Liberty Mutual Fire Insurance Company v. Heather Sutton

USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 1 of 16

UNPUBLISHED

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 21-1277

LIBERTY MUTUAL FIRE INSURANCE COMPANY,

Plaintiff - Appellee,

v.

HEATHER SUTTON, as parent of minor H.S.,

Defendant - Appellant,

and

DAVID LINDSEY, as a parent of minor K.L.; DAPHNE LINDSEY, as parent of minor K.L.; K.L.,

Defendants.

Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. David Shepardson Cayer, Magistrate Judge. (3:19-cv-00666-DSC)

Submitted: August 30, 2022 Decided: October 19, 2022

Before AGEE and HARRIS, Circuit Judges, and MOTZ, Senior Circuit Judge.

Affirmed by unpublished per curiam opinion. *2 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 2 of 16

ON BRIEF: Kenneth P. Andresen, KENNETH P. ANDRESEN, PLLC, Englewood, Florida, for Appellant. Christopher J. Blake, Leslie Lane Mize, NELSON MULLINS RILEY & SCARBOROUGH LLP, Raleigh, North Carolina, for Appellee.

Unpublished opinions are not binding precedent in this circuit. *3 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 3 of 16

PER CURIAM:

This case involves an insurance dispute arising from a golf-cart accident on a public

road in North Carolina. An injured passenger brought a state court negligence action

against defendants insured by Liberty Mutual Fire Insurance Company, which in turn filed

for declaratory judgment in federal court, seeking to determine the rights and duties of the

parties under its homeowner’s insurance policy. A magistrate judge held that the accident

was excluded under the policy and, accordingly, that Liberty Mutual had no duty to defend

the state court action or to indemnify the defendants.

The plaintiff in the state court action now appeals, challenging both the district

court’s decision to exercise jurisdiction under the Declaratory Judgment Act and the merits

decision interpreting the insurance policy. Substantially for the reasons given by the

district court and the magistrate judge, we affirm.

I.

In March 2018, H.S., twelve years old at the time, was riding in the passenger seat

of a golf cart driven by K.L., then eleven years old, on a public road in North Carolina.

The golf cart belonged to K.L.’s grandparents but was kept at the home of her parents,

David and Daphne Lindsey. According to H.S., K.L. caused an accident when she

suddenly turned the golf cart to the right and the fender on the passenger side crashed into

the ground. H.S.’s jaw was fractured on both sides, and she sustained a severe gash in her

scalp. *4 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 4 of 16

H.S., through her mother, Heather Sutton, filed a negligence action in North

Carolina state court against K.L. and her parents (collectively, the Lindseys), seeking

damages for her injuries. At the time of the accident, the adult Lindseys held a

homeowner’s insurance policy issued by Liberty Mutual Fire Insurance Company, and

Sutton claimed that the accident was covered by that policy.

Liberty Mutual disagreed, and about a month after Sutton filed the negligence

action, it denied coverage. According to Liberty Mutual, the accident fell within a policy

exclusion for “motor vehicle liability.” That exclusion, Liberty Mutual recognized,

contained an exception for golf carts. But the exception applied only to carts owned by the

insured and operated on a golf course or in a private residential community, Liberty Mutual

reasoned, and neither of those conditions was satisfied here. Liberty Mutual did agree,

however, to provide the Lindseys a defense in the state court action, subject to a full and

complete reservation of rights.

Liberty Mutual then filed the federal court declaratory judgment action giving rise

to this appeal, naming as defendants Sutton and the Lindseys. Pursuant to the Declaratory

Judgment Act, 28 U.S.C. §§ 2201–2202, it sought a declaration as to the rights and

obligations of the parties in the state court negligence action. Specifically, Liberty Mutual

asked the district court to find that under the terms of its policy, it had no duty to defend or

indemnify the Lindseys against Sutton’s state court claims.

Two separate decisions followed, one regarding the district court’s exercise of

jurisdiction under the Declaratory Judgment Act and one resolving the parties’ coverage

dispute. We review each below. *5 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 5 of 16

A.

First, Sutton and the Lindseys filed motions to dismiss Liberty Mutual’s action,

arguing that the district court should leave matters to the state court and decline to exercise

its discretionary jurisdiction under the Declaratory Judgment Act. See 28 U.S.C. § 2201;

Penn-Am. Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004) (describing Act as

“confer[ring] a discretion on the courts rather than an absolute right upon the litigant”

(internal quotation marks omitted)). The district court denied the motions, finding it

appropriate to exercise its jurisdiction to decide Liberty Mutual’s action. Liberty Mutual

Fire Ins. Co. v. Lindsey, No. 3:19-CV-00666-GCM, 2020 WL 5821978 (W.D.N.C. Sept.

