                            UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT


                            No. 06-1232



AUTO-OWNERS INSURANCE COMPANY,

                                             Plaintiff - Appellee,

          versus

DEBRA J. POTTER; ROBERT F. POTTER; NICHOLAS E.
PIGGOTT; KARIN PIGGOTT; EDWARD F. FITZGERALD;
KAREN L. FITZGERALD; SUSAN WILLIAMS; BRIAN
EASON; JANET EASON; CHARLES N. REGISTER; NANCY
P.   REGISTER;   DOUGLAS    BAREFOOT;   ANGELA
BAREFOOT; JOHN JOSEPH BIANCHINO; KAREN MARIE
BIANCHINO; DANIEL BLACKMAN; HOLLY BLACKMAN;
RONALD E. BRAY; SUSAN M. BRAY; CLYDE CORSON;
MARY CORSON; RICHARD AL COX; BARBARA S. BOOB;
JAMES W. DELUCA; MARY H. DELUCA; KENNETH
DEMOSS; REGINA DEMOSS; DAVID R. DIETZ; HELEN
L. DIETZ; DIANE DILLON; JESSE M. DINGLE; LYNN
K. DINGLE; DAVID M. GOODWYN; VALERIE C.
WASHINGTON; JOYCE GRIFFIN-KEENE; SABOOR HAKEM;
WENDY D. HAKEM; JOHNNY M. HUMPHREY; SUSAN V.
HUMPHREY; DWAUN A. HUMPHRIES; KRISTY G.
HUMPHRIES; GREGORY J. JONES; KYMBERLY A.
JONES; MILTON WAYNE KING, SR.; JOYCE S. KING;
DAVID   SAMUEL  LEINFELDER;    SANDRA  IVESTER
LEINFELDER; STEPHANIE EDWARDS MASSENGALE;
MICHAEL R. MCKAY; JILL L. MCKAY; ROBERT
WILLIAM MOORES; VICTORIA MORGAN MOORES; ROBERT
P. NENNO; CARINE M. NENNO; STEVEN D. PARKER;
KAREN D. PARKER; JOSEPH J. RACHIS; SUSAN T.
RACHIS; MARK T. RADER; SUE N. RADER; RAMIRO
ROBLES, JR.; PATRICIA BEATRICE ROBLES; JIHAD
A. SHAWWA; HOWAYDA SHAWWA; JOHN F. STEHMAN;
MICHELLE A. STEHMAN; AMANDA TALLEY; STEPHEN
TURNER; LOLITA FIELDS; SHAWN M. WAGNER; JODI
A. WAGNER; CATHY WHITE; DALE S. WIGGINS; MARY
WIGGINS; ANJANETTE IRENE WOOTEN,

                                          Defendants - Appellants,
          and

WHITEWOOD PROPERTIES, INCORPORATED, d/b/a
Neuse Crossing Utilities Company Properties,
d/b/a Neuse Crossing Utilities Company; JAMES
D. ADAMS, JR.,

                                                         Defendants,

          versus

THE HARLEYSVILLE INSURANCE COMPANIES,

                                              Third Party Defendant.

--------------------

COMPLEX    INSURANCE     CLAIMS       LITIGATION
ASSOCIATION,

                                         Amicus Supporting Appellee.



                           No. 06-1298



AUTO-OWNERS INSURANCE COMPANY,

                                               Plaintiff - Appellee,

          versus

WHITEWOOD PROPERTIES, INCORPORATED, d/b/a
Neuse Crossing Utilities Company Properties,
d/b/a Neuse Crossing Utilities Company; JAMES
D. ADAMS, JR.,

                                            Defendants - Appellants,

          and

DEBRA J. POTTER; ROBERT F. POTTER; NICHOLAS E.
PIGGOTT; KARIN PIGGOTT; EDWARD F. FITZGERALD;
KAREN L. FITZGERALD; SUSAN WILLIAMS; BRIAN
EASON; JANET EASON; CHARLES N. REGISTER; NANCY


