Tuesday, June 6, 2023

City of Wilmington suing its insurance company to recover $7 million Small settlement, legal fees

Johnny Small was awarded $7 million after a judge vacated his conviction; Small had spent nearly 3 decades in prison. The city originally said the money would come from the General Fund --- but a new federal lawsuit shows they are hoping a judge will force an insurance company to cover the bill.

(Editor’s note: this story has been updated to include a statement provided by the City of Wilmington). 

WILMINGTON — In December of last year the City of Wilmington announced it would pay $7 million in a settlement to a man who spent 28 years in prison who later had his conviction vacated by a judge.

Related: Update: $7 million settlement for man who spent 28 years in prison after Wilmington police made ‘errors’

But the legal battle surrounding the case is apparently far from over. The City of Wilmington has now filed its lawsuit in an attempt to recuperate that $7 million from its insurance provider.

The Small case

In 2016, Johnny Small, who was convicted of murder in 1988, had his conviction overturned after evidence was presented that the police department had coerced false testimony during the trial.

Small was accused and convicted of murdering pet shop owner Pamela Dreher in 1988.

“… A key prosecution witness, David Bollinger, who was Small’s co-defendant at the time of the trial, had recanted his original trial testimony. During a hearing, Bollinger told Parsons that he had lied when initially questioned and, following that, a Wilmington Police Department detective had coerced his false testimony by threatening him with murder charges,” according to Port City Daily’s previous reporting.

Who will pay?

Domestic sex trafficking is disturbingly common and yet exceedingly hard to spot. And that's only part of the problem. (Port City Daily photo / City of Wilmington)
The City of Wilmington is taking its insurance provider to court over a $7 million settlement leaders agreed to pay to Johnny Small (Port City Daily photo / City of Wilmington)

During a December of 2018 press conference, Mayor of Wilmington Bill Saffo said the payment would be coming out of the city’s general fund.

In June of this year, the City of Wilmington filed a lawsuit against the Travelers Indemnity Company (the city’s insurance provider) claiming the company should be responsible for paying out the settlement.

The insurance provider does not seem to agree.

The lawsuit claims Travelers is the successor to USF&G Insurance — the company that issued the city its policy from 1988-1989 — and is thereby responsible.

The insurance policy provides the city with several types of coverage including commercial general liability, with a policy limit of $1 million and $2 million general aggregate limit. The city alleges in the lawsuit Travelers’ policy includes coverage for ‘personal injury’ which is “Injury, other than ‘bodily injury,’ arising out of one or more of the following offenses:

  • False arrest, detention or imprisonment
  • Malicious prosecution.”

But according to the lawsuit, after the conviction of Small, in August of 1990, Travelers amended its own policy by adding an endorsement titled “Exclusion-Law Enforcement Activities.”

It said, “This insurance does not apply to ‘bodily injury,’ ‘property damage,’ ‘personal injury,’ or ‘advertising injury,’ arising out of any act or omission of your [the city’s] police department or law enforcement agency of [the city] including their agents or employees.”

An alleged breach of contract

The City of Wilmington is claiming in its lawsuit that Travelers breached its duty to defend the city during the Small Lawsuit.

“The claims against the City in the Small Lawsuit fell within the coverage of the Travelers Policy because the arrest, prosecution, and conviction of Mr. Small, out of which the claims purportedly arose, took place within the Travelers Policy’s effective dates of coverage, and the Small Complaint alleges fact that would constitute false arrest, detention or imprisonment and/or malicious prosecution,” according to the lawsuit.

The documents go on to claim that Travelers refused to defend the city in the May 2017 lawsuit citing the Law Enforcement Exclusing.

But the city is claiming that the lawsuit and subsequent settlement were not actually against the actions taken against the Wilmington Police Department, rather, that they were based on claims against the city itself.

“As a matter of law, Mr. Small’s Section 1983 claims against the City were necessarily based on the allegation that the deprivation of his constitutional rights were caused by an official policy or custom of the city (the existence of which is denied) which could be created only by written ordinances and regulations or decisions or omission of policy-making officials, and not by tortious conduct of individual members of the police department,” the lawsuit claims.

“On its face, the Law Enforcement Exclusion upon which Travelers bases its denial of coverage and refusal to defend does not exclude coverage for liability arising from official City policies or customs created by policy-making officials,” it continues.

The city claims that because of Travelers’ ‘breach of its duties’ the city was forced to pay substantial sums for its own defense. In an effort to lessen the burden of excess litigation, the city claims it entered into the $7 million settlement with Small to resolve the lawsuit (one payment of $3 million has already made with more installments planned for the future).

The city claims it provided Travelers with advanced notice regarding the settlement negotiations but the insurance company refused to participate or fund the city’s defense. The lawsuit goes on to claim the city is entitled to a judgment against the insurance company for all damages including the cost of defending the Small lawsuit as well as the amounts paid out to Small so far.

The city also claims it is entitled to a judgment, “declaring that Travelers is obligated to pay on behalf of the City all future installments due under the Small Settlement. ”

Notice of removal

The entire aforementioned lawsuit was filed in New Hanover County Superior Court, but Travelers made the motion to move the case to federal court — a motion that has since been approved.

A notice of removal, essentially transferring the case the United States District Court for the Eastern District of North Carolina was submitted in July. Since the company is domiciled in the State of Wisconsin, the defendant is considered a “citizen of Wisconsin” while the plaintiff, the City of Wilmington, is considered a citizen of North Carolina. The request for removal has been approved and will remain in federal court until a verdict is reached.

The city admitted to filing the lawsuit and is seeking reimbursement to ease taxpayers’ contributions, but could not comment further on pending litigation.

“The Johnny Small case concluded in December of 2018 when a final settlement was reached; that case has not changed and remains closed. The facts and settlement amounts, as well as the insurance contribution stated previously, were accurate and remain unchanged, and the City has already made provisions for payout within its existing budget, according to the city’s statement.

“The City has filed a lawsuit against Travelers Indemnity Company seeking reimbursement to recoup additional contribution for the taxpayers from a different insurance policy. The City is in active discussion with Travelers. As this is active litigation, no further comment will be provided at this time,” it concludes.

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