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A recent decision by a U.S. District Court in North Carolina, applying North Carolina law, held that in third party coverage actions, an insurer may not need to include third party claimants. See Scottsdale v. B&G Fitness Ctr., Inc., 4:14-CV-187, 2015 WL 4641530 (Aug. 4, 2015, E.D.N.C.). The practical effect of this holding is that by having one less party or set of parties to contend with, an insurer may avoid certain legal arguments and, perhaps, obtain a judicial resolution more quickly and efficiently. A summary of the holding and operative facts is below.
The Scottsdale v. B&G matter arose after five plaintiffs commenced two separate lawsuits against B&G Fitness Center, Inc. (“B&G”) following a B&G employee recording approximately 120 female patrons undressing. Once B&G provided notice of the lawsuits, Scottsdale defended B&G, while separately commencing a declaratory judgment action. In the Declaratory Judgment Action, Scottsdale argued that its commercial liability insurance policy (“Policy”) with B&G did not obligate Scottsdale to defend or indemnify B&G. B&G counterclaimed for coverage. Before commencing discovery, both B&G and Scottsdale filed motions to dismiss. Scottsdale’s motion sought to strike B&G’s counterclaim as redundant of Scottsdale’s coverage claim, while B&G’s motion sought to dismiss Scottsdale’s lawsuit for failure to join the underlying plaintiffs, which according to B&G were “necessary and indispensable.” Ultimately, the Court denied both motions.
Relative to Scottsdale’s motion, the court acknowledged that “B&G’s counterclaim is likely redundant of Scottsdale’s claims.” However, the possibility exists “that the counterclaim will raise different or additional issues” not discernable this “early in the litigation.” Therefore, in an abundance of caution, the court allowed the counterclaim to proceed.
Relative to B&G’s motion, the seminal issue was whether the B&G patron-plaintiffs were “necessary.” In other words, could the court adjudicate coverage under the Policy without their presence? The court answered “yes.” According to the court, a party is “necessary” if, as a result of its absence, complete relief cannot be accorded, or via the party’s absence, its interest or the interest of the existing parties may be detrimentally affected. Here, the court found that the B&G patron-plaintiffs had not sought to participate in the coverage action and that B&G had neither prejudiced their position nor obtained any right to assert an interest on their behalf. Further, even if the foregoing was present, the B&G patron-plaintiffs lacked legal standing because they were not parties to the contract—i.e., the insurance policy. Therefore, while their recovery may be affected by the court’s ruling, that was a financial interest, not a legal one.
In most third-party coverage disputes, an insurer impleads both the insured and the claimants to ensure the presence of a binding coverage decision upon all parties. Scottsdale v. B&G Fitness Center alters that. Perhaps. According to the Scottsdale court, because the B&G third party plaintiffs lacked a cognizable, legal interest under an insurance policy, even though their financial interest may be affected by the court’s ruling, they lacked standing to be involved in the suit. The importance of this for an insurance carrier is that now it may potentially avoid the coverage arguments and potential claims in interest that the impleading of a third party may bring. Ultimately, we’ll have to wait to see whether other courts in North Carolina follow this approach.
For any further questions, please contact T. Nicholas Goanos.