                                  2
P.   REGISTER;   DOUGLAS    BAREFOOT;   ANGELA
BAREFOOT; JOHN JOSEPH BIANCHINO; KAREN MARIE
BIANCHINO; DANIEL BLACKMAN; HOLLY BLACKMAN;
RONALD E. BRAY; SUSAN M. BRAY; CLYDE CORSON;
MARY CORSON; RICHARD AL COX; BARBARA S. BOOB;
JAMES W. DELUCA; MARY H. DELUCA; KENNETH
DEMOSS; REGINA DEMOSS; DAVID R. DIETZ; HELEN
L. DIETZ; DIANE DILLON; JESSE M. DINGLE; LYNN
K. DINGLE; DAVID M. GOODWYN; VALERIE C.
WASHINGTON; JOYCE GRIFFIN-KEENE; SABOOR HAKEM;
WENDY D. HAKEM; JOHNNY M. HUMPHREY; SUSAN V.
HUMPHREY; DWAUN A. HUMPHRIES; KRISTY G.
HUMPHRIES; GREGORY J. JONES; KYMBERLY A.
JONES; MILTON WAYNE KING, SR.; JOYCE S. KING;
DAVID   SAMUEL  LEINFELDER;    SANDRA  IVESTER
LEINFELDER; STEPHANIE EDWARDS MASSENGALE;
MICHAEL R. MCKAY; JILL L. MCKAY; ROBERT
WILLIAM MOORES; VICTORIA MORGAN MOORES; ROBERT
P. NENNO; CARINE M. NENNO; STEVEN D. PARKER;
KAREN D. PARKER; JOSEPH J. RACHIS; SUSAN T.
RACHIS; MARK T. RADER; SUE N. RADER; RAMIRO
ROBLES, JR.; PATRICIA BEATRICE ROBLES; JIHAD
A. SHAWWA; HOWAYDA SHAWWA; JOHN F. STEHMAN;
MICHELLE A. STEHMAN; AMANDA TALLEY; STEPHEN
TURNER; LOLITA FIELDS; SHAWN M. WAGNER; JODI
A. WAGNER; CATHY WHITE; DALE S. WIGGINS; MARY
WIGGINS; ANJANETTE IRENE WOOTEN,

                                                        Defendants,

          versus

THE HARLEYSVILLE INSURANCE COMPANIES,

                                             Third Party Defendant.

--------------------

COMPLEX INSURANCE CLAIMS LITIGATION ASSOCIATION,

                                        Amicus Supporting Appellee.



Appeals from the United States District Court for the Eastern
District of North Carolina, at Raleigh. W. Earl Britt, Senior
District Judge. (5:01-cv-00819-BR)


                                3
Argued:   December 1, 2006                 Decided:   July 13, 2007


Before MICHAEL and GREGORY, Circuit Judges, and Gerald Bruce LEE,
United States District Judge for the Eastern District of Virginia,
sitting by designation.


Affirmed by unpublished opinion. Judge Lee wrote the opinion, in
which Judge Michael and Judge Gregory joined.


ARGUED: Curtis James Shipley, ELLIS & WINTERS, L.L.P., Greensboro,
North Carolina, for Appellants. Walter E. Brock, Jr., YOUNG, MOORE
& HENDERSON, P.A., Raleigh, North Carolina, for Appellee.        ON
BRIEF: Jonathan D. Sasser, Thomas H. Segars, ELLIS & WINTERS,
L.L.P., Raleigh, North Carolina; Kurt J. Olson, Matthew F. Fussa,
MAUPIN & TAYLOR, P.A., Raleigh, North Carolina, for Appellants.
John A. Yeager, WILLINGHAM & COTE, P.C., East Lansing, Michigan,
for Appellee.    Laura A. Foggan, John C. Yang, WILEY, REIN &
FIELDING, L.L.P., Washington, D.C., for Amicus Supporting Appellee.


