Your Insured Is in Default: Have You Checked Whether the Policy Was Ceded to the North Carolina Reinsurance Facility?

Carriers often refer matters to me when their insured has not responded to a lawsuit and opposing counsel is moving for default judgment. One of the threshold inquiries when receiving such an assignment should be: does this matter involve a policy ceded to the North Carolina Reinsurance Facility? I have found that claim handlers are often unfamiliar with what the Facility is and why it matters.

What is it?

North Carolina law requires vehicle owners to maintain at least minimum liability insurance coverage. However, there are a lot of bad drivers out there that insurance companies would not normally insure due to the risk. To balance the requirement for liability insurance against an individual insurer’s risk tolerance, the North Carolina Reinsurance Facility was created in 1973. The Facility is a nonprofit, unincorporated legal entity composed of all insurers licensed to write motor vehicle insurance in North Carolina. N.C. Gen. Stat. § 58-37-5. Every insurer that writes auto insurance in North Carolina must be a member of the Facility and is bound by its rules. N.C. Gen. Stat. § 58-37-5.

The Facility exists to make sure motor vehicle insurance is available to eligible drivers in North Carolina, including drivers an insurer may consider too risky to keep in its ordinary, voluntary book of business. The Facility was created as part of North Carolina’s compulsory automobile liability insurance system, and courts have described it as a pool of insurers that covers drivers whom insurers determine they do not want to individually insure. Discovery Ins. Co. v. N.C. Dep’t of Ins., 255 N.C. App. 696.

How does it work?

Every company that writes motor vehicle insurance in North Carolina must belong to the Facility. N.C. Gen. Stat. § 58-37-5. A company cannot simply opt out while continuing to write auto insurance in the state. N.C. Gen. Stat. § 58-37-5. After issuing a “high risk” policy, an insurer can keep the policy as voluntary business or “cede” it to the Facility. Discovery Ins. Co. v. N.C. Dep’t of Ins., 255 N.C. App. 696. Ceding means the insurer transfers the risk of loss to the Facility’s reinsurance pool, while the insurer that issued the policy continues to service the policy.

When a loss occurs under a ceded policy, the company that issued the policy pays and handles the claim, then receives reimbursement from the Facility. Unigard Mut. Ins. Co. v. Ingram, 71 N.C. App. 725. In other words, the Facility is behind the scenes, but the policyholder and injured claimant usually still deal with the insurance company that issued the policy.

How does it relate to default judgments?

North Carolina General Statutes § 20-279.21(f)(1) provides:

As to policies issued to insureds in this State under the assigned risk plan or through the North Carolina Motor Vehicle Reinsurance Facility, a default judgment taken against such an insured shall not be used as a basis for obtaining judgment against the insurer unless counsel for the plaintiff has forwarded to the insurer, or to one of its agents, by registered or certified mail with return receipt requested, or served by any other method of service provided by law, a copy of summons, complaint, or other pleadings, filed in the action.

Here’s the bottom line: With a ceded policy, if plaintiff’s counsel has not served the carrier with a copy of the lawsuit as set out in this statute, the carrier has grounds to have any default judgment — and likely any entry of default — set aside so the insurer can still defend the lawsuit.

When you receive a claim on a ceded policy

1. Check for lawsuit notice: As soon as a claim comes in on a ceded policy, verify whether any litigation has been filed. If you receive a copy of a summons and complaint by certified mail or other proper service, you are on notice.
2. Docket the 30-day deadline: You have 30 days from signing the return receipt to file a motion to intervene and responsive pleadings. N.C. Gen. Stat. § 20-279.21. Do not let this deadline slip.
3. Investigate promptly: Use the 30-day window to investigate liability, coverage, and damages. Determine whether intervention is the best strategy.
4. Coordinate with counsel: Work with outside counsel to decide whether to intervene. In many cases, intervention is the smart move to control the outcome.

Questions? Contact Steven Lucente with TLG Law at slucente@tlg-law.com or (704) 626-6552.