Court Opinion

ID: 9586583
Source: CourtListenerOpinion
Date Created: 2023-08-21 23:13:04.1403+00
Date Added: 2024-06-11T17:32:44.024159
License: Public Domain

Justice WHICHARD
dissenting.
I agree that there is no ambiguity in the meaning of the word “exhausted,” but I do not agree that a latent ambiguity lurks in the “manner by which the coverage must be exhausted before the duty to defend terminates.” The more reasonable reading of this policy language is a contextual one, such as that given an identical provision by the Supreme Court of Louisiana:
Read as a whole, the only reasonable interpretation of this section is that the insurer will defend any claim, but the defense obligation will terminate if and when the insurer’s policy limits are exhausted. These provisions are not subject to more than one reasonable interpretation. The policy in this regard is not ambiguous.
This standard policy provision [“In addition to our limit of liability, we will pay all defense costs we incur”] simply means that defense costs will be paid separately by the insurer and will not be applied against its policy limits. . . . This language cannot be taken to mean that the company will continue to pay defense costs once its policy limits have been exhausted, and in fact the very next sentence of the policy expressly states that this will not be the case. Once again, these sentences must be construed together, and when they are so construed there is no ambiguity.
Pareti v. Sentry Indem. Co., 536 So. 2d 417, 421 (La. 1988). See also Stanley v. Cobb, 624 F. Supp. 536, 538 (E.D. Tenn. 1986) (absent provision that insurer may pay the insured the policy limits or defend to judgment, policy language identical to that here must *398be interpreted by its plain meaning and any ambiguity must be resolved against the contract’s drafter); Anderson v. U.S. Fidelity & Guar. Co., 339 S.E.2d 660, 661 (Ga. App. 1986).
I would hold that defendant’s unilateral tender of the policy limit to Hinson, and Hinson’s acceptance, sufficed to exhaust defendant’s “limit of liability” and thus to end its duty to defend plaintiff. I would do so because, in the context presented, neither the word “exhausted” nor the manner of “exhausting” the policy limits is ambiguous: the only reasonable interpretation is that by paying its full policy limits to the party injured by its insured, defendant “exhausted” its limit of liability and ended its duty to settle or defend.
The double meaning that the majority perceives in the policy language — that the duty to defend or settle ends only after judgment or settlement or that it ends when the policy limits are exhausted in any other manner —and its interpretation that the former, which favors the insured, controls, in effect reinserts policy language into the contract that was standard in post-1966 insurance contracts, but is omitted from the policy here:
[T]he company shall not be obligated to pay any claim or judgment or to defend any suit or prosecute or maintain any appeal after the applicable limits of the Company’s liability have been exhausted by payment of any judgments or settlements.
E.g., Conway v. Country Cas. Ins. Co., 92 Ill. 2d 388, 393, 442 N.E.2d 245, 247 (1982) (emphasis added).
In Conway, the company, after making several advance payments to the plaintiff for her medical expenses, entered into an agreement, with the approval of its insured, to pay the remainder of the $10,000 limit. Conway, 92 Ill. 2d at 391-92, 442 N.E.2d at 246. The agreement, however, did not release the insured, against whom the plaintiff continued her action. Id. at 392, 442 N.E.2d at 246. The Illinois Supreme Court held that the company was not discharged of its duty to defend. It stated:
Our holding that an insurer cannot discharge its duty to its insured simply by making payments to the claimant to the extent of its policy’s limits is clearly supported by the language of the policy here. As we have noted above, the policy provided that the insurer could terminate its obligation to defend and pay by payments to the policy’s limits of “any judgments or *399settlements.” The insurer here, of course, made no payment pursuant to a judgment or a settlement agreement.
Id. at 395-96, 442 N.E.2d at 248. Thus, in Conway the inclusion of the language that exhaustion of the policy limit must be by payment of “judgments or settlements” was crucial to the court’s determination that the company’s payments to the claimant did not discharge its duty to defend.
Policy language in Gross v. Lloyd’s of London Ins. Co., 121 Wis. 2d 78, 83, 358 N.W.2d 266, 269 (1984), was identical to that in Conway, with the appended phrase that exhaustion of policy limits could be either by payment of judgments or settlements “or after such limit of the Company’s liability has been tendered for settlement.” The trial court allowed the company to pay its policy limit into court and thereby be relieved of its duty to defend its insured. Id. at 83, 358 N.W.2d at 269. The court of appeals affirmed, but the Wisconsin Supreme Court reversed, stating that the “tendered for settlement” language contemplated payment prior to judgment or settlement, that the addition of that language was evidence of a “substantial change” in the insurer’s obligation to defend, and that the insurer improperly failed to highlight the new language in the policy so as to give notice to the insureds of a change in the insurer’s duty to defend. Id. at 86, 89, 358 N.W.2d at 270, 271.