Unpublished opinions are not binding precedent in this circuit.




                                4
LEE, District Judge:

     THIS MATTER is before the Court on an appeal of the District

Court’s decision that a withdrawal of defense of an insured by the

Auto-Owners Insurance Company (“Auto-Owners”) was not “unjustified”

under North Carolina law.       This case concerns residents and former

residents of a subdivision in North Carolina who allege that the

entity responsible for their utilities, Whitewood Properties, Inc.

(“Whitewood”), provided contaminated water to them; the residents

appeal the District Court’s denial of summary judgment in their

quest to have Whitewood’s insurance company, Auto-Owners, indemnify

Whitewood under the settlement agreement between the residents and

Whitewood.     The issue before the Court is whether the District

Court   correctly   held   that   Auto-Owners    did   not   unjustifiably

withdraw its defense of Whitewood when (1) Auto-Owners defended

under   a    reservation   of    rights,   (2)   Auto-Owners   brought   a

declaratory judgment action to determine if there was coverage or

a duty to defend, (3) the District Court held that Auto-Owners did

not have to defend Whitewood, and (4) Auto-Owners chose not to

continue to defend Whitewood while the declaratory judgment was on

appeal given that there was no stay of the litigation.           The Court

affirms the judgment of the District Court because even if the

insurer, Auto-Owners, had a duty to defend its insured, Whitewood,

the withdrawal of defense was not unjustifiable after the federal

District Court issued a declaratory judgment that there was no duty


                                     5
to defend (and the litigation was not stayed).                    In addition,

because     the     Auto-Owners'       withdrawal     of    defense      was    not

unjustifiable, under the terms of its contract with Whitewood,

Auto-Owners       cannot   be   held   liable   for   a     settlement    between

Whitewood and claimants which it did not authorize.



                                 I. BACKGROUND

     On March 22, 2001, a group of current and former residents of

a   North   Carolina       subdivision    (“Potter”    or    “Potters”),       sued

Whitewood, a developer that formed a utilities company to offer

water and sewer services. Auto-Owners defended under a reservation

of rights while it sought a declaratory judgment that it was not

required to defend Whitewood on the issues involved.                  (J.A. 653.)

The District Court held that Auto-Owners was not required to defend

Whitewood in this action and that summary judgment for Auto-Owners

was appropriate.

     On April 17, 2003, Potter filed an appeal.                       Auto-Owners

notified Whitewood that it would stop defending them because of the

declaratory judgment unless Whitewood sought a stay of the Order

(which would cause Auto-Owners to continue to defend Whitewood).1

Given that no stay was sought or issued, Auto-Owners discontinued

defense of Whitewood on June 1, 2003. (J.A. 654.)


      1
       In their brief, the Potter Appellants dispute that Auto-
Owners ever suggested a stay.    Brief of Appellant at 27, Auto
Owners Ins. Co. v. Potter, No. 06-1298 (4th Cir. May 24, 2006).

                                         6
     On October 28, 2003, Whitewood and Potter settled for $6

million, plus all of Whitewood’s rights to indemnification by Auto-

Owners.     Auto-Owners declined to sign this settlement agreement,

noting that it was not reasonable or in good faith. (J.A. 655.)

Auto-Owners suggested an alternate settlement in which it would

participate:    $150,000 in accord with the case evaluation report

obtained by the defense counsel.2 (J.A. 654-55.)

     The Fourth Circuit vacated3 the summary judgment Order of the

District Court on July 27, 2004, and remanded to the District Court

to see if there were other parts of the contract that could bar

coverage by the insurer, and, if the duty to defend attached,

whether   Auto-Owners    was   liable      to   indemnify   Whitewood.   On

September 8, 2004, Potter counterclaimed in District Court to

enforce   Auto-Owners’    need    to   indemnify    under   the   settlement

agreement with Whitewood.        Potter moved for summary judgment.

     The District Court ordered a settlement conference on August

19, 2005.    Whitewood and Auto-Owners reached a partial settlement.



     2
       A letter from Auto-Owners to Whitewood stated: “If you wish
to enter into a reasonable settlement, contingent on the outcome of
the appeal, in a way so that if Auto-Owners prevails on appeal it
pays nothing but if Auto-Owners loses on appeal it pays the
settlement amount, and without the silly provisions for having the
settlement be partly in force and partly not in force depending on
the coverage ruling, Auto-Owners is certainly willing to consider
agreeing to such a proposed settlement.” (J.A. 494.)
     3
       Auto-Owners makes a point to state in its brief that the
judgment of the District Court was not reversed, but rather
vacated.

                                       7
Potter and Auto-Owners did not reach a settlement.

      The District Court denied summary judgment for Potter on

February 7, 2006, holding that the agreement between Whitewood and

Auto-Owners did not alter the questions before the court as to

Potter’s motion for summary judgment. The Court held that it would

assume that Auto-Owners had a duty to defend Whitewood for purposes

of the motion.   Even under this assumption, the Court determined

that Auto-Owners’ withdrawal of defense of Whitewood was not

“unjustifiable” for two reasons:       (1) Auto-Owners did not withdraw

defenses mid-course without authorization and (2) did not refuse to

defend Whitewood from the beginning. (J.A. 656.)          In addition, no

stay pending appeal existed; a pending appeal, by itself, would not

preclude   Auto-Owners   from   relying     on   the    District   Court’s

declaratory judgment that it was not required to defend Whitewood.

(J.A. 659-61.)   Finally, Auto-Owners did not unjustifiably refuse

to indemnify Whitewood because there was no consent by Auto-Owners,

as required by its contract with Whitewood, to the settlement

agreement between Whitewood and Potter. (J.A. 663.)                A final

judgment was entered on February 8, 2006.              The appeal of this

judgment is now before this Court.




                                   8
                               II. DISCUSSION

                            A. Standard of Review

     This Court reviews de novo grants or denials of summary

judgment by a district court. Seabulk Offshore, Ltd. v. Am. Home

Assurance Co., 377 F.3d 408, 418 (4th Cir. 2004).                 Under Federal

Rule of Civil Procedure 56(c), summary judgment is only appropriate

when “the pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, ... show that

there is no genuine issue of material fact and that the moving

party is entitled to a judgment as a matter of law.” Fed R. Civ. P.

56(c).

                                 B. Analysis

     The Court holds that the District Court's ruling is affirmed

because    the   insurer's    withdrawal    of    defense    after     a   federal

declaratory      judgment    determined    that   there     was   no   insurance

coverage or duty to defend was not “unjustified” under North

Carolina law.      In addition, because the insurer's withdrawal of

defense was not unjustified, the insurer cannot be held liable for

an unauthorized settlement that it did not consent to between its

insured and a claimant.

          1. Withdrawal of Defense by Insurer Not Unjustified

                                     a.

     Auto-Owners'     withdrawal    of    defense    of   Whitewood        was   not

unjustified because it relied upon a federal declaratory judgment.


                                      9
North Carolina law governs under the insurance policy at issue

here.       North Carolina law is clear about the process that an

insurer must go through in order to determine if it is required to

defend an insured:          the insurance policy and the complaint should

be compared side-by-side under a “comparison test.” St. Paul Fire

& Marine Ins. Co. v. Vigilant Ins. Co., 724 F. Supp. 1173, 1176

(M.D.N.C. 1989). “Any doubt as to coverage is to be resolved in

favor of the insured.” Id.              If the claim of the insured falls

within the coverage of the policy, “the insurer’s refusal to defend

is unjustified even if it is based upon an honest but mistaken

belief that the claim is not covered.” Duke Univ. v. St. Paul Fire

& Marine Ins. Co., 96 N.C. App. 635, 637 (N.C. Ct. App. 1990).

Under North Carolina law, “the duty to defend arises whenever there

is    a    potential   or    possible    liability    to     pay   based   on    the

allegations in the complaint and is not dependent on the probable

liability to pay based on the facts ascertained through trial.”

Vigilant, 724 F. Supp. at 1177 (citation omitted).                   The duty to

defend is “excused only if the facts alleged in the complaint do

not       even   arguably   fall   within     the   policy    coverage     and   an

independent investigation reveals no extrinsic facts demonstrating

coverage.” Id. at 1179. This Court previously held that withdrawal

of defense by an insurer was appropriate when the insurance company

determined, before any trial on liability or declaratory judgment,

that there was no duty to defend because the claims at issue were


                                         10
not covered by the insurance policy. Liberty Mut. Ins. Co. v.

Triangle Indus., Inc., 957 F.2d 1153, 1160 (4th Cir. 1992).                    We

noted that the District Court had found that there was no evidence

that the insured was left “defenseless or seriously hampered” in

its ability to protect itself. Id. at 1160.

     A declaratory judgment allows a court to “declare the rights

and other legal relations of any interested party seeking such

declaration, whether or not further relief is or could be sought;”

such a judgment has “the force and effect of a final judgment or

decree and shall be reviewable as such.” 28 U.S.C. § 2201(a)

(1993).    A stay pending appeal may be sought by a party under

Federal Rule of Civil Procedure 62(d).

                                      b.

     The Potter appellants assert that Auto-Owners abandoned its

insured (Whitewood) and forced them to settle the case when Auto-

Owners    withdrew   from    the   case.     They   argue    that    because   an

insurer’s refusal to defend would be unjustified under North

Carolina law even if it is based upon an honest but mistaken belief

that the claim is not covered, Auto-Owners has a duty to indemnify

given that it made an “honest but mistaken” choice to rely on a

District Court Order when it withdrew from defending Whitewood.

     In    addition,   the    Potters      argue    that    only    three   other

jurisdictions--Wisconsin, Michigan, and the Eighth Circuit--have

considered a factual situation similar to the one at issue and each


                                      11
court found that an insurer bears the risk that an appeals court

will reverse the determination of no coverage.             In the past, argue

the Potters, North Carolina appellate courts have been persuaded by

the reasoning of the Eighth Circuit and the state courts of

Michigan, Wisconsin, and Missouri.            The Potter appellants argue

that North Carolina likely would place the risk that an appeal (of

a determination that an insurer had no duty to defend an insured)

would be successful on the insurer.           In addition, North Carolina

law requires that ambiguities in insurance policies are to be

resolved in favor of finding coverage for insureds. E.g., Pa. Nat.

Mut. Cas. Ins. Co. v. Associated Scaffolders & Equip. Co., 579

S.E.2d 404, 406 (N.C. Ct. App. 2003).

     The Potters argue that they were not required to seek a stay

of the federal declaratory judgment because it would not have

directed any party to do or refrain from doing anything.              Even if

a stay were practicable, they argue, it is unlikely that the

District Court would issue such a stay pending appeal given that it

would have to determine that Potter could likely prevail on the

merits of the appeal.

                                    c.

     Auto-Owners    argues   that   its       withdrawal    of   defense    was

justified when it was done only after the District Court entered a

final   judgment   finding   no   duty   to    defend   existed,    and    when

Whitewood did not obtain or seek a stay of that final judgment.


                                    12
Declaratory   judgments,   argues    Auto-Owners,   are   like   other

judgments.    Auto-Owners also argues that the cases Potter uses

mistakenly conflate the notion of failure to defend with being

given approval by a court not to defend; the cases are not binding

on this Court, and not persuasive. The Fourth Circuit rejected the

notion that insurers have continuing obligations to defend when a

determination of no coverage is made.4     In addition, Auto-Owners

argues that a stay of the District Court’s order would not have

been meaningless, impractical, or impossible.       Potter could have

applied to this Court for a stay; Potter also could have sought a

stay in the underlying case.

                                d.

     The Court affirms the District Court’s declaratory judgment

that Auto-Owners was not unjustified under North Carolina law for

withdrawing its defense of Whitewood after the District Court

issued a declaratory judgment indicating that Auto-Owners had no

duty to defend Whitewood in the matter at hand.     We agree with the

District Court that it would tip the balance too far in favor of

the insured to hold that an insurer must wait for all appeals of a


     4
        The Complex Insurance Claims Litigation Association
(“CICLA”) submitted an amicus brief. They argue that if the Court
reverses the District Court in this case, insurers who are found
not to owe a duty to defend would have two unappealing choices.
First, the insurers could continue to provide a defense until all
levels of appeal have been exhausted (with no guarantee that they
would be reimbursed by the policyholder). Second, the insurers
could risk being treated as though they breached their duty to
defend.

                                13
declaratory judgment (relieving it of a duty to defend) to be

exhausted before removing its defense of the insured.          The fact

that the insurer provided a defense for the insured until the time

the insurer received a declaratory judgment Order demonstrates to

this Court that the insurer adhered to the spirit of the public

policy requiring defense of insured persons.          Auto-Owners, the

insurer, had a right to rely upon the District Court’s declaratory

judgment Order, absent a stay of judgment. Guinness PLC v. Ward,

955 F.2d 875, 898 (4th Cir. 1992) (citation omitted).            Federal

declaratory judgments have the force and effect of a final judgment

– while parties may seek a stay of the judgment pending appeal, no

stay was sought in this case.       The Court finds unpersuasive the

Potter    appellants'   arguments   that   a   stay   would   have   been

meaningless, and, if not meaningless, then impossible to obtain;

the Court agrees with the District Court that a stay of the

judgment under Federal Rule of Civil Procedure 62(d) would have

been possible here, had it been sought, because the judgment was

monetary in nature. (J.A. 660 (citing Arnold v. Garlock, Inc., 278

F.3d 426 (5th Cir. 2001)).

     The Court finds unpersuasive the cases the Potters cite from

other jurisdictions to forward the argument that an insurer should

continue to defend the insured after a declaratory judgment absent

a stay.   First, on an appeal from summary judgment for the insurer,

the Michigan state court of appeals overruled a state circuit court


                                    14
in Detroit Edison v. Michigan Mutual Insurance Co., 301 N.W.2d 832

(Mich. Ct. App. 1980); it held that the insurer at issue had a duty

to defend and that the insurer had to pay the settlement amount

owed by the insured after having an opportunity to present evidence

on the coverage of the insurance policy.      As Auto-Owners aptly

points out, Detroit Edison can be distinguished from this case in

several ways.   First, this case involved an insurer that, unlike

Auto-Owners, neither defended its insured at any time, nor filed a

declaratory judgment action to ascertain its duties to defend (the

policyholder did so); the insurer in the Detroit Edison case did

not adhere to the policy goals relating to insureds and insurers

that this Court seeks to advance.    Second, the duty to defend law

of Michigan differs from that of North Carolina.   Third, there was

no settlement between the parties in the Michigan case.   Finally,

the Michigan state opinion does not indicate whether the trial

court's ruling was stayed or not.     Thus, Detroit Edison is not

persuasive because it can be distinguished in several key ways from

this case.

     Second, Royal Insurance Co. of America v. American Employers

Insurance Co., 304 F.3d 804 (8th Cir. 2002), involved a factual

situation revolving around a combination of state and federal court

litigation; the court held that after an insurer has breached a

duty to defend, if an insured settles a claim, the insurer must

reimburse the insured for settlement obligations covered by the


                                15
liability policy (after being allowed to argue the coverage issue).

