Federal Judge Howard Troubled By North Carolina Court of Appeals Statutory Construction in Selection/Rejection Disputes

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1 NEWSLETTER ARTICLE 225 HILLSBOROUGH STREET, SUITE 300 RALEIGH, NORTH CAROLINA P. O. BOX RALEIGH, NORTH CAROLINA TELEPHONE: (919) FAX: (919) W. TRADE STREET, SUITE 600 CHARLOTTE, NORTH CAROLINA P. O. BOX CHARLOTTE, NORTH CAROLINA TELEPHONE: (704) FAX: (704) CULBRETH CENTER 1209 CULBRETH DRIVE, SUITE 200 WILMINGTON, NORTH CAROLINA TELEPHONE: (910) FAX: (910) Excerpted from the April 2011 edition of Litigation Forum A newsletter published by Cranfill Sumner & Hartzog LLP Hot Topics: Recent Developments in Selection/Rejection Litigation by George L. Simpson, IV (RAL), Insurance Law Group When the North Carolina Supreme Court decided in October 2006 after having allowed the parties to brief the legal issues and to present oral arguments that it had improvidently allowed discretionary review in Williams v. Nationwide, it effectively let stand a controversial Court of Appeals decision with serious implications for North Carolina auto insurers. Pursuant to the Court of Appeals decision, insurers who fail to offer insureds the ability to select or reject UM/UIM coverage face the potential for court-imposed liability as high as the maximum allowed by law, $1 million. In the intervening years, plaintiffs attorneys have routinely demanded $1 million in UM/UIM coverage in cases where the insurer cannot produce a valid selection/rejection form, resulting in a considerable amount of litigation. This article will address several recent appellate decisions involving missing selection/rejection forms, all of which limit in some way a claimant s ability to seek $1 million in UM/UIM coverage. Federal Judge Howard Troubled By North Carolina Court of Appeals Statutory Construction in Selection/Rejection Disputes In Progressive v. McLeod, Senior District Judge Malcolm Howard denied the insurer s summary judgment motion, but not before calling into question the soundness of the North Carolina Court of Appeals legal analysis in UM/UIM selection/rejection disputes. The coverage dispute in McLeod arose out of a tragic accident in March Twenty-two year old Annie McLeod, a junior at UNC-Wilmington, was killed when an unlicensed, uninsured, and intoxicated driver hydroplaned, crossed the center line, and crashed into the car in which Annie was riding as a backseat passenger. Because the drunk driver was uninsured, Annie s mother, Karon McLeod, sought recovery under her own Progressive policy s uninsured motorist coverage. Mrs. McLeod first purchased the Progressive policy in November 2003, and subsequently renewed it on eight separate occasions prior to the wreck. According to the declarations page of the original policy, as well as each of the renewal policies, Mrs. McLeod had UM/UIM coverage in the amount of $50,000 per person, $100,000 per accident. At the time of the accident, all insurers writing auto policies in North Carolina were required by statute to provide applicants with a form approved by the North Carolina Rate Bureau allowing the applicant to select UM/UIM coverage in an amount up to $1 million, or, alternatively, to reject such coverage outright. In the case at hand, Progressive could not locate a selection/rejection form signed by Mrs. McLeod. However, Progressive was able to show that each of Mrs. McLeod s declarations pages including the original from November 2003 and each of the

2 subsequent renewals reflected UM/UIM coverage in the amounts of $50,000/$100,000. Additionally, Progressive was able to show that it charged Mrs. McLeod premiums for $50,000/$100,000 in UM/UIM coverage, and that Mrs. McLeod paid those premiums from 2003 to the time of the accident in Because Progressive could not produce the selection/rejection form confirming UM/UIM coverage in the amount of $50,000/$100,000, Mrs. McLeod sought coverage up to $1 million pursuant to the 2005 North Carolina Court of Appeals Williams decision. In Williams, as in the case at hand, the insurer was unable to locate a selection/rejection form signed by the insured. In contrast with the case at hand, the insurer in Williams stipulated that it never provided the insured with the opportunity to select or reject UM/UIM coverage. The Court of Appeals concluded in Williams that the insurer s complete failure to offer the insured the ability to select or reject such coverage required a finding that the insurer must provide up to the maximum statutory coverage limits of $1 million. Since the Court of Appeals issued its decision in Williams, insureds making UM or UIM claims in cases where the insurer is unable to produce a valid selection/rejection form have routinely sought coverage of $1 million. The courts have, however, placed certain limits on such claims, and have declined to find as a matter of law that insureds are entitled to $1 million in coverage absent a showing that the insurer completely failed to offer the opportunity to select or reject such coverage. In reviewing the parties cross-motions for summary judgment in McLeod, Judge Howard walked through the relevant case law and concluded that neither side