Church Mutual Insurance Company v. Lake Pointe Assisted Living, Inc.

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF NORTH CAROLINA

EASTERN DIVISION

CASE NO. 4:20-CV-00055-M

CHURCH MUTUAL INSURANCE )

COMPANY, )

Plaintiff, )

)

V. ) OPINION AND ORDER

)

LAKE POINTE ASSISTED LIVING, INC. _ )

et al., )

Defendants. )

Plaintiff Church Mutual Insurance Company (“Plaintiff”), through this declaratory-

judgment action, asks this court to determine whether or not it is obligated to defend and indemnify

Lake Pointe Assisted Living, Inc. and its owners/operators Tony and Edith Bigler (“Lake Pointe

Defendants”) in ongoing litigation in Craven County Superior Court (“Underlying Lawsuit”). The

plaintiffs in the Underlying Lawsuit are joined as defendants in this action (“Resident Defendants”)

as their rights will ultimately be affected by any court order. This matter is before the court on

Plaintiffs Motion for Judgment on the Pleadings (“Motion”) [DE-24]. For the reasons that follow,

the Motion will be granted in part and denied in part.

I. Factual and Procedural Background

A. The Underlying Lawsuit!

Lake Pointe Assisted Living is an adult care home.” FAC 1, DE-35-1. The facility and its

residents entered into identical contracts, entitled the “Home Contract.” Jd. J 17. In exchange for

monthly fee, the contract included several promises to its residents including that “[m]eals would

be nutritious”; the facility “would provide assistance with eating, walking, dressing, bathing,

personal grooming, ambulating, correspondence, scheduling of appointments, and shopping”;

residents would be supervised ‘“‘on a 24 hour basis”; and group and individual activities would be

planned and implemented. Jd. § 18, 23. Additionally, the facility was to provide its residents “with

and services that were in compliance with relevant federal and state laws and rules and

regulations” and operate “in compliance with relevant federal and state laws and rules and

regulations.” Id. 20-21.

Because the Lake Pointe Defendants allegedly did not fulfill contractual obligations as

promised, the Resident Defendants filed a class action lawsuit in Craven County Superior Court

on behalf of themselves and all residents of the facility from December 1, 2014, until the present?

Id. | 24. The complaint raises three causes of action: breach of contract, violation of the North

Carolina Unfair Trade Practices Act (““UTPA”), and negligence. Id. 33-61.

' When the Motion was filed, the Third Amended Complaint (“TAC”) was the operative complaint

in the Underlying Lawsuit. TAC, DE-1-5. The TAC has since been amended and the Fourth.

Amended Complaint (“FAC”) is now the operative complaint in the Underlying Lawsuit. See D.

Coats Aff. attaching FAC, DE-35. For purposes of recounting the allegations in the Underlying

Lawsuit and employing the “comparison test” infra, the court will rely on the currently operative

complaint, the FAC.

2 An “adult care home” is an assisted living residence under North Carolina Law. N.C. Gen. Stat.

§ 131D-2.1(3).

3 Elsewhere, the FAC indicates that the facility closed in 2018. DE-35-1 27.

Specific to their breach-of-contract claim are allegations that the Lake Pointe Defendants

understaffed the facility, failed to serve nutritious meals, failed to provide activities, and generally

failed to comply with the law, rules, and regulations that govern the operation of a licensed adult

care home. Jd. § 36. The core of the UTPA claim is that the Lake Pointe Defendants, not members

of a learned profession, engaged in false representations in their marketing brochures and the

Home Contract knowing they could not fulfill their promises to residents and that these actions

“were driven by greed to increase profit margins.” Jd. J 42, 46, 50(d), 52. Finally, the Underlying

Lawsuit alleges that Tony and Edith Bigler were negligent in the management and operation of

the adult care home. Jd. § 60. The Resident Defendants seek recovery of economic damages they

sustained as a result of these violations. Jd. 4. □

B. The Insurance Policy

Plaintiff issued two insurance policies to the Lake Pointe Defendants that were in effect

from May 1, 2018, through May 1, 2019, a primary policy and an umbrella policy. Mem. in Supp.

of Pl.’s Mot. for J. on the Pleadings at 10,4 DE-25. The primary policy included professional

liability coverage and the umbrella policy included a professional liability coverage endorsement

to the extent provided by the primary policy. Jd. at 12-13. With regards to the professional liability

coverage, the insurance, in pertinent part, “applies to injury only if: . . . caused by a ‘professional

health care incident.’” Policy of Insurance Issued to Lake Pointe Assisted Living Facility, Inc. at

217, DE-4-1. The term injury is not defined in the policy. “Professional health care incident” is

defined and means:

a. Any act, error, omission or failure:

(1) In the furnishing of “professional health care services.” This

includes furnishing of food, beverages, medications or

appliances in connection with such services;

4 Page references are to the page numbers assigned by the CM/ECF electronic docketing system.

(2) In the handling of deceased human bodies;

(3) Arising out of service by any persons as members of a formal

accreditation, standards review or similar board of the

Named Insured or as a person who executes the duties of

such board.

b. Failure to comply with any right of a resident under any state or

federal law regulating you as a resident health care facility;

c. Failure to protect any resident from undue influence by an insured

when such undue influence is to the personal detriment of the

resident.