This case can be distinguished from the one at hand in two

important ways.   First, unlike Royal Insurance, there has never

been a specific ruling by the District Court as to whether or not

the claim at issue is covered by the insurance policy.   Second, in

Royal Insurance the Eighth Circuit Court of Appeals reversed a

finding of the district court that the insurer had no duty to

defend.   However, even though the court found that the insurer in

Royal Insurance had breached its duty to defend, there was no

holding that the insurer was not entitled to rely upon the ruling

of the federal district court and no discussion of whether a stay

of the litigation was sought pending appeal (which would have

caused the insurer to continue to defend the insured).

      Finally, the Wisconsin Supreme Court decision in Newhouse can

be distinguished from this case. Newhouse v. Citizens Sec. Mut.

Ins., 501 N.W.2d 1 (Wis. 1993).       The Newhouse case involved a

complex procedural history.    In brief, a Wisconsin trial court

found that the insurer did not have a duty to defend the insured;

this decision was appealed.   The Wisconsin Supreme Court held that

the insurer “did not follow the proper procedure” when it refused

the state circuit court's offer to stay the liability trial until

the resolution of the appeal on the duty to defend issue. Id. at 5-

6.   In contrast this case does not involve a liability trial, but

rather a settlement between the insured and the Potters reached


                                 16
before the ruling on the appeal of the duty to defend issue.   Also,

in Newhouse the state circuit court made a determination about the

duty to defend; here, however, the District Court did not make a

determination that Auto-Owners had a duty to defend.   In addition,

the District Court in this case, unlike the Wisconsin state court,

did not offer to stay the trial and neither did the plaintiffs.

Finally, because Newhouse involved a state proceeding, the Federal

Declaratory Judgment Act was not operative; it carries a finality

that a Wisconsin state declaratory judgment does not. See Newhouse,

501 N.W. 2d 6 (holding that “[a]n insurance company breaches its

duty to defend if a liability trial goes forward during the time a

no coverage determination is pending on appeal and the insurance

company does not defend its insured at the liability trial.”)

Thus, Newhouse can be distinguished in several important ways from

this case.

     Therefore, because Auto-Owners was entitled to rely upon the

declaratory judgment of the District Court, and only withdrew its

defense after the issuance of that judgment, Auto-Owners was not

“unjustified” in withdrawing its defense when there was no stay of

the declaratory judgment while the ruling was on appeal.

        2. Insurer Not Liable Under Settlement Agreement

     Auto-Owners is not liable under the settlement agreement

between Whitewood and Potter because, as held above, Auto-Owners'

withdrawal of defense did not breach its contract with Whitewood.


                                17
In addition, under the contract, Whitewood could not assign its

rights under the contract to Potter.                  If an insurer “wrongfully

refuses to defend a suit against its insured,” then it will be

“liable to the insured for sums expended in payment or settlement

of the claim, for reasonable attorneys’ fees, for other expenses of

defending    the   suit,     for   court   costs,      and    for    other      expenses

incurred    because   of     the   refusal       of   the    insurer      to    defend.”

Vigilant, 724 F. Supp. at 1182.              The insurer has the right to

challenge the reasonableness of the settlement and whether it was

made in good faith, even if the insurer breached its duty to

defend. Id. at 1183 n.6 (citing Nixon v. Liberty Mut. Ins. Co., 120

S.E.2d 430 (N.C. 1961)). In addition, under North Carolina law, if

the insurer unjustifiably refuses to defend claims covered by the

insurance policy, then it commits a breach of the policy contract

and   “thereby     waives    the   provisions         defining      the    duties   and

obligations of the insured.” Id. at 1183 (citing Ames, 340 S.E.2d

at 485 (citing Nixon, 120 S.E.2d at 435)).                   Finally, under North

Carolina law, “[e]xceptions to the rule that contracts are freely

assignable are when the contract expressly provides that it is not

assignable   or    when     performance     of    some      term   of     the   contract

involves an element of personal skill or credit.” Hurst v. West,

272 S.E.2d 378, 382-83 (N.C. Ct. App. 1980) (citations omitted).




                                       18
                                      a.

