              IN THE COURT OF APPEALS OF NORTH CAROLINA

                                   No. COA16-620

                                Filed: 3 October 2017

Wake County, No. 15 CVS 4738

NORTH CAROLINA FARM BUREAU MUTUAL INSURANCE COMPANY, INC.,
Plaintiff,

             v.

BEVERLY LEE PHILLIPS, VICTORIA PHILLIPS, and JOHN DOE 236,
Defendants.


      Appeal by plaintiff from judgment entered 12 April 2016 by Judge G. Bryan

Collins, Jr. in Superior Court, Wake County. Heard in the Court of Appeals 16

November 2016.


      Young Moore and Henderson P.A., by Walter E. Brock, Jr. and Andrew P. Flynt,
      for plaintiff-appellant.

      Batch, Poore & Williams, PC, by J. Patrick Williams, for defendant-appellee
      Beverly Lee Phillips and Victoria Phillips.

      Jeff Anderson & Associates, P.A., by Gregg Meyers, pro hac vice, and Copeley
      Johnson & Groninger PLLC, by Leto Copeley, for defendant-appellee John Doe
      236.

      STROUD, Judge.


      Plaintiff North Carolina Farm Bureau Mutual Insurance Company, Inc.

appeals a judgment ordering it to defend and indemnify defendants Beverly Lee

Phillips and Victoria Phillips under the insurance policy plaintiff issued to them. We

reverse and remand.
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                                  Opinion of the Court



                                    I.      Background

      The background of this case is provided by the trial court’s judgment and is not

at issue on appeal:

                   1.     Farm Bureau issued policy FO 1051463 to
             Beverly Lee Phillips and Vicki O. Phillips as named
             insureds effective January 11, 2008. The policy has been
             renewed annually and amended from time to time through
             January 11, 2016.

                      ....

                    5.     Beverly Lee Phillips was charged with
             various sexual offenses which occurred over a period of
             time against the minor child of John Doe 236, referred to
             in this order as KGK.

                    6.    From those various charges, Beverly Lee
             Phillips agreed to plead guilty to two counts of taking
             indecent liberties with KGK (a violation of N.C.G.S. 14-
             202.1) and two counts of sexual activity by a substitute
             parent (a violation of N.C.G.S. 14-27.7[a]).

                   7.     The date of the offenses pertinent to the plea
             were within the 2008 policy year: May 1, 2008 and August
             7, 2008. The date on which the cause of action for John Doe
             236 arose was in the 2012 policy year, when he learned of
             the abuse of KGK.

                    8.     John Doe 236 is a pseudonym for the father of
             KGK. John Doe 236 filed a civil action in Chatham County
             Superior Court against Beverly Lee Phillips and Victoria
             Phillips: John Doe 236 v. Beverly Lee Phillips and Victoria
             Phillips, 14 CVS 885, Chatham County Superior Court (the
             Chatham County Action). That complaint alleges one cause
             of action for negligence and one cause of action for loss of
             services.



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                     Opinion of the Court



       9.    The Chatham County Action alleges in its
statement of the “Nature of the Wrongdoing” that “Beverly
Phillips was convicted of indecent liberty with [John Doe
236’s] minor child;” that “Beverly Lee Phillips was charged
and convicted for the sexual battery of the [John Doe 236’s]
minor child;” and that “[t]his case is about sexual battery
made against [John Doe 236’s] child by Beverly Lee
Phillips, and the negligence of Victoria Phillips to entrust
that minor with Beverly Lee Phillips.”

       10.   The First Cause of Action of the Chatham
County Action alleges in pertinent part that “Defendant
Victoria Phillips was negligent in failing to properly
supervise Beverly Lee Phillips, or warn [John Doe 236]
about the assailant;” that “as a result of the conduct of the
Defendants, [John Doe 236’s] child suffered damage, and
that damage also impeded the relationship between [John
Doe 236] and his child and caused independent injury to
[John Doe 236].”

      11.     The Second Cause of Action of the Chatham
County Action alleges in pertinent part that “[a]s a direct
and proximate result of the assault and battery by Beverly
Lee Phillips, and the negligence of Victoria Phillips, [John
Doe 236’s] child was affected” and that “Defendants’
actions and inactions which resulted in the damage to
[John Doe 236’s] child created difficulty between, parent
and child, and loss of services of the child to the father.”