30, 2020) (“Liberty Mutual I”).

The court began its analysis with the two “princip[al] criteria” established by this

court: whether a declaratory judgment would “serve a useful purpose in clarifying and

settling the legal relations in issue,” and whether it would “terminate and afford relief from

the uncertainty, insecurity, and controversy giving rise to the proceeding,” id. at *2

(quoting Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir. 1937)). Those

criteria, the district court found, “clearly favor[ed] rendering a declaratory judgment,”

which would “settl[e] the question” of whether Liberty Mutual was required to defend the

Lindseys and thus “promptly provide all parties with relief” from the uncertainty and

insecurity of “not knowing” whether the Lindseys would be provided coverage. Id.

Recognizing that a federal court “should carefully consider whether it is interfering

with a state court action” if a parallel state suit is pending, id. at *1, the court went on to

consider the so-called “Nautilus factors,” which guide that inquiry. See United Capitol Ins. *6 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 6 of 16

Co. v. Kapiloff, 155 F.3d 488, 493–94 (4th Cir. 1998) (citing Nautilus Ins. Co. v.

Winchester Homes, Inc., 15 F.3d 371, 376–77 (4th Cir. 1994), abrogated in part on other

grounds by Wilton v. Seven Falls Co., 515 U.S. 277 (1995)). Those factors, too, the court

concluded, favored the exercise of federal jurisdiction. Id. at *2. No complicated or

unsettled issues of state law were presented, the court reasoned, and there was no “strong

state court interest” in deciding the coverage issue. Id. Indeed, it would be inefficient to

dismiss the case from federal court and require Liberty Mutual – not a party to the

underlying negligence action – to file a separate state court lawsuit to resolve the coverage

dispute. Id. Nor was there any concern about “unnecessary entanglement” between the

state and federal actions, given their distinct subject matters – a state action for negligence,

and a federal action pertaining only to insurance coverage. Id. And finally, there was no

indication that Liberty Mutual was engaged in “procedural fencing” or forum shopping;

instead, Liberty Mutual “has simply chosen to file this case in federal court, as it is

authorized to do” under the Declaratory Judgment Act. Id.

B.

With federal jurisdiction established, Liberty Mutual filed a motion for judgment on

the pleadings under Federal Rule of Civil Procedure 12(c), arguing that the plain language

of its policy barred coverage for the injuries at issue in the state court negligence action.

Sutton opposed the motion and filed her own motion for summary judgment, asserting that *7 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 7 of 16

coverage was not excluded under the policy. The parties consented to referral of the case

to a magistrate judge. 1

The magistrate judge granted Liberty Mutual’s motion for judgment on the

pleadings and denied Sutton’s motion for summary judgment. Liberty Mutual Fire Ins.

Co. v. Lindsey, No. 3:19-CV-006666-DSC, 2021 WL 510624, at *5 (W.D.N.C. Feb. 11,

2021) (“Liberty Mutual II”). Applying North Carolina rules of contract interpretation, the

magistrate judge agreed with Liberty Mutual that the golf-cart accident was excluded from

coverage under the policy. That question, the magistrate judge explained, was governed

by the policy provision excepting certain golf carts – those owned by the insured and

operated on a golf course or in a private community – from the general exclusion for “motor

vehicle liability.” But no coverage existed under that exception, the magistrate judge

concluded, because the golf cart at issue was owned by K.L.’s grandparents, not the

insureds, and was being driven on a public road at the time of the accident. Id. at *4.

The magistrate judge rejected Sutton’s argument that coverage nevertheless was

preserved under a different exception, for vehicles “designed for recreational use.” Here,

the magistrate judge relied on the “well-settled principle” of North Carolina contract law

“applying specific provisions over more general ones dealing with the same subject

1 The “district court may refer a case to a magistrate judge if all parties consent.” Muhammad v. Fleming, 29 F.4th 161, 162 (4th Cir. 2022). In that event, the magistrate judge “conduct[s] any or all proceedings in a jury or nonjury civil matter and order[s] the entry of judgment in the case.” 28 U.S.C. § 636(c)(1); see Fed. R. Civ. P. 73. In this case, after the district court entered its order denying the motion to dismiss, the parties consented to a magistrate judge handling the remaining proceedings. Hence our need to refer to decisions of both the district court and the magistrate judge throughout this opinion.

USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 8 of 16

matter.” Id. at *4 (citing Lail v. Cleveland Cty. Bd. of Educ., 645 S.E.2d 180, 187 (N.C.

Ct. App. 2007)). Recreational vehicles and golf carts, the magistrate judge observed, “are

treated differently” under the policy: “Had the insurer intended for a golf cart to be treated

as a recreational vehicle, the drafters of the policy would not have included a separate

exclusion for golf carts. But they did.” Id. That more specific exception for golf carts

alone, the district court concluded, must apply over the more general exception for all

recreational vehicles where, as here, the two would lead to conflicting results. Id. And

that was so even construing the policy language in favor of coverage, consistent with North

Carolina law. Id. at *4 (“Even construing the [exception] ‘strictly to provide coverage,’

coverage does not exist.” (quoting Lail, 645 S.E.2d at 186)).

Because the accident was not covered under the Lindseys’ homeowner’s insurance

policy, the magistrate judge held, Liberty Mutual had neither a duty to defend nor a duty

to indemnify. Accordingly, the magistrate judge granted Liberty Mutual’s motion for

judgment on the pleadings and, for the same reasons, denied Sutton’s motion for summary

judgment. Id. at *4–5.

Sutton timely appealed the entry of final judgment in Liberty Mutual’s declaratory

judgment action.

II.

A.

We must begin by addressing two jurisdictional issues raised by Sutton for the first

time on appeal. See United States v. Poole, 531 F.3d 263, 270 (4th Cir. 2008) (describing *9 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 9 of 16

independent obligation of federal appellate courts to satisfy themselves of district court

jurisdiction). We may dispense briefly with Sutton’s first claim: that the district court

lacked subject matter jurisdiction because Liberty Mutual did not meet its burden of

establishing complete diversity. See 28 U.S.C. § 1332; Kokkonen v. Guardian Life Ins. Co.

of Am., 511 U.S. 375, 377 (1994). We disagree.

As we have explained, there are two ways in which a defendant like Sutton may

challenge subject matter jurisdiction. Kerns v. United States, 585 F.3d 187, 192 (4th Cir.

2009). A defendant may mount a “facial challenge,” arguing that the facts alleged in a

complaint are not a basis for jurisdiction. Id. Or a defendant may contend that the

jurisdictional allegations in a complaint are not true. Id. But Sutton has done neither here.

There is no dispute that Liberty Mutual adequately alleged complete diversity, identifying

itself as a corporation organized under the laws of Wisconsin with its principal place of

business in Massachusetts, see 28 U.S.C. § 1332(c)(1) (defining corporate citizenship for

purposes of diversity jurisdiction), and all defendants as citizens and residents of North

Carolina. And Sutton has never contested the truthfulness of those allegations, denying

them solely on the basis that she was “without sufficient information” as to Liberty

Mutual’s corporate citizenship. J.A. 113.

So Sutton has brought neither of the challenges we recognized in Kerns. Instead,

she argues that Liberty Mutual failed to submit a “verified pleading” or other “verified

documentation” demonstrating that its principal place of business is in Massachusetts. But

there is no statute, rule, or case that requires such verified support for well-pleaded factual

allegations establishing subject matter jurisdiction. Cf. Kerns, 585 F.3d at 192–93 *10 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 10 of 16

(describing fact-finding process by which district court may resolve a challenge to the

truthfulness of jurisdictional allegations). And the background principle of the Federal

Rules of Civil Procedure is that “[u]nless a rule or statute specifically states otherwise, a

pleading need not be verified or accompanied by an affidavit.” Fed. R. Civ. P. 11(a).

Sutton’s argument is therefore without merit, and Liberty Mutual’s well-pleaded

allegations suffice to establish jurisdiction.

We also disagree with Sutton’s second threshold contention: that under Trustgard

Insurance Co. v. Collins, 942 F.3d 195 (4th Cir. 2019), this case does not present an actual

controversy and was not ripe for adjudication by the district court. In Trustgard, this court

questioned – without resolving – whether a federal court has jurisdiction to issue a

declaratory judgment as to an insurer’s duty to indemnify before a state court renders a

judgment on the insured’s liability. Id. at 200. That is because, we reasoned, prior to

judgment, an insurer’s “alleged injury – that it might have to guarantee a future judgment

. . . – is of a hypothetical and contingent nature: the injury may or may not occur depending

on the outcome of the state lawsuit.” Id. It follows, Sutton argues, that Liberty Mutual’s

request for a declaration as to its duty to indemnify is not ripe, because there has been no

state court judgment on liability. Nor, she argues, is the duty-to-defend issue ripe for

adjudication, because Liberty Mutual has not shown that it has begun to provide a defense

and incurred expenses in doing so.