     The Potters argue that the District Court’s holding would

inappropriately require appellants to obtain a stay in order to

preserve their substantive legal rights on appeal.               The District

Court held that the failure of Whitewood and the Potters to secure

a stay effectively waived their right to assert that Auto-Owners

waived its right to approve the 2003 Settlement.            Failure to seek

or obtain a post-judgment stay does not usually constitute a waiver

of rights.

                                      b.

     Auto-Owners argues that Potter cannot bring suit against Auto-

Owners because, even if Whitewood assigned its claims to indemnity

to Potter, the “no action” clause of the contract between Whitewood

and Auto-Owners only allows Auto-Owners to be sued on settlement

agreements signed by Auto-Owners, the insured and the claimant; on

these facts, only Whitewood and Potter agreed, and thus Potter

cannot sue Auto-Owners to recover. In addition, Auto-Owners argues

that the issue of whether or not Auto-Owners had a duty to defend

Whitewood    when   it    withdrew   its   defense    in   reliance   on   the

declaratory judgment is moot because Whitewood and Auto-Owners

settled.    Auto-Owners argues that the duty to defend is a personal

right that is not assignable.        Strangers to an insurance contract

cannot   invoke     it.     While    the   Potter    litigants    argue    that

contractual claims are always assignable, as is the duty to defend,


                                      19
that       is   not   correct--exceptions   to   the   general   rule   include

personal rights and contracts that preclude assignment.

                                      c.

       The Court affirms the District Court’s holding that Auto-

Owners cannot be held liable for a settlement between its insured,

Whitewood, and a claimant, Potter, which it did not authorize.

Potter’s argument fails.         Because we hold that Auto-Owners did not

unjustifiably withdraw its defense of Whitewood, Auto-Owners may

still rely upon the insurance policy provisions that prohibit

Whitewood, the insured, from settling a claim without Auto-Owners'

consent.        Under the terms of the contract between Auto-Owners and

Whitewood, the insured did not have the authority to act on a claim

without the express consent of Auto-Owners. (J.A. 168, 235.5)               The

contract states that “[n]o insureds will, except at their own cost,

voluntarily make a payment, assume any obligation, or incur any

expense, other than for first aid, without our consent.” (J.A. 167,

234.)

       In addition, the issue of whether or not Auto-Owners had a

duty to defend Whitewood became moot when Auto-Owners and Whitewood

settled.        The contract states that the policy at issue here was not

assignable. (J.A. 130, 197)          Contracts are freely assignable in



       5
       The joint appendix did not include the entire Exhibit 4 to
the Potter litigants’ motion for summary judgment, Record No. 90;
this document would have contained the Auto-Owners insurance policy
for December 8, 1999 to December 8, 2000.

                                       20
general; however, contracts that expressly state that they are not

assignable are an exception to that general principle.

     Based on the above provisions, Auto-Owners is not liable under

the settlement agreement between Whitewood and Potter because the

settlement was not authorized by Auto-Owners and Whitewood could

not assign its rights to Potter. See Terrell v. Lawyers Mut. Liab.

Ins. Co., 507 S.E.2d 923, 927 (N.C. Ct. App. 1998).



                         III. CONCLUSION

     The Court affirms the District Court's ruling because it was

not “unjustified” for the insurer, Auto-Owners, to withdraw its

defense of Whitewood, its insured, when it relied on an unstayed

federal declaratory judgment.   It follows, therefore, that Auto-

Owners is not liable for the settlement between Whitewood and

Potter; because there was no unjustified withdrawal of defense, the

contract between the insurer and insured in this case prohibits the

insurer from becoming liable for settlements between claimants and

the insured which it did not approve.

     For these reasons, the judgment of the District Court is

                                                         AFFIRMED.




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