Any such act, error, omission, or failure, together with all related acts,

errors, omissions or failures in the furnishing of “professional health care

services” to any one person, shall be considered one “professional health

care incident” subject to the Each Claim Limit of Insurance in force at the

time the first “professional health care incident” covered by this policy

occurred.

Id. at 223. Furthermore, “professional health care services” is defined as “professional medical,

nursing, cosmetic, social, and similar professional services that relate to the care of your residents.”

Id.

C. The Federal Lawsuit

Plaintiff filed a Complaint for Declaratory Judgment against the Lake Pointe and Resident

Defendants in this court on March 30, 2020 [DE-1]. The Lake Pointe Defendants filed a Corrected

Answer on June 2, 2020, and asserted counterclaims for declaratory judgment, breach of contract,

unfair claims practices/trade practices, and breach of the covenant of good faith [DE-16]. The

Resident Defendants filed an Answer on June 12, 2020, and asserted counterclaims for declaratory

judgment and unfair claims practices/trade practices [DE-17]. Plaintiff filed Answers to the

counterclaims on June 18, 2020, and July 1, 2020, respectively [DE-21; DE-22]. Plaintiff filed the

Motion [DE-24] and memorandum in support [DE-25] on August 3, 2020. The Resident and Lake

Pointe Defendants separately responded in opposition on August 24, 2020 [DE-29; DE-30].

Plaintiff replied on September 8, 2020 [DE-33] and the Motion is ripe for ruling. On October 22,

2020, this court ordered a stay in discovery pending resolution of the Motion [DE-34].

The pending Motion seeks three things: (1) a declaration that Plaintiff has no duty to defend

the Lake Pointe Defendants because the allegations in the Underlying Lawsuit fall outside the

scope of professional liability insurance coverage; (2) a declaration that Plaintiff has no duty to

indemnify the Lake Pointe Defendants, for the same reason; and (3) dismissal with prejudice of

Defendants’ counterclaims against Plaintiff.

Il. Legal Standards

A. Judgment on the Pleadings

Federal Rule of Civil Procedure 12(c) permits a party to move for judgment on the

pleadings “[a]fter the pleadings are closed—but early enough not to delay trial.” Fed. R. Civ. P.

12(c). A motion for judgment on the pleadings should be granted if “the moving party has clearly

established that no material issue of fact remains to be resolved and the party is entitled to judgment

as a matter of law.” Progress Solar Sols. v. Fire Prot., Inc., Nos. 5:17-CV-152-D, 5:19-CV-5-D,

2020 WL 5732621, at *13 (E.D.N.C. Sept. 24, 2020) (citations omitted). The court may consider

the pleadings along with any materials referenced in or attached to the pleadings, which are

incorporated by reference. See Fed. R. Civ. P. 10(c). The same standard of review applies under

Rule 12(b)(6) and Rule 12(c). See, e.g., Burbach Broad. Co. of Del. v. Elkins Radio Corp., 278

F.3d 401, 405-06 (4th Cir. 2002). When a court reviews a motion for judgment on the pleadings,

it must “construe the facts and reasonable inferences . . . in the light most favorable to the [non-

moving party].” Ibarra v. United States, 120 F.3d 472, 474 (4th Cir. 1997) (Rule 12(b)(6) motion);

Burbach, 278 F.3d at 406 (Rule 12(c) motion).

B. Choice of Law

The parties agree, and the court finds, that the substantive law applicable to Plaintiff's

insurance policy is the law of North Carolina. See N.C. Gen. Stat. § 58—-3-1 (“All contracts of

insurance on property, lives, or interests in this State shall be deemed to be made therein, and all

contracts of insurance the applications for which are taken within the State shall be deemed to have

been made within this State and are subject to the laws thereof.”); see also Cont’l Cas. Co. v.

Physicians Weight Loss Ctrs. of Am., Inc., 61 F. App’x 841, 844-45 (4th Cir. 2003) (unpublished)

' (“Because of constitutional concerns, application of this provision has been limited to situations

where there is a ‘close connection’ between North Carolina and the interests insured by the

policy.”) (citation omitted). In the instant case, the Plaintiff's policy insures the interests of the

Lake Pointe Defendants in their provision of services within the state of North Carolina. DE-25 at

10; DE-35-1 4 1. The policy therefore falls within the plain terms of North Carolina General Statute

Section 58—3—1. In addition, the requisite close connection between the insured’s interests and

North Carolina exists. Lake Pointe Assisted Living—the facility to which Plaintiffs policy was

issued—was licensed by the state of North Carolina to operate an adult care home in the state and

home to citizens of the state. DE-1 $3, 6-8.

C. Duties to Defend and Indemnify

i. Generally

An insurance policy is a contract and therefore its plain terms and provisions govern the

rights and duties of the contracting parties. Gaston Cnty. Dyeing Mach. Co. v. Northfield Ins. Co.,

351 N.C. 293, 299, 524 S.E.2d 558, 563 (2000). The goal “is to arrive at the insurance coverage

intended by the parties when the policy was issued.” Harleysville Mut. Ins. Co. v. Buzz Off Insect

Shield, L.L.C., 364 N.C. 1, 9, 692 S.E.2d 605, 612 (2010) (citation omitted); see also Woods v.

