Watts Guerra built a $120 million captive to insure its own lawsuits, then hired Susman Godfrey to sue it when a $116 million claim stalled — and the North Carolina Business Court let the bad-faith count survive even after dismissing the contract count.
On March 3, 2026, the North Carolina Business Court told Watts Guerra LLC that its bad-faith case against its own insurance company could go to trial. "Even when an insurer does not breach the insurance contract because it ultimately indemnifies its insured," Judge Adam Conrad wrote, "it can be liable in tort for engaging in bad faith during the claims handling process." The line reads like boilerplate. It is not. The insured suing for bad faith was a plaintiffs' firm. The carrier it was suing was a captive the firm had stood up to insure its own lawsuits. And the lawyer running the offense was Bill Carmody of Susman Godfrey.
Read that sequence again. A plaintiffs' firm bought insurance on the value of its own contingency cases. When the carrier slow-walked the payout, the firm did the one thing plaintiffs' firms are built to do. It sued the carrier for bad faith. The hunter became the policyholder, then went back to being the hunter, with itself cast as the wronged party. There is no cleaner role-reversal in the 2026 docket.
The structure came first. Watts Guerra, the San Antonio firm that built its name on mass-tort and pharmaceutical recoveries, set up a captive arrangement through Series 1 of Oxford Insurance Company NC LLC, a North Carolina series captive. The firm paid roughly $7 million in premium for twelve $10 million policies. Layered together, that is $120 million of coverage written against the firm's own litigation portfolio, a book the firm valued at more than $340 million. The policies were meant to backstop the firm if its expected recoveries fell short. Insurance on lawsuits. Bought by the people filing them.
Then a claim came due. Watts Guerra presented a $116 million loss against the captive. And the captive, the entity the firm had funded and structured to pay exactly this kind of event, did not pay. It asked questions. It requested documents. It let the calendar run. Whatever the captive thought it was doing, Watts Guerra read it as a stall, and a stall on $116 million is not a paperwork dispute. It is a fight.
For most insureds, that fight starts and ends with breach of contract. Watts Guerra is not most insureds. The firm brought in Susman Godfrey, the trial shop that has spent decades teaching corporate defendants what a real plaintiffs' offense looks like. Bill Carmody, with Shawn Rabin and Samir Doshi on the brief, did not file a tidy coverage suit. They filed breach of contract, statutory unfair-and-deceptive-trade-practices claims under North Carolina's UDTPA, and common-law bad faith. They built the complaint the way they would build it for any client suing a carrier. The fact that the carrier was their client's own captive did not soften a single count.
The captive moved to dismiss, and here the case turns. On the contract count, the court agreed with the carrier and dismissed it. A plaintiffs' firm that engineered its own coverage structure could not, on these pleadings, show the policy had been breached. That should have been the carrier's day. It was not.
Join 1,847 litigation leaders who get weekly intelligence on strategy, technology, and the data that matters.
Because Judge Conrad refused to let the contract ruling carry the rest of the case with it. The court held that the bad-faith and UDTPA claims survive on their own legs, independent of whether the contract was ever breached. The reasoning is the spine of the opinion. Bad faith in North Carolina is a tort about conduct during claims handling, not a verdict on whether the check eventually clears. A carrier that drags out a meritorious claim, that manufactures pretext, that treats a real loss as a negotiating posture, can be liable for that conduct even if it pays in the end. The contract count asks whether the carrier owed the money. The tort count asks how the carrier behaved while deciding. Those are different questions, and dismissing the first does not answer the second.
That holding is what makes the case dangerous, and not just to one captive in North Carolina. The conventional defense playbook treats a coverage dispute as a closed system. Win the contract argument and the extracontractual exposure collapses with it. The Business Court just severed that link in writing. The carrier can be right about the policy and still stand trial for bad faith. Pay the claim and still owe damages for the stall. For an industry that has spent years arguing that good-faith disputes over coverage cannot become tort cases, that is the holding nobody wanted to read in a published opinion.
And it is published, by the court that other commercial dockets watch. The North Carolina Business Court is a designated forum for complex business litigation, and its opinions travel. In the thirteen weeks since the March ruling, the reasoning has not stayed put. Policyholder-side firms have started citing it for the proposition that a dismissed breach count does not dispose of a bad-faith count, and they are citing it against carriers who assumed the two rose and fell together. This is no longer a curiosity from one captive fight. It is precedent that has begun to replicate, and it cuts in the direction of more extracontractual trials, not fewer.
Sit with the irony, because it is the whole story. The captive insurance structure exists, in part, so sophisticated parties can control their own risk and avoid exactly this kind of adversarial coverage war. Watts Guerra built one. The firm picked the carrier because the firm was the carrier, in substance. And when the claim came, the structure did not buy peace. It bought a lawsuit, brought by Susman Godfrey, on the same theories plaintiffs' firