Legal Developments and Special Issues in UM/UIM Cases

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A. Recent Court Cases
B. Current Trends
C. The Latest on Handling Claims Involving Multiple Tortfeasors
D.  Conflicts of Law
E. Stacking of Coverages and Excess Liability
F. Primary and Excess Policies
G. Can Failure to Pay Limits be Bad Faith?
H. Issues that Arise in Arbitration

  1.

The timing and form of demand

  2.

Waiver of Arbitration

  3.

Issues Subject to Arbitration

  4.

Recovery of “expenses” and attorneys fees in arbitration.

  5. Overturning Arbitration Award by Court
  6.

Modifying Arbitration Award (including interest)

  7.

Filing Award as Judgment

  8.

Offsets

  9.

Discovery Rights

  10.

Procedures in Arbitration

A. Recent Court Cases

            There have been several UM/UIM cases in 2008.

            In Great American Ins. Co. v. Freeman, 665 S.E.2d 536, 538 (N.C.App. 2008), the insured was operating his personal motorcycle in the scope of his employment with his employer.  The employer had a policy which provided $1,000,000 in UIM coverage, but defined “covered autos” for UM/UIM purposes as “only those autos described in Item Three of the declarations.”  The motorcycle was not identified on the declarations page.  The insurer argued that the employee had no UIM coverage because he was not in a listed vehicle, and the insured had, in effect, rejected UIM coverage for the motorcycle (by not listing it in the policy). 

            The employee argued that the policy provided liability coverage of $1,000,000 in liability limits, that the employer did not sufficiently reject UIM coverage, and that he was therefore an insured and was entitled to $1,000,000 in UIM limits.  The court agreed with the employee.

            The case turned heavily on the application for coverage, and the form of the policy.  Portions of the policy are attached to this manuscript.  The court wrote:

In Omega Development's completed application, there were no marks indicating that any of the options had been offered to Omega Development, and the spaces for signatures next to the options being selected were all left blank.  In addition, on the application's first page, where the applicant could place an “X” beside the type of coverage selected and the types of motor vehicles that would be “covered autos” for each type of coverage, Omega Development did not indicate that it was selecting UM or UIM coverage or designate the type of vehicles that would be “covered autos” for UM/UIM coverage.  Thus, in this case, the insured had the option to either select UIM coverage or reject UIM coverage, and it did neither. The insured had the option of selecting a different definition of “covered autos” than it did for its liability coverage, but it did not do so.  We cannot, therefore, draw from these facts any inference that Omega Development intended to select a different type of coverage for UIM than for liability.  Such an inference on these facts would amount to mere speculation.
            The insurer had argued that the policy was a fleet policy, and hence that the insurer did not have to use the Rate Bureau selection/rejection form.  The court held that the insurer still had to give the insured the opportunity to reject the greater UM/UIM limits.  The insurer also relied heavily on the former Hlasnick case, which had held that the insured rejected greater UM/UIM coverage by affirmatively selecting lesser coverage.  The court in this case held that the documents did not show a rejection as clearly as was done in Hlasnick.

            The opinion is somewhat unclear regarding the reason that the policy was required to provide liability coverage to the employee.  The court noted that the policy provided liability coverage for “any auto,” but the court seemed to focus on the coverage provided for non-owned autos.  “In Omega Development's policy with Great American, the highest limit of bodily injury liability coverage for purposes of § 20-279.21(b)(4) is $1,000,000.00 for “any ‘auto.’ ”  The Omega Development policy defines an “auto” as “a land motor vehicle, ‘trailer’ or semitrailer designed for travel on public roads but does not include ‘mobile equipment.’”  Its definition of “any ‘auto’ ” encompasses “nonowned ‘autos,’” which includes “those ‘autos' you do not own, lease, hire, rent or borrow that are used in connection with your business.  This includes ‘autos' owned by your ‘employees' ... but only while used in your business or your personal affairs.””  The court reasoned, “Because Freeman, an employee of Omega Development, was using his motorcycle in Omega Development's business, it falls within the policy's definition of “any ‘auto’” and is a “covered auto” under Great American's policy.”

            In North Carolina Counties Liability and Property Joint Risk Management Agency v. Curry, 662 S.E.2d 678 (N.C.App. 2008), the court seemingly held that the UIM carrier’s limits are not reduced by either (a) payments made under the liability policy or (b) payments made by the workers compensation carrier.  The case was not governed by the FRA (because it involved a county vehicle), but the policy language was standard.

            In this case, the insured was in a MVA and sustained significant damages, which were stipulated to be $300,000.  He recovered $30,000 from the liability carrier, and $144,000 from worker’s compensation.  The policy covering the vehicle he occupied had UIM limits of $100,000.  The policy stated “b. Any amount payable under Section III, E. Uninsured/Underinsured Motorist Coverage shall be reduced by:(1) all sums paid or payable under any workers' compensation, disability benefits, or similar law exclusive of non-occupational disability benefits; (2) all sums paid by or for anyone who is legally responsible, including all sums paid under the Contract's liability coverage; . . . .”  The court stated the policy stated that “’any amount payable’ under the provision shall be reduced, but did not indicate whether that amount payable referred to the obligation to ‘pay all sums the Covered Person is legally entitled to recover as damages’ or to the limit that would be paid for all damages.”  North Carolina Counties Liability and Property Joint Risk Management Agency v. Curry, 662 S.E.2d 678 (N.C.App. 2008).

            Where the named insured’s signature on the selection/rejection form was not his real signature (as found by handwriting expert), and the named insured later stated that he authorized the agent or others to sign the form for him, but the actual insurance agent said that he typically would have the insured sign the form, there were material issues of fact regarding the selection/rejection form was valid.  Hammond v. Wray, 2008 WL 2582400, 2 (N.C.App. 2008).

            The UIM carrier was liable for interest on the full arbitration award of $75,000, even though it was entitled to an offset of $50,000; UIM carrier was therefore liable for $25,000 plus interest on $75,000.  King v. Lingerfelt, 2008 WL 2097590, 2 (N.C.App. 2008) (“’damages’ included pre-and postjudgment interest.”; court awarded interest, after “the issue of prejudgment interest is left by the panel to be addressed by the parties or a Court of competent jurisdiction”).

            An arbitration panel can award pre-judgment interest.  Sprake v. Leche, 658 S.E.2d 490, 491 (N.C.App. 2008) (“the provision granting the arbitration panel authority to address issues of ‘compensatory damages’ was ambiguous as to whether prejudgment interest was available”).

            A driver who strikes a log in the road does not have UIM coverage under the “hit and run” provisions of the FRA.  Moore v. Nationwide Mut. Ins. Co., 664 S.E.2d 326 (N.C.App. 2008) (“plaintiff's complaint alleged he had “struck a pine tree log that had fallen off a truck and was lying in the middle of the interstate.” No evidence shows from what vehicle, truck or trailer, if any, the pine tree log fell from, when it fell, or how long it had been lying on the interstate prior to impact.”; insured failed to satisfy physical-contact element of statute providing; insured must prove physical contact occurred between insured's vehicle and hit-and-run driver's vehicle).

            Where a rock fell off a truck and struck the claimant in his vehicle, the claimant had UM coverage under the hit-and-run provisions.  “If it is ultimately found to be true, as defendant alleges, that the rock that crashed through Ana Larson's windshield fell and escaped directly from an unidentified dump truck that was hauling the rock in the course of its business, then there has been an “an unbroken ‘chain collision’ which involves the hit-and-run vehicle.... [and] the physical contact requirement has been satisfied, albeit intermediate and indirect.”  Geico Insurance Co. v. Larson, 542 F.Supp.2d 441 (E.D.N.C. 2008).

          The spouse’s claim for loss of consortium must be tried with the principal action.  Further, where the consortium claim is dismissed, that dismissal must be immediately appealed; if the principal action goes forward, the consortium claim is lost.  Jones v. Parsons, 2008 WL 711127, 2 (N.C.App. 2008) (“Although the appeal would have been interlocutory, Ms. Jones could have rightfully argued that it affected a substantial right that would be lost, causing injury to Ms. Jones, if not heard.”).

            Where the lower court finds that UM coverage exists, the appeal is interlocutory and the tort action must go forward to determine damages (before the coverage issue can be appealed).  Nolan v. Cooke, 2008 WL 434583, 2 (N.C. App. 2008) (trial court found that risk pool provided 2,000,000 in UM coverage, and that amount paid by the County to plaintiff in workers' compensation would not be deducted from the coverage limits, but instead would constitute a lien).

            Where insured signed form stating, “I choose to reject Combined Uninsured/Underinsured Motorists Coverage and select Uninsured Motorists Coverage at limits of: Bodily Injury 100/300; Property Damage 50,” insured did not have UIM coverage.  State Farm Mut. Auto. Ins. Co. v. Gaylor, 660 S.E.2d 104, 107 (N.C.App. 2008).

            The insured must properly serve the UM carrier within the statute of limitations.  Cline v. Owens, 2008 WL 2415930, 3 (N.C. App. 2008) (“plaintiff issued a summons to ‘Safeco Insurance Company’ on 18 September 2006, and to ‘General Insurance Company of America, a subsidiary of Safeco Insurance Company’ on 28 February 2007.  The statute of limitations on plaintiff's claim expired on 31 October 2006.  See N.C. Gen.Stat. § 1-52(16) (2007).  Since General Insurance and Safeco are separate and distinct corporate entities, had the process served on General Insurance been valid, it would have effectively added a new party to the lawsuit.  Plaintiff seeks not to correct any mistakes or misnomers in the service of process, but to add General Insurance as a party, an impermissible action under Rule 15(c).”).

            Where the UM/UIM insurer cannot find the selection/rejection form, then it is required to provide $1,000,000 in UIM limits (in a policy requiring UIM coverage), and it cannot argue that the insured rejected this coverage based on the general business practices of the insurer.  In Progressive Southeastern Ins. Co. v. Greene, 2008 WL 4170058, 2 (M.D.N.C. 2008), the policy declarations expressly stated that the insured rejected UIM coverage and selected only UM coverage of $50,000.  The insurer never charged for UIM coverage.  The insurer could not find the Selection/Rejection form that was allegedly executed by the insured.  The insured “does not remember whether she signed the Selection/Rejection form for UIM coverage.”  The insurer’s position was stated as follows:
According to the affidavits, Mrs. Greene would have been required to sign a policy application and the requisite N.C. Form 0185 Selection/Rejection Form expressing the desired type and amounts of UM and UIM coverage in the amounts she selected on the policy before the application was submitted electronically to Progressive Southeastern Progressive Southeastern contends that this evidence of its routine business practices constitutes “affirmative proof” that Mrs. Greene was provided an opportunity to reject, and did reject, UIM coverage under the policy at the time of its initial purchase in July 2000, and that she executed the approved N.C. Form 0185, in which she specifically rejected UIM coverage. Progressive Southeastern contends that it is therefore not required to provide UIM coverage for bodily injuries sustained by Jody Greene in the accident occurring on July 1, 2006.
                      “[A]n insurer that obtained a signature rejecting UIM coverage on a form that did not comply with the N.C. Rate Bureau form could subsequently conveniently “lose” the form and then later contend that the form was in compliance. This federal court should not create such a loophole around the North Carolina statute.”  “[T]he failure of Progressive Southeastern to produce the requisite form in this case is treated as if Mrs. Greene were never offered the requisite form to either accept or reject.  Therefore, rather than being entitled to the coverage limits under the policy, Mr. Greene is entitled to the maximum amount recoverable by statute, which is $1 million.”

            Diversity exists between in-state insured and out-of-state UIM carrier.  Insurer was sued for breach of contract and for its independent tortuous acts, and not for vicarious liability.  Boyd v. Baird, 2008 WL 1724011, 7 (W.D.N.C. 2008) (Section 1332(c)(1), primarily regarding a “direct action,” does not defeat diversity jurisdiction).

B. Current Trends

            In a case from 2005, the North Carolina Court of Appeals held that where the UIM carrier did not provide the insured with a right to select limits greater than the liability limits, the insured was entitled to the maximum UIM limits of $1,000,000.  Williams v. Nationwide Mut. Ins. Co., 174 N.C. App. 601, 603, 621 S.E.2d 644, 645 - 646 (2005), review improvidently allowed, 360 N.C. 586, 634 S.E.2d 887 (2006).  The Court stated, “A total failure on the part of the insurer to provide an opportunity to reject UIM coverage or select different UIM policy limits violates the requirement that these choices be made by the policy owner.  Such a failure should not invoke the minimum UIM coverage limits established in N.C.G.S. § 20-279.21(b)(4) and shield the insurer from additional liability.”  Even though liability limits were $50,000, the insured was determined to be entitled to $1,000,000 in UIM limits. 

            After Williams, many insureds pushed the UIM carrier to produce a copy of the selection/rejection form.  They take the position that unless the insurer can produce this form, that they are entitled to $1,000,000 in UIM limits.  In two appellate cases, the UIM carrier produced a selection/rejection form, and the insured (named insured or additional insured) claimed that the signature was forged.  Hammond v. Wray, 2008 WL 2582400, 2 (N.C.App. 2008) (where the named insured’s signature on the selection/rejection form was not his real signature (as found by handwriting expert), and the named insured later stated that he authorized the agent or others to sign the form for him, but the actual insurance agent said that he typically would have the insured sign the form, there were material issues of fact regarding the selection/rejection form was valid.); Piles v. Allstate Ins. Co., 653 S.E.2d 181, 185 -186 (N.C.App. 2007) (claim for fraud, bad faith etc. is not barred by statute of limitations; insured argued that Allstate forged her name to the Selection/Rejection Form, per handwriting expert; claims for bad faith accrued when she was denied UIM coverage, and not the date of the MVA).

            Where the UIM did not produce the signed form, it typically responded by arguing that its standard procedure was to have the insured sign the form, and that therefore the insured probably signed such a form.  In a recent case, a federal court rejected this approach, and held that where the UM/UIM insurer cannot find the selection/rejection form, then it is required to provide $1,000,000 in UIM limits (in a policy requiring UIM coverage), and it cannot argue that the insured rejected this coverage based on the general business practices of the insurer.  In Progressive Southeastern Ins. Co. v. Greene, 2008 WL 4170058, 2 (M.D.N.C. 2008), the policy declarations expressly stated that the insured rejected UIM coverage and selected only UM coverage of $50,000.  The insurer never charged the insured for UIM coverage.  The insurer could not find the Selection/Rejection form that was allegedly executed by the insured.  The insured “does not remember whether she signed the Selection/Rejection form for UIM coverage.”  The insurer’s position was stated as follows:
According to the affidavits, Mrs. Greene would have been required to sign a policy application and the requisite N.C. Form 0185 Selection/Rejection Form expressing the desired type and amounts of UM and UIM coverage in the amounts she selected on the policy before the application was submitted electronically to Progressive Southeastern Progressive Southeastern contends that this evidence of its routine business practices constitutes “affirmative proof” that Mrs. Greene was provided an opportunity to reject, and did reject, UIM coverage under the policy at the time of its initial purchase in July 2000, and that she executed the approved N.C. Form 0185, in which she specifically rejected UIM coverage. Progressive Southeastern contends that it is therefore not required to provide UIM coverage for bodily injuries sustained by Jody Greene in the accident occurring on July 1, 2006.

The federal court took a rather cynical view, stating, “[A]n insurer that obtained a signature rejecting UIM coverage on a form that did not comply with the N.C. Rate Bureau form could subsequently conveniently “lose” the form and then later contend that the form was in compliance.  This federal court should not create such a loophole around the North Carolina statute.”  “[T]he failure of Progressive Southeastern to produce the requisite form in this case is treated as if Mrs. Greene were never offered the requisite form to either accept or reject.  Therefore, rather than being entitled to the coverage limits under the policy, Mr. Greene is entitled to the maximum amount recoverable by statute, which is $1 million.”

            Our state Court of Appeals may of course adopt a different approach to this issue.

            Apparently in response to Williams, under the newer statute, effective for policies issued after January 1, 2009, the insurer must provide UM/UIM limits equal to the liability limits.  The new statute does not appear to allow the insured to reject UM/UIM coverage. 

            The insurer is required to notify the insured of a right to purchase $1,000,000 in UM/UIM limits.  (There is a safe-harbor provision regarding this notice; if the insurer provides the notice described in the statute, then the notice is deemed reasonable.)  Under the new statute, the failure to offer these higher limits probably does not result in higher coverage.  G.S. § 20-279.21(n) (“Nothing in this section shall be construed to provide greater amounts of uninsured or underinsured motorist coverage in a liability policy than the insured has purchased from the insurer under this section.”).

            Under the new FRA, policies covering commercial vehicles and fleet vehicles are not required to provide UM/UIM coverage.  Policies covering these types of vehicles and other vehicles also are required to provide some UM/UIM coverage.  The statute states:

Notwithstanding the provisions of this subsection, no policy of motor vehicle liability insurance applicable solely to commercial motor vehicles as defined in G.S. 20-4.01(3d)  or applicable solely to fleet vehicles shall be required to provide uninsured motorist coverage.  Any motor vehicle liability policy that insures both commercial motor vehicles as defined in G.S. 20- 4.01(3d) and noncommercial motor vehicles shall provide uninsured motorist coverage in accordance with the provisions of this subsection in amounts equal to the highest limits of bodily injury and property damage liability coverage for any one noncommercial motor vehicle insured under the policy, subject to the right of the insured to purchase higher uninsured motorist bodily injury liability coverage limits as set forth in this subsection.  For the purpose of the immediately preceding sentence, noncommercial motor vehicle shall mean any motor vehicle that is not a commercial motor vehicle as defined in G.S. 20-4.01(3d), but that is otherwise subject to the requirements of this subsection.

           A commercial motor vehicle is defined as “Any of the following motor vehicles that are designed or used to transport passengers or property:”

a. A Class A motor vehicle that has a combined GVWR of at least 26,001 pounds and includes as part of the combination a towed unit that has a GVWR of at least 10,001 pounds.
b. A Class B motor vehicle.
c. A Class C motor vehicle that meets either of the following descriptions:
           1. Is designed to transport 16 or more passengers, including the driver.
           2. Is transporting hazardous materials and is required to be placarded in            accordance with 49 C.F.R. Part 172, Subpart F.
G.S. § 20-4.01(3d).    
        
           This provision may have the most frequent application for “fleet” policies.  A fleet policy is simply a policy that covers five or more vehicles, which presumably means that the policy lists five or more vehicles in the schedule of vehicles.  Hlasnick v. Federated Mut. Ins. Co., 136 N.C. App. 320, 324, 524 S.E.2d 386, 389 (2000) (“A ‘nonfleet’ motor vehicle ‘means a motor vehicle not eligible for classification as a fleet vehicle for the reason that the motor vehicle is one of four or less motor vehicles owned or hired under a long-term contract by the policy named insured.’  N.C. Gen.Stat. § 58-40-10(2) (1994).  There is no dispute that Federated Mutual's policy insured more than four vehicles; therefore, the policy is a fleet policy.”).

            Therefore, with respect to these commercial and fleet vehicles, the FRA does not require any UM or UIM coverage, and such coverage will be determined solely by the terms of the policy (and not the FRA).

C. The Latest on Handling Claims Involving Multiple Tortfeasors

            As a general matter, the UIM policy begins providing coverage after the limits of the underlying motor vehicle liability policy are exhausted.  In most instances, the exposure of the UIM carrier is fairly clear.  The UIM carrier is exposed to those damages of the insured between the aggregate of all insurance policies which cover the underinsured motorist (assuming that all such policies can be stacked), and the limit of liability under the particular UIM policy.  (This analysis also excludes the presence of other UIM insurance, which is addressed elsewhere in this article.)

            A complication is presented, however, where the insured has claims against two or more tortfeasors.  In most such instances, the two tortfeasors will be two motorists.  It is also possible, however, to have a tortfeasor who was not operating a motor vehicle.  This could be, for example, a governmental entity which is responsible for a defect in the roadway, or a private owner of land for a defect or hazard in a parking lot.

            The troubling issue that arises is whether the UIM carrier may deny coverage (i.e. a duty to pay or even negotiate) until the limits of liability of both tortfeasors have been exhausted.

            For example, if the insured submits a claim against the driver of the vehicle in which he is a passenger, and that driver’s liability carrier exhausts its limits, and there is a second motorist who contributed to the accident, then it is not clear whether (a) the UIM carrier’s exposure begins immediately for the first dollar of liability beyond the payment of the liability carrier which has exhausted its limits, or whether the insurer may disclaim a duty to pay until the liability policy of the second tortfeasor is exhausted, (b) whether the insured may demand arbitration, notwithstanding the failure of the second liability carrier to exhaust limits, and (c) whether the UIM carrier’s exposure (whether viewed as limits or as a duty to pay) is offset by the limits of the second insurer.

            This issue has been litigated more extensively in other states, with varying results.  General Acc. Ins. Co. v. Wheeler, 221 Conn. 206, 213, 603 A.2d 385, 388 (1992) (“Likewise, other jurisdictions have held that under similar statutes, the insured was not required to exhaust the policies of all joint tortfeasors.”); Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 439 -440 (Del. Super. 2005) (“The plain meaning of the provision is that UIM carriers are not obligated to pay their insureds until after the insureds exhaust all available liability insurance policies.”; insured had received limits from one tort-feasor, and had also sued another tortfeasor “State Farm was not obligated to pay the Dunlaps [insureds] before the Dunlaps either received a policy limits settlement from DART [second tort-feasor] or obtained a judgment after trial.”).

            The FRA does not provide a clear answer to this issue.  Some of the language of the UIM portions of the FRA suggest that the insured must exhaust all policies which may provide liability coverage, and other portions suggest that the focus is on all policies covering a particular vehicle (and not e.g. two vehicles).  G.S. § 20-279.21(b)(4) (“’an underinsured highway vehicle,’ [] means a highway vehicle with respect to the ownership, maintenance, or use of which, the sum of the limits of liability under all bodily injury liability bonds and insurance policies applicable at the time of the accident is less than the applicable limits of underinsured motorist coverage for the vehicle involved in the accident and insured under the owner's policy”); id. (“Underinsured motorist coverage is deemed to apply when, by reason of payment of judgment or settlement, all liability bonds or insurance policies providing coverage for bodily injury caused by the ownership, maintenance, or use of the underinsured highway vehicle have been exhausted.”); id. (“Underinsured motorist coverage is deemed to apply to the first dollar of an underinsured motorist coverage claim beyond amounts paid to the claimant under the exhausted liability policy.”).

            In North Carolina, we have no case which squarely addresses this issue.  One case addressed the UIM carrier’s right to pursue a second underinsured motorist, and two cases involved the relationship between the UIM carrier and third-parties who are not motorists.

In Johnson v. Hudson, 122 N.C. App. 188, 468 S.E.2d 64 (1996), the insured-passenger sued a motorist, and his UIM carrier filed a third-party action for “contribution” against a second motorist who allegedly caused the automobile accident.  The lower court dismissed the third-party claim.  The Court of Appeals noted that N.C.G.S. § 20-279.21(b)(4) states that the UIM carrier “may participate in the suit as fully as if it were a party.”  The court wrote, “This statute allows the underinsured insurance carrier to assert all claims that could have been asserted by its insured, the plaintiff.”  Id. at 190, 468 S.E.2d at 66.  The court then wrote, “Because Utica [UIM carrier] may assert all claims that the insured can under N.C.G.S. § 20-279.21(b)(4), we reverse the trial court's entry of summary judgment . . . .”  Id. at 190, 468 S.E.2d at 66.

            Although this case did not directly address whether the presence of a second tortfeasor affects the point at which the UIM carrier’s liability is triggered, a fair implication of the opinion is that the UIM carrier’s obligation to pay is triggered by the exhaustion of all policies covering one vehicle (and its driver), and the significance of other liability insurance is that the UIM carrier may pursue its insured’s claim against the second tortfeasor.  This opinion does not clearly address whether the UIM carrier’s claim is one for contribution or subrogation.  (The opinion states, “Utica is not a tort-feasor,” but generally uses the term “contribution.”)  The opinion also does not address the apportionment of any money recovered against the second motorist (i.e. whether that money is first paid to the insured to make him whole, or whether it is first paid to the UIM carrier, or whether it is pro-rated).  (The FRA does provide for a pro-rata allocation of proceeds recovered against the underinsured motorist, where the insured is not made whole by insurance payments.  G.S. § 20-279.21(b)(4) (“Upon the entry of judgment in a suit upon any such claim in which the underinsured motorist insurer and claimant are joined, payment upon the judgment, unless otherwise agreed to, shall be applied pro rata to the claimant's claim beyond payment by the insurer of the owner, operator or maintainer of the underinsured highway vehicle and the claim of the underinsured motorist insurer.”).

            The other two cases did not arise in the context of two underinsured motorists; they each involved a second tortfeasor who was liable not by virtue of operating a motor vehicle.

            In McCrary v. Byrd, 148 N.C.App. 630, 559 S.E.2d 821 (2002), the insured was injured when she was struck by a motorist in the parking lot of Ham’s Restaurant in Chapel Hill.  The driver’s liability carrier (Farm Bureau) paid $100,000 to the insured.  Ham’s then paid $35,000 to the liability carrier to resolve a potential contribution or indemnification action by the driver against Ham’s (based on providing the driver with alcohol), resulting in a “net” payout by the liability carrier of only $65,000.  The insured then submitted a claim to her UIM carrier (Nationwide).  “Nationwide argues there has been no exhaustion as Farm Bureau received reimbursement of $35,000.00 from Ham's, thus, Farm Bureau's net payout was $65,000.00.  In determining exhaustion, the focus is not on Farm Bureau's net payout but whether Farm Bureau paid to Plaintiff the full dollar amount its policy set as the limits of liability.”  Id. at 636, 559 S.E.2d at 826.  The court therefore held that the “underinsured motorist coverage provisions had [] been triggered.”

            The Court did not directly address the issue of whether the potential liability of Ham’s affected the UIM carrier’s duty to provide UIM coverage.  Although the issue was not directly raised, a fair implication of the decision is, however, that the presence of a second potential tortfeasor (Ham’s), did not in any way reduce the duty of the UIM carrier. 

            The second case is Farm Bureau Ins. Co. of N.C., Inc. v. Blong, 159 N.C. App. 365, 583 S.E.2d 307 (2003).  In this case, the insured was injured in a motor vehicle accident caused by a drunk driver.  The victim reached a settlement with the driver (consisting of policy limits) and from the bars which served alcohol to the intoxicated driver.  The insured had previously reached a settlement with her UIM carrier, in which they agreed to subsequently resolve the issue of whether the UIM carrier received an offset for amounts paid by the bars.  The court ruled in favor of the insurer, and held that the insurer was entitled to an offset for both the amount paid by the intoxicated motorist, and the amounts paid by the liability carriers for the bars.  In its discussion of this issue, the court wrote, “Marvin's [drunk driver’s] insurer paid out its entire liability coverage, thereby exhausting her coverage.  According to the Act, this being the only applicable policy, UIM coverage was ‘deemed to apply.’”  Id. at 370, 583 S.E.2d at 310.

            It would therefore appear that the UIM carrier’s obligation begins immediately upon the exhaustion of one tort-feasor’s policy.

            The UIM carrier probably is, however, probably subrogated to the insured’s claim against other tortfeasors (motorists and otherwise).  The Blong court dealt with this as follows:
In the event of payment to any person under the coverage required by this section and subject to the terms and conditions of coverage, the insurer making payment shall, to the extent thereof, be entitled to the proceeds of any settlement for judgment resulting from the exercise of any limits of recovery of that person against any person or organization legally responsible for the bodily injury for which the payment is made, including the proceeds recoverable from the assets of the insolvent insurer.

N.C. Gen.Stat. § 20-279.21(b)(3) (2001) (emphasis added).

Defendants contend that this section of N.C. Gen.Stat. § 20-279.21(b)(3) only refers to the proceeds of the insured's action against the owner/operator of the motor vehicle involved in the collision, i.e., the suit against Marvin that was abandoned and which plaintiff waived its subrogation rights. Defendant argues that provision does not include all liability actions, including those maintained against persons wholly separate from the motor vehicle collision, i.e., the dram shops.

Id. at 371, 583 S.E.2d at 311.  The court then noted that the UIM policy stated, “’[a]ny amount otherwise payable for damages under this coverage shall be reduced by all sums paid because of the bodily injury or property damage by or on behalf of persons or organizations who may be legally responsible.’ This tracks the language in (b)(3).”  Id. at 371-72, 583 S.E.2d at 311.  The court concluded, “Plaintiff insurer, by the Act and the present policy, is subrogated to defendants' right to recover from any legally responsible party.”  Id. at 372, 583 S.E.2d at 311.  The court suggested that the UIM carrier can compel the insured to proceed against other tortfeasors, and that the UIM carrier can then recoup its payment, stating:
If there are parties that exist that may be made “legally responsible” through proper court channels, the UIM insurer may pursue them via their subrogation rights. . . .  The fear of defendants that insureds will be kept hanging in limbo as they are forced to sue any and all possible persons or organizations for years before they could recover their UIM benefits are unfounded. Such actions on the part of UIM carriers would be in the realm of bad faith.

Id. at 373, 583 S.E.2d at 312.

            Thus, the net effect of the Blong case is that the insured is not required to exhaust all other claims against other tortfeasors before triggering the UIM policy, but the UIM insurer (and not the insured) essentially receives the benefit of other sources of recovery.

            The Blong case is therefore somewhat at odds with the McCrary case, in which the insured (and/or the liability carrier) receive the benefit of Ham’s contribution to the settlement, and the UIM carrier received no benefit from this contribution.  (The UIM carrier actually presumably received a benefit of $5,000, which Ham’s paid directly to the insured, because the insured should not make a double recovery in any event.)  The only distinction between the two cases conceptually is that in Blong, the UIM carrier paid first and then the claim against other tort-feasors was settled; in McCrary, the insured settled the other claim first and then pursued his UIM claim.

            In McCrary, the UIM insurer argued that the insured’s conduct (in settling with Ham’s) prejudiced the UIM insurer’s contribution claim against Ham’s, but the court rejected this, stating, “In this case, Nationwide, an underinsured motorist insurance carrier, is not a tort-feasor and thus has no right of contribution against Ham's.  Accordingly, the trial court erred in concluding Plaintiff's release of Ham's extinguished any claims Nationwide would have had for contribution against Ham's.”  McCrary, 148 N.C. App. at 638, 559 S.E.2d at 827.  Therefore, the nature of the UIM insurer’s claim is in subrogation, and not contribution.  (In McCrary, the UIM carrier had expressly waived its subrogation claims against Ham’s.)

            When faced with multiple tortfeasors, the UIM carrier may want to object to any settlements with other tort-feasors, unless the UIM carrier believes that the offset it will receive (for this settlement amount) is outweighed by the value of the subrogation claim.

D. Conflicts of Law

            If the UM/UIM policy was issued outside of North Carolina, then both parties should examine the law of the state where the policy was issued, to see if its law differs from that of North Carolina. 
 
            For example, in one case a family-member exclusion was held enforceable because the policy was issued in Tennessee, and North Carolina's connection to the case was merely casual, even though the automobile accident occurred in North Carolina.  Johns v. Automobile Club Ins. Co., 118 N.C. App. 424, 455 S.E.2d 466 (1995).  The result would have been different under North Carolina law.

            In another case, the insured’s UIM claim was saved because the North Carolina law regarding the selection/rejection form applied.  Martin v. Continental Ins. Co., 23 N.C. App. 650, 656, 474 S.E.2d 146, 149 (1996) (rejection form not in compliance with North Carolina Rate Bureau ineffective; insured “registered 1,479 vehicles in this state”; even though this was only 18 percent of the vehicles insured on the policy, the connection with North Carolina was sufficient to invoke North Carolina law).

            The general rule is, of course, that the law of the state where the policy was issued governs the insurance dispute.  Sitzman v. Government Employees Ins. Co., 641 S.E.2d 838, 842 (N.C. App. 2007) (“We interpret this policy under Virginia law because the policy was issued in Virginia.”).

            The North Carolina statute states, however, that if the policy insures “lives, property, or interests” in North Carolina, that North Carolina law applies.  The interplay between the general rule and this more specific statute is not always clear.  In one case, our Supreme Court held that North Carolina law governed, even though the policy was issued in California, based on the number of trucks the insured had in North Carolina.  Collins & Aikman v. Hartford Accident & Indemnity, 335 N.C. 91, 95, 436 S.E.2d 243, 246 (1993).

E. Stacking of Coverages and Excess Liability

            In recent years, there has been less litigation involving the stacking of UM or UIM policies.  This is because the statute has been revised to attempt to address these issues, and our courts have already addressed the most commonly occurring stacking issues.

            In both a UM and UIM claim, it is now fairly clear that the insured may not stack UM/UIM coverage for different vehicles insured under the same policy, but he may stack coverages on different policies.  See G.S. § 20-279.21(b)(3) (“If a person who is legally entitled to recover damages from the owner or operator of an uninsured motor vehicle is an insured under the uninsured motorist coverage of more than one policy, that person may combine the highest applicable uninsured motorist limit available under each policy to determine the total amount of uninsured motorist coverage available to that person.”).  “[A]n insured party is only permitted to stack interpolicy underinsured motorist coverages for non-fleet private passenger type vehicles.  An insured may not stack underinsured motorist coverages pertaining to separate vehicles insured under a single policy of insurance.”  Iodice v. Jones, 135 N.C. App. 740, 744, 522 S.E.2d 593, 595 (1999).

            For an accident occurring before January 1, 2004, there are conflicting cases as to whether the insured may stack UM policies.  Hoover v. State Farm Mut. Ins. Co., 156 N.C. App. 418, 419-421, 576 S.E.2d 396, 397 - 398 (2003) (insured may not stack his and another UM policy); Jones v. N.C. Ins. Guar. Ass'n, 163 N.C. App. 105, 111-112, 592 S.E.2d 600, 604 (2004) (“The plain language of the statute prohibits intra- and inter-policy stacking of UM coverage only for the same owner or named insured.”).  The current FRA indicates that UM policies are stacked.

            F.  Primary and Excess Policies

            When multiple UM or UIM policies are involved, our courts generally follow the rule that the insurance “follows the vehicle.” 

            The basic rule is that the insurance policy which is implicated because the plaintiff-insured is occupying a covered vehicle is deemed primary (and hence the insurance follows the vehicle), and a policy covering the plaintiff-insured regardless of the vehicle he is occupying (and instead because of his status as the named insured or a relative of a named insured) is secondary.  Our courts sometimes use the term “Class I” insured for the named insured and his family members residing with him, and the courts use the term “Class II” for persons who are occupying a vehicle listed on the policy.

            This general rule is the result of the standard “other insurance” language in most insurance policies.  The typical language states that a given insurance policy is excess “with respect to a vehicle you do not own.”  In the UM/UIM context, the courts therefore look to whether the vehicle in which the plaintiff/insured was traveling is owned by its named insured (“you”). 

            A Class I insured has UM/UIM coverage even if he or she is not occupying any vehicle.  In such a case, it is not clear how to interpret the above policy language.  A fairly recent case has, however, construed the language as referring to the vehicle which the insured was occupying at the time of the accident.  In that particular case, the vehicle was a bicycle, and because the insured owned his bicycle, his UIM policy was primary.  Sitzman v. Government Employees Ins. Co., 641 S.E.2d 838 (2007).

            The Court of Appeals has held that where the plaintiff/insured is a “Class I” insured under both policies, that the policies share coverage on a pro rata basis.  The court held that the policy language is repugnant, and that the UM/UIM coverage afforded to a Class I insured is not dependent on the vehicle he is occupying, and therefore that the “other clause” was unenforceable.  North Carolina Farm Bureau, Mut. Ins. Co. v. Bost, 126 N.C. App. 42, 483 S.E.2d 452, disc. review denied, 347 N.C. 138, 492 S.E.2d 25 (1997).

            Under a strict application of the policy language, however, the court could easily have concluded that the policies could be read harmoniously, because the named insured, the “you,” was different under each policy.  In any event, this holding and the pro rata doctrine are now well-settled in North Carolina.  SeeHarleysville Mut. Ins. Co. v. Nationwide Mut. Ins. Co., 359 N.C. 421, 611 S.E.2d 832 (2005) (dismissing review as improvidently granted, after briefing and argument on this issue).

            We typically assume that an insurer wants to be excess, but there is one instance in which an insurer prefers to be primary.  If the insured has two or more UIM policies, then the UIM carriers may want to be primary to obtain the benefit of the underlying limits of liability.  In some instances, the underlying liability insurance can effectively shield the UIM carrier from any further exposure, leaving the secondary UIM carrier entirely on the hook for the UIM liability.  Iodice v. Jones, 133 N.C. App. 76, 514 S.E.2d 291 (1999).  “Nationwide provides primary UIM coverage in this case.  As such, Nationwide is entitled to set off the entire $62,500.00 against any UIM amounts it owes Iodice, because ‘the primary provider of UIM coverage ... is entitled to the credit for the liability coverage.’”

G. Can Failure to Pay Limits be Bad Faith?

            The law in North Carolina is somewhat varied as to whether the insured may assert a “bad faith” suit against his UM/UIM carrier based on either an inadequate offer, or based on other misconduct in the claims handling process.

            Where the insured has already obtained a judgment, then he may have a bad faith claim for failure to pay the uninsured portion of the judgment.  In one case, the insured obtained a judgment against the tort-feasor for $85,000 and the insurer.  There were two liability policies providing a total liability coverage of $50,000, and a UIM policy with additional coverage.  The UIM carrier refused to pay the interest on the judgment.  (The tort verdict was appealed, and hence there were a couple of years of interest.)  It was later determined by appellate decision that the UIM carrier owed the interest.  The UIM carrier also withheld $2,000 based on a claim that it could offset the med-pay payments (even after an appellate decision contrary to this position).  The Court of Appeals held that the insured’s claim for treble and punitive damages against the UIM insurer should have survived summary judgment.  Murray v. Nationwide Mut. Ins. Co., 123 N.C. App. 1, 472 S.E.2d 358 (1996) (also noting that payment to Clerk of Court by UIM carrier and two liability carriers nearly two years after bad faith suit was filed did not negate Chapter 75 claim).

            When the claim is that the insurer should have paid its UIM limits prior to a judgment, the law is somewhat varied.  In Braddy v. Nationwide Mut. Liability Ins. Co., 122 N.C. App. 402, 470 S.E.2d 820 (1996), the insured settled with the liability carrier for its limits of $50,000 and filed suit against the underinsured motorist, and the UIM carrier appeared and defended the action.  The plaintiff/insured also stated a claim for bad faith directly against the UM carrier, which was an “unnamed defendant.”  The opinion does not indicate the pre-suit negotiations, but does indicate that the insurer valued the claim at more than the underlying limits.  The trial judge bifurcated the trial of compensatory damages from the trial of the bad faith action.  The plaintiff recovered a verdict of $70,000 (after receiving favorable findings on negligence and contributory negligence), and then appealed various issues.  It is not clear from the opinion what happened to the bad faith claim, but it appears that the plaintiff/insured abandoned that claim at the trial level.  In its discussion of the decision to bifurcate the trial, the Court of Appeals stated “Further, we note the resolution of Count IV [for UIM coverage], in fact, obviated the need for a trial on Count V [“bad faith refusal to settle and punitive damages”].”  Id. at 406, 470 S.E.2d at 822. 

            The opinion does not further elaborate on this issue, but this language could be interpreted to mean that the Court of Appeals was of the opinion that after the compensatory damages were set or determined by the jury, the insurer would presumably pay that amount and the insured does not have a bad faith action.

            There are, however, some cases from the Court of Appeals which recognize an action for bad faith against the UM/UIM carrier.In Vazquez v. Allstate Ins. Co., 137 N.C. App. 741, 529 S.E.2d 480 (2000), the plaintiff (passenger) filed a wrongful death action against an uninsured driver following a head-on collision.  He had two UM policies for $25,000 each.  He simultaneously asserted a bad faith claim against his UM carrier based on the failure to pay the claim and on conduct during the claims-handling process.  The trial court first tried the liability claim, which resulted in a verdict of $104,000.  The UM carrier then offered its limits, and over its objection the trial court proceeded to the Chapter 75 claim.  The jury found that “the defendant had refused to settle the plaintiff's claim in bad faith.  Furthermore, the jury determined that the defendant had failed to adjust the plaintiff's loss fairly, follow its own standards, act reasonably in communications, conduct a reasonable investigation and to effect a fair settlement in good faith.”  The trial court required the insured to elect between $50,000 plus costs (i.e. policy limits) or $29,160 for bad faith, or $29,160 to be trebled with attorneys fees.  The insured elected treble damages and attorneys fees.  On appeal, the court held that the UM carrier’s offer to pay the verdict (following the verdict) did not vitiate the Chapter 75 claim, stating:
Had we accepted the defendant's argument, this punitive purpose would have suffered tremendously.  The defendant's contention would encourage misconduct by insurance companies, rather than discourage it.  Under the defendant's assertion, insurance companies would have no incentive to settle legitimate claims before a jury verdict.  Rather, the defendant could simply take its chances with a jury and then avoid treble damages by stipulating to contractual liability should the jury find for the plaintiff.  This method would eliminate the brunt of any damages that the plaintiff could recover under Chapter 75.

Id. at 745, 529 S.E.2d at 482.

            In an unpublished opinion, the insured settled with the liability carrier for $25,000 and submitted a UIM claim.  The UIM carrier learned from the liability carrier that the medical expenses were $4,000, and that the insured was permanently impaired.  (Later at trial the insured offered evidence that his economic loss was roughly between $100,000 and $1,000,000.)  The liability carrier had earlier felt that $15,000 was a fair offer, and opined that the claim would settle within the $25,000 limits.  The UIM insurer offered only $2,000 and the insured sued.  The UIM carrier raised a liability issue at trial, but the insured recovered a $75,000 verdict.  The insured sued for his UIM carrier for bad faith in refusing to tender the UIM limits (which were $75,000, but had previously been thought to be $25,000).  The court held that the UIM carrier was entitled to summary judgment, in part because it reasonably relied on the evaluation by the liability carrier.  Rivenbark v. N.C. Farm Bureau, 2003 WL 138930 (Jan. 21, 2003) which also rejected arguments that insurer failed to explain UIM limit; and failed to notify him of potential witness on liability issue, whom insured knew to lack credibility.

             Some cases may involve alleged bad faith consisting not of valuing the UM/UIM claim, but rather in the carrier taking an adverse position on coverage.  In one case, the insured received $50,000 from the liability carrier, and submitted a UIM claim.  He had one UIM policy with $100,000 in limits, and another policy for $100,000 or $200,000 depending on whether stacking was allowed.  He provided the UIM carrier with $98,000 in medical bills, and evidence that he had a severe and extensive permanent, disabling injury.  He provided the UIM insurer with documentation that the claim was worth more than $300,000, and two months later the UIM carrier paid $150,000 in UIM coverage and the parties agreed to litigate the issue of whether the insured had another $100,000 in UIM coverage.  The insured alleged that the UIM carrier had a policy of denying stacking regardless of policy language.  The Court of Appeals held that the insured’s claim for bad faith for a refusal to pay was properly dismissed on a Rule 12(b)(6) motion.  Miller v. Nationwide Mut. Ins. Co., 112 N.C.App. 295, 435 S.E.2d 537 (1993).

              Reading all of these cases together, it would appear that the UM/UIM carrier does have a potential bad faith action against it for “low-balling” its insured.  Such a claim is more viable where it is accompanied by other misconduct in the claims handling process.  There is some authority that the insured is not required to comply with his duty to cooperate after he and his UIM carrier become adversarial, McCrary ex rel. McCrary v. Byrd, 148 N.C. App. 630, 638, 559 S.E.2d 821, 826 (2002) where the insured did not violate duty to attend examination under oath, in part because “Nationwide appeared to be assuming an adversarial role.”  Yet the UIM insurer may still have a duty of “good faith” toward its insured.

              North Carolina does not have any cases addressing whether the UM/UIM carrier’s trial conduct may constitute bad faith.  Other jurisdictions have struggled with whether the UM carrier’s attorney’s conduct at trial can constitute bad faith.  Parsons v. Allstate Ins., 165 P.3d 908 (Colo. App. 2006) (attorney’s litigation conduct may be admitted against insurer if risk of unfair prejudice, confusion, delay are substantially outweighed by probative value; noting also that allowing such evidence deters zealous advocacy; affirming exclusion of evidence that counsel asserted groundless denials and defenses, refused to participate in discovery until a case management order was entered, would not make himself available for hearing, “forced an unnecessary jury trial to be held”).

H. Issues that Arise relating to arbitration.

              The typical UM/UIM policy in North Carolina states that the insured may demand arbitration.  It is noteworthy that, unlike most agreements with an arbitration clause, the insurer cannot demand arbitration, but only the insured has the right to do so.  The typical policy states “If we and an insured do not agree: 1. Whether that person is legally entitled to recover damages under this Part; or 2. As to the amount of the damages; the insured may make a written demand for arbitration.”  North Carolina does not have many cases addressing the scope and application of this arbitration provision.