Nationwide Mut. Ins. Co., 295 N.C. 500, 506, 246 S.E.2d 773, 777 (1978) (“[The courts] may not,

under the guise of construing an ambiguous term, rewrite the contract or impose liabilities on the

parties not bargained for and found therein.”). Terms explicitly defined in the agreement are

ascribed that meaning; undefined, nontechnical words are given their ordinary meaning unless

context clearly requires otherwise; and any ambiguity is resolved against the insurance company.

Woods, 295 N.C. at 505-06, 246 S.E.2d at 777. North Carolina “follow[s] the rule that provisions

of insurance policies and compulsory insurance statutes which extend coverage must be construed

liberally so as to provide coverage, whenever possible by reasonable construction.” State Capital

Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 538, 350 S.E.2d 66, 68 (1986) (citations

omitted). Exclusions from coverage, on the other hand, are construed narrowly—again favoring a

finding of coverage. Jd.

Insurance contracts commonly give rise to two related duties, the duty to defend and the

narrower duty to indemnify. Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688,

691, 340 S.E.2d 374, 377 (1986). The “duty to defend refers to the insurer’s obligation to defend

its insured against claims brought by third parties” while the “duty to indemnify is the duty to pay

for settlement or to pay a judgment rendered against an insured.” 1 Lexis Nexis Practice Guide:

New Appleman N.C. Ins. Litig. §§ 15.02, 4.04 (2020). In other words, “the duty to defend is

broader than the duty to indemnify in the sense that an unsubstantiated allegation requires an

insurer to defend against it so long as the allegation is of a covered injury[.]” Harleysville, 364

N.C. at 7, 692 S.E.2d at 610-11. However, the duty to defend is not without limitation: “even a

meritorious allegation cannot obligate an insurer to defend if the alleged injury is not within, or is

excluded from, the coverage provided by the insurance policy.” Jd. On the other hand, if there are

both covered and uncovered allegations, the insurer’s duty to defend extends to the entire action.

Waste Mgmt., 315 N.C. at 691 n.2, 340 S.E.2d at 377 n.2 (“[Al]llegations of facts that describe a

hybrid of covered and excluded events or pleadings that disclose a mere possibility that the insured

is liable (and that the potential liability is covered) suffice to impose a duty to defend upon the

insure[r].”); see also Crandell vy. Am. Home Assurance Co., 183 N.C. App. 437, 440, 644 S.E.2d

604, 606 (2007) (same).

ii. Comparison Test

To assess whether an insurance policy gives rise to a duty to defend, North Carolina courts

employ the comparison test. Harleysville, 364 N.C. at 6, 692 S.E.2d at 610. The comparison test

entails reading the pleadings alongside the policy to determine whether the events, as alleged, are

either covered or excluded.? Jd. All of the facts as alleged are taken as true for this purpose. Id. at

7, 692 S.E.2d at 611. Because there are no issues of fact to resolve, determination of the duty to

defend is appropriate at the judgment-on-the-pleadings stage. See Penn-America Ins. Co. v. Coffey,

368 F.3d 409, 414 (4th Cir. 2004) (concluding that the district court could address the insurance-

coverage question without having to resolve factual disputes related to causation that would

ultimately be determined in the underlying tort suit). By contrast, the duty to indemnify is based

upon a comparison of the insurance policy and the facts ultimately determined at trial. Harleysville,

364 N.C. at 7, 692 §.£.2d at 611. Thus, whether Plaintiff also has a duty to indemnify is a question

that is not yet ripe for adjudication. See, e.g., Old Republic Ins. Co. v. C&G Express Trucking,

LLC, No. 5:20-CV-00082-M, 2020 WL 2772767, at *3 (E.D.N.C. May 28, 2020) (“The Fourth

Circuit recognized that declaratory judgment actions to determine a duty to indemnify prior to the

resolution of an insured’s liability risk being both premature and notional.”). □

Lake Pointe Defendants argue that per the North Carolina Supreme Court’s decision in Waste

_ Management, “this [c]ourt must compare the insuring language of the [p]olicy to the Class Action

Order [entered in the Underlying Lawsuit] . . . .” DE-30 at 12, 16-17. Lake Pointe Defendants

failed to provide a citation and the court was unable to find support for this proposition in the

referenced case. See Waste Mgmt., 315 N.C. at 692, 340 S.E.2d at 378 (“The briefs and portions

of the record before this Court include parts of three third-party complaints and a deposition.”).

III. Analysis

A. Scope of Insurance Coverage

The parties do not presently dispute the insurance policy language, the timeliness of the

claim, or the allegations in the Underlying Lawsuit. The primary question is whether Plaintiff is

obligated to defend the Lake Pointe Defendants against the Resident Defendants’ allegations in

the Underlying Lawsuit under a reasonable construction of the policy. Plaintiff argues the answer

is no because the Underlying Lawsuit does not allege damages because of an “injury” “caused by”

a “professional health care incident” as outlined in the insurance policy. Furthermore, Plaintiff

makes a policy argument that liability insurance generally cannot and should not be construed to

cover contractual obligations and thereby transform an insurer into a silent business partner. DE-

25 at 30-31. The court will first address whether the allegations in the FAC constitute a

“professional health care incident” as defined by the policy. Because the allegations in the FAC

could potentially qualify under two of the policy’s five delineated “professional health care

incident[s],” the court will address both (1) those stemming from acts, errors, omissions, or failures

in the furnishing of professional health care services and (2) those stemming from the failure to

comply with any right of a resident under any state or federal law regulating the insured as a

resident health care facility. The court will then address Plaintiff's alternative arguments for

denying coverage, specifically the policy’s use of the terms “injury” and “caused by.”

i. Professional health care incident

1. Stemming from acts, errors, omissions, or failures in the

furnishing of professional health care services

Unlike general liability insurance, professional liability insurance is designed to insure

against claims related to acts or omissions in the provision of professional services. North Carolina

courts have adopted the following definition of professional services: an act or service “‘arising

out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or

skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical

or manual.’” Smith v. Keator, 21 N.C. App. 102, 105-06, 203 S.E.2d 411, 415 (quoting Marx v.

