Proximate Cause Is Required on a Per Se Claim for Unfair or Deceptive Trade Practices: Taking a Flyer on a Philadelphia Policy
We have written previously about the interplay between our insurance laws and section 75-1.1, including the requirement that a plaintiff must show actual and reasonable reliance when its claim rests on misrepresentations. We also visited (carefully) with the Broad Street Bullies in an earlier decision that looked at the relationship between a statute prohibiting unfair claim settlement practices and claims under section 75-1.1.
A recent decision from the United States District Court for the Eastern District of North Carolina amplifies these earlier posts, again focusing on the third of the three elements for a section 75-1.1 claim: an injury proximately caused by unfair or deceptive conduct.
In this case, Kenney Properties v. Philadelphia Indemnity Insurance Co., United States District Judge James C. Dever III concluded that the plaintiff must meet the proximate-cause requirement embedded in section 75-16. Judge Dever took the readers on a triple-overtime journey through the interplay between section 58-63-15(11) (regarding unfair claim settlement practices), section 75-1.1’s general prohibitions on unfair and deceptive trade practices, and the cause of action created by section 75.16. So, let’s lace up our skates and jump on the ice.
The North Carolina Residential Rental Agreements Act
Kenney Properties and its affiliated companies offer apartments for rent in North Carolina. Philadelphia Indemnity insured Kenney under a commercial-lines policy during the relevant period. But that relevant period included a change to the North Carolina Residential Rental Agreements Act or RRAA, section 42-38 of our General Statutes.
In 2018, the General Assembly amended the RRAA to clarify what additional “out-of-pocket expenses” landlords could assess against tenants. But because those expenses were not specifically delineated prior to 2018, litigants filed numerous lawsuits seeking reimbursement of certain pre-amendment fees that weren’t spelled out in the RRAA.
One of those lawsuits, brought by Alisa Brogden against Kenney Properties, provides the backdrop for Kenney’s suit against Philadelphia. Kenney settled the Brogden case and sought coverage from Philadelphia.
Philadelphia’s Neutral Zone Trap
Seeking to tie up Kenney as it proceeded out of its own zone, Philadelphia argued that it had no obligation to defend or indemnify Kenney for the Brogden settlement. The parties agreed that “Coverage B” was the applicable coverage, if any. Coverage B was for “personal and advertising injury” which, following application of an endorsement, provided coverage for several different types of injury, including malicious prosecution or abuse of process.
As Kenney moved to dump and chase to avoid the 1-3-1 trap, the parties scuffled at the blue line about whether the Brogden case contained an abuse-of-process claim. Judge Dever methodically worked through North Carolina law on what must be alleged in a complaint to trigger an insurer’s duty to defend. North Carolina uses the comparison test, comparing the insurance policy with the allegations in the complaint to determine whether the events as alleged are covered. If the complaint alleges facts demonstrating that an alleged injury is covered, the insurer has a duty to defend, even though the insured may not ultimately be held liable.
Here, the Brogden complaint alleged statutory violations related to landlord-tenant regulations and debt collection, as well as a section 75-1.1 claim. It did not allege malicious prosecution or abuse of process. Therefore, Brogden’s claims did not fall within the policy’s definition of “personal and advertising injury.” Kenney argued that some factual allegations in the complaint hinted at an abuse-of-process claim. The court quickly cleared the puck all the way down the ice, finding that the allegations Kenney cited would not themselves plausibly allege an abuse-of-process claim.
This led the court to conclude that Philadelphia had no duty to defend.
The Interplay of Icing, Offsides, Sections 58-63-15(11), 75-1.1, and 75-16.
With that background, and a lengthy intermission to rest up for sudden-death overtime, the court then analyzed Kenney’s section 75-1.1 claim. Kenney alleged a per se violation of section 75-1.1 based on Philadelphia’s alleged violation of section 58-63-15(11).
First, Judge Dever noted the well-worn three elements of a claim under section 75-1.1: (1) an unfair or deceptive act or practice, (2) the action in question was in or affecting commerce, and (3) the act proximately caused injury to the plaintiff.
As should be familiar to regular readers, a violation of section 58-63-15(11) is indeed a per se violation of section 75-1.1. But the question remains open whether the violation of section 58-63-15 satisfies all, or only some, of the three elements of a section 75-1.1 claim.
Because the question is unsettled under North Carolina law, the court needed to predict how the Supreme Court of North Carolina would rule. The court concluded that a violation of section 58-63-15(11) would satisfy the first and second elements of a section 75-1.1 claim, but not the third. In other words, a plaintiff alleging an unfair claim settlement practice must also allege that it suffered damages that were proximately caused by the unfair practice.
To reach this conclusion, Judge Dever noted that section 75-1.1 does not itself create a private right of action. Instead, that right of action is created by section 75-16. North Carolina courts have long held that violating section 58-63-15(11) is a violation of the broader provisions in section 75-1.1 as a matter of law. The court continued by examining whether it was inherent in a violation of section 58-63-15(11) that the matter was in or affecting commerce, and concluded that it was. After all, the business of insurance is unquestionably “in commerce,” as it arises out of a purchase of an insurance policy, and people who purchase insurance policies are consumers whose welfare section 75-1.1 was enacted to protect. Thus, the section 58-63-15(11) violation satisfies the first two elements of a section 75-1.1 claim.
But as to the proximate cause element, the court focused on section 75-16’s requirement that a plaintiff has a right of action “on account of such injury done.” In finding that proximate cause was required, the court looked at analogous cases under other regulatory statutes, like Pearce v. American Defender Life Insurance Co., which involved a violation of section 58-54.4 (also an insurance regulation). In Pearce, the North Carolina Supreme Court required that the plaintiff show an actual injury as a proximate result of the defendant’s deception.
Likewise, the North Carolina Court of Appeals has issued multiple decisions finding that even if a plaintiff plausibly alleges a section 58-63-15(11) violation, it must still plausibly allege proximately caused damages.
Finally reaching the overtime goal that ended Philadelphia’s rival’s season, the court reviewed the violations of section 58-63-15(11) that Kenney alleged and found that they contained the same open five-hole that once doomed Flyer great Ron Hextall. Kenney could not allege any independent harm that was caused by Philadelphia’s alleged violations—primarily because there was no duty to defend.
Philadelphia Doesn’t Always Win
In a coda to this discussion, it is worth noting that the Fourth Circuit recently decided another case against Philadelphia Indemnity, which happened to be the appeal of our last visit with the Broad Street Bullies. In that case, the district court had found that the defendant engaged in unfair settlement practices such as issuing a deceptive denial of coverage letter. The Fourth Circuit found that deceptive conduct was a substantial aggravating circumstance attending a breach of contract sufficient to support a section 75-1.1 claim.
Notably, the Fourth Circuit also concluded that the district court erred when it engaged in a separate proximate cause analysis. The Fourth Circuit held that because the “same course of conduct” supported both a breach of contract and section 75-1.1 violation, treble damages were appropriate. That conclusion prevents a defendant from dividing the breach and the aggravating conduct to minimize its damages. In other words, a finding that the damages flowed from “one continuous transaction” (a breach and aggravating circumstances) satisfies the proximate cause requirement of section 75-16.
We will cover this decision in more detail in a future post.
The Kenney Properties case did not break any new ground, but is worth reading for the thorough discussion of the interplay between our insurance code and section 75-1.1. And it’s a worthy reminder that alleging a per se violation might get you in alone against the goalie, but you still have to put the puck in the back of the net. And without an allegation of proximately caused damages, that puck is going to end up in the goalie’s glove.