                           1.         The timing and form of demand

              The policy does not indicate the manner in which arbitration must be demanded.  Typically, the insured’s attorney will send a letter to the insurer or its counsel demanding arbitration.  The Arbitration Act states that the demand must be maid by certified mail.  N.C.G.S.A. § 1-569.9(a) “A person initiates an arbitration proceeding by giving notice in a record to the other parties to the agreement to arbitrate in the agreed manner between the parties or, in the absence of agreement, by certified or registered mail, return receipt requested, and obtained, or by service as authorized for the commencement of a civil action.  The notice shall describe the nature of the controversy and the remedy sought.”

              In a UM policy, it appears that the insured may demand arbitration at any time, unless that right has been waived, as discussed later.  In a UIM policy, however, the insured cannot demand arbitration until the underlying liability policy is exhausted, and the claimant and carrier are unable to agree on the claimant’s entitlement or on the amount of damages.  Register v. White, 160 N.C. App. 657, 662, 587 S.E.2d 95, 98 (2003).  “We hold a UIM insured's right to demand arbitration arises when the liability insurer has offered a settlement exhausting its coverage, and only once this right has arisen may the time limitation for demanding arbitration commence.”  See also Hackett v. Bonta, 113 N.C. App. 89, 97, 437 S.E.2d 687, 692 (1993) “Accordingly, we conclude that the arbitration rights under plaintiff's UIM policy were not triggered prior to State Farm's 17 February 1992 offer.”

              The “insured may not demand arbitration” “after the liability insurer tenders its limits‑when the UIM insurer ad­vances and thereby blocks the proposed settlement between the insured and the tortfeasor/liability insurer.”   George Simpson, North Carolina Uninsured and Underinsured Motorist Coverage § 4:2, p. 256 (2002 ed.).

              The insured is not required to file a lawsuit prior to demanding arbitration.  For the reasons stated below, however, the insured may want to initiate a lawsuit prior to demanding arbitration.
The UM/UIM claim is theoretically predicated upon a judgment against an uninsured or underinsured motorist.  For that reason, the insured generally wants to file suit against the tortfeasor within the statute of limitations.  It is not clear whether a demand for arbitration, made within three years of the accident, is sufficient to preserve the UM/UIM claim, where the statute of limitations subsequently expires against the tortfeasor.  Neither the insurance policy, nor the UM/UIM statute, specifically addresses this issue.

              There is little authority on the issue of the time constraints imposed on the insured for demanding arbitration.  It is not clear, for example, whether the insured must demand arbitration within the statute of limitations (which is typically three years in North Carolina).  Even where the policy states that the demand for arbitration must be made within a given time period, the provision will not be enforced if it deprives the insured of his right to demand arbitration.  See Register v. White, 160 N.C. App. 657, 661, 587 S.E.2d 95, 98 (2003) (where arbitration provision provides that plaintiff must demand arbitration of a UIM claim within the time limit for bodily injury claims (i.e. 3 years), but liability carrier does not tender within that time period, policy is amgibuous and insured may thereafter demand arbitration).

              If the insurer denies coverage, then ideally it should first litigate the coverage issue to a conclusion, prior to engaging in arbitration.  One case held that the insurer which participated in arbitration waived any right to contest UM/UIM coverage.  In Miller v. ROCA & Son, Inc., 167 N.C. App. 91, 93, 604 S.E.2d 318, 319 (2004), the parties “agreed that the case should be arbitrated and that an order staying this matter be entered until the completion of the arbitration.”  Following the arbitration award, the insurer argued that the award should not have been confirmed because the tortfeasor’s vehicle was not uninsured.  The holding:  “We hold that Insurer has waived any right to object to the arbitration award based on a lack of coverage.”; “arbitration will only occur if there is ‘an uninsured motor vehicle.’”

              In one case, the plaintiff-insured filed a tort action, moved for summary judgment on the UIM claim, prevailed, and demanded arbitration.  The appellate court reversed the finding of coverage.  Smith v. Harris, 640 S.E.2d 436, 437-38 (2007).  Therefore, where the coverage issue is decided by the court prior to arbitration, the insurer has preserved the coverage issue.  Accord Darroch v. Lea, 150 N.C. App. 156, 162, 563 S.E.2d 219, 223 (2002).  There the insurer lost summary judgment argument on coverage, was ordered to arbitrate claim, and argued “that a substantial right is affected because of the possibility that plaintiff could receive a binding arbitration award before the issue of coverage is determined.”  The Court dismissed the appeal, presumably meaning that coverage issue can be raised later.

              In other instances, it is not clear whether the arbitration should proceed first, or whether a given issue must be decided first by a court.  If, for example, the UM/UIM carrier contends that the UIM claim is barred by the statute of limitations (and assuming that this issue is not subject to arbitration), then there is no clear authority on which proceeding should occur first; i.e., the motion in court for a determination on the statute of limitations, or the arbitration hearing.

                         2.         Waiver of Arbitration

              Where the insured engages in extensive written discovery, pursuant to the Rules of Civil Procedure, prior to demanding arbitration, he may be found to have waived his right to arbitration.  Capps v. Virrey, 645 S.E.2d 825 (2007) (insured waived arbitration of UM claim by serving interrogatories, a request for admissions, and three requests for production of documents, which exceeded the scope allowed by the Uniform Arbitration Act).  Compare Sullivan v. Bright, 129 N.C. App. 84, 497 S.E.2d 118 (1998) (where insured deposed two witnesses and then sought to compel arbitration against UIM carrier, he did not waive arbitration); McCrary v. Byrd, 148 N.C. App. 630, 559 S.E.2d 821 (2002) (insured did not waive arbitration where UIM carrier incurred $8,000 in legal expenses prior to demand for arbitration, and delay in demand did not cause loss of evidence).

                         3.         Issues Subject to Arbitration

              There is sometimes a dispute as to which issues are subject to arbitration.  The cases hold, of course, that the court must look to the scope of the parties’ written arbitration agreement.  Further, many cases recognize a public policy preference that disputes be submitted to arbitration, and therefore any ambiguity in the scope of those matters to be submitted to arbitration is probably going to be resolved in favor of the party seeking arbitration.

              North Carolina does not have much appellate authority addressing the scope of issues to be submitted to the UIM arbitration panel.  At a minimum, the arbitration panel should decide the liability of the tortfeasor and damages.  Liability encompasses issues such as negligence, contributory negligence, last clear chance, and any other issues or defenses.  There is no clear authority on whether, for example, the arbitrators should rule upon a statute of limitations defense available to the tortfeasor.  Because this defense would negate “liability,” the courts would presumably hold that this issue should be submitted to arbitration.  All of the damages issues should also be submitted to the arbitrators, such as lost earnings and mitigation of damages.

              The arbitration generally does not include coverage issues.  North Carolina does not have any law on this point, but most jurisdictions have so held.  See, e.g., National Union Fire Ins. Co. v. Reynolds, 77 Hawai'i 490, 494, 889 P.2d 67, 71 (App. 1995) (“we hold that under the standard arbitration clause in the underinsured motorist provision, arbitration on the question of whether the insured was ‘legally entitled to recover damages’ is limited to a determination of the offending motorist's fault and his or her resulting liability to the person covered under the policy, and does not include the ascertainment of whether underinsured coverage applies under any particular circumstance.”  In that case, the policy stated, “If we and a covered person do not agree: 1. Whether that person is legally entitled to recover damages under this [underinsured motorist] endorsement; or 2. as to the amount of damages; either party may make a written demand for arbitration.”  It was noted that this is majority rule.

                         4.         Recovery of “expenses” and attorneys fees in arbitration.

              The current Arbitration Act states:
(b)        An arbitrator may award reasonable expenses of arbitration if an award of              expenses is authorized by law in a civil action involving the same claim or by              the agreement of the parties to the arbitration proceeding.  An arbitrator may              award reasonable attorneys' fees if:

             (1)        The arbitration agreement provides for an award of attorneys' fees;                           and
             (2)        An award of attorneys' fees is authorized by law in a civil action                                      involving the same claim.
N.C.G.S.A. § 1-569.21.

            The Act therefore expressly allows for expenses and attorneys fees if those would be recoverable in court.  The term “expenses” does not appear to include interest, but rather out-of-pocket expenses of arbitration, such as expert fees.

                        5.         Overturning Arbitration Award by Court

             A UM/UIM arbitration, pursuant to the standard policy provision, is governed by the North Carolina arbitration rules.  Those rules state:
(a) Upon motion to the court by a party to an arbitration proceeding, the court shall vacate an award made in the arbitration proceeding if:

             (1) The award was procured by corruption, fraud, or other undue means;
             (2) There was:
                          a. Evident partiality by an arbitrator appointed as a neutral arbitrator;
                          b. Corruption by an arbitrator; or
                          c. Misconduct by an arbitrator prejudicing the rights of a party to the                           arbitration proceeding;
             (3) An arbitrator refused to postpone the hearing . . . .

N.C.G.S.A. § 1-569.23.

            The courts are reluctant to overturn an arbitration award.

                        6.         Modifying Arbitration Award (including interest)

              It is generally likewise difficult to modify the arbitration award.  The statute states that  the arbitration award cannot be overturned or modified except in the following instances if:

(1)        There was an evident mathematical miscalculation or an evident mistake in the              description of a person, thing, or property referred to in the award;
(2)        The arbitrator has made an award on a claim not submitted to the arbitrator,              and the award may be corrected without affecting the merits of the decision on              the claims submitted; or
(3)        The award is imperfect in a matter of form not affecting the merits of the              decision on the claims submitted.

N.C.G.S.A. § 1-569.24.

             This statute has been addressed in the context of an insured who seeks to have interest added to the award.  Most cases have held that the insured may not recover costs of court following an arbitration award, because that would constitute a modification of the award.  In Eisinger v. Robinson, 164 N.C. App. 572, 576, 596 S.E.2d 831, 833 (2004), the Court rejected “plaintiff’s argument that the arbitrator’s award should be treated like a jury verdict” (citation omitted).  “An award of costs does not fit within the parameters of the trial court's authority to modify an award.  Accordingly, the trial court did not err in denying plaintiff's motion for costs and this assignment of error is without merit.”   In Sloop v. Tesfazghi, 2006 WL 695677 (N.C. App. 2006), the Plaintiff “nonetheless argues that, because the amended arbitration award acknowledges plaintiff's request for prejudgment interest and explicitly states that the award does not include prejudgment interest, the amended award thereby ‘provides for the addition of prejudgment interest.’”  The court rejected this argument.  But seeWalker v. Penn Nat. Sec. Ins. Co., 168 N.C. App. 555, 561, 608 S.E.2d 107, 111 (2005) (following arbitration award the insured went to court where the insurer insisted on an offset for workers compensation and liability payments).

             The apt rule may be that the court may not modify the award as to an element of damage (or other calculation) which could and should have been done by the arbitrators (e.g. interest or attorneys fees), but that the court can modify the award to address an issue which was not subject to arbitration (e.g. offset for workers compensation payment).

             In one case, the arbitration award specifically stated, “The determination whether prejudgment interest should be paid by defendant and if so in what amount, is expressly left to counsel for the parties and a Superior Court Judge in Richmond County to decide.”  The appellate court held that the trial court was authorized to award interest.  Lovin v. Byrd, 178 N.C. App. 381, 382, 631 S.E.2d 58, 59 (2006).  Accord King v. Lingerfelt, 2008 WL 2097590, 2 (N.C.App. 2008) (the UIM carrier was liable for interest on the full arbitration award of $75,000, even though it was entitled to an offset of $50,000 and therefore its UIM exposure was only $25,000. “’damages’ included pre- and postjudgment interest.”; court awarded interest, after “the issue of prejudgment interest is left by the panel to be addressed by the parties or a Court of competent jurisdiction”).