Hartford Accident & Indem. Co., 183 Neb. 12, 14, 157 N.W.2d 870, 872 (1968)), cert. denied, 285

N.C. 235, 204 S.E.2d 25, and aff'd, 285 N.C. 530, 206 S.E.2d 203, and appeal dismissed, 419 U.S.

1043 (1974). In addition, the North Carolina “Supreme Court has noted that [t]he term professional

services refers to those services where a professional relationship exists between plaintiff and

defendant—such as a physician-patient or attorney-client relationship.” Scott & Jones, Inc. v.

Carlton Ins. Agency, Inc., 196 N.C. App. 290, 294, 677 S.E.2d 848, 851 (2009) (citing Barger v.

McCoy Hillard & Parks, 346 N.C. 650, 665, 488 S.E.2d 215, 223 (1997) in the context of

construing a North Carolina statute) (internal quotation marks omitted).

North Carolina courts examine the nature of the act itself to determine whether it arises out

of that person’s specialized knowledge—thereby constituting a professional service—instead of

focusing on the title of the person performing the act. In Smith v. Travelers Indemnity Co., a North

Carolina district court held that an attorney who invested $15,000 for the plaintiff was not covered

by the attorney’s professional liability policy. 343 F. Supp. 605, 610 (M.D.N.C. 1972) (policy

extending coverage for professional services). The court noted “it is sometimes difficult to draw a

line between the practice of law and non-legal services since the field of law encompasses such a

large area, and the attorney is called upon to use his legal background in many situations.” Jd. at

609. In part, the court looked to the nature of the transaction itself and concluded it “is one that

requires no legal skill or training and indeed, is done every day by thousands of individuals who

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without legal training but who are probably better qualified in the investment field than most

attorneys.” Jd. at 610.

In the health-care context this court in Hartford Fire Insurance Co. v. St. Paul Fire &

Marine Insurance Co. held that a medical professional liability policy did not cover injuries

resulting from a motor vehicle accident that occurred while the insured’s employee was

transporting a patient in connection with health care services being provided to that patient. 606 F.

Supp. 2d 602, 608-09 (E.D.N.C. 2009) (policy extending coverage for professional services). The

court concluded driving services did not involve any specialized knowledge that constituted a

professional health service. Jd. at 609-13 (“In the instant case, the driving services provided by

[employee] required no type of specialized health care or other specialized skills and could have

been performed by any person licensed to drive a passenger car or truck, including [patient]’s

mother had she been available to do so on the day in question.”).

Similarly—though regarding an insurance policy exclusion, which as discussed above is

construed narrowly so as to favor a finding of coverage—the North Carolina Court of Appeals

determined that the wrongful death of a dialysis patient occurred not from the treatment itself but

rather from a fall that occurred because of an employee’s failure to lock casters in place or take

other steps to stabilize the chair while the patient rose and that these were not professional services

because they do “not require any special skills or training” and “are purely manual.” Duke Univ.

v. St. Paul Fire & Marine Ins. Co.,96N.C. App. 635, 641, 386 S.E.2d 762, 766 (1990).

. Though outside the insurance-coverage context, North Carolina courts have found that not

all acts performed at a health care facility necessarily involve the specialized skill/knowledge that

is the hallmark of professional services. For example, in Taylor v. Vencor, Inc., the court concluded

that the failure of a nursing home to supervise a resident whose nightgown caught on fire while

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she was smoking constituted a claim for ordinary negligence, not for medical malpractice. 136

N.C. App. 528, 530, 525 S.E.2d 201, 203 (2000). The court reasoned that “[p]reventing a patient

from dropping a match or a lighted cigarette upon themselves, while in a designated smoking room,

does not involve matters of medical science.” Jd. (discussing professional services in the context

of whether compliance with North Carolina Rule of Civil Procedure 9(j) for medical malpractice

claims was necessary). Likewise in Lewis v. Setty, the court held that the failure of a physician to

lower an examining table prior to transferring his patient back into a wheelchair was not an activity

that fell within the definition of “professional medical services.” 130 N.C. App. 606, 608, 503

S.E.2d 673, 674 (1998) (same Rule 9(j)-compliance context).

In two instances where the Fourth Circuit found the complained-of action did fall within

the scope of coverage when applying North Carolina law, the focus in the first case was on whether

the complained-of act stemmed from the withholding of a professional service and in the second

the particular policy language was the determining factor. In Continental Casualty Co. v.