       12.   The First Cause of Action and Second Cause
of Action conclude that “Defendants’ conduct was willful,
wanton, and committed with knowledge that it was likely
to cause damage to [John Doe 236] and his minor child.
Therefore, [John Doe 236] is entitled to an award of
punitive damages.” As noted above, the parties agree that
punitive damages is not at issue under the policy, and in
oral argument counsel for Farm Bureau agreed that
viewing the pleading as a whole, that Victoria Phillips is
entitled to this allegation being read as a recklessness
standard.


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                                  Opinion of the Court




                    13.    Beverly Lee Phillips admits that the
             Transcript of Plea is a true and accurate copy of that plea
             entered in State v. Beverly Lee Phillips, 09 CRS 315,
             Chatham County Superior Court; that he initialed the plea
             arrangement in the Transcript of Plea; and that he signed
             the Transcript of Plea. By way of explanation, Beverly Lee
             Phillips asserts in his answers to interrogatories that “I
             entered a plea in this matter because I was facing
             significant time if convicted and the plea was in my best
             interest. However, I maintain now as I did at the time of
             the plea that I did not sexually assault or harm in any way
             KGK.”

                    14.    Victoria Phillips admits the Transcript of
             Plea, her husband’s initials on the plea arrangement and
             her husband’s signature on the Transcript of Plea. By way
             of explanation, Victoria Phillips asserts in her answers to
             interrogatories that “we do not believe a sexual assault
             occurred and my husband entered into plea because it was
             in his best interests at the time.”

                   15.    Due to his ex-wife abducting his child at age
             one, and she and her family separating her from him, John
             Doe 236 learned only in 2012 that his child had been
             sexually assaulted.

      In April of 2015, plaintiff North Carolina Farm Bureau Mutual Insurance

Company, Inc. (“Farm Bureau”) filed a complaint for declaratory relief “declaring that

the Farm Bureau policies do not apply to any claims in the Chatham County Action,

and that Farm Bureau does not have a duty to defend or indemnify Beverly Lee

Phillips or Victoria Phillips in the Chatham County Action[.]”       The defendants

answered and requested that the complaint be dismissed. On 12 April 2016, the trial

court entered judgment and ordered that plaintiff “Farm Bureau has a duty to defend


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                                      Opinion of the Court



and an obligation to indemnify each of Beverly Lee Phillips or Victoria O. Phillips in

the Chatham County Action.” Plaintiff Farm Bureau appeals.

                                II.       Policy Coverage

      Plaintiff Farm Bureau’s brief argues several reasons why it should not have

an obligation to defend in the Chatham County lawsuit, all based upon the policy

language. The parties have presented arguments regarding the meanings of several

defined terms and phrases under the policy and exclusions. But we will begin with

plaintiff Farm Bureau’s last argument first, since it addresses the first relevant

definition in the policy and is dispositive. Plaintiff Farm Bureau argues that “the

Chatham County claims do not seek damages for ‘bodily injury’ as defined by the

policies.” (Original in all caps.) We agree.

A.    Standard of Review

      Generally,

             [t]he standard of review in declaratory judgment actions
             where the trial court decides questions of fact is whether
             the trial court’s findings are supported by any competent
             evidence. Where the findings are supported by competent
             evidence, the trial court’s findings of fact are conclusive on
             appeal. Findings of fact not challenged on appeal are
             binding on this Court. However, the trial court’s
             conclusions of law are reviewable de novo.

Basmas v. Wells Fargo Bank Nat.’l Ass’n, 236 N.C. App. 508, 511, 763 S.E.2d 536,

538–39 (2014) (citations and quotation marks omitted). Because no issues are raised

as to the findings of fact in the judgment on appeal, the only question before this


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                                        Opinion of the Court



Court is the legal issue of whether plaintiff Farm Bureau has a contractual obligation

to defend defendants Beverly and Victoria Phillips for the claims in the Chatham

County lawsuit.1

B.     Comparison Test

                      In our Supreme Court’s most recent decision on the
               duty to defend, the Court explained that in order to answer
               the question whether an insurer has a duty to defend, we
               apply the comparison test, reading the policies and the
               complaint side-by-side to determine whether the events as
               alleged are covered or excluded. In performing this test,
               the facts as alleged in the complaint are to be taken as true
               and compared to the language of the insurance policy. If
               the insurance policy provides coverage for the facts as
               alleged, then the insurer has a duty to defend.

Kubit v. MAG Mut. Ins. Co., 210 N.C. App. 273, 278, 708 S.E.2d 138, 144 (2011)

(citations, quotation marks, and ellipses omitted). Our Supreme Court has also noted

that the duty to defend exists unless the facts as alleged in the complaint “are not

even arguably covered by the policy.” Id. at 278, 708 S.E.2d at 144 (citation and

quotation marks omitted).