            An arbitration panel can award pre-judgment interest.  Sprake v. Leche, 658 S.E.2d 490, 491 (N.C.App. 2008) (“the provision granting the arbitration panel authority to address issues of ‘compensatory damages’ was ambiguous as to whether prejudgment interest was available.”).
The plaintiff/insured therefore should either request that the arbitration award expressly reserve costs for the court, or seek to include costs in the arbitration award.
The parties are not required to have an agreement specifying the parameters and rules for the arbitration proceeding, but this is often a good idea.  Such an agreement may expressly address those issues which are to be decided by the arbitrators, and may preserve (or attempt to preserve) those issues to be resolved later by a court.

                       7.         Filing Award as Judgment

            Following the rendering of an award, it is not entirely clear how the award ultimately becomes a judgment against the UM/UIM insurer.  Arguably, the UM/UIM carrier has a duty to pay the amount of the arbitration award (less any credits or offsets), without requiring the insured to obtain a judgment against the UM/UIM carrier.  Stated otherwise, once the damages are determined by the arbitrators, as permitted by the insurance policy, the damages are fixed, and the insurer should probably pay the award regardless of whether a judgment is entered, unless it has a coverage defense (which has been preserved.

            The Arbitration Act allows the insured to file the arbitration award as a judgment.  The application of the Arbitration Act to a UM/UIM lawsuit against the tort-feasor is somewhat problematic because the UM/UIM carrier is not a typical defendant. 

            Pursuant to the FRA, a UM carrier is a “party to the action between the insured and the uninsured motorist though not named in the caption of the pleadings and may defend the suit in the name of the uninsured motorist or in its own name.”  G.S. 20-279.21(b)(3).  A UIM carrier “shall have the right to appear in defense of the claim without being named as a party therein, and without being named as a party may participate in the suit as fully as if it were a party.”  G.S. § 20-279.21(b)(4).  Therefore, a UM carrier is technically a party to the tort action, and arguably the tort action can be used to obtain a judgment against the UM carrier as a party.  Strictly speaking, however, a UIM carrier is not a party, and thus arguably the tort action is not a proper vehicle for obtaining a judgment against the UIM carrier.

            The UM/UIM award is filed against the defendant/underinsured (or uninsured) motorist, or against the UM/UIM carrier in the same action, or whether instead the insured must file a separate action directly against the UM/UIM carrier only.  The precise procedural vehicle used by the insured to file the award (or perhaps used by the carrier to challenge the award) may affect the rights of the parties to modify the award or obtain any offsets.

            The arbitration award may also be entered as a judgment against the defendant/tortfeasor (uninsured or underinsured motorist).  Although the tortfeasor was not a party to the arbitration agreement, he may nevertheless be bound by the arbitration award.  Burger v. Doe, 143 N.C. App. 328, 546 S.E.2d 141 (2001) (where arbitrator ruled in favor of motorist against UM insurer and awarded $19,000, and UM carrier then tried action against uninsured motorist and jury awarded $7,000, award of $19,000 was binding against tort-feasor if “arbitration settlement” was reasonable and in good faith, and lower court erred in submitting independent damages issue to jury; note that in this case “The plaintiffs gave the defendants timely notice of the arbitration hearing. Defendants' counsel attended but did not participate in the arbitration proceeding.”).

                        8.         Offsets

            If either party seeks to have the court adopt the arbitration award in toto, or to adopt portions of the award or to modify the award, then it is commonly understood that the UM/UIM carrier still has the right to take certain offsets or credits or reductions in its liability, pursuant to the insurance policy and the FRA.

            Even though the court may not lightly modify an arbitration award, many cases recognize that the insurer may nevertheless receive these offsets or credits (such as med-pay, or the limit of the liability policy).  These cases have not expressly addressed the potential conflict between the insurer’s right to certain offsets, and the general rule that an arbitration award should not be modified.  The cases may be reconciled on the theory that the offsets are a matter of coverage (and not subject to arbitration), but that interest is a matter of damages and is to be awarded (if at all) by the arbitrators.

            The cases clearly hold, for example, that the insurer may receive a reduction from the arbitration award in the amount of any payment made under the “med pay” coverage.  Espino v. Allstate Indem. Co., 159 N.C. App. 686, 687-688, 583 S.E.2d 376, 377 (2003) (where arbitrators awarded $9,000, and UM carrier had already paid $1,000, and insurer paid balance of $8,000, and language in UM policy stated that coverage was in excess of and shall not duplicate med-pay payments, court holds that UM carrier is entitled to offset). 

            The cases also recognize that the UIM carrier is entitled to an offset for the amount of liability coverage payments.  Walker v. Penn Nat. Sec. Ins. Co., 168 N.C. App. 555, 561, 608 S.E.2d 107, 111 (2005) (following arbitration award parties went to court for guidance on various offsets; court found that UIM insurer was entitled to various offsets, stating “From this amount [plaintiff’s total loss as determined in arbitration] we subtract the amount of workers' compensation benefits, . . . and the amount plaintiff received from the liability carrier ($30,000).”; “Defendant first assigns error to the trial court's failure to credit defendant with the amount plaintiff received from the liability carrier.  Defendant argues that by failing to credit defendant with this amount, plaintiff has received a windfall and a net recovery in excess of his actual damages.  We agree.”).

            The UIM carrier also effectively receives an offset for the workers compensation payments (which compensate the insured for his loss), but the workers compensation carrier is still liable for the workers compensation lien.  Our courts have not addressed many issues which can arise with this offset.  For example, can the UIM carrier seek to have the workers compensation lien reduced by the Superior Court?  If so, then how is this accomplished following an arbitration award.  It would appear that the UIM carrier can probably take the arbitration award to court and ask that its obligations be determined following the award, and in that process can also ask that the lien be reduced. 

            Also, how would the UIM carrier establish the negligence of the employer, in order to defeat the workers compensation lien?  The employer’s negligence is not subject to the arbitration proceeding.  The statute states:

If the third party defending such proceeding, by answer duly served on the employer, sufficiently alleges that actionable negligence of the employer joined and concurred with the negligence of the third party in producing the injury or death, then an issue shall be submitted to the jury in such case as to whether actionable negligence of employer joined and concurred with the negligence of the third party in producing the injury or death. The employer shall have the right to appear, to be represented, to introduce evidence, to cross-examine adverse witnesses, and to argue to the jury as to this issue as fully as though he were a party although not named or joined as a party to the proceeding. Such issue shall be the last of the issues submitted to the jury.

N.C.G.S.A. § 97-10.2(e).

                       9.         Discovery Rights

            Discovery is generally very limited in arbitration proceedings.  The Rules of Civil Procedure do not apply, and the parties therefore do not have a right to issue interrogatories or a request for documents or to take depositions.  Capps v. Virrey, 645 S.E.2d 825, 829 (2007) (“The procedural and evidentiary rules governing judicial proceedings do not apply to arbitrations absent plain and unambiguous language in the arbitration agreement that those rules apply.”).
The rules do provide, however, that the arbitrators may, in their discretion, order various forms of discovery.  The rule states:

(a) An arbitrator may issue a subpoena for the attendance of a witness and for the production of records and other evidence at any hearing and may administer oaths.  A subpoena shall be served in the manner for service of subpoenas in a civil action and, upon motion to the court by a party to the arbitration proceeding or the arbitrator, enforced in the manner for enforcement of subpoenas in a civil action.
(b) In order to make the proceedings fair, expeditious, and cost-effective, upon request of a party to or a witness in an arbitration proceeding, an arbitrator may permit a deposition of any witness to be taken for use as evidence at the hearing, including a witness who cannot be subpoenaed for or is unable to attend a hearing.  The arbitrator shall determine the conditions under which the deposition is taken.
(c) An arbitrator may permit any discovery the arbitrator decides is appropriate under the circumstances, taking into account the needs of the parties to the arbitration proceeding and other affected persons and the desirability of making the proceeding fair, expeditious, and cost-effective.
(d) If an arbitrator permits discovery under subsection (c) of this section, the arbitrator may order a party to the arbitration proceeding to comply with the arbitrator's discovery-related orders, issue subpoenas for the attendance of a witness and for the production of records and other evidence at a discovery proceeding, and take action against a noncomplying party to the extent a court could if the controversy were the subject of a civil action in this State.
(e) An arbitrator may issue a protective order to prevent the disclosure of privileged information, confidential information, trade secrets, and other information protected from disclosure to the extent a court could if the controversy were the subject of a civil action in this State.
(f) All laws compelling a person under subpoena to testify and all fees for attending a judicial proceeding, a deposition, or a discovery proceeding as a witness apply to an arbitration proceeding as if the controversy were the subject of a civil action in this State.
(g) The court may enforce a subpoena or discovery-related order for the attendance of a witness within this State and for the protection of records and other evidence issued by an arbitrator in connection with an arbitration proceeding in another state upon conditions determined by the court so as to make the arbitration proceeding fair, expeditious, and cost-effective.   A subpoena or discovery-related order issued by an arbitrator in another state shall be served in the manner provided by law for service of subpoenas in a civil action in this State and, upon motion to the court by a party to the arbitration proceeding or the arbitrator, enforced in the manner provided by law for enforcement of subpoenas in a civil action in this State.
(h) An arbitrator shall not have the authority to hold a party in contempt of any order the arbitrator makes under this section.  A court may hold parties in contempt for failure to obey an arbitrator's order, or an order made by the court, pursuant to this section, among other sanctions imposed by the arbitrator or the court.

G.S. § 1-569.17.

            The UM/UIM carrier may effectively have some limited “discovery rights” by virtue of some of its policy provisions.  The standard policy requires the insured to generally “cooperate” with the insurer in its investigation of the claim.  These provisions are also binding on additional insureds, and the failure to comply with them can result in a loss of coverage.  Lockwood v. Porter, 98 N.C. App. 410, 390 S.E.2d 742 (1990) (additional insured who submitted UM claim lost coverage by failing to attend medical examination).

            The insured is also required to provide the insurer with a written medical release, to obtain the insured’s medical records.  Finally, some policies may require that the insured submit to an “examination under oath,” which is similar to (but not the same as) a deposition under the Rules of Civil Procedure.

            In North Carolina, it is not clear the extent to which the UM/UIM carrier may enforce these rights in an arbitration proceeding.  One case suggests that if the insurer is not trying to settle the case, that it loses its right to an examination under oath.  McCrary ex rel. McCrary v. Byrd, 148 N.C. App. 630, 638, 559 S.E.2d 821, 826 (2002) (where insured “refused to attend the scheduled deposition,” and “the provision in Nationwide's contract required that an insured submit to examinations under oath as cooperation to the defense, settlement, or investigation of a claim,” insured did not breach contract because “[a]t the time Nationwide sought to depose Plaintiff, there was no indication Nationwide wished to settle with Plaintiff, rather, Nationwide appeared to be assuming an adversarial role.”).  Cases from other jurisdictions similarly hold that after the parties become “adversarial,” the insured’s duty to cooperate ceases. 

