The Fourth Circuit refused on Friday to revive a suit brought by the owners of a North Carolina beach house accusing certain underwriters at Lloyd's London of stalling a $1 million payout over hurricane damage.

4th Circuit NC Homeowners Coverage Suit : Court Affirms Dismissal

A North Carolina federal court properly dismissed Michael and Christie Bailey's suit claiming the underwriters acted in bad faith and violated the Unfair and Deceptive Trade Practices Act, a three-judge panel concluded, agreeing that the couple failed to allege that the underwriters committed the level of malfeasance required for such claims.

"This case remains merely a reasonable disagreement regarding the scope of damage," the panel said.

Hurricane Florence Damage Dispute

The dispute stems from damage that occurred in September 2018 when Hurricane Florence struck the couple's beach house in Carteret County, according to court filings. A Lloyd's adjuster assessed the damage as minor, and the Baileys made repairs for about $170,000.

The Baileys later hired their own engineer to evaluate the loss, who determined that the damage caused by the storm was greater than what the Lloyd's adjuster believed, according to court filings.

4th Circuit NC Homeowners Coverage Suit : Appraisal and Legal Proceedings

The couple submitted a claim to the underwriters, and Lloyd's made several supplemental payments, court filings stated. Because of ongoing disagreement over the amount of damage, which the couple claimed was over $2 million, the parties entered into an appraisal agreement.

In September 2021, while appraisal was underway, the Baileys filed suit against Lloyd's in North Carolina state court. The case, which was removed to federal court the following month, was stayed pending the completion of the appraisal process, according to court filings. Shortly after, the appraisal panel awarded the Baileys over $1 million, which the underwriters paid.

Amended Complaint and Appeal

In an amended complaint filed in August 2022, the couple asserted claims of breach of contract, bad faith, violations of the North Carolina UDTPA and negligence. U.S. District Judge James C. Dever III tossed the suit in its entirety in May 2023, though the couple appealed only the dismissal of their bad faith and UDTPA claims.

The district court correctly concluded that the Baileys failed to plausibly allege that Lloyd's demonstrated bad faith.

"As to the assessment of the field adjuster, the amended complaint includes no plausible, nonconclusory allegations that the adjuster knew, yet concealed, the true extent of the damages," the judges said.

4th Circuit NC Homeowners Coverage Suit : Panel's Ruling

While the Lloyd's adjuster's assessment may have been wrong, the panel noted that an honest disagreement or mistake does not constitute bad faith. Nor does Lloyd's alleged disregard of a statement from the North Carolina Department of Insurance saying beach properties required more invasive inspections, the panel said.

The underwriters "can hardly be said to have acted in bad faith by refusing to pay appellants' demand when the appraisal panel awarded appellants less than half of what they demanded," the panel said. Further, Lloyd's "willingness to provide supplemental payments above the initial assessed damage shows its good faith in the execution of the insurance contract."

In addition, the Baileys have not alleged any unfair or deceptive business practice committed by the underwriters, the panel held.

"As with the common-law covenant of good faith claim, here, appellants are attempting to squeeze allegations that appellee was mistaken about and reasonably disagreed regarding the scope of coverage into a claim that appellee committed a deceptive trade practice," the judges said.

4th Circuit NC Homeowners Coverage Suit : Representation and Judges

Representatives of the parties did not immediately respond to requests for comment Friday.

U.S. Circuit Judges Stephanie D. Thacker, DeAndrea Gist Benjamin, and Nicole G. Berner sat on the appeals panel.

The Baileys are represented by Wesley A. Collins of Harvell & Collins PA. The underwriters are represented by Kevin M. O'Brien, Anna Pulliam Cathcart, and Machaella Reisman of Phelps Dunbar LLP.