Physicians Weight Loss Centers of America, Inc., the Fourth Circuit held that a professional

liability insurer had a duty to defend a class action lawsuit alleging a violation of a wide variety of

claims, including unfair and deceptive trade practices. 61 F. App’x at 846. The heart of the

allegations of the underlying suit were that the defendant and its physicians conspired to force

patients to purchase weight loss drugs directly from the defendant, at inflated prices, and refused

to give patients prescriptions for the drugs that they could then have filled elsewhere at reduced

rates. Jd. In rejecting the insurer’s argument that the underlying suit was not about professional

services but rather a pricing dispute, the court concluded that there was coverage because

prescription writing is a professional service that involves specialized skill and knowledge to

assess whether the prescription is medically indicated, the refusal to write a prescription is the

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withholding of a professional service, and that the underlying action stemmed from the refusal to

issue a prescription. Id.

In Affinity Living Group, LLC v. StarStone Specialty Insurance Co., the professional

liability insurance policy at issue covered “damages resulting from a claim arising out of a medical

incident.” 959 F.3d 634, 640 (4th Cir. 2020). The parties agreed that the act of failing to provide

_ personal-care services to residents of an adult-care home constituted a “medical incident” under

the insurance policy, which broadly defined the term to include even administrative tasks. Jd. at

640 n.8-9. The question before the court was whether “arising out of’ was sufficiently broad to

encompass damages resulting from the submission of fraudulent Medicaid reimbursement claims

for services the home never provided as alleged in the underling false-claims-act action. Jd. at 640-

43. Interpreting North Carolina state law, the court held that it was. Id. at 642-43.

Here, however, the pertinent part of Plaintiff's insurance policy covers injuries caused by

omissions and failures in the furnishing of professional health care services and associated duties,

such as furnishing food and medication in connection with professional health care services. DE-

4-1 at 223 (emphasis added). The court finds that there is no ambiguity in these terms. As the cases

above make clear, professional liability insurance does not cover all claims that arise out of

everything merely associated with running an adult-care facility. Cf Hartford Fire, 606 F. Supp.

613 (‘Adoption of such a construction—that services provided with health care professional

services are by that fact themselves health care professional services—would effectively transform

defendant’s policy from a professional liability policy into a general liability policy.”). As alleged,

the various acts that caused the Resident Defendants injury do not involve specialized health-care

knowledge, skill, or training and thus cannot constitute the type of professional health care services

contemplated by Plaintiff's insurance policy. The allegations of the FAC can be summed up by

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the following generalized complaint: in an effort to maximize profits, the owners and operators of

the facility woefully understaffed it to such an extent that the services and care promised to its

residents via the Home Contract could not be fulfilled. This is at base a business decision, and

though it certainly has a direct connection to the covered profession and sets the stage for the

performance of professional services, it unambiguously is not a health-care decision involving

matters of medical science or skill. Notably, the North Carolina General Statutes describe adult

care homes as offering only occasional or incidental medical care. N.C. Gen. Stat. § 131E-176(1);

see also N.C. Gen. Stat. § 131E-101(1) (“[Adult care homes] provide[] residential care for aged or

disabled persons whose principal need is a home with the shelter or personal care their age or

disability requires. Medical care in an adult care home is usually occasional or incidental, such as

may be required in the home of any individual or family, but the administration of medication is

supervised.”).

Regarding the breach-of-contract claim in particular, Resident Defendants first allege that

the facility was staffed at the “bare minimum.” DE-35-1 § 36(a). Decisions about the number of

staff to employ at the facility clearly affect the facility’s ability to perform professional services

but do not require health-care skills or training. Next, the Resident Defendants allege that they

were not served nutritious meals. Jd. ¢ 36(b). While possible that the meals were developed by

trained nutritionists, medically necessary, or associated with a prescribed medical regimen for the

residents, this has not been pled. In fact, the complaint makes clear that no personal injury or

wrongful death was suffered as a result of the acts or omissions of the Lake Pointe Defendants. Id.

q 38. The court will accept the complaint’s allegations as true but will not make inferential leaps.

See Harleysville, 364 N.C. at 7, 692 S.E.2d at 611 (“In addressing the duty to defend, the question

is not whether some interpretation of the facts as alleged could possibly bring the injury within the

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coverage provided by the insurance policy; the question is, assuming the facts as alleged to be true,

whether the insurance policy covers that injury.”). Therefore, the failure to provide nutritious

meals—an act performed daily by food servers all over the world who are without medical or other

health-care training—is not, in the context presented, the withholding of professional services.

Similarly claims of a failure to provide promised activities, including social services and ten hours

of planned group activities, DE-35-1 § 36(c), without indication that these were medically

necessary likewise do not constitute the withholding of a health-care professional services. Finally,

the allegation that the Lake Pointe Defendants failed to keep in compliance with the law, rules,

and regulations that governed the facility as a licensed adult care home, id. | 36(d), does not

constitute a professional service.

The Resident Defendants’ UTPA claim charges that the Lake Pointe Defendants engaged

false and misleading marketing tactics. DE-35-1 {| 46-47. Marketing decisions are, again,

business decisions and not the type of health-care professional service contemplated by the parties

when the professional liability health care policy was issued. Finally, the negligence claim is

limited to the Biglers’ failures in the operation and management of the facility—decision-making

that does not involve specialized medical skill or knowledge.

