Brown v. Lumbermens Mutual Casualty Co.

EXUM, Chief Justice.

This is an action seeking in part damages against Lumbermens Mutual Casualty Company (Lumbermens) for an alleged breach of a “duty to defend” provision in an automobile liability policy issued by Lumbermens. The trial court entered summary judgment for Lumbermens on the ground that it had discharged its duty to defend when it paid its entire coverage limits to one of the claimants allegedly injured by the negligence of its insureds, the plaintiffs.¹ The Court of Appeals reversed and remanded. We affirm the decision of the Court of Appeals.

On 20 June 1983 plaintiff Doyle Brown purchased a general liability automobile insurance policy from Lumbermens. The policy period was 20 June to 20 December 1983. Coverage under the policy was limited to $25,000 per person and $50,000 per accident. Both plaintiffs were insured as operators of Mr. Brown’s 1979 Cadillac. The policy contained this provision:

We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted.

On 14 October 1983 plaintiff Coleen Brown was driving the Cadillac when it collided with a car driven by Joan Hinson. Hinson and Nora Shore, a passenger in Hinson’s car, were injured. On 28 March 1984 Hinson filed suit against the Browns for her injuries.²

Pursuant to the insurance contract, Lumbermens employed counsel to defend Hinson’s suit against the Browns. On 1 June 1984 counsel filed answer on behalf of the Browns. In a 3 December 1986 affidavit, counsel gave his opinion that the Browns probably would be found liable and he predicted a jury verdict between $50,000 and $75,000. On 19 August 1984 Lumbermens filed an offer of judgment in the amount of its $25,000 coverage limit. Hinson rejected the offer, saying she would accept $43,000 to settle the claim. Lumbermens then determined to pay its policy limit of $25,000 to Hinson in partial satisfaction of Hinson’s claim, and on 4 January 1985 it informed the Browns of its decision. The Browns objected and refused to contribute to the settlement of Hinson’s claim. On 7 January 1985 Lumbermens paid $25,000 to Hinson pursuant to N.C.G.S. § 1-540.3 and an “Advance Payment Agreement” in which Hinson released Lumbermens from all claims arising out of the automobile collision and reserved her right to pursue her claim against the Browns.³

After paying its policy limit to Hinson, Lumbermens stopped defending the Browns and discharged counsel which it had employed for this purpose. The trial court granted counsel’s motion to withdraw on 14 January 1985. The Browns did not then employ new counsel.

Hinson’s claim against the then unrepresented Browns came on for trial in April 1985. On 1 May 1985 Hinson obtained a verdict against the Browns in the amount of $45,000. The trial court entered judgment on the verdict but credited the judgment with the $25,000 Lumbermens had paid Hinson. The Browns then obtained counsel and appealed. The Court of Appeals found no error. Hinson v. Brown, 80 N.C. App. 661, 343 S.E.2d 284 (1986), disc. rev. denied, 318 N.C. 282, 348 S.E.2d 138 (1986).

The Browns, thereafter, filed this action, alleging that Lumbermens breached its insurance contract by failing properly to defend them and that it negligently failed to investigate the design, construction and assembly of the brake system on the 1979 Cadillac.⁴ At the hearing on Lumbermens’ motion for summary judgment Lumbermens contended that by paying its entire coverage to Hinson it had discharged its duty to defend the Browns under the duty to defend provision of its insurance contract. The trial court agreed with this contention and entered summary judgment for Lumbermens.

The Court of Appeals disagreed, reversed the ruling and remanded the case. The Court of Appeals concluded that the duty to defend provision in Lumbermens’ policy was ambiguous in that it failed to specify in what manner Lumbermens’ coverage limits would have to be “exhausted” before its duty to defend was discharged. The Court of Appeals concluded the substantive portion of its opinion on this issue by saying, “[G]iven the unnecessarily ambiguous use of the word ‘exhaust’ in this . . . policy, we adopt plaintiffs’ interpretation which requires [Lumbermens] to continue defending the Browns until a settlement or judgment is reached despite having paid its policy limits under Section 1-540.3.” Brown v. Lumbermens Mut. Casualty Co., 90 N.C. App. at 475-76, 369 S.E.2d at 374.

We allowed Lumbermens’ petition for discretionary review, limited to the question of whether the Court of Appeals erred in concluding that the company had not discharged its duty to defend and in reversing summary judgment in its favor. Concluding that the Court of Appeals did not err, we affirm.

