
imposing a duty on the insurance carrier to investigate:
Conversely, when the pleadings allege facts
indicating that the event in question is not
covered, and the insurer has no knowledge
that the facts are otherwise, then it is not
bound to defend.
Where the insurer knows or could
reasonably ascertain facts that, if proven,
would be covered by its policy, the duty to
defend is not dismissed because the facts
alleged in a third-party complaint appear to
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Opinion of the Court
be outside coverage, or within a policy
exception to coverage. In this event, the
insurer’s refusal to defend is at his own peril:
if the evidence subsequently presented at
trial reveals that the events are covered, the
insurer will be responsible for the cost of the
defense. This is not to free the carrier from its
covenant to defend, but rather to translate its
obligation into one to reimburse the insured if
it is later adjudged that the claim was one
within the policy covenant to pay. In addition,
many jurisdictions have recognized that the
modern acceptance of notice pleading and of
the plasticity of pleadings in general imposes
upon the insurer a duty to investigate and
evaluate facts expressed or implied in the
third-party complaint as well as facts learned
from the insured and from other sources.
Even though the insurer is bound by the
policy to defend groundless, false or
fraudulent lawsuits filed against the insured,
if the facts are not even arguably covered by
the policy, then the insurer has no duty to
defend.
Id. at 277–79, 708 S.E.2d at 144-45 (emphasis added) (citations, quotation marks,
and brackets omitted). We now turn to the comparison of the complaint to the
insurance policy. See id. Because the duty to defend may be broader than the duty
to indemnify we address the duty to defend because if it fails, so too does the duty to
indemnify. See id. at 277–79, 708 S.E.2d at 144-45.
C. Analysis
The insurance policy contains coverage both for property and liability coverage,
but no property claims are at issue here. The liability coverage includes personal
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Opinion of the Court
liability coverage labeled as “Coverage L” and medical payments to others labeled as
“Coverage M[.]” Defendant John Doe’s complaint does not seek to recover for any
medical expenses incurred by KGK or himself, so the issue here arises under
Coverage L, regarding personal liability:
Coverage L – Personal Liability – We pay up to our limit,
all sums for which an insured is liable by law because of
bodily injury2 or property damage caused by an
occurrence to which this coverage applies. We will defend
a suit seeking damages if the suit resulted from
bodily injury or property damage not excluded
under this coverage. We may make investigations and
settle claims or suits that we decide are appropriate. We
do not have to provide a defense after we have paid an
amount equal to our limit as a result of a judgment or
written settlement.
Bodily injury is defined by the policy as
bodily harm to a person and includes sickness, disease or
death. This also includes required care and loss of
services.
Bodily injury does not mean bodily harm, sickness,
disease or death that arises out of:
a. a communicable disease; or
b. the actual, alleged or threatened sexual
molestation of a person.
Defendant John Doe set forth two claims in his complaint. In both claims, the
negligence and loss of services, defendant John Doe is not suing for injuries to KGK
but for alleged injuries he sustained as a result of the crimes committed against KGK.
2 All emphasis in bold to the policy language has been added by this Court throughout this
opinion.
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Opinion of the Court
The negligence claim alleges defendant Victoria Phillips was negligent in caring for
KGK because she knew or should have known of defendant Beverly Phillips’s “sexual
interest” in KGK and her lack of supervision allowed him to sexually abuse her.
Defendant John Doe’s negligence claim implicates no property damage but rather
addresses the damage to “the relationship” with his daughter, and taking the
allegations in his complaint as true, id. at 278, 708 S.E.2d at 144, it could potentially
fall within the definition of a “bodily injury” claim under Coverage L within the policy.
The second claim is entitled “Loss of Services[;]” here, defendant John Doe
alleges damages from “loss of services of the child to the father[.]” Defendant John
Doe explains in his brief that “loss of services is an ancient Common Law cause of
action . . . [u]nder [which] the overt fiction of . . . the injured child’s lost ‘service’ is
presumed.” See generally Tillotson v. Currin, 176 N.C. 479, 480-81, 97 S.E. 395, 396
(1918) (“This is an action brought by the father to recover damages for the seduction
of his daughter. . . . The right of the father to recover for debauching his daughter is
based upon the loss of services growing out of the relation of master and servant,
which, as said by Nash, J., in Briggs v. Evans, 27 N.C. 20, is a figment of the law, to
open to him the door for the redress of his injury, but is, however, the substratum on
which the action is built. If the daughter is under twenty-one years of age, the loss
of service is presumed, and no evidence of the fact need be offered; and, if over twenty-
one, the slightest service, such as handling a cup of tea, milking a cow, is sufficient
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Opinion of the Court
at common law to support the action; but, while the father comes into court as a
master, he goes before the jury as a father, and may recover damages for his
humiliation, loss of the society of his daughter and mental suffering and anguish,
destruction of his household, sense of dishonor, as well as expenses incurred and for
loss of services, and the jury may also award exemplary damages as a punishment.”
(citations and quotation marks omitted)). The claim of seduction can be maintained
only by a father, since at common law, the father was master, and the daughter was
the servant; it required that the father show that the defendant had sexual
intercourse with his daughter, either with or without the daughter’s consent. See
generally id. We will generously assume that the claim for “loss of services” stemming
from the claim of “seduction” -- which is based upon a master-servant relationship of
father to daughter – still exists, see id., and “loss of services” is thus also potentially
a “bodily injury” under the policy definitions.
But we must continue with the remainder of the definition of “bodily injury.”
Defendant John Doe’s claims also “arise[] out of” “the actual . . . sexual molestation
of a person.” No prior North Carolina case has directly addressed the meaning of the
words “arising out of” in this context, perhaps because the meaning is apparent,
though courts in other states have addressed similar provisions. See, e.g., Supreme
Servs. & Specialty Co. v. Sonny Greer, Inc., 958 So. 2d 634, 645 (La. 2007) (“The key
words in this provision are ‘arising out of,’ which could mean ‘but for’ the damaged
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Opinion of the Court
property the resulting incident would not have occurred.”). Defendant John Doe’s
claims are entirely based upon the sexual molestation of his daughter and would not
exist “but for” the “molestation of a person[,]” his daughter. Id. Whatever name, title,
or label defendant John Doe seeks to assign to his claims, they arise out of the sexual
molestation of his daughter and are not included under the definition of a “bodily
injury” as defined under the policy.
The policy provides that plaintiff Farm Bureau “will defend a suit seeking
damages if the suit resulted from bodily injury or property damage not excluded
under this coverage.” The Chatham County suit did not result from a “bodily injury”
as defined by the policy, so we need not consider potential exclusions. The claims
raised by defendant John Doe did not result from “bodily injury” as defined by the
policy because that definition explicitly does not include bodily harm that “arises out
of” “sexual molestation[.]” Because defendant John Doe’s entire action hinges
on the sexual molestation of his daughter, it is not “a suit seeking damages” resulting
“from bodily injury[.]” Therefore, plaintiff Farm Bureau has no duty to defend or
indemnify defendants.
III. Conclusion
We reverse the judgment of the trial court concluding there was coverage under
the policy and remand for entry of a declaratory judgment that plaintiff Farm Bureau
has no duty to defend or indemnify defendants Beverly and Victoria Phillips in John
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Opinion of the Court
Doe’s Chatham County lawsuit.
REVERSED and REMANDED.
Judges BRYANT and HUNTER concur.
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