2. Stemming from the failure to comply with any right of a

resident under any state or federal law regulating you as a

resident health care facility

Nevertheless, the insurance policy has significantly broader application by virtue of its

incorporation of state law in its definition of a “professional health care incident.” Insurance

policies that cross-reference bodies of law most often relate to exclusions for criminal acts or

omissions. See e.g., Durham City Bd. of Edu. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 109

15

N.C. App. 152, 160, 426 S.E.2d 451, 455 (1993). When the policy does not specify the body of

law, the courts apply a rule of reasonable construction. For example in a case involving a criminal

acts exclusion, the Eigth Circuit opined that “[a]s a party to a contract governed by [state] law, a

reasonable insured would understand that a criminal acts exclusion would exclude coverage for

defined as criminal by the [State] Criminal Code.” Allstate Ins. Co. v. Burrough, 120 F.3d

834, 840 (8th Cir. 1997); see also Nationwide Mut. Ins. Co. v. Jones, No. Civ. JEM-05-2792, 2006

WL 361336, at *4 (D. Md. Feb. 15, 2006) (“The policy excludes from coverage claims for bodily

injury ‘caused by or resulting from an act or omission which is criminal in nature and committed

by an insured.’ . . . I interpret [‘criminal in nature’] to mean ‘defined as criminal by Maryland

law.’”). Furthermore, courts have not limited criminal acts to those of a serious nature, such as

robbery and murder. See Horace Mann Ins. Co. v. Drury, 445 §.E.2d 272, 273-74 (Ga. Ct. App.

1994) (determining that the Georgia-misdemeanor offense of being in illegal possession of

firecrackers constituted “‘a violation of any criminal law or statute” for purposes of homeowner’s

policy exclusion). A professional liability insurance policy that covered damages resulting from a

medical incident, which was defined to include “[fJailure to comply with any right of a health care

facility resident under any state law regulating your business as a resident health care facility,”

encompassed the facility’s violation of the Ohio Nursing Homes Patients’ Bill of Rights. The

Corinthian v. Hartford Fire Ins. Co., 758 N.E.2d 218, 397-98 (Ohio Ct. App. 2001) (concerning

coverage for statutory punitive damages).

Though “resident health care facility,” the term used in the insurance policy, appears

undefined in the North Carolina statutes, in other contexts “heath care facility” or “health service

facility” is explicitly defined to include “adult care homes.” See N.C. Gen. Stat. § 13 1E-256(b)(1)

(for purposes of a health care personnel registry); § 131E-176(9b) (for purposes of a “certificate

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of need,” designed to limit the construction of health care facilities in North Carolina to those that

are needed by the public and that can be operated efficiently and economically for the public’s

benefit). Therefore, the court will consider an “adult care home” to be a “resident health care

facility” as that term is used in the insurance policy.

Assisted living residences are called “adult care home[s]” under North Carolina law. NC.

Gen. Stat. § 131D-2.1(3). Adult-care-home residents are statutorily provided with certain rights.

Id. § 131D-21 (Declaration of residents’ rights). One such right is the right “[t]o receive care and

services which are adequate, appropriate, and in compliance with relevant federal and State laws

_ and rules and regulations.” Id. § 131D-21(2) (emphasis added). The licensing of adult care homes

is governed by Title 10A of the North Carolina Administrative Code Subchapter 13F and includes,

inter alia, requirements regarding the physical structure of the facility, staff qualifications, care and

services, and medications.

The resident-care-and-services regulations cover requirements about nutrition and food

services and activity programming, among other things. Food requirements include that “[e]ach

resident shall be served a minimum of three nutritionally adequate, palatable meals a day at regular

hours with at least 10 hours between the breakfast and evening meals.” 10A N.C. Admin. Code

13F.0904(d)(1). The regulations also detail the composition of the daily menus for regular diets.

See id. 13F.0904(d)(3) (milk, fruit, vegetables, eggs, protein, cereals and breads, fats, water and

other beverages). Adult care homes are additionally required to “develop a program of activities

designed to promote the residents’ active involvement with each other, their families, and the

~ community.” Jd. 13F.0905(a). This includes “a minimum of 14 hours of variety of planned group

activities per week.” Jd. 13F.0905(d).

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The FAC makes several specific allegations regarding the Lake Pointe Defendants’ failures

to comply with North Carolina regulations governing the adult care home. The Lake Pointe

Defendants “[flailed to serve nutritious meals, as promised and as required by 10A NCAC 13F

.0904.” DE-35-1 J 36(b); see also id. § 60. The Lake Pointe Defendants “[flailed to provide

activities, including social and similar services, that promoted the Plaintiffs and Class Members’

active involvement with each other, their families, and the community and provide 10 hours of

planned group activities per week, as promised and as required by 10A NCAC 13F .0905.” Id.