The language specifying means of exhaustion of policy limits is patently absent in the contract at issue here. Although an insurer’s duty to defend suits against its insured must be determined on the basis of the language in the insurance contract, Liberty Mutual Insurance Co. v. Mean Corporation, 219 Ga. 6, 8, 131 S.E.2d 534, 535 (1963), the majority reads more into the contract than is there: the contract neither states nor implies a provision limiting “exhaustion” of policy liability limits to settlement or judgment, or even to a tender “for settlement.” See Gross v. Lloyd’s of London Ins. Co., 121 Wis. 2d at 83, 358 N.W.2d at 269. Indeed, the absence of such limiting language, which underlay the courts’ holdings in Conway and Gross, suggests that defendant’s drafters may well have avoided it for the reasons therein expressed.
It is well established that “[a]ll parts of a contract are to be given effect if possible. It is presumed that each part of the contract means something.” Bolton Corp. v. T.A. Loving Co., 317 N.C. 623, 628, 347 S.E.2d 369, 372 (1986). See also Williams v. *400Insurance Co., 269 N.C. 235, 240, 152 S.E.2d 102, 107 (1967) (“each clause and word must be ... given effect if possible by any reasonable construction”); Robbins v. Trading Post, 253 N.C. 474, 477, 117 S.E.2d 438, 440-41 (1960).
The terms of a contract must, if possible, be construed to mean something, rather than nothing at all, and where it is possible to do so by a construction in accordance with the fair intendment of a contract, the tendency of the courts is to give it life, virility, and effect, rather than to nullify or destroy it.
17 Am. Jur. 2d Contracts § 254 at 648-49 (1964). The majority would interpret the provision in question to mean “that the insurer’s duty to defend continues until its coverage limits have been exhausted in the settlement of a claim or claims against the insured or until judgment against the insured is reached.” Where a settlement or judgment has been reached in the factual context presented here, no claim against the insured remains. The duty of the insurer to defend thus terminates inevitably, and contractual provision therefor is unnecessary. To interpret the provision as the majority does thus renders it meaningless surplusage, without purposeful effect. Under the interpretation here — that unilateral payment of the policy limit to the injured party presettlement or prejudgment effects an exhaustion of the insured’s liability limits and a termination of the insurer’s duty to settle or defend — the provision “mean[s] something, rather than nothing at all”; it has “effect, rather than [being] nullified] or destroy[ed].” Id.
The majority briefly surveys the handful of cases — Stanley v. Cobb, 624 F. Supp. 536; Samply v. Integrity Ins. Co., 476 So. 2d 79 (Ala. 1985); Anderson v. U.S. Fidelity & Guar. Co., 177 Ga. App. 520, 339 S.E.2d 660 (1986); and Pareti v. Sentry Indem. Co., 536 So. 2d 417 — in which state and federal courts have construed policy language identical to that before us. In each of these cases the insurer’s assertion that tender of the policy limits terminated its duty to defend the insured was rejected. The majority acknowledges that these cases are factually distinguishable, but denies the materiality of the difference. I disagree.
In Stanley, Samply and Anderson, the insurance companies tendered the policy limits into court, then awaited determination of liability. Pareti involved a compromise and release agreement between the claimants', the insured, and the insured’s insurance *401company. The agreement released the insured and the insurance company from further liability. In return, the insurance company tendered $50,000 in settlement. The claimants’ underinsured carrier argued that the insurance company did not exhaust its duty to defend. The court held that because the insurer had exhausted its policy limits through a good faith settlement, it no longer had a duty to defend. The court only suggested in a footnote that a “unilateral tender” of the policy limits might not exhaust the duty to defend, citing Samply and cases on point cited therein, which are factually distinguishable from this case because they involve tender of policy limit amounts into a court and/or because they involve different language.1
Here the company paid its policy limit directly to the claimant. The injured claimant thus benefitted — immediately and maximally— from the payment. When an insurer merely tenders its policy limits into court, the insured may or may not be found liable for the claimant’s injuries. If the insured is found not liable, the insurer recovers the entire sum tendered. Given that possibility, the insurer may not have ■ “exhausted” its “limit of liability” when it merely tenders its limits into court. By contrast, when an insurer has paid to the claimant all it can be required to pay, and it cannot recover any part of that sum, by any reasonable construction its “limit of liability . . . has been exhausted.”
*402Finally, the interpretation here is in accord with the public policy of North Carolina implicit in N.C.G.S. § l-540.3(a), which provides for advance payments by an insurance company to a person making a claim for bodily injury against the company’s insured. This statute states:

