Thomas H. Segars

Today’s post examines a recent decision from the Middle District of North Carolina on the intersection of section 75-1.1 claims and insurance law.  As explained in more detail below, Martin v. Nautilus Insurance Co. illustrates how courts approach section 75-1.1 claims made in the context of insurance and offers lessons on how to plead such claims. It also provides a jackpot of gambling puns. 

The Flop: An Ill-Fated Fish Fry

Blazing 7’s Skill Game and Fish Table in Eden, North Carolina, invited patrons to try their luck . . . or, Blazing 7 might say skill . . . at a video game called a “fish table.” Fish tables are pay-to-play arcade games that offer players the prospect of winning cash. For that reason, law enforcement in North Carolina has shut many of them down, characterizing them as illegal gaming operations. 

Before law enforcement could shut it down, Blazing 7 suffered a series of different misfortunes. In a single day, Blazing 7 was burglarized and then destroyed by a fire.  

After that fateful day, Blazing 7 made a claim on its insurance policy, issued by Nautilus. Nautilus initially paid Blazing 7 $10,000 on its claim, but then denied the claim. Nautilus did so because Blazing 7 had failed to install a burglary alarm at its property—a precaution that the policy required to improve the odds of avoiding a burglary-related loss. Down on its luck, Blazing 7 decided to up the ante by suing Nautilus for breach of contract and for violation of section 75-1.1.  

Leaving nothing to chance, Blazing 7’s complaint spelled out three separate violations of North Carolina General Statute section 58-63-15(11)—the law that regulates unfair insurance-claim-settlement methods—as predicates for section 75-1.1 liability. In particular, Blazing 7 alleged that Nautilus violated sections 58-63-15(11)(a), (f), and (n), respectively, by (1) “[m]isrepresenting pertinent facts or insurance policy provisions related to coverages at issue,” (2) “[n]ot attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear,” and (3) “[f]ailing to promptly provide a reasonable explanation of the basis” for denying the claim.

Blazing 7 also hedged its bets, though. It alleged misconduct outside of the insurance law as a basis for section 75-1.1 liability. Blazing 7 contended generally that Nautilus unreasonably compelled it to file a lawsuit in order to obtain policy benefits and that Nautilus had violated section 75-1.1 in “other ways to be solicited through discovery and proven at trial.”

Nautilus moved to dismiss the section 75-1.1 claim from Blazing 7’s complaint for failure to state a claim.

The Turn: Explaining the House Rules

The Martin court examined each of the alleged predicates for section 75-1.1. It started with Blazing 7’s three of a kind—the trifecta of alleged section 58-63-15(11) violations.

Martin dispensed with the alleged violations of sections 58-63-15(11)(a) and (f)—for misrepresenting facts or policy provisions and failing to effect a prompt settlement, respectively—in short order. Blazing 7 contended that Nautilus’s invocation of the burglary alarm requirement was dirty pool because much of Blazing 7’s damages were caused by fire—not burglary.  It also contended that Nautilus’s initial payment of $10,000 was deceptive because it led Blazing 7 to believe that a more comprehensive settlement of the claim would be forthcoming. Nautilus countered that Blazing 7’s complaint itself was proof that Blazing 7 understood Nautilus’s position on the policy. Nautilus also argued that the burglary alarm provision was relevant to Blazing 7’s claim because the fire had been caused by a burglary accompanied by arson. The court agreed with Nautilus, noting that neither a simple dispute about how to interpret and apply the policy nor an “honest disagreement” about what happened at Blazing 7 could rise to a statutory violation.

The court reached a different conclusion on Blazing 7’s theory predicated on section 58-63-15(11)(n)—the alleged failure to promptly provide a reasonable explanation of the insurer’s position.  Here, the Court noted that Nautilus’s initial position on the matter, which accompanied the $10,000 payment, distinguished between (a) Blazing 7’s burglary or theft loss and (b) Blazing 7’s fire loss. Although Nautilus later connected these losses under a common “causal link”—a burglary accompanied by arson—the court explained that it was Nautilus’s obligation to explain its position “in the first instance.” Because Nautilus had not done so, the court held that Blazing 7 stated a claim for relief under section 75-1.1, predicated on section 58-63-15(11)(n). In reaching this conclusion, the court relied heavily on DENC, LLC v. Philadelphia Indemnity Insurance Co., a Fourth Circuit case that we wrote about recently.

What about the theory based on alleged misconduct outside of the insurance statute? It wasn’t in the cards. The Martin court dispensed with that theory in a one-sentence footnote, concluding that no such claim had been alleged. It was a bad beat for Blazing 7.

The River: Don’t Miss Your Outs by Failing to Plead All Available Suits

Martin illustrates a recurring theme: Courts tend to evaluate section 75-1.1 claims based on the company they keep. Section 75-1.1 applies to a broader scope of conduct than does section 58-63-15(11), the unfair-claim-settlement statute. Yet, in a section 75-1.1 case that arises out of the insurance claim process, a court is likely to look to insurance law to determine the boundaries of the claim. This phenomenon underscores the need for claimants to correctly categorize their section 75-1.1 claims, which we have discussed.

With a different pleading, the separate section 75-1.1 theory predicated on conduct outside of insurance law might have been treated as a direct unfairness claim—giving Blazing 7 an ace up the sleeve. Unfortunately, though, the complaint included only the barest of allegations on this point—even suggesting that its basis was unknown and to be “solicited through discovery.” Perhaps Blazing 7 simply did not have a factual basis for making a broader direct unfairness claim. However, whenever grounds for such a theory exist, a plaintiff would be wise to include them in some detail.

Will we keep dealing out section 75-1.1 lessons that we find in the caselaw? You bet.