36(c); see also id. 60. The Lake Pointe Defendants “[flailed to ensure that [the facility] materially

and routinely complied with the applicable laws, rules and regulations related to the operation of

alicensed adult care home, as promised and as required by 10A NCAC 13F.” Jd. { 36(d); see also

id. J 60. These allegations fall squarely within the scope of the insurance policy’s broad,

unambiguous language that a “professional health care incident” can stem from violations of “any

right of a resident” pursuant to bodies of law that regulate the insured as a resident health care

facility.

ii. Injury

While the term injury is not defined in the policy, Plaintiff suggests that it should be limited

to a physical harm or exclude economic loss. DE-25 at 17. The Oxford English Dictionary defines

"injury as a “[w]rongful action or treatment; violation or infringement of another’s rights; suffering

or mischief wilfully and unjustly inflicted.” Injury, Oxford English Dictionary,

https://www.oed.com/view/Entry/96114?rskey=-AVWNgS&result=1#eid (last visited Jan. 26,

2021). Black’s Law Dictionary defines injury as

[t]he violation of another’s legal right, for which the law provides a

remedy; a wrong or injustice. .. . Anything said or done in breach

of a duty not to do it, if harm results to another in person, character,

or property. Injuries are divided into real injuries (such as

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wounding) and verbal injuries (such as slander). They may be

criminal wrongs (as with assault) or civil wrongs (as with

defamation). . . . Some authorities distinguish harm from injury,

holding that while harm denotes any personal loss or detriment,

injury involves an actionable invasion of a legally protected interest.

INJURY, Black’s Law Dictionary (11th ed. 2019) (citations omitted).

In the primary case to which Plaintiff seeks to analogize, Security Insurance Group v.

Wilkinson, it was not the nature of the breach-of-contract injury that precluded coverage (as

Plaintiff suggests) but rather the person who sustained the injury. John Wilkinson originally sued

a hospital for breach of contract arising out of the hospital’s agreement to render psychiatric

services to his wife. Sec. Ins. Grp. v. Wilkinson, 297 So. 2d 113, 113 (Fla. Dist. Ct. App. 1974).

His wife and the psychiatrist assigned to treat her developed an emotional connection. Jd. After

_ her discharge, she divorced Mr. Wilkinson and subsequently committed suicide. Jd. Mr. Wilkinson

was successful in obtaining a judgment against the hospital for a full reimbursement of the money

he paid under the contract. Jd. at 113-14. The hospital’s professional liability insurance provider,

that refused to defend the Wilkinson suit under its policy, appealed the summary judgment against

it for the Wilkinson judgment, attorneys’ fees for the hospital’s defense of the primary action, and

attorneys’ fees for the prosecution of the hospital’s third-party complaint. Jd. at 114. The appellate

court reversed summary judgment, finding

[i]n the instant case, the language of the policy provides for injury

‘sustained by any Person arising out of malpractice, error or mistake

. . . in rendering or failing to render to Such person’ medical

treatment. This language leads to the inescapable conclusion that the

injury must be suffered by the person to whom the medical services

were rendered. Had the original suit been one seeking damages for

injury to Mrs. Wilkinson or one alleging her wrongful death, the

policy would have provided coverage even though the hospital-

patient relationship originated by way of contract.

Td.

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Here, in light of the North Carolina rules of construction that one, policies extending

coverage should be construed liberally, State Capital, 318 N.C. at 538, 350 S.E.2d at 68, and two,

that undefined words should be given their ordinary meaning, Harleysville, 364 N.C. at 9, 692

§,.E.2d at 612, “injury” as used in the instant insurance policy should encompass monetary injury

alleged by the Resident Defendants.

ili. Caused by

Plaintiff focuses on the fact that the policy uses the terms “caused by” instead of the broader

“arising out of” language. DE-25 at 26-28; see State Capital, 318 N.C. at 539, 350 S.E.2d at 69

(“They [arising out of] are words of much broader significance than ‘caused by.’”); see also

Affinity, 959 F.3d at 642-43 (finding that the broad “arising out of” language in an professional

liability insurance policy encompassed allegations of false medical billing in a false-claims-act

Here, unlike the more tenuous medical billing issue in Affinity, the Defendants do not need

the broad “arising out of” language to correctly assert that the Lake Pointe Defendants are entitled

to coverage. The injuries alleged in the FAC were directly caused by Lake Pointe Defendants’

failure to fulfill their contractual promises made via the Home Contract.

‘Having decided that certain allegations in the FAC do fall within the insurance policy’s

definition of a “professional health care incident,” this establishes Plaintiffs duty to defend on all

claims asserted against the Lake Pointe Defendants in the Underlying Lawsuit. See Waste Mgmt.,

315 N.C. at 691 n.2, 340 S.E.2d at 377 n.2. The Defendants’ alternative argument regarding

estoppel need not be considered.

B. Defendants’ Counterclaims Against Plaintiff

The Lake Pointe Defendants filed counterclaims against Plaintiff for (1) declaratory

judgment that there exists a duty to defend and indemnify, (2) breach of contract, (3) unfair claims

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practices/trade practices, and (4) breach of the covenant of good faith stemming from the Plaintiff's

failure to carry out its obligations under the policy. See generally Lake Pointe Defs.’ Answer &

Counterclaim J{ 47-82, DE-16. Similarly, the Resident Defendants filed counterclaims against

Plaintiff for (1) declaratory judgment that there exists a duty to defend and indemnify the Lake

Pointe Defendants and (2) for unfair claims practices/trade practices. See generally, Resident

Defs.’ Answer & Counterclaim 90-103, DE-17. The court has already determined that there is

duty to defend and will defer ruling on the question of indemnity because it is not yet ripe, see

supra Parts II.C.ii., III.A, therefore the Lake Pointe Defendants’ and Resident Defendants’

respective first counterclaim for declaratory judgment has been decided.

