By Cole C. Younger, Summer Associate

The Court of Appeals’ opinion in N.C. Farm Bureau Mut. Ins. Co. v. Young, (No. COA24-594) addresses how a court is likely to assess the duty to defend and the duty to indemnify under an insurance contract, and the interplay of whether an individual is or is not an employee of the insured contractor.     

In Young, Jay Young, d/b/a Youngs Construction Company, entered a contract with an owner to replace a metal roof at Water Rescue Building Station 75. Young subcontracted with Willie Locklear d/b/a Locklear Roofing (Locklear Roofing) to perform labor and install the materials on the project.

Mildred Williams, whose car had broken down and was looking for work to pay for repairs, went to Young to ask for work. In the past, Ms. Williams had performed odd jobs for Young and for Youngs Construction Company from time to time, for which she was paid cash. Young initially told her no, but later agreed that she could pick up trash around the worksite, but the two did not discuss whether she would be paid. In the past, Young had given Ms. Williams money whether or not she performed odd jobs for him. Meeting Ms. Williams on site where Locklear Roofing was performing its roof work, Young specifically told Ms. Williams not to go on the roof or to help the Locklear crew. When Young left the site, Ms. Williams began walking on the roof, fell off, hit the ground 15 feet below, and suffered a fatal head injury.

Ms. Williams’ Estate filed a lawsuit against Locklear Roofing, and a separate lawsuit against Young individually, and against his construction company. The Locklear Roofing complaint included multiple allegations asserting that Ms. Williams had been an employee of Young’s at the time of the accident. In turn, Young’s general liability insurer, North Carolina Farm Bureau Mutual Insurance Company (Insurer), defended Young under a reservation of rights. Insurer also filed a declaratory judgment action and asserted that it had no duty to defend or indemnify Young. Specifically, the general liability policy disclaimed coverage for injuries to employees of the insured, and to families of the insured’s employees. The policy did not apply to “temporary workers,” however.

Following a bench trial, the trial court entered judgment declaring the Insurer had no duty to defend or indemnify Young. The Estate appealed, arguing that the trial court erred in concluding that Ms. Williams was an “employee” because she was a “volunteer,” and for concluding that Ms. Williams was not a “temporary worker.”

The Court of Appeals of North Carolina upheld the ruling of the trial court, explaining that an insurance policy is a contract, and “[a]s with all contracts, the object of constructing an insurance policy is to arrive at the insurance coverage intended by the parties when the policy was issued.” (citing Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C.). An enforceable insurance policy triggers two independent duties that an insurer owes an insured: (1) Duty to Defend and (2) Duty to Indemnify. If the facts of the case are not reasonably covered by the insurance policy, then there is no duty to defend. (citing Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co.) Because the duty to defend is broader than the duty to indemnify, if the duty to defend fails, so does the duty to indemnify. N.C. Farm Bureau Mut. Ins. v. Phillips, 255 N.C. App. 758, 764, 805 S.E.2d 262, 366 (2017).

The Court of Appeals reasoned that given the language of the contract, there was no duty for the Insurer to defend Young in the lawsuit. There was a clear gap in the coverage in relation to the case at hand. Because there was no duty to defend, there was no duty to indemnify.

The Court of Appeals further addressed the ruling of the trial court classifying Ms. Williams as an “employee”. The Defendant argued that the trial court erred because no competent findings support this conclusion. Young had contradicting statements on whether he was going to pay Ms. Williams, and the Defendant argued that this was not enough to determine whether she was going to be paid. Also, the Defendant noted that the North Carolina Occupational Safety and Health Division (OSH) uses a different definition of “employee” than the general liability policy of the contract. However, the Court of Appeals did not focus on the definition of “employee” that OSH used; instead, like the trial court, the Court of Appeals focused on Young’s interactions with the OSH investigator. Young at first told the OSH investigator that Ms. Williams had been working for him part-time and that he was going to pay Ms. Williams. Even though Young later claimed that Ms. Williams was a volunteer, the initial statements Young made to the OSH investigator established an employer-employee relationship. As a result, the Court of Appeals found that the OSH investigator’s conclusion and resultant citation for OSH violations issued to Young’s construction company provided enough competent findings to support the trial court’s conclusion that Ms. Williams was Young’s employee at the time of the accident.

The importance of the Young opinion is that it clarifies that duties to defend and indemnify must be stated in or inferred from the language of the contract. If the duty to defend cannot be supported, then the narrower duty to indemnify also cannot be supported. The opinion also illustrates how the court can use a variety of evidence to support its findings, not necessarily the government agency’s standards. With the rise in commercial construction since the pandemic, this clarification enables parties to construction contracts facing insurance coverage lawsuits to identify what their insurance policies cover and to be aware of factors the courts can use when coming to their findings.