Advance Payments.

(a) In any claim, potential civil action or action in which any person claims to have sustained bodily injuries, advance or partial payment or payments to any such person claiming to have sustained bodily injuries . . . may be made to such person ... by the person or party against whom such claim is made or by the insurance carrier for the person . . . [who] is or may be liable for such injuries or death. Such advance or partial payment or payments shall not constitute an admission of liability on the part of the person ... on whose behalf the payment or payments are made or by the insurance carrier making the payments .... The receipt of the advance or partial payment or payments shall not in and of itself act as a bar, release, accord and satisfaction, or a discharge of any claims of the person or representative receiving the advance or partial payment or payments, unless by the terms of a properly executed settlement agreement it is specifically stated that the acceptance of said payment or payments constitutes full settlement of all claims ....
N.C.G.S. § l-540.3(a) (1983). Part of the General Assembly’s purpose in enacting this statute was to encourage insurance companies to make advance partial payments to a claimant prior to a final settlement. Thornburg v. Lancaster, 303 N.C. 89, 94, 277 S.E.2d 423, 427 (1981), overruled on other grounds, Daniels v. Montgomery Mut. Ins. Co., 320 N.C. 669, 360 S.E.2d 772 (1987).
As a result of this statute, seriously injured persons who require long-term medical treatment can now accept piecemeal payments from an insurer before any determination of liability, and those payments represent neither an admission of liability on the part of the insurer nor full satisfaction of the injured party’s claims. Under the present law, acceptance of partial or advance payments, absent a properly executed full settlement agreement, does not bar the party receiving the payments from suing on the underlying claim.
*403Id. The majority’s holding, in effect, that an insurer cannot exhaust its policy limit by making advance payment(s) to a claimant of the maximum sum payable under the policy, and thereby terminate its duty to defend, will discourage payments to claimants prior to a judgment or full settlement, and is thus counter to the public policy implicit in N.C.G.S. § l-540.3(a).
I thus would hold that, under the facts and the language of the insurance contract here, defendant did not breach its duty to defend its insured.2 The decision of the Court of Appeals reversing the summary judgment for defendant on the claim that defendant breached its contractual duty to defend thus should be reversed and the cause should be remanded to the Court of Appeals for further remand to the Superior Court, Davie County, for reinstatement of the summary judgment for defendant on the duty-to-defend issue.
For the foregoing reasons, I respectfully dissent.
Justices MEYER and Webb join in this dissenting opinion.

. Pareti cites Keene Corp. v. Insurance Co. of N. America, 597 F. Supp. 946 (D.D.C.), vacated on other grounds, 631 F. Supp. 34 (D.D.C. 1985); Simmonds v. Jeffords, 260 F. Supp. 641 (E.D. Pa. 1966); National Casualty Co. v. Insurance Co. of N. America, 230 F. Supp. 617 (N.D. Ohio 1964); Samply v. Integrity Ins. Co., 476 So. 2d 79 (Ala. 1985); Conway v. County Cas. Ins. Co., 92 Ill. 2d 388, 442 N.E.2d 245 (1982); Sutton Mutual Ins. Co. v. Rolph, 109 N.H. 142, 244 A.2d 186 (1968); Delaney v. Vardine Paratransit, Inc., 132 Misc. 2d 397, 504 N.Y.S.2d 70 (N.Y. Sup.Ct. 1986), and Batdorf v. Transamerica Title Ins. Co., 41 Wash. App. 254, 702 P.2d 1211 (1985).
Keene, Simmonds, and Sutton Mutual involved pre-1966 policy language. National Casualty involved a pre-1966 policy; the specific policy language was not before the court. The policy in Conway stated that the liability limits must be “exhausted by payment of judgments or settlements.” The policy in Delaney contained the following language on which the court based its decision: “our payment of Liability Insurance limit ends our duty to settle or defend.” In Simmonds, National Casualty, Samply, and Sutton Mutual, the insurance companies tendered or offered to tender their policy limits into court. In Batdorf, the court held that the insurer’s payment of the policy in full to the insured terminated the insurer’s duty to defend. The court’s decision rested on policy language stating that the insurance company had the option of paying the policy in full, thus terminating the insured’s liability.

. The question of whether defendant discharged its contractual obligations to plaintiffs in good faith is not argued. “The duty of an insurance company to defend its insured arises solely from the language of the insurance contract. A breach of the duty to defend can be determined objectively from the contract itself without regard to the good or bad faith of the insurer.” Schiebout v. Citizens Ins. Co. of America, 140 Mich. App. 804, 813, 366 N.W.2d 45, 49 (1985). An insurance company has a fiduciary duty to defend its insured and to consider the insured’s interest. Pareti v. Sentry Indem. Co., 536 So. 2d at 423. “An insurer which hastily enters a questionable settlement simply to avoid further defense obligations under the policy clearly is not acting in good faith and may be held liable for damages caused to the insured.” Id.; see also Zulkey & Pollard, The Duty to Defend After Exhaustion of Policy Limits, For The Defense, June 1985, at 21, 28.
[A]ny payment of the policy limits which does not release the insured from a pending claim (e.g., unilateral tender of policy limits to the court, the claimant or the insured), even if sufficient to terminate the duty to defend under the wording of the policy involved, raises serious questions as to whether the insurer has discharged its policy obligations in good faith.
Pareti, 536 So. 2d at 424; see also Van Vugt, Termination of the Insurer’s Duty to Defend By Exhaustion of Policy Limits, 44 Ins. Couns. J. 254, 264 (1977).