There is no statutory requirement that an insurance company provide its insured with a defense. See N.C.G.S. § 20-279.21 (1983 & Cum. Supp. 1988) (stating requirements of a “motor vehicle liability policy”). However, a company may provide by contract that it will defend its insured. Carrousel Concessions v. Florida Ins. Guar., 483 So. 2d 513, 516 (Fla. Dist. Ct. App. 1986); Schiebout v. Citizens Insur. Co. of America, 140 Mich. App. 804, 813, 366 N.W.2d 45, 49 (1985); see also Waste Management of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340 S.E.2d 374, 377, reh’g denied, 316 N.C. 386, 346 S.E.2d 134 (1986) (extent of duty to defend requires resolution of scope of policy provisions). An insurer’s duty to defend suits against its insured is determined by the language in the insurance contract, Liberty Mutual Insurance Co. v. Mead Corporation, 219 Ga. 6, 8, 131 S.E.2d 534, 535 (1963); Gross v. Lloyd’s of London Ins. Co., 121 Wis. 2d 78, 87, 358 N.W.2d 266, 270 (1984), and is broader than its obligation to pay damages under a particular policy. Waste Management of Carolinas, Inc., 315 N.C. at 691, 340 S.E.2d at 377.

An insurance policy is a contract and, unless overridden by statute, its provisions govern the rights and duties of the parties thereto. Fidelity Bankers Life Ins. Co. v. Dortch, 318 N.C. 378, 380, 348 S.E.2d 794, 796 (1986). “As with all contracts, the goal of construction is to arrive at the intent of the parties when the policy was issued.” Woods v. Insurance Co., 295 N.C. 500, 505, 246 S.E.2d 773, 777 (1978). In construing an insurance policy, “nontechnical words, not defined in the policy, are to be given the same meaning they usually receive in ordinary speech, unless the context requires otherwise.” Grant v. Insurance Co., 295 N.C. 39, 42, 243 S.E.2d 894, 897 (1978); see also Davis v. Maryland Casualty Co., 76 N.C. App. 102, 104, 331 S.E.2d 744, 746 (1985).

Any ambiguity in the policy language must be resolved against the insurance company and in favor of the insured. Woods, 295 N.C. at 506, 246 S.E.2d at 777. A difference of judicial opinion regarding proper construction of policy language is some evidence calling for application of this rule. See Maddox v. Insurance Co., 303 N.C. 648, 654, 280 S.E.2d 907, 910 (1981); Electric Co. v. Insurance Co., 229 N.C. 518, 521, 50 S.E.2d 295, 297 (1948); Annot., “Insurance — Ambiguity — Split Court Opinions,” 4 A.L.R. 4th 1253, 1255 (1981). While “[t]he fact that a dispute has arisen as to the parties’ interpretation of the contract is some indication that the language of the contract is at best, ambiguous,” St. Paul Fire & Marine Ins. Co. v. Freeman-White Assoc., Inc., 322 N.C. 77, 83, 366 S.E.2d 480, 484 (1988); accord Mazza v. Medical Mut. Ins. Co., 311 N.C. 621, 630, 319 S.E.2d 217, 223 (1984), “ambiguity . . . is not established by the mere fact that the plaintiff makes a claim based upon a construction of its language which the company asserts is not its meaning.” Trust Co. v. Insurance Co., 276 N.C. 348, 354, 172 S.E.2d 518, 522 (1970).

“All parts of a contract are to be given effect if possible. It is presumed that each part of the contract means something.” Bolton Corp. v. T.A. Loving Co., 317 N.C. 623, 628, 347 S.E.2d 369, 372 (1986). See also Williams v. Insurance Co., 269 N.C. 235, 240, 152 S.E.2d 102, 107 (1967) (“each clause and word must be . . . given effect if possible by any reasonable construction”); Robbins v. Trading Post, 253 N.C. 474, 477, 117 S.E.2d 438, 440-41 (1960).

The terms of a contract must, if possible, be construed to mean something, rather than nothing at all, and where it is possible to do so by a construction in accordance with the fair intendment of a contract, the tendency of the courts is to give it life, virility, and effect, rather than to nullify or destroy it.

