The following are excerpts from Section 4.07[4][a] of Chapter 4 of the New Appleman North Carolina Insurance Litigation (2022 Edition of the LexisNexis Practice Guide) entitled “Commercial General Liability Insurance,” and it was written by PCKB’s Deb Bowers. Most case citations that appear in these sections of the book are omitted.

Policyholders, as well as other insureds, have certain duties to the insurer. These duties fall generally into three categories: notice, cooperation, and no voluntary payment. Although these duties of the insured are conditions of coverage under the policy, the North Carolina courts have treated them more like exclusions — placing the burden on the insurer to prove non-compliance. Generally, the courts have been reluctant to enforce these provisions unless the insurer was clearly prejudiced by the insured’s failure to comply. The notice requirement falls on the named insured (or policyholder). The term “You” is used in the policy section defining the notice parameters that must be met, and “you” is defined in the policy preamble as the Named Insured. Thus, an insured who is not a named insured may not be subject to the notice condition, although there is no North Carolina case holding that to be the case.

The policyholder is required to notify the insurer of an “occurrence” or an offense that may result in a claim “as soon as practicable.” North Carolina law on the notice requirement was clarified in two Supreme Court opinions: Great American Insurance Co. v. C.G. Tate Construction Co., 303 N.C. 387, 279 S.E.2d 769 (1981) (“Great American I”) and Great American Insurance Co. v. C.G. Tate Construction Co., 315 N.C. 714, 340 S.E.2d 743 (1986) (“Great American II”). In Great American I, the Court explained the three pronged notice analysis as follows: (1) the court will determine whether notice was provided by the insured as soon as practicable; (2) if not, there will be an inquiry as to whether the insured acted in good faith, “… e. g., that he had no actual knowledge that a claim might be filed against him.”; (3) if the good faith test is met, the burden then shifts to the insurer to show material prejudice by the. The burden is initially on the insured to demonstrate that it acted in good faith, but the test is a subjective one. As articulated in Great American II, the good faith inquiry is twofold:

1) Was the insured aware of his possible fault, and 2) Did the insured purposefully and knowingly fail to notify the insurer?

Under the Great American I and Great American II tests, North Carolina is generally considered to be a so-called “notice/prejudice” state, despite the fact that no showing of prejudice is required if the insured fails to meet the good faith requirements.

The typical CGL policy requires that any insured cooperate with the insurer. This includes anyone included in the definition of Who Is An Insured, not just the Named Insured/policyholder.

In Greco v. Penn National Security Ins. Co., 218 N.C. App. 394, 721 S.E.2d 280 (2012), the Court of Appeals refused to enforce the provision in a situation where the insurer was not able to reach an insured who was not a Named Insured/policyholder. An appeal was taken as a matter of right due to a dissent in the appellate court opinion, but the case was settled before the North Carolina Supreme Court ruled on the appeal, so the Court of Appeals opinion stands. The underlying case involved alleged negligence in attaching a trailer to a vehicle which allowed it to detach and hit an oncoming vehicle and cause injury to the occupants. The insurer of the trailer owner was unable to find or to obtain communication or cooperation from the purported insured who attached the trailer. The Greco court ruled that failure to cooperate is an affirmative defense with the insurer having the burden of proof. Concluding that “… some kind of affirmative action by the insured is required before a court can conclude, as a matter of law, that the insured failed to cooperate,” the majority refused to hold that complete unavailability of the insured was a per se failure to cooperate. The court referenced prior opinions involving failure to cooperate that had involved collusion or some affirmative act on the part of an uncooperative insured, such as failure to submit to a required medical evaluation. The Greco court majority noted that the insured’s failure to cooperate must also prejudice the insurer’s ability to investigate and/or defend the claim (citing to Bond/Tec, Inc. v. Scottsdale Ins. Co., 174 N.C. App. 820, 622 S.E.2d 165 (2005)) and then proceeded to find that the insurer did not make a sufficient showing that the disappearance of the insured resulted in the required prejudice.

[Deb notes:] In situations where an insured cannot be found, the insurer may be required to appear and defend in its own name in order to preserve any defenses to the claims asserted. Ethical rules do not allow insurer retained counsel to represent a party without his or her knowledge or consent, so in those cases, the only recourse is for the insurer to intervene and to have retained counsel appear for the insurer, rather than the insured.

There is also a requirement that no insured may make a voluntary payment or voluntarily assume an obligation without the consent of the insurer. The provision will not be enforced unless the insurer can show it was prejudiced by the insured’s voluntary payment.