was entitled to judgment as a matter of law. According to Judge Howard, there are disputed issues of fact as to whether Mrs. McLeod was offered to option of selecting or rejecting UM/UIM coverage prior to the accident. In particular, Progressive presented evidence that it was the routine business practice of its agent to require an applicant to sign a Rate Bureau-approved selection/rejection form, and that as a result the agent must have presented such a form to Mrs. McLeod when she applied for coverage. For her part, Mrs. McLeod submitted evidence that she does not remember what documents she signed when applying for coverage, and that she does not recall going over the paperwork with her agent. Because these facts do not clearly reveal whether Mrs. McLeod was presented with a selection/rejection form, Judge Howard concluded that the dispute must be resolved by a jury. Before deciding that the factual issues precluded an award of summary judgment to either party, Judge Howard observed in passing that he is troubled by the reasoning of Williams and the statutory construction it employs. (p. 5) Judge Howard does not specify exactly what troubles him about the Court of Appeals selection/rejection jurisprudence, although one might speculate that he objects to requiring an insurer to provide the maximum allowable UM/UIM coverage of $1 million based on the insurer s failure to offer the option to select or reject such coverage. Judge Howard also notes that the North Carolina Supreme Court has not yet weighed in on the validity of the Court of Appeals conclusion in Williams, and that it is his job, as a federal court sitting in diversity, to apply the law as he believes North Carolina s highest court would apply it, even if that means disregard[ing] the law as applied by the state s intermediate appellate court. Id. This dicta arguably suggests that, in the appropriate case, Judge Howard might be willing to reject the Court of Appeals holding in Williams, and to conclude that the Supreme Court would not require the insurer to provide UM/UIM coverage up to the maximum limits allowed by statute. The Battle Of The Selection/Rejection Forms Continues

3 As has become standard in the post-williams era, the insured in North Carolina Farm Bureau v. Jenkins argued that a missing selection/rejection form required a finding of $1 million in UIM coverage. In this instance, the Court of Appeals disagreed and affirmed the trial court s entry of summary judgment in favor of the insurer. At the time of the accident, the insured, Mitchell Jenkins, was riding as a passenger in his own Toyota vehicle, which was driven by his brother, Jamie Jenkins. Mitchell s Toyota was covered by a Farm Bureau policy providing liability limits of $50,000/$100,000. Jamie and his wife, Sharon, had their own, separate Farm Bureau policy that also had liability limits of $50,000/$100,000. Farm Bureau offered to pay Jamie a total of $100,000 $50,000 based on the liability coverage provided in his own policy, and another $50,000 based on the liability coverage in Mitchell and Sharon s policy. Mitchell contended that his damages exceeded the $100,000 tendered by Farm Bureau, and he attempted to make a UIM claim. Farm Bureau contended, however, that there was no UIM coverage available under either Mitchell s policy or Jamie and Sharon s policy. Mitchell s policy provided UIM coverage in the amount of only $50,000 per person less than the $100,000 Farm Bureau had already offered. Mitchell argued, however, that he was entitled to up to $1 million in UIM coverage under Jamie and Sharon s policy because Farm Bureau could not produce a valid selection/rejection form. Mitchell was correct that Farm Bureau could not produce a valid selection/rejection form, but Farm Bureau denied that the missing form necessitated a finding of $1 million in UIM coverage under the applicable case law. To support its argument, Farm Bureau relied in part on evidence indicating that it was the company s routine business practice to obtain selection/rejection forms from insureds as part of the application process. In addition, Farm Bureau submitted the affidavit of Sharon Jenkins. Mrs. Jenkins affidavit provided: I chose uninsured motorists coverage in the amount of $50,000 for each person, and $100,000 for each accident. I chose not to purchase underinsured motorists coverage. I cannot remember whether I signed a Selection/Rejection form.... It is possible that I signed one. I simply do not remember one way or the other. I understood then and I understand now that I can purchase uninsured motorists coverage or combined uninsured/underinsured motorists coverage in various amounts up to $1,000,000. I have renewed this same personal auto policy every six months since 1994 and I have never changed my decision to buy uninsured motorists coverage but not underinsured motorists coverage. Relying on Mrs. Jenkins affidavit, Farm Bureau argued that Williams should not apply to the current case because, unlike the facts of the Williams case, Farm Bureau undeniably offered UIM coverage to Mrs. Jenkins, who acknowledged that she chose not to purchase it. The Court of Appeals agreed, and affirmed the trial court s award of summary judgment in Farm Bureau s favor. In reaching its conclusion, the Court of Appeals walked through its recent decision in Burgdoff, as well as the Williams and Fortin opinions. Based upon Burgdoff, the dispositive issue before us is whether there is a genuine issue of material fact as to whether defendants were given the opportunity to reject or select different UIM coverage limits. Id. at, S.E.2d at. Defendant dedicates a large portion of his brief to argument regarding why plaintiff s employee s affidavits regarding routine business