17 Am. Jur. 2d Contracts § 254, at 648-49 (1964).

With these principles in mind we conclude that there is ambiguity in the Lumbermens policy’s duty to defend provision and this ambiguity must be construed favorably to the insured and that the Court of Appeals correctly reversed the trial court. The relevant policy provision states in part:

We will pay damages for bodily injury or property damage for which any covered person becomes legally responsible because of an auto accident. We will settle or defend, as we consider appropriate, any claim or suit asking for these damages. In addition to our limit of liability, we will pay all defense costs we incur. Our duty to settle or defend ends when our limit of liability for this coverage has been exhausted.

(Emphasis added.) To “exhaust” means “to use up the whole supply or store of.” Webster’s Third New International Dictionary 796 (1971). Lumbermens would have us concentrate on the word “exhaust” and conclude that its payment of liability limits to Hinson terminated its obligation to defend under the policy because the limits were “used up.” However, we cannot divorce the last sentence in the provision from its context. We must consider the entire provision dealing with the insurer’s duty to defend and base our decision on the whole. “The various terms of the policy are to be harmoniously construed, and if possible, every word ... is to be given effect.” Woods, 295 N.C. at 506, 246 S.E.2d at 777. The second sentence in the provision requires the insurer to “settle or defend” covered claims against its insured. The third sentence requires the insurer to bear defense costs in addition to paying liability limits, indicating that the duties to pay claims and to defend are separate and independent.

When the final sentence regarding exhaustion of coverage limits and termination of the duty to settle or defend is read together with the prior sentences, the entire provision’s ambiguity becomes apparent. As the plaintiffs argue and the Court of Appeals correctly recognized, the insurer could “exhaust” its coverage limits in any number of ways. It could pay them into court and interplead conflicting claimants in a declaratory judgment action. It could pay them to one of several claimants in return for a complete settlement of that claim against its insured. It could pay them in full or partial satisfaction of a judgment against its insured. It could advance the sum to its insured in lieu of investigating whatever defenses might be available. It could, as was done here, pay them to the injured party, in return for a release only of the insurer and not the insured. Other methods of exhausting coverage limits are possible.

The ambiguity in the questioned provision thus lies not in the meaning of the word “exhausted.” It lies in the manner by which the coverage must be exhausted before the duty to defend terminates. The insurer under this provision first assumes a duty to “settle or defend” any covered claim. This duty ends only when its coverage limits are exhausted. The question is whether, considering both propositions, exhaustion of the coverage limits must be by way of settlement or judgment before the duty to defend ends, or whether simply exhausting the limits in any manner terminates the duty. Both interpretations are possible. Plaintiff argues for the first; defendant, for the second.

Given the ambiguity, the provision relating to the insurer’s duty to defend must be interpreted favorably to the insured. So interpreted, it means that the insurer’s duty to defend continues until its coverage limits have been exhausted in the settlement of a claim or claims against the insured or until judgment against the insured is reached.

Our interpretation of the duty to defend provision is supported by cases from other jurisdictions which have considered insurance contracts with language essentially identical to the language here.⁵ Stanley v. Cobb, 624 F. Supp. 536, 537 (E.D. Tenn. 1986) (“this Court is of the opinion that the limit of liability may not be exhausted in a manner other than that specified by the policy, i.e., to either settle or defend”); Samply v. Integrity Ins. Co., 476 So. 2d 79, 83 (Ala. 1985) (“we hold that the better rule of law is that an insurer, when it obligates itself to defend, . . . cannot avoid its duty to defend against an insured’s contingent liability by tendering the amount of its policy limits into court without effectuating a settlement or obtaining the consent of the insured”); Anderson v. U.S. Fidelity & Guar. Co., 177 Ga. App. 520, 521, 339 S.E.2d 660, 661 (1986) (“[w]e do not agree . . . that the term ‘exhaust’ encompasses the paying into court of the policy limits, but interpret that term to mean the payment either of a settlement or of a judgment wholly depleting the policy amount”). Anderson reaches its result after concluding the provision is not ambiguous but clearly requires exhaustion of limits in the payment of a settlement or judgment. Id. Stanley finds ambiguity which it resolves favorably to the insured. Stanley, 624 F. Supp. at 538. Samply fails to mention the ambiguity issue but nevertheless construes the provision in favor of the insured. Samply, 476 So. 2d at 83-84.

It is true that in each of the above cases the insurer tendered its policy limits into court and awaited determination of liability, Stanley, 624 F. Supp. at 537; Samply, 476 So. 2d at 81; Anderson, 177 Ga. App. at 520, 339 S.E.2d at 660, while here defendant paid its policy limit directly to the claimant in return for a release of the insurer. This, we believe, is a distinction without material difference. The result under both procedures, vis-a-vis the insured, is the same. The claim against the insured remains outstanding, because there has been neither a judgment nor settlement disposing of that claim.

