NC Court Allows Bad Faith Claims Against Captive Insurer to Proceed

The North Carolina Business Court has ruled that bad faith and unfair trade practices claims against a captive insurer can move forward in a dispute over more than $100 million in insurance coverage tied to a litigation finance investment.

In a March 3 decision, the court dismissed the policyholder's breach of contract claim without prejudice after finding that the insured had not complied with policy requirements to provide information requested during the claims investigation.

The case, Watts Guerra LLC v. Series 1 of Oxford Ins. Co. NC LLC, stems from insurance purchased to hedge an investment in a portfolio of mass tort litigation, as detailed in the court's decision.

Watts Guerra LLC, a Puerto Rico-based company, invested in a group of lawsuits managed by a New York law firm that were valued at more than $340 million. To protect its expected return, the firm purchased 12 $10 million policies from Series 1 of Oxford Insurance Company NC LLC, a special-purpose captive insurer licensed in North Carolina. The policies were designed to cover any shortfall between an anticipated $120 million recovery and the actual proceeds received by September 15, 2024.

Watts Guerra paid approximately $7 million in premiums for the policies. By the time the coverage period expired, however, the firm had received only about $2 million in fees from the litigation portfolio.

The company later submitted claims seeking more than $100 million under the policies.

According to the complaint, the insured alleged that representatives connected with Oxford and its parent company indicated before any claim was filed that the insurer would refuse to pay and asked the insured to delay filing a claim while the parties explored potential transactions involving the litigation portfolio.

Watts Guerra filed an initial claim in November 2024 and later filed a second claim in June 2025 seeking approximately $116 million. After receiving the claim, Oxford requested documents and other information it said were necessary to investigate the claim.

The insured declined to provide the requested materials, arguing that the requests exceeded what the policies required.

Oxford moved to dismiss the lawsuit, arguing that the policies required the insured to provide requested information as part of the claims process before bringing suit.

The court agreed in part. The policies required the insured to submit claim forms, documentation of loss, and "all other information requested" by the insurer before filing suit. The court concluded that this language allowed Oxford to request information reasonably needed to investigate the claim. Because Watts Guerra did not respond to the insurer's requests, the court held that the insured had not satisfied a condition precedent to filing a breach of contract claim and dismissed that claim without prejudice.

However, the court allowed the insured's bad faith claims to proceed. The decision noted that under North Carolina law, an insurer may face liability for bad faith claims handling even if a breach of contract claim is not established. The allegations that Oxford intentionally delayed the claims process in order to improve the financial position of its parent company during a potential acquisition were sufficient at the pleading stage to support the bad faith claims.

The court also rejected the insurer's argument that its status as a captive insurer shielded it from claims under North Carolina's Unfair and Deceptive Trade Practices Act. While captive insurers are exempt from certain provisions of the state's insurance-specific unfair trade practices statute, the court held that the broader consumer protection law can still apply to allegedly unfair claims-handling conduct.

As a result, the court denied the insurer's motion to dismiss the bad faith and unfair trade practices claims, as well as portions of the insured's request for declaratory relief. The case will now proceed on those claims.