Key Points

  • The Court of Appeals held that the trial court kept jurisdiction over the receiver's claims even after Discovery settled with the injured passenger and the default judgment was marked satisfied.
  • Discovery had actual notice of the underlying suit because it received the complaint from the named insured and from the passenger's lawyer, even though the driver never forwarded it.
  • In the alternative, an adjuster's statement that Discovery would not pay anything on the driver's behalf waived the policy's notice condition.
  • The trial court acted within its discretion in awarding $246,425 in attorney fees under N.C. Gen. Stat. § 75-16.1 and in declining the receiver's $1.1 million contingency-based request.
  • Only $10 in nominal damages was available because the $3 million default judgment was satisfied before Discovery's liability was decided, leaving nothing to treble. Judge Tyson dissented on notice and good faith.

A divided North Carolina appeals court on Wednesday upheld a ruling that Discovery Insurance Co. acted in bad faith when it failed to defend a driver later hit with a $3 million default judgment. The court rejected the insurer's argument that it lacked notice of the suit because the driver never forwarded the papers.

The Court of Appeals of North Carolina affirmed summary judgment for Benjamin Eagles, a court-appointed receiver pursuing claims on behalf of the driver, Ikeem Cherry. Judge Hampson wrote for the court, joined by Judge Zachary. Judge Tyson agreed on a jurisdictional question but dissented on liability.

The decision holds that an insurer's duty to defend can be triggered when the insurer learns of the suit from someone other than the defendant. It also leaves in place $246,425 in attorney fees under the state's unfair trade practices law. The receiver's damages stay at $10, however, because the default judgment was marked satisfied after Discovery paid the injured passenger $1.5 million.

The case arose from a single-car crash early on May 10, 2020. Cherry was driving a Honda owned by Melanie Sauls, the mother of Cherry's child, and the passenger, Samuel Tomlin, was injured. Discovery's policy on the car covered anyone using it, but excluded anyone who used it "without a reasonable belief that [the] insured is entitled to do so."

Sauls told Discovery the day after the crash that Cherry had stolen the car, and a claims adjuster noted telling Sauls that Discovery "would not pay anything" on Cherry's behalf. The record does not show that Discovery investigated further or obtained the theft affidavit its claims manual required.

Tomlin sued Cherry and Sauls in Wilson County in December 2020. Sauls faxed the complaint to Discovery, which hired a lawyer for her, and Tomlin's attorney emailed the insurer a copy in January 2021. Cherry never responded, and the court entered a $3 million judgment against Cherry by default in March 2021.

After the judgment went unpaid, a court appointed Eagles to pursue Cherry's claims against any insurer, and the receiver sued Discovery in June 2022. In May 2024, Discovery settled with Tomlin for $1.5 million, and the judgment was marked satisfied. Nash County Superior Court Judge Timothy W. Wilson then granted summary judgment for the receiver on liability but awarded only $10 in nominal damages.

On appeal, Discovery argued that the receivership ended when the judgment was satisfied. The majority disagreed, noting that the receiver had sued nearly two years before the settlement. Righton v. Pruden, one of the cases the insurer cited, involved a receiver who sued after the judgment was paid. "Nothing in Righton suggests the receivership terminates automatically upon satisfaction of the judgment," Hampson wrote.

Discovery contended that "actual notice" required the insured to forward the summons. The court said Discovery received the complaint from Sauls and Tomlin's lawyer, and its vice president of automotive claims, Cassandra Stallings, testified that the company knew both Sauls and Cherry had been sued. "Stallings' deposition testimony undermines any assertion by Discovery that an alleged lack of notice undermined its ability to fully investigate the accident," Hampson wrote. "Thus, Discovery's argument it lacked notice is without merit."

The majority held in the alternative that Discovery waived the notice requirement by denying liability on other grounds. Rejecting the insurer's argument that the adjuster's remark was not a formal denial, the court said Discovery "made a clear statement it would 'not pay anything' on Cherry's behalf, even if it did not make that statement directly to Cherry." The majority also concluded that Cherry acted in good faith, noting that Sauls had refused to give Cherry her insurance information.

The panel upheld the fee award under N.C. Gen. Stat. § 75-16.1, which allows fees when a defendant acted willfully and made an "unwarranted refusal" to resolve the matter. The record "tends to disclose Discovery failed to make an effort to defend Cherry or inquire into whether he came within Policy coverage despite knowing he had been named in Tomlin's Lawsuit," Hampson wrote. The court rejected Discovery's objection that the trial judge relied on its conduct in the Tomlin suit, calling the two cases "inextricably intertwined."

On the receiver's cross-appeal, the panel held that the amount of the fee award rested in the trial court's discretion. Eagles had sought $1,122,252.34 in fees, based on a 40 percent contingency agreement with the receiver's lawyers. The trial judge instead used hourly rates, cutting the rate for J. David Stradley from $850 to $625.

The panel also rejected the receiver's bid for treble damages, the triple damages available under the trade practices statute, based on the $3 million judgment. Because that judgment was marked satisfied before Discovery's liability was decided, the court said, it was not part of Cherry's actual injury. "Receiver did not show any damages to treble in this case," Hampson wrote.

Tyson faulted the majority for presuming notice by January 2021, though the record left unclear when Sauls sent her copy. "This notion violates the standard of review during summary judgment," Tyson wrote. The dissent said Tomlin's courtesy copy "did not include the summons or show when and if service was accomplished," and that the delay kept Discovery from defending under a reservation of rights. "This gamesmanship prejudiced the Defendant and precludes summary judgment," Tyson wrote.

Lawyers for the receiver included J. David Stradley of White & Stradley, PLLC. Discovery was represented by Joshua H. Bennett and Mitchell H. Blankenship of Bennett Guthrie PLLC.

The court affirmed both trial court orders in full and did not remand. The ruling leaves Discovery owing $246,425 in fees, $12,957.66 in costs, $29,487.32 for the lawyer the receiver hired for Cherry, the receiver's own fee and $10 in nominal damages.