Plaintiff's argument for the dismissal of the Lake Pointe Defendants’ remaining

counterclaims hinges on its contention that there is no duty to defend. Where there is no duty to

_ defend, an insured cannot have a valid claim or legal entitlement to insurance coverage. DE-25 at

32-33. Because this issue has been determined against the Plaintiff and Plaintiff failed to provide

the court with an alternative basis for dismissing Lake Pointe Defendants’ counterclaims two

through four, the court will decline to dismiss them at this juncture.

In arguing for the dismissal of the Resident Defendants’ remaining counterclaim, Plaintiff

asserts that they lack standing. DE-25 at 34; DE-33 at 9-10. The court agrees. “The concept of

standing—-which requires that the plaintiff have a sufficiently personal stake in the outcome of the

litigation—forms an indispensable part of the Article III case-or-controversy requirement.” Miller

v. Augusta Mut. Ins. Co., 157 F. App’x 632, 635 (4th Cir. 2005) (unpublished). Standing requires

a litigant to demonstrate an “(1) injury in fact (2) that is fairly traceable to the defendant’s conduct

and (3) that is likely to be redressed by a favorable decision.” Retail Indus. Leaders Assoc. v.

Fielder, 475 F.3d 180, 186 n.1 (4th Cir. 2007) (citing Lujan v. Defs. of Wildlife, 504 U.S. 555,

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560-61 (1992)). To satisfy the injury-in-fact element of this test, a plaintiff must have “suffered . .

. an invasion of a legally protected interest which is (a) concrete and particularized, and (b) actual

or imminent, not conjectural or hypothetical.” White Tail Park, Inc. v. Stroube, 413 F.3d 451, 458

(4th Cir. 2005) (quoting Lujan, 504 U.S. at 560-61). Particularly in the context of potential third-

_ party beneficiaries to insurance contracts, state law informs whether there has been an invasion of

a legally protected interest.° Compare Scottsdale Ins. Co. v. B & G Fitness Ctr., Inc., No. 4:14-

CV-187-F, 2015 WL 4641530, at *4 (E.D.N.C. Aug. 4, 2015) (determining third-party claimants

did not have a legally protected interest where North Carolina caselaw establishes that without

being parties to the contract at issue, or having some other legally enforceable right under the

contract, such as by way of judgment, incidental beneficiaries of an insurance policy lacked

standing to have the insurance contract construed) with Lott v. Scottsdale Ins. Co., 811 F. Supp.

2d 1224, 1230 (E.D. Va. 2011) (determining that the parents of a child who drowned in a pool

. during a party at a swim club satisfied the injury-in-fact requirement where Virginia law confers

on tort claimants the right to sue on the policy as a third-party beneficiary and further cements

status as third-party beneficiary at the moment of injury as opposed to final judgment). “North

Carolina does not recognize a cause of action for third-party claimants against the insurance

company of an adverse party based on unfair and deceptive trade practices.” Wilson v. Wilson, 121

N.C. App. 662, 665, 468 S.E.2d 495, 497 (1996); see also USA Trouser, S.A. de C.V. v. Williams,

258 N.C. App. 192, 196, 812 S.E.2d 373, 376-77 (acknowledging that Wilson remains the

controlling case regarding direct actions by third-parties against an insured’s insurer while noting

6 The Resident Defendants’ reliance on Maryland Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270

(1941) is inapposite. As pointed out by the Plaintiff, DE-33 at 9 n.2, the question there was whether

an insurer’s action, against an insured and third-party beneficiary, for declaratory judgment that it

was not bound to defend or indemnify in an underlying state court case constituted an actual

controversy.

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that an exception was created for injured parties in an automobile accident), denying review, 371

N.C. 448, 817 S.E.2d 199 (2018). The Resident Defendants concede this point but argue

alternatively that the rule should not apply based on policy considerations or “their direct

unfairness claim.” DE-29 at 8-10. It is not the role of a federal district court to expand state law.

Grayson v. Anderson, 816 F.3d 262, 265, 272 (4th Cir. 2016). Here the Resident Defendants cannot

satisfy the injury-in-fact element. At best, they are potential, incidental beneficiaries to the

insurance contract at issue and this does not give rise to any legally protected interest under North

Carolina law. The Resident Defendants second counterclaim for unfair and deceptive trade

practices must therefore be dismissed.

IV. Conclusion

For the reasons discussed above, Plaintiff's Motion [.DE-24] is GRANTED IN PART AND

DENIED IN PART. Plaintiffs request for a declaration that Plaintiff has no duty to defend the

Lake Pointe Defendants is DENIED. Plaintiff's request for a declaration that Plaintiff has no duty

to indemnify the Lake Pointe Defendants is DENIED WITHOUT PREJUDICE; the issue is not

yet ripe for adjudication. Plaintiff's request to dismiss Lake Pointe Defendants’ counterclaim one

and Resident Defendants’ counterclaim one is DENIED AS MOOT; Plaintiff's request to dismiss

with prejudice Lake Pointe Defendants’ remaining counterclaims two through four is DENIED

WITHOUT PREJUDICE; these counterclaims will proceed. Plaintiff's request to dismiss with

prejudice Resident Defendants’ remaining counterclaim two is GRANTED.

SO ORDERED this the wee. of February, 2021.

Kihd ses

RICHARD LC. MYERS i

CHiEF UNITED STATES DISTRICT JUDGE

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