Sutton misreads Trustgard. Trustgard’s discussion of ripeness bears only on duty-

to-indemnify claims; duty-to-defend claims are expressly distinguished. See id. at 200.

And under Trustgard’s reasoning, once a state court case is filed and an insured claims a *11 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 11 of 16

defense, that claim – the duty-to-defend claim – becomes a concrete question, ripe for

resolution by a federal court. See id. Here, the Lindseys had already claimed a defense

from Liberty Mutual when Liberty Mutual filed its declaratory judgment action in federal

court, arguing against a duty to defend. That is enough to make the duty-to-defend claim

ripe. And under North Carolina law, where there is no duty to defend, there can also be no

duty to indemnify. N.C. Farm Bureau Mut. Ins. Co., Inc. v. Phillips, 805 S.E.2d 362, 365–

66 (N.C. Ct. App. 2017) (citing Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C.,

692 S.E.2d 605 (N.C. 2010)). Here, in other words, Liberty Mutual’s duty-to-indemnify

claim ripens along with its duty-to-defend claim, and its request for a declaratory judgment

as to both presents a concrete question for the district court’s resolution.

B.

That brings us, finally, to the two decisions on appeal. We review the district court’s

decision to hear Liberty Mutual’s federal declaratory judgment action for abuse of

discretion. See Penn-Am. Ins. Co., 368 F.3d at 412. The magistrate judge’s merits ruling,

granting judgment on the pleadings to Liberty Mutual, is reviewed de novo. Pa. Nat’l Mut.

Cas. Ins. Co. v. Beach Mart, Inc., 932 F.3d 268, 274 (4th Cir. 2019). 2 On appeal, the

parties advance substantially the same arguments they presented to the district court and

magistrate judge. And for substantially the same reasons given by the district court and

2 Sutton also summarily asserts that the magistrate judge erred in denying her summary judgment motion. Because the grant of judgment to Liberty Mutual was predicated on the same conclusion as the denial of summary judgment to Sutton – that coverage of the golf-cart accident was excluded under the homeowner’s insurance policy – we address only the first here.

USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 12 of 16

magistrate judge, we affirm the exercise of jurisdiction over this action and entry of

judgment in favor of Liberty Mutual.

1.

We begin with the district court’s decision to exercise jurisdiction over Liberty

Mutual’s request for declaratory relief while the state court negligence action was pending.

Under the Declaratory Judgment Act, in a case or controversy otherwise within its

jurisdiction, 3 a district court “may declare the rights and other legal relations of any

interested party seeking such declaration, whether or not further relief is or could be

sought.” 28 U.S.C. § 2201 (emphasis added); see Penn-Am. Ins. Co., 368 F.3d at 412. As

the district court recognized, Liberty Mutual I, 2020 WL 5821978, at *2, in deciding

whether “to exercise authority to proceed with a declaratory judgment action,” courts are

to consider whether the judgment would serve a useful clarifying purpose in settling

contested legal relations and afford relief from uncertainty and insecurity. Kapiloff, 155

F.3d at 493 (citing Quarles, 92 F.2d at 325). And when a parallel case is pending in state

court, courts analyze additional factors animated by “considerations of federalism,

efficiency, and comity.” Id. at 493–94 (citing Nautilus, 15 F.3d at 376–77); see Liberty

Mutual I, 2020 WL 5821978, at *2 (listing and applying “Nautilus factors”).

We can discern no abuse of discretion in the district court’s careful weighing of the

relevant considerations here. It is well established that a “declaration of parties’ rights

3 As discussed above, Liberty Mutual properly invoked the district court’s jurisdiction pursuant to 28 U.S.C. § 1332. See Liberty Mutual I, 2020 WL 5821978, at *2.

USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 13 of 16

under an insurance policy is an appropriate use of the declaratory judgment mechanism”

because it can “afford relief from the uncertainty of whether coverage exists under the

policy.” Kapiloff, 155 F.3d at 494 (internal quotation marks omitted). That general

principle is fully applicable in this case, as the district court explained: A declaratory

judgment could provide the Lindseys – already defendants in a state court negligence action

– with “relief from the uncertainty[ and] insecurity[] . . . of not knowing” whether Liberty

Mutual would be required to pay for their defense and indemnify any judgment against

them. Liberty Mutual I, 2020 WL 5821978, at *2.