4 practices should not be considered competent evidence; however, even if we disregard plaintiff s employee s affidavits, the affidavit of Ms. Jenkins, the copolicy holder, is dispositive of the question at hand. Ms. Jenkins stated in her affidavit, I chose not to purchase underinsured motorists coverage and I understood then and I understand now that I can purchase uninsured motorists coverage or combined uninsured/underinsured motorists coverage in various amounts up to $1,000,000. I have renewed this same personal auto policy every six months since 1994 and I have never changed my decision to buy uninsured motorists coverage but not underinsured motorists coverage. This evidence alone establishes Ms. Jenkins was given the opportunity to reject or select different UIM coverage limits. Id. at, S.E.2d at. Her affidavit shows that she was aware of her options as to uninsured/underinsured motorist coverage and that she made a conscious decision not to purchase UIM coverage. Accordingly, Williams does not control this case, see id. at, S.E.2d at, and summary judgment was properly allowed in favor of plaintiff. Despite the lack of the selection/rejection form, there is no dispute that Ms. Jenkins had the opportunity to reject or select different UIM coverage limits, so plaintiff is entitled to the relief requested, a declaratory judgment that defendant is not entitled to any UIM coverage regarding the 11/04/2006 accident[.] Whether Insurer Properly Gave Insured Opportunity To Select Or Reject UM/UIM Coverage An Issue For The Jury, Says North Carolina Court Of Appeals In the recent Court of Appeals decision Nationwide Mutual Insurance Company v. Burgdoff, the insured defendants sought the reversal of the trial court s grant of summary judgment to Nationwide in a declaratory judgment action arising out of a dispute over whether the insureds had been given the opportunity to select or reject UM/UIM insurance, as required by statute. This issue has gained increased significance since the 2005 North Carolina Supreme Court decision in Williams v. Nationwide Mutual Insurance Company, in which it was held that an insured who was not offered any Selection/Rejection form at all was entitled by default to UM/UIM limits equal the statutory maximum of $1 million. In Burgdoff, the eight year old daughter of the insureds was killed in an auto accident in The insureds filed suit against the driver of the other vehicle, whose insurer tendered its $100,000 in liability limits. The insureds then turned to their own insurer, Nationwide, to seek further recovery under their UIM coverage. When the insureds moved to North Carolina in 1995, they applied for auto insurance with Nationwide agent Susan Bare. During that process, Mrs. Burgdoff filled out a written application requesting UM/UIM coverage in the amount of $100,000 per person, $300,000 per accident. Mrs. Burgdoff did not, however, fill out a Rate Bureau-approved Selection/Rejection form when she signed the closing statement to obtain the policy, which was repeatedly renewed through the time of the 2006 accident. The issue, then, boiled down to whether the failure to provide the Burgdoffs with a valid, Rate Bureau-approved Selection-Rejection form despite Mrs. Burgdoff having filled out a written application requesting UM/UIM limits of $100,000/$300,000 amounted to a failure by Nationwide to offer UM/UIM coverage as required by statute. If Nationwide s actions amounted to a complete failure to provide the Burgdoffs with this opportunity, the Burgdoffs would be entitled to $1 million in UIM coverage for their claim based on their daughter s death. If, however, Nationwide s efforts amounted to some attempt (albeit flawed) to offer UM/UIM

5 coverage, the Burgdoffs would be limited to $100,000 in UIM coverage for their claim on behalf of their daughter. Nationwide contended that the case should be governed by the North Carolina Supreme Court decision State Farm v. Fortin. In that case, after the insured initially rejected UM/UIM coverage in writing, the relevant statutory provision was amended to require that insureds be given the opportunity to select or reject such coverage on a Rate Bureau-approved form. The insured was not provided the Rate Bureau-approved form when he subsequently renewed his policy, and he later argued that his written rejection of such coverage was no longer valid since his rejection was not on the Rate Bureau form, as then required by N.C.G.S (b)(4). The Supreme Court agreed with the insured s argument in Fortin, and determined that he was entitled to UIM coverage in an amount equal to his liability coverage, as required by