Pareti v. Sentry Indem. Co., 536 So. 2d 417 (La. 1988), also supports our decision. In Pareti the policy limits were paid to effect a formal settlement of one among several claims, which resulted in a complete release of both the insured and the insurer by that claimant and which was agreed to by the insured. Pareti, 536 So. 2d at 419. Under these circumstances the court held the insurer had no duty to defend the other claims. Id. at 424. It also held that the language as applied to these circumstances was not ambiguous. Id. at 420-21. It said,

[r]ead as a whole, the only reasonable interpretation of this section is that the insurer will defend any claim, but the defense obligation will terminate if and when the insurer’s policy limits are exhausted. These provisions are not subject to more than one reasonable interpretation. The policy in this regard is not ambiguous.

Id. at 421. Importantly, the Pareti Court distinguished from the circumstances before it,

the numerous cases which hold that the insurer cannot discharge its defense duties by unilaterally tendering its policy limits to the court, the claimant, or the insured. When an insurer merely tenders its limits without obtaining a settlement of any claim for its insured, a strong argument can be made that it has neither “exhausted” its policy limits nor fulfilled its fiduciary duty to discharge its policy obligations to the insured in good faith.

Id. at 422-23 (footnote omitted). The Pareti Court also recognized,

[i]f an effort were made to construe the policy clause at issue here to cover the situation where there is a tender of policy limits, arguably it would be ambiguous in that context . . . . [Unilateral tenders by the insurer have generally been viewed as insufficient to terminate the duty to defend.

Id. at 421, n.3. We agree with the result and the reasoning in_£yreti.

Finally, as one court has noted: “[A] most significant protection afforded by the policy — that of defense — is rendered a near_nullitv” if the duty to defend terminates upon unilateral tender of the policy limits. Simmonds v. Jeffords, 260 F. Supp. 641, 642 (E.D. Pa. 1966).

We conclude, for the reasons given, that under the terms of the policy in question Lumbermens’ unilateral tender to, and Hinson’s acceptance of, the policy limit without effecting settlement of Hinson’s claim against the Browns did not relieve Lumbermens of its duty to defend against this claim. The decision of the Court of Appeals is, therefore,

Affirmed.

1 . THe Browns’ action also seeks damages against General Motors, the maker of plaintiffs’ automobile involved, for various acts of alleged wrongdoing. The trial court granted General Motors’ motion to dismiss the claims against it. The Court of Appeals affirmed in part and reversed in part this ruling. This aspect of the case is not before us.

2 . Shore also filed an action against plaintiffs for the injuries she sustained in the accident. The Browns brought Lumbermens into that suit as a third-party defendant. In Shore v. Brown, 324 N.C. 427, 378 S.E.2d 778 (1989), we held that the third-party claim there abated because of the pendency of this action.

3 . N.C.G.S. § 1-540.3 governs the treatment of “advance or partial” payments) to claimants in personal injury or wrongful death claims vis-a-vis admissions of liability on the part of the payor, release of the payor from further liability, and the crediting of the advance payment on any judgment later rendered against the payor.

4 . As we understand the briefs and record, the Browns contended in Hinson’s claim against them that the Cadillac’s brake system was defective and this defect rather than any negligence on the part of Ms. Brown caused the collision. Apparently, too, this allegation forms part of the basis of the Browns’ claim against General Motors.

5 . The Court of Appeals correctly recognized that over the years the insurance industry “has moved towards contractually limiting its duty to defend its insureds.” Brown v. Lumbermens Mut. Casualty Co., 90 N.C. App. at 477, 369 S.E.2d at 374. Before 1966 standard liability policies did not include provisions terminating the insurer’s obligation to defend upon “exhaustion” of coverage limits. Pareti v. Sentry Indem. Co., 536 So. 2d 417 (La. 1988); Zulkey & Pollard, The Duty to Defend After Exhaustion of Policy Limits, For The Defense, 21, 22 (June 1985). Since 1966 standard liability policies have included this provision; “[T]he company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted by payment of judgments or settlements.” Van Vugt, Termination of the Insurer’s Duty to Defend By Exhaustion of Policy Limits, 44 Ins. Couns. J. 254, 257 (1977). More recently standard liability policies have contained the language now before us; and only a few cases have interpreted this language. Those we have found are discussed in the text.