And while it is true, as the district court noted, that a federal court must “carefully

consider whether it is interfering with a state court action” before it exercises jurisdiction,

id. at *1, the district court made just such a “careful[]” examination of the Nautilus factors

here. As the district court explained, if it declined to exercise jurisdiction over this action,

Liberty Mutual’s claims would not be resolved in the pending state court action, which

involves only negligence issues and to which Liberty Mutual is not a party. Instead, Liberty

Mutual would have to “file a separate state court lawsuit to resolve the present dispute,”

making state court resolution the less efficient alternative. Id. at *2. For similar reasons,

there is no risk that “overlapping issues of fact or law” will entangle the state court hearing

Sutton’s negligence claim and the federal court resolving a separate coverage dispute. Id.

And we agree with the district court that there is no indication here of any “procedural

fencing” on Liberty Mutual’s part, or a particularized state interest in having this coverage

dispute resolved in state court. Id. In short, the district court, having engaged in precisely

the inquiry required by our case law, was well within its broad discretion, see Med. Mut. *14 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 14 of 16

Ins. Co. of N.C. v. Littaua, 35 F.4th 205, 208 (4th Cir. 2022), when it determined that it

would be appropriate to exercise jurisdiction over Liberty Mutual’s declaratory judgment

action.

2.

Finally, we consider the magistrate judge’s merits decision in favor of Liberty

Mutual. As the magistrate judge explained, in reviewing a Rule 12(c) motion for judgment

on the pleadings, a court must view the facts presented in the light most favorable to the

nonmoving party and determine whether the case can be decided as a matter of law. Liberty

Mutual II, 2021 WL 510624, at *2; see Beach Mart, 932 F.3d at 274. There is no dispute

that the law of North Carolina – as the place where the insurance policy was delivered –

applies to the coverage dispute here. Liberty Mutual II, 2021 WL 10624, at *2. And under

North Carolina law, both Liberty Mutual’s duty to defend and its duty to indemnify turn

on whether the golf-cart accident is covered under the Lindseys’ homeowner’s insurance

policy; an insurer has no duty to defend where the alleged injury is not covered by the

policy, and when there is no duty to defend, there also is no duty to indemnify. Id.

The critical question in this case, as the magistrate judge recognized, is whether the

golf-cart accident is governed by the golf-cart exception to the policy’s “motor vehicle

liability” exclusion. See id. at *4. The Lindseys’ homeowner’s insurance policy excludes

coverage for claims arising from “motor vehicle liability” unless, as relevant here, the

“motor vehicle” is either (a) a “motorized golf cart that is owned by an ‘insured’” and,

among other conditions, “at the time of an ‘occurrence,’” within the legal boundaries of a

“golfing facility” or a “private residential community,” or (b) “[d]esigned for recreational *15 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 15 of 16

use off public roads” and “[n]ot owned by an insured.” J.A. 40. If the golf-cart exception

applies, as the magistrate judge explained, then there plainly is no coverage under the terms

of that exception: The golf cart is owned by K.L.’s grandparents, not the insured Lindseys;

and at the time of the accident, it was on a public road, not on a golf course or in a private

residential community. But if, as Sutton argues, the “recreational vehicle” exception

applies, then there would be coverage, because the cart was not owned by the Lindseys.

We agree with the magistrate judge that the golf-cart exception controls. Like the

magistrate judge, we recognize that under North Carolina law, insurance policy exclusions

are to be construed in favor of coverage and against the insurer. See id. at *4; Lail, 645

S.E.2d at 186. But North Carolina also follows the specific-over-the-general canon of

contract construction, under which the more specific provision governs over the more

general in case of conflict. See Liberty Mutual II, 2021 WL 10624, at *4; Wood-Hopkins

Contracting Co. v. N.C. State Ports Auth., 202 S.E.2d 473, 476 (N.C. 1974) (“[W]hen

general terms and specific statements are included in the same contract and there is a

conflict, the general terms should give way to the specifics.”). And that rule, applied to

this policy language, leaves no ambiguity: The golf-cart accident is governed by the golf-

cart exception, and not by a broader exception covering all recreational vehicles. As the

magistrate judge observed, had the insurer intended golf carts to be treated as recreational

vehicles, it “would not have included a separate exclusion for golf carts. But [it] did.”

Liberty Mutual II, 2021 WL 10624, at *4. As a result, that specific exception governs the

golf-cart accident in question and, on the undisputed facts of this case, operates to preclude

coverage. *16 USCA4 Appeal: 21-1277 Doc: 28 Filed: 10/19/2022 Pg: 16 of 16

III.

For the reasons given above, the judgment of the district court is affirmed.

AFFIRMED