A recent federal decision considers how N.C. Gen. Stat. § 75-1.1 applies when a plaintiff attacks the resolution of a legal claim. The decision might create a new categorical limit on direct-unfairness claims under section 75-1.1.

A Suspicious Request

Davis v. State Farm Life Insurance Co. involved an insurance company that refused to change the owner of, and the beneficiary designation for, a life insurance policy.

When the policy was issued, the insured person under the policy was also the policy owner. The insured named his daughter as the “irrevocable beneficiary” under the policy.

A couple of years later, however, the insurance company received a written request to change the policy owner from the insured to his ex-wife. The company also received a separate request to change the beneficiary from the insured’s daughter to the ex-wife. Both change requests bore the insured’s signature.

After these change requests, the trustee for the daughter contacted the insurance company and claimed that the insured’s signatures had been forged. The trustee also claimed that the terms of the divorce decree between the insured and the ex-wife required that the daughter remain the primary beneficiary.

The insurance company investigated the trustee’s claims. It concluded that the divorce decree did not specifically require the designated beneficiary to be the daughter. The company nevertheless decided that the change forms were not effective because the insured’s daughter and the trustee had not signed them. This decision made the forgery claims moot, from the company’s perspective.

The Fateful Settlement Offer

After this decision, the insurance company offered to refund the ex-wife’s last premium payment, in exchange for a release of her ownership and beneficiary claims. The ex-wife had been making premium payments ever since the change forms were submitted. Thus, the insurance company’s offer would have returned only 10% of the total premium payments the ex-wife had made.

The ex-wife asked the insurance company to explain its decision, but the insurance company demurred.

The Lawsuit

The ex-wife sued the insurance company for breach of contract. She also sought a declaratory judgment that she was the rightful policy owner and beneficiary under the policy.

The ex-wife also pursued a 75-1.1 claim. To support her 75-1.1 claim, she alleged several bad acts by the insurance company. The court sorted those acts into six categories:

1. The insurance company failed to properly provide an explanation for its decision.
2. The insurance company failed to conduct a reasonable investigation.
3. The insurance company removed the ex-wife as owner without a sufficient legal basis.
4. The insurance company removed the ex-wife as beneficiary without a sufficient legal basis.
5. The insurance company made an unreasonably low settlement offer.
6. The insurance company’s threats to remove the ex-wife as owner and beneficiary forced her to retain counsel.

Although the lawsuit was filed in state court, the insurance company removed the case to the U.S. District Court for the Eastern District of North Carolina based on diversity jurisdiction. Judge Louise Flanagan decided the case.

The Court’s Reasoning

The insurance company moved for judgment on the pleadings on the breach-of-contract and 75-1.1 claims. The district court granted this motion.

For the first four categories of alleged bad acts, the court treated the allegations as no more than a claim that the insurance company had breached its contractual duties under the policy. The court decided that the plaintiff did not allege enough aggravating or egregious circumstances to allow a 75-1.1 claim. The court noted that in this context, aggravating circumstances usually involve “forged documents, lies and fraudulent conduct.” The plaintiff did not allege any of these.

The fifth category was where things got more interesting. The plaintiff argued that the insurance company’s settlement offer to her was a per se violation of section 75-1.1 because the offer also violated the North Carolina statute that bars unfair claims-handling practices in the business of insurance.

The court rejected this per se theory. The court acknowledged that an insurance company’s failure to reach prompt, fair, and equitable settlements of claims in which liability has become reasonably clear is a violation of the claims-handling statute and a per se violation of section 75-1.1. However, the court decided that the claims-handling statute did not apply at all in this case, because the claim at issue was a legal claim, as opposed to a contractual claim under the insurance policy. This difference, the court held, stripped the plaintiff’s claim of its per se status.

The court then asked whether the plaintiff’s claim might succeed as a direct-unfairness claim. The court decided that the claim failed the definition of unfairness, because the conduct at issue was not “substantially injurious to consumers.” On this point, the court relied on this passage from Marshall v. Miller: “A practice is unfair when it offends established public policy as well as when the practice is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.” The court implied that the plaintiff’s status as a potential litigant made her something other than a consumer of the insurance company’s services.

For similar reasons, the court questioned whether offers to settle legal claims meet the “in commerce” test under section 75-1.1.

Finally, the court addressed category six, the plaintiff’s novel claim that causing her to hire counsel was itself a violation of section 75-1.1. The court reasoned that the plaintiff had hired counsel because she was claiming a breach of contract. Incurring attorney fees in this context could not support recovery under section 75-1.1, the court wrote, because the plaintiff had not alleged substantial aggravating circumstances. The court also reasoned that this claim was an invalid attempt to convert a claim for statutory fee shifting into a claim for a new species of damages—a result that the law prohibits.

A 75-1.1 Exemption for Resolutions of Legal Claims?

The most interesting feature of Davis is the court’s suggestion that efforts to resolve potential litigation can never support a claim under section 75-1.1, even if the plaintiff generally would be considered a consumer. There might be reasons to question that conclusion.

For example, in HAJMM Co. v. House of Raeford Farms, Inc., the North Carolina Supreme Court implied that a plaintiff need not be acting purely as a consumer to have a right to sue under section 75-1.1. The Supreme Court wrote that section 75-1.1 “was clearly intended to benefit consumers,” but acknowledged that “its protections extend to businesses in appropriate contexts.”

More importantly, Davis seems in tension with the North Carolina Business Court’s recent RREF decision, which holds that a failure to negotiate in good faith can support liability under section 75-1.1. Davis implicitly limits RREF to situations where a defendant owes a preexisting duty to a plaintiff. Query whether the claims-handling statute—which penalizes “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear”—imposes such a preexisting duty.

Time will tell whether Davis is remembered as a one-time response to an unusual fact pattern or as the beginning of a new categorical exemption under section 75-1.1.

Author: George Sanderson