            Another case, however, states that the insured is required to comply with a provision requiring an examination under oath.  Capps v. Virrey, 645 S.E.2d 825, 829 (N.C. App. 2007) (“The deposition was of Plaintiff and was noticed by Nationwide.  Under the terms of Plaintiff's insurance policy, he was required to ‘[s]ubmit as often as [Nationwide] reasonably require[d] to examinations under oath and subscribe the same.’  Had Plaintiff not participated in his deposition, Nationwide could have considered Plaintiff in breach of the contract and not provided coverage for Plaintiff's injuries.  Therefore, Plaintiff was required to participate in this deposition.”).

            The insured is in a risky position if he refuses to comply with the insurer’s requests that he comply with these policy provisions.  The refusal of the insured to comply with a policy provision may result in a loss of his coverage.  In one case, for example, the insured failed to appear for an appointment with a doctor hired by the UM/UIM carrier.  The Court of Appeals affirmed a dismissal of the insured’s UM/UIM claim, on the basis that he failed to cooperate.  Lockwood v. Porter, 98 N.C.App. 410, 411, 390 S.E.2d 742, 743 (1990) (“Aetna's right to have plaintiff examined by its physician is a material part of the insurance contract, and plaintiff's unjustified refusal to be so examined violated the cooperation clause of the policy and bars his action as a matter of law.”).  (Of course, if our courts ultimately clearly hold that an insurer does not have these types of rights after the parties have become adversarial, then the insured may be able to avoid such provisions and possibly even argue that the insurer’s demand that the insured comply with these policy provisions constitutes “bad faith.”).

                       

10.            Procedures in Arbitration

            In North Carolina, the UM/UIM arbitration is governed by the Revised Uniform Arbitration Act (except to the extent modified by the parties). In general, the insurer and the insured will each select one arbitrator. Those two arbitrators will then select a third, or “neutral,” arbitrator. The neutral arbitrator may not have a substantial relationship with a party. N.C.G.S.A. § 1-569.11(b) (“An individual who has a known, direct, and material interest in the outcome of the arbitration proceeding or a known, existing, and substantial relationship with a party shall not serve as an arbitrator required by an agreement to be neutral.”). The arbitrators then rule by majority vote. G.S. § 1-569.13 (“the powers of an arbitrator shall be exercised by a majority of the arbitrators, but all of them shall conduct the hearing”).

            At the arbitration proceeding, the Rules of Evidence are generally relaxed. N.C.G.S.A. § 1-569.15(f) (“The rules of evidence shall not apply in arbitration proceedings, except as to matters of privilege or immunities.”). Hearsay is therefore more likely to be accepted into evidence, and medical and other records may not require a formal authentication. The parties may still object to evidence which is clearly irrelevant or inadmissible may be excluded, as well as evidence without a proper foundation, especially if it is otherwise suspect. The proceeding may be recorded if the parties agree. As noted earlier, however, there is no true “appeal” from the arbitration award. A party cannot, therefore, challenge the introduction of evidence, or the exclusion of evidence, in court.

            The arbitration hearing generally follows the typical course of a jury trial. There may be opening statements, followed by the plaintiff’s presentation of evidence (with cross-examination), and the defendant’s presentation of evidence, followed by rebuttal evidence and closing arguments.

            A decision by two arbitrators is binding. The dissenting arbitrator may prepare and sign a written dissent, but this appears to be of no great legal import.

            The arbitrators are generally not informed of the insurance coverage available, nor of any special agreements which do not affect the actual arbitration proceeding, such as a “high-low” arrangement.

            As noted earlier, following an arbitration award, either party may file the award with the court and obtain a judgment.

                       A.             Discovery Strategies

            The UM/UIM carrier can greatly improve its’ chances of prevailing at trial by conducting effective discovery. The UM/UIM carrier’s discovery strategy is primarily dependent upon whether the insured has demanded arbitration (and whether it has the right to demand arbitration), or whether instead the case is pending in court for a determination by a jury (or bench trial), in which event the Rules of Civil Procedure apply.

            If the Rules of Civil Procedure apply, then the UIM carrier has the right to “participate” in the action as if it were a party. The UIM carrier may therefore engage in written discovery (interrogatories and request for documents) and depositions, and possibly a physical examination of the insured. In this situation, the strategies of the UIM carrier are not significantly different from the strategies of the liability insurer in defending such a claim. The insurer would generally want to ascertain the insured’s prior medical history and his current physical condition, and obtain all of his medical records. The insurer may want to depose the insured or his doctors or other witnesses.

            If the defendant/tortfeasor is insured and is provided with an attorney for his defense, then in many instances the UIM carrier may be able to monitor the case and await developments with the defendant’s discovery to the plaintiff/insured. The insurer should not, however, be lulled into a false sense of security and conduct no investigation or assessment of its own. The liability carrier may tender its limits at any moment, and of course the UIM carrier is always subject to the excess verdict. (The UIM carrier of course has a right of subrogation against the tortfeasor, but this will often be worthless.)

            The UIM carrier should generally vigorously defend the case and issue its own discovery, rather than rely entirely on the defendant to do so. If, for example, the plaintiff reaches a settlement with the defendant, the defendant may have no interest in pursuing a motion to compel (or other sanctions) against the plaintiff for a failure to completely respond to discovery, and the UIM carrier may lack standing to complain about the plaintiff’s deficient responses to the defendant’s discovery. (We are aware of no law in North Carolina addressing whether a person who did not propound discovery may complain of a deficiency in the discovery response.)

            If the UM/UIM carrier anticipates that the plaintiff may demand arbitration, then it probably wants to assert its discovery requests as early as possible, prior to the demand for arbitration. This is especially the case in an underinsured motorist case, where the insured has an absolute duty to respond to discovery as long as the case is pending in the General Court of Justice (and prior to an appropriate demand for arbitration).

            Where the insured engages in discovery or other trial procedures, he may waive his right to arbitration. One case held that where the plaintiff issued three sets of written discovery to the UM carrier, that it waived its right to arbitrate. Capps v. Virrey, 645 S.E.2d 825 (App. 2007).

            Although the Defendant and the UIM carrier are separate entities, they are largely “joined at the hip.” There is some conduct of the Defendant that may affect the UM/UIM carrier's liability. A purely "procedural" matter by the Defendant (such as a Request for Admission, or an admission in the Answer) may not be binding as to the UIM carrier; but substantive evidence by the Defendant (such as his testimony) may effectively be binding. The UM/UIM carrier may be stuck with the trial strategy of the UM carrier, and by the same token the Defendant is stuck with the UM/UIM carrier's trial strategy. In one case, the court held that a sanction (striking the answer) against the defendant for discovery violations could not prejudice the UIM carrier. Abrams v. Surrette, 119 N.C. App. 239, 240-241, 457 S.E.2d 770, 771-772 (1995) (“This order [striking answer] conclusively establishing Surrette's liability also established State Farm's liability, even though they had filed a timely answer contesting the issue of negligence and alleging the contributory negligence of Abrams. The order thus precluded State Farm from presenting its defenses, is inconsistent with Section 20-279.21(b)(3)(a) and must be reversed.”; noting that UM carrier is not subject to insured’s default).

                        B.             Responding to and Drafting Pleadings

            From the plaintiff’s perspective, the complaint in a UM/UIM case is essentially no different than a standard complaint. Some plaintiffs prefer to include allegations regarding the existence of UM/UIM coverage in their complaints. If the UM/UIM carrier files a response to the complaint, then this may be an effective way to clarify the extent of UM/UIM coverage.

            Where the UIM carrier has waived its subrogation rights prior to suit, the plaintiff-insured may sue the UIM carrier directly as the named defendant. Wilmoth v. State Farm Mut. Auto. Ins. Co., Inc., 127 N.C. App. 260, 265, 488 S.E.2d 628, 632 (1997). It is not clear whether this affects the general rule that the identity of the UIM carrier should not be disclosed to the jury.

            As a general matter, the insured’s lawsuit should primarily pertain to the liability of the tortfeasor, and not to coverage issues. In many cases, however, the coverage issues have been raised and litigated in the tort action. The plaintiff-insured may therefore want to allege the essential elements of his UM/UIM coverage, such as his status as a Class I insured, or as a person occupying or using a covered vehicle. The UM/UIM carrier generally should not be named in the caption. McCrary ex rel. McCrary v. Byrd, 148 N.C.App. 630, 632, 559 S.E.2d 821, 823 (2002) (“After Nationwide filed a motion, the trial court deleted Nationwide's name from the caption of the proceeding and Nationwide was allowed to defend as an unnamed defendant.”).

            If the plaintiff believes that the UM/UIM carrier should have resolved his claim through settlement prior to filing suit, he may in addition file a claim for bad faith or for Chapter 75 in the same lawsuit. In one case, the judge first tried the issue of liability and damages against the tortfeasor, and he then tried a second phase of the trial for damages under Chapter 75, and he then tried a third phase for punitive damages. Vazquez v. Allstate Ins. Co., 137 N.C. App. 741, 529 S.E.2d 480 (2000).

            From the UIM carrier’s perspective, the defense will usually want to file an answer. The FRA does not require the UM/UIM carrier to file an answer.

            The UM/UIM carrier generally wants to be careful to include all defenses to the tort action and to the UM/UIM claim in its answer. The UM/UIM carrier should assert all defenses available to the defendant-tortfeasor, such as contributory negligence. In addition, it should assert any independent defenses which it has, such as a lack of service or notice upon the UM/UIM carrier, a lack of cooperation, a coverage defense, or an offset issue.

            In a UM case, or a UIM case in which the UIM carrier has subrogation rights, the UIM carrier may want to assert its potential claim against the defendant-tortfeasor in its answer. The rules and cases do not provide clear guidance as to whether such a cross-claim is permissible. One case held that the UIM carrier lost its right of subrogation against the tortfeasor, when neither the carrier nor the insured filed suit against the tortfeasor within the three-year statute of limitations. Nationwide Mut. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 109 N.C. App. 281, 284, 426 S.E.2d 298, 300 (1993). The UM/UIM carrier may therefore want to err on the side of caution and assert this claim early in the litigation.

            C. Trial Strategy

            Success in a UM/UIM case begins well before the trial. The UM/UIM carrier should engage in the discovery techniques described previously, must preserve any coverage defenses, and preserve any subrogation claims against the tortfeasor.

            In a UM/UIM case tried to a jury or to a panel of arbitrators, the case is basically not tried any differently than it would be tried by the defendant’s attorney. The UM/UIM carrier should raise all liability and damages issues through cross-examination and through presentation of its own fact and expert witnesses.

            The UM and UIM carriers have a right to defend their interests in the litigation at trial, but the scope of their rights is slightly different. “The [UM] insurer, upon being served as herein provided, shall be a party to the action between the insured and the uninsured motorist though not named in the caption of the pleadings and may defend the suit in the name of the uninsured motorist or in its own name.” G.S. § 20-279.21(b)(3). “[T]he underinsured motorist insurer shall have the right to appear in defense of the claim without being named as a party therein, and without being named as a party may participate in the suit as fully as if it were a party.” G.S. § 20-279.21(b)(4). The UIM carrier seems to have all of the rights that the tortfeasor-defendant has. “This statute allows the underinsured insurance carrier to assert all claims that could have been asserted by its insured, the plaintiff.” Johnson v. Hudson, 122 N.C. App. 188, 190, 468 S.E.2d 64, 66 (1996). Thus, the UIM carrier may assert a third-party claim for contribution. Johnson v. Hudson, 122 N.C. App. 188, 190, 468 S.E.2d 64, 66 (1996) (“Because Utica may assert all claims that the insured can under N.C.G.S. § 20-279.21(b)(4), we reverse the trial court's entry of summary judgment on the ground that the third-party claim . . . .”). The UIM carrier who asserting claims would generally be subject to any limitations on the defendant’s claims, but in this case the court actually held that the UIM carrier had a greater right to assert a third-party action than did the defendant. In this case, the defendant’s contribution action would have been barred by a release, but the court held that the FRA’s specific provision allowed the UIM carrier’s claim to proceed. Johnson v. Hudson, 122 N.C. App. 188, 190, 468 S.E.2d 64, 66 (1996).