                      Our Supreme Court has observed that the insurer’s
               duty to defend the insured is broader than its obligation to
               pay damages incurred by events covered by a particular
               policy. This duty to defend is ordinarily measured by the
               facts as alleged in the pleadings. When the pleadings state
               facts demonstrating that the alleged injury is covered by
               the policy, then the insurer has a duty to defend, whether
               or not the insured is ultimately liable. An insurer is
               excused from its duty to defend only if the facts are not even

       1   We take no position on the merits, if any, of the underlying Chatham County lawsuit, which
is not at issue in this case.

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                     Opinion of the Court



arguably covered by the policy.
        ....
        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 coverage provided by the insurance
        policy; the question is, assuming the facts as
        alleged to be true, whether the insurance
        policy covers that injury. The manner in
        which the duty to defend is broader than the
        duty to indemnify is that the statements of
        fact upon which the duty to defend is based
        may not, in reality, be true. As we observed
        in Waste Management, when the pleadings
        state facts demonstrating that the alleged
        injury is covered by the policy, then the
        insurer has a duty to defend, whether or not
        the insured is ultimately liable.
Under Harleysville, the duty to defend is broader than the
duty to indemnify only in the sense that an
unsubstantiated allegation requires an insurer to defend
against it so long as the allegation is of a covered injury;
however, 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.
        Harleysville does not specifically address and
nothing in its language appears to revisit the following
caveat to the comparison test set out in Waste Management
imposing a duty on the insurance carrier to investigate:
        Conversely, when the pleadings allege facts
        indicating that the event in question is not
        covered, and the insurer has no knowledge
        that the facts are otherwise, then it is not
        bound to defend.
               Where the insurer knows or could
        reasonably ascertain facts that, if proven,
        would be covered by its policy, the duty to
        defend is not dismissed because the facts
        alleged in a third-party complaint appear to


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                                   Opinion of the Court



                    be outside coverage, or within a policy
                    exception to coverage. In this event, the
                    insurer’s refusal to defend is at his own peril:
                    if the evidence subsequently presented at
                    trial reveals that the events are covered, the
                    insurer will be responsible for the cost of the
                    defense. This is not to free the carrier from its
                    covenant to defend, but rather to translate its
                    obligation into one to reimburse the insured if
                    it is later adjudged that the claim was one
                    within the policy covenant to pay. In addition,
                    many jurisdictions have recognized that the
                    modern acceptance of notice pleading and of
                    the plasticity of pleadings in general imposes
                    upon the insurer a duty to investigate and
                    evaluate facts expressed or implied in the
                    third-party complaint as well as facts learned
                    from the insured and from other sources.
                    Even though the insurer is bound by the
                    policy to defend groundless, false or
                    fraudulent lawsuits filed against the insured,
                    if the facts are not even arguably covered by
                    the policy, then the insurer has no duty to
                    defend.

Id. at 277–79, 708 S.E.2d at 144-45 (emphasis added) (citations, quotation marks,

and brackets omitted). We now turn to the comparison of the complaint to the

insurance policy. See id. Because the duty to defend may be broader than the duty

to indemnify we address the duty to defend because if it fails, so too does the duty to

indemnify. See id. at 277–79, 708 S.E.2d at 144-45.

C.    Analysis

      The insurance policy contains coverage both for property and liability coverage,

but no property claims are at issue here. The liability coverage includes personal


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                                        Opinion of the Court



liability coverage labeled as “Coverage L” and medical payments to others labeled as

“Coverage M[.]” Defendant John Doe’s complaint does not seek to recover for any

medical expenses incurred by KGK or himself, so the issue here arises under

Coverage L, regarding personal liability:

                Coverage L – Personal Liability – We pay up to our limit,
                all sums for which an insured is liable by law because of
                bodily injury2 or property damage caused by an
                occurrence to which this coverage applies. We will defend
                a suit seeking damages if the suit resulted from
                bodily injury or property damage not excluded
                under this coverage. We may make investigations and
                settle claims or suits that we decide are appropriate. We
                do not have to provide a defense after we have paid an
                amount equal to our limit as a result of a judgment or
                written settlement.

       Bodily injury is defined by the policy as

                bodily harm to a person and includes sickness, disease or
                death. This also includes required care and loss of
                services.

                Bodily injury does not mean bodily harm, sickness,
                disease or death that arises out of:
                a.    a communicable disease; or
                b.    the actual, alleged or threatened sexual
                molestation of a person.

       Defendant John Doe set forth two claims in his complaint. In both claims, the

negligence and loss of services, defendant John Doe is not suing for injuries to KGK

but for alleged injuries he sustained as a result of the crimes committed against KGK.