statute. In Burgdoff, Nationwide argued that Fortin requires a holding that the Burgdoffs are entitled to UIM coverage in an amount equal to their liability coverage, which would be $100,000. In response, the Burgdoffs argued that resolution of their claim should be determined by the Court of Appeals opinion in Williams v. Nationwide. In Williams, it was undisputed that Nationwide never offered the insured the opportunity to select or reject coverage at all. The Court of Appeals concluded that Nationwide s complete failure to comply with the statutory requirements meant that the insured should be entitled to the maximum coverage available under the law, $1 million. Based on the Williams opinion, the Burgdoffs argued that Nationwide s failure to obtain a signed selection/rejection form should result in UIM coverage of $1 million. After reviewing both Fortin and Williams, the Court of Appeals concluded that the case ought to be decided by a jury: [T]he relevant inquiry in determining whether Williams applies is whether defendants were given the opportunity to reject or select different UIM coverage limits. Whether or not [the Burgdoffs] were provided the opportunity to reject or select different UIM coverage limits is a factual determination that is generally best resolved by a jury. The record in the instant case reveals a genuine issue of material fact as to whether [Nationwide] provided [the Burgdoffs] with the opportunity to reject or select different UIM coverage limits and, therefore, summary judgment was inappropriate. (p. 8) Although the Court of Appeals reversal of summary judgment is on one level clearly a loss for auto insurers in North Carolina, the court s holding is notable in its rejection of the insureds argument for a blanket rule requiring $1 million in UM/UIM coverage in every case where the insurer fails to obtain a Rate Bureau-approved selection/rejection form. And while insurers will not relish the thought of litigating selection/rejection disputes to juries, they ought to stand a fighting chance in cases such as the instant one, where the insureds filled out a handwritten application requesting $100,000 in UM/UIM coverage, only to later claim to be entitled to $1 million on the grounds that they were not offered any UM/UIM coverage at all. Nationwide v. Martinson: The Final Word? Following in the footsteps of a string of recent selection/rejection cases that help to limit the scope of the North Carolina Court of Appeals 2005 controversial decision in Williams v. Nationwide, summary judgment has been affirmed in the insurer s favor in Nationwide v. Martinson (N.C. Ct. App., Nov. 16, 2010). In so doing, the court declined a request, set forth in

6 an amicus brief filed by the North Carolina Advocates for Justice, to require an insurer to prove it gave an insured actual notice of the right to purchase up to $1,000,000 in UM/UIM coverage. During the spring and summer of 2007, the insured in Martinson communicated several times with an insurance agent about obtaining various types of insurance, including UIM insurance. Those discussions concerned, in part, an evaluation of the total amount of UIM insurance the insured desired, and eventually the insured decided to increase his coverage from $50,000/$100,000 (which was the amount of UIM coverage he had with his prior insurer) to $100,000/$300,000. The agent acknowledged that she did not inform the insured that he could purchase up to $1,000,000 in UIM coverage, but explained that she would have quoted him a price for that much coverage if he had asked for it. (pp. 3-4) The agreement to purchase UIM coverage in the amount of $100,000/$300,000 was memorialized in an from the agent to the insured on August 8, 2007, and on August 20, 2007 the agent received payment from the insured for six months of coverage. At the time the insured made his payment, however, he had not signed the insurer s application or selection/rejection form. (p. 4) He asked the agent to mail the applicable documents to his home address. (Id.) The agent claimed that the documents were placed in the mail on August 21, 2007, and the agent retained copies of those documents in a file at its office. (Id.) The insured did not sign the application or selection/rejection form prior to being involved in a fatal car accident on September 11, (Id.) Following the accident, the insured s wife had several conversations with the agency regarding the unsigned application and selection/rejection form. She denied having received the letter sent by the agency on August 21, and claimed that her husband did not mention having received it either. (p. 17) Eventually, on September 26, she signed a new selection/rejection form sent directly to her by the agency in which she selected coverage in the amount of $100,000/$300,000. (p. 6) Sometime thereafter, counsel for the insured learned what had occurred with the selection/rejection form and attempted to argue that the insurer should be on the hook for $1,000,000 in UIM coverage under the holding of Williams v. Nationwide. The insurer filed a declaratory judgment action in which it asked the court to hold that it provided UIM coverage only in the amount of $100,000/$300,000. The trial court agreed and entered summary judgment in the insurer s favor. The insured appealed, and the North Carolina Court of Appeals affirmed. In reaching its decision, the court reviewed the development of selection-rejection case law over the last fifteen years, including the Williams case, which held that insurers must provide $1,000,000 in UIM coverage when the insurer has completely failed to offer such coverage to the insured. The Martinson court distinguished the present case from Williams on the grounds that the insurer (through its agent) mailed the selection-rejection form to the insured, meaning that, even if the form was not received by the insured, the insurer had made at least some effort to make it available: The question, therefore, is whether the mailing of the selection/rejection form by Nationwide was sufficient to satisfy the standard of notice established by our case law upon interpretation of N.C. Gen. Stat (b)(3) even where the insured does not receive it prior to an accident in which he claims UIM coverage. We hold that it does and that there was not a total failure on the part of Nationwide to provide an opportunity for Mr. Martinson to reject UIM coverage or select different UIM policy limits. The mailing of the selection/rejection form to Mr. Martinson the day after he paid for the coverage prevents us from holding that a total failure to inform occurred. In Williams, the parties stipulated that

7 there was no effort whatsoever on the part of the insurer to provide the insured a selection/rejection form. 174 N.C. App. at 603, 621 S.E.2d at 646. That is not the case here. (pp ) The court went further to distinguish its holding in Martinson, in which the insurer was determined to be entitled to judgment as a matter of law, from its recent decision in Nationwide v. Burgdoff, in which the court held that disputed factual issues required the case to be resolved by a jury. In Burgdoff, the insurer acknowledged that it had not mailed any forms to the insured, but contended that the insured had been verbally informed of the right to purchase UM/UIM coverage in an amount up to $1,000,000. The insured denied any such conversation took place, and the court concluded that determining which story was correct should be left in the hands of a jury. By contrast, in the Martinson case, the insurer presented evidence that it had mailed the selection-rejection form to the insured, and there was no evidence to the contrary. It is true that the insured s wife presented evidence that neither she nor her husband actually received the forms in the mail, but despite this evidence the court had no difficulty concluding that the insurer had, in fact, mailed it: In the present case, [the insured] was not verbally informed of the UIM coverage limits, but the selection/rejection form was mailed to him in a timely manner. reiterated in Burgdoff, the critical determination is whether the insured was given some opportunity to reject or select different coverage limits. Id.; Williams, 174 N.C. App. at 605, 621 S.E.2d at 647. [The insured] was insured at the time of the accident for 100/300 UM/UIM coverage and we cannot say that mailing a selection/rejection form by [the insurer] that was never signed prior to the accident is a total failure on the part of [the insurer] to inform the insured of available coverage that would require adherence to Williams. Consequently, we affirm the trial court s order. (pp ) Thus, according to Martinson, all an insurer has to do to avoid a determination that it provides $1,000,000 in UIM coverage under Williams is to present evidence that it mailed a selectionrejection form to the insured, even if the insured denies receiving it. Whether there is a meaningful difference between the facts of Martinson and Burgdoff may be subject to debate. Isn t the insurer who claims to have mailed the selection-rejection forms (and which the insured claims not to have received) standing in the same shoes as the insurer who claims to have verbally informed the insured of his rights (which the insured denies having heard)? If the insurer is entitled to judgment as a matter of law in Martinson, shouldn t the insurer have been entitled to judgment as a matter of law in Burgdoff, too? In Martinson and Burgdoff, are we not looking at a difference without a distinction? In any event, the question appears to be moot, as the North Carolina Supreme Court recently denied the insured s petition for discretionary review, effectively ending the lawsuit. While there are still a few selection/rejection cases percolating through the system, the Martinson decision arguably sounds the death knell for what I've heard one plaintiff's attorney describe as the $1 million UIM "lotto" created by Williams v. Nationwide. As discussed throughout this article, the appellate courts have been limiting insureds' claims right and left lately, and it is hard to see these claims gaining new life if the Supreme Court will not agree to review Martinson - and this is particularly true given the statutory amendments that went into effect in January 2009, which will effectively bar new selection/rejection litigation beginning in January 2012.