            A subsequent case addressed whether UM carrier has a right to bring a third-party action. The Court of Appeals noted that the UM statute only allows the UM carrier to “defend,” and thus that the UM carrier cannot assert such a claim. Hunter v. Kennedy, 128 N.C. App. 84, 86, 493 S.E.2d 327, 328 (1997) (“Dictionaries define "defend" as the contesting of a claim or endeavoring to "defeat a claim or demand made against one in a court of justice."). Both the UM and UIM carrier can defend at trial. The UIM carrier may participate in the trial even if the tortfeasor has not been released and participates also. Seay v. Snyder, 638 S.E.2d 584, 591 (N.C.App. 2007). A recent case holds that the liability carrier’s attorney and the UIM carrier’s attorney may both participate at trial. Kosek v. Barnes, 2007 WL 3581 (N.C. App. 2007) (insured rejected offer of $50,000, and jury awarded $17,000; “Plaintiff contends that while the underinsured motorist statute states that an underinsured motorist carrier ‘may participate as fully as if it were a named party,’ the legislative intent was not to provide insurance carriers an unfair advantage at trial by allowing counsel for the defendant and counsel for the unnamed insurance carrier to participate at trial simultaneously.”; affirming proceedings).

            Several cases have addressed issues regarding the UM/UIM carrier’s role at trial. The UM carrier may defend the suit “in the name of the uninsured motorist”; the UIM carrier may defend “without being named as a party.” There is not much authority addressing the significance of the UM carrier’s defending “in the name of” the defendant. The UM carrier’s answer generally pertains only to the UM carrier. Reese v. Barbee, 129 N.C.App. 823, 826, 501 S.E.2d 698, 700 (1998) (UM carrier’s motion to dismiss was sufficient to raise issue that it was not properly served with process; “Nationwide's motion to dismiss filed ‘in the name of’ defendant Barbee was asserted solely on Nationwide's own behalf, and was not rendered moot by the subsequent service of process on defendant Barbee.”). Accord Grimsley v. Nelson, 342 N.C. 542, 544, 467 S.E.2d 92, 92 (1996) (answer signed by attorney “Appearing in the name of the Defendant” indicated that attorney did not represent defendant).

            The manner in which the UM/UIM carrier’s attorney is described to the jury is not clear. “The General Assembly states that UIM carriers cannot be compelled to be named defendants in the liability phase of a trial.” Church v. Allstate Ins. Co., 143 N.C. App. 527, 531, 547 S.E.2d 458, 460 (2001). In one case, “The plaintiffs argue that to substitute the tortfeasor's name for the UIM carrier's name would produce absurd results, because the direct action would lie against the UIM carrier but allow the real defendant to be unnamed at trial. This is precisely what the General Assembly has mandated by enacting G.S. 20-279.21(b)(4).” Church v. Allstate Ins. Co., 143 N.C.App. 527, 531, 547 S.E.2d 458, 460 (2001). This is consistent with the general principle that insurance should be excluded from trial. Warren v. General Motors Corp., 142 N.C. App. 316, 319, 542 S.E.2d 317, 319 (2001) (trial court did not err in excluding UIM carrier’s answer, over plaintiff’s objection; “Moreover, in negligence cases, it is not generally permissible to introduce evidence of liability insurance or to make any reference of its existence in the presence of the jury.”).

            In Nationwide cites Sellers v. N.C. Farm Bureau Mut. Ins. Co., 108 N.C.App. 697, 424 S.E.2d 669 (1993), the plaintiff filed a negligence action against defendant tortfeasor, and subsequently amended her complaint to add a claim for UIM coverage. The lower court dismissed the action against the tortfeasor after the plaintiff settled with the tortfeasor, and the trial court substituted the unnamed UIM carrier as the named defendant. The Court of Appeals reversed, stating, “release or settlement of an action against the tortfeasor does not vitiate the express statutory terms of N.C.G.S. 20-279.21(b)(4) such that the action can continue with the [UIM] carrier remaining as an unnamed defendant.” Id. at 699-700, 424 S.E.2d at 670. The court wrote that this would “ensure [juries] would ... concentrate on the facts and the law as instructed, rather than the parties. . . .”

            In a 2007 case, the plaintiff filed a motion in limine to be allowed to refer to the UIM carrier’s attorney as representing the “unnamed defendant.” The trial court introduced the attorney by stating, “Also at the defense table with [defendant’s attorney] on behalf of ... [D]efendant is attorney William Russell.” The Plaintiff argued that it was “inherently prejudicial that the jury was led to believe that Mr. Russell was present at trial in a representative capacity for ... Defendant, as he simply was not.” Seay v. Snyder, 638 S.E.2d 584, 591 (N.C. App. 2007). The Court of Appeals rejected this issue because the plaintiff did not cite any authority for her position, she did not establish prejudice, and the court “noted” the provisions of G. S. § 20-279.21(b)(4) which allow the UIM carrier to appear “without being named as a party.”

            Even if subrogation rights against the defendant-motorist are waived, the UIM carrier is still entitled to remain anonymous. Braddy v. Nationwide Mut. Liability Ins. Co., 122 N.C. App. 402, 408, 470 S.E.2d 820, 823 (1996) (“Therefore, as an insurer's rights under section 20-279.21(b)(4) are not tied to subrogation rights, we find no meaningful distinction between the present case and Sellers.”).

            There is some notion that the UIM carrier should not be named in the caption. See McCrary ex rel. McCrary v. Byrd, 148 N.C.App. 630, 632, 559 S.E.2d 821, 823 (2002) (“After Nationwide filed a motion, the trial court deleted Nationwide's name from the caption of the proceeding and Nationwide was allowed to defend as an unnamed defendant.”).

            Although the North Carolina courts have thus far refused to disclose the identity of the UM/UIM carrier to the jury, the issues is still being litigated, and cases from other jurisdictions have generally ruled that the UM/UIM carrier must be disclosed to the jury to avoid a subterfuge. Stinson v. Mattingly, 2007 WL 1191906 (Ky. App. 2007) (trial court's error of failing to identify (UIM) carrier to jury as named defendant was error and required reversal, although jury found that insured was responsible for accident); King v. State Farm Mut. Auto. Ins. Co., 157 Md.App. 287, 303, 850 A.2d 428, 438 (2004) (“We hold that, under the facts of the instant case, the court's ruling, concealing State Farm's identity and role as the party defendant, infringed on the role of the jury and created a significant procedural error that requires reversal.”); Medina v. Peralta, 724 So.2d 1188, 1189 (Fla. 1999) (“defendants' motions in limine will be denied insofar as they seek to avoid disclosing Travelers' identity as plaintiffs' uninsured motorist carrier”; it is appropriate for a jury to be aware of the presence of a UM insurer which has been properly joined in the action against the tortfeasor.”). But see Swartz v. Peterson, 199 Neb. 171, 256 N.W.2d 681 (1977) (trial court did not err in overruling plaintiff's motion to disclose interest of her uninsured motorist carrier which was not party to action, denial of which motion did not result in any prejudice to plaintiff).

            Interestingly, there may be situations in which the UM/UIM carrier wants to have its identity disclosed to the jury. For example, if the tortfeasor is especially unsavory, then the UM/UIM carrier may prefer to avoid that target-defendant. In a case in another jurisdiction, the UIM carrier wanted to be identified to the jury, and the appellate court held that the UIM carrier was entitled to defend in its own name. State ex rel. State Farm Mut. Auto. Ins. Co. v. Canady, 197 W.Va. 107, 475 S.E.2d 107 (1996) (Accordingly, we hold that pursuant to West Virginia Code § 33-6-31(d), an uninsured motorist carrier is entitled to appear and defend in its own name rather than that of the uninsured tortfeasor even when policy defenses raising issues of coverage are not asserted by the carrier.).

            Where there are coverage issues to be tried, they should be bifurcated from the liability issues. Church v. Allstate Ins. Co., 143 N.C. App. 527, 533, 547 S.E.2d 458, 462 (2001) (“In cases where the UIM carrier defends the liability issues as an unnamed defendant, we hold that trial of the coverage issues should be bifurcated.”; “The issue of whether this defendant provides coverage for these plaintiffs is separate from whether Argie Coffey is liable for the accident.?”).

            During trial (and before trial), it is important to understand that the attorney for the UIM carrier represents the UIM carrier, and not the defendant-tortfeasor. A few ethics opinions address this role. The attorney for the UIM carrier may not contact the defendant without the defendant’s attorney’s consent. RPC 110 (1991) (“Attorney Y owes his allegiance to the court and UIM Co. whose interest may or may not be aligned with the interest of Driver Two on particular issues or at various times.”). See also RPC 193 (1995) (plaintiff’s attorney may communicate with Uninsured Motorist, even though UIM carrier has attorney).

            Also, the UIM carrier’s attorney may not represent the defendant, unless subrogation rights have been waived. RPC 154 (1993) (subrogation rights “would cause the interests of Driver B and Insurance Company X under its UIM policy to likely be materially different and adverse.”); RPC 177(1994) (”Defendant M has no personal liability because Insurance Company has waived its right of subrogation against Defendant M, and Plaintiff has executed a covenant not to enforce judgment against Defendant M. The interests of Defendant M and Insurance Company are not, therefore, adverse, . . . .”). The Court of Appeals addressed a similar issue, in a rather confusing passage, as follows:

Plaintiffs also argue that an impermissible conflict of interest would arise if the UIM carrier's attorney were to represent to the jury that he represented the interests of the tortfeasor. Here, where the tortfeasor has been released from liability, no conflict arises. The nature of UIM claims is such that in the liability phase of a trial, the UIM's defenses are the same as the tortfeasor's defenses would be if the tortfeasor was a party to the action. The parties would be codefendants.
Church v. Allstate Ins. Co., 143 N.C. App. 527, 531, 547 S.E.2d 458, 461 (2001). This case could be read to mean that the UIM carrier’s attorney can “represent to the jury that he represent[] the interests of the tortfeasor.” The UIM carrier can clearly defend the case, and it can defend without disclosing its identity, but it is not clear that the UIM carrier’s attorney can suggest to the jury that she represents the defendant.

This is defined as “A combination of motor vehicles that meets either of the following descriptions: a. Has a combined GVWR of at least 26,001 pounds and includes as part of the combination a towed unit that has a GVWR of at least 10,001 pounds. b. Has a combined GVWR of less than 26,001 pounds and includes as part of the combination a towed unit that has a GVWR of at least 10,001 pounds.”

This is defined as “A single motor vehicle that has a GVWR of at least 26,001 pounds” or “A combination of motor vehicles that includes as part of the combination a towing unit that has a GVWR of at least 26,001 pounds and a towed unit that has a GVWR of less than 10,001 pounds.”

This is defined as “A single motor vehicle not included in Class B” or “A combination of motor vehicles not included in Class A or Class B.”

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