       2   All emphasis in bold to the policy language has been added by this Court throughout this
opinion.

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                                     Opinion of the Court



The negligence claim alleges defendant Victoria Phillips was negligent in caring for

KGK because she knew or should have known of defendant Beverly Phillips’s “sexual

interest” in KGK and her lack of supervision allowed him to sexually abuse her.

Defendant John Doe’s negligence claim implicates no property damage but rather

addresses the damage to “the relationship” with his daughter, and taking the

allegations in his complaint as true, id. at 278, 708 S.E.2d at 144, it could potentially

fall within the definition of a “bodily injury” claim under Coverage L within the policy.

       The second claim is entitled “Loss of Services[;]” here, defendant John Doe

alleges damages from “loss of services of the child to the father[.]” Defendant John

Doe explains in his brief that “loss of services is an ancient Common Law cause of

action . . . [u]nder [which] the overt fiction of . . . the injured child’s lost ‘service’ is

presumed.” See generally Tillotson v. Currin, 176 N.C. 479, 480-81, 97 S.E. 395, 396

(1918) (“This is an action brought by the father to recover damages for the seduction

of his daughter. . . . The right of the father to recover for debauching his daughter is

based upon the loss of services growing out of the relation of master and servant,

which, as said by Nash, J., in Briggs v. Evans, 27 N.C. 20, is a figment of the law, to

open to him the door for the redress of his injury, but is, however, the substratum on

which the action is built. If the daughter is under twenty-one years of age, the loss

of service is presumed, and no evidence of the fact need be offered; and, if over twenty-

one, the slightest service, such as handling a cup of tea, milking a cow, is sufficient



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                                    Opinion of the Court



at common law to support the action; but, while the father comes into court as a

master, he goes before the jury as a father, and may recover damages for his

humiliation, loss of the society of his daughter and mental suffering and anguish,

destruction of his household, sense of dishonor, as well as expenses incurred and for

loss of services, and the jury may also award exemplary damages as a punishment.”

(citations and quotation marks omitted)). The claim of seduction can be maintained

only by a father, since at common law, the father was master, and the daughter was

the servant; it required that the father show that the defendant had sexual

intercourse with his daughter, either with or without the daughter’s consent. See

generally id. We will generously assume that the claim for “loss of services” stemming

from the claim of “seduction” -- which is based upon a master-servant relationship of

father to daughter – still exists, see id., and “loss of services” is thus also potentially

a “bodily injury” under the policy definitions.

      But we must continue with the remainder of the definition of “bodily injury.”

Defendant John Doe’s claims also “arise[] out of” “the actual . . . sexual molestation

of a person.” No prior North Carolina case has directly addressed the meaning of the

words “arising out of” in this context, perhaps because the meaning is apparent,

though courts in other states have addressed similar provisions. See, e.g., Supreme

Servs. & Specialty Co. v. Sonny Greer, Inc., 958 So. 2d 634, 645 (La. 2007) (“The key

words in this provision are ‘arising out of,’ which could mean ‘but for’ the damaged



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                                   Opinion of the Court



property the resulting incident would not have occurred.”). Defendant John Doe’s

claims are entirely based upon the sexual molestation of his daughter and would not

exist “but for” the “molestation of a person[,]” his daughter. Id. Whatever name, title,

or label defendant John Doe seeks to assign to his claims, they arise out of the sexual

molestation of his daughter and are not included under the definition of a “bodily

injury” as defined under the policy.

      The policy provides that plaintiff Farm Bureau “will defend a suit seeking

damages if the suit resulted from bodily injury or property damage not excluded

under this coverage.” The Chatham County suit did not result from a “bodily injury”

as defined by the policy, so we need not consider potential exclusions. The claims

raised by defendant John Doe did not result from “bodily injury” as defined by the

policy because that definition explicitly does not include bodily harm that “arises out

of” “sexual molestation[.]”      Because defendant John Doe’s entire action hinges

on the sexual molestation of his daughter, it is not “a suit seeking damages” resulting

“from bodily injury[.]” Therefore, plaintiff Farm Bureau has no duty to defend or

indemnify defendants.

                                  III.    Conclusion

      We reverse the judgment of the trial court concluding there was coverage under

the policy and remand for entry of a declaratory judgment that plaintiff Farm Bureau

has no duty to defend or indemnify defendants Beverly and Victoria Phillips in John



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                                Opinion of the Court



Doe’s Chatham County lawsuit.

     REVERSED and REMANDED.

     Judges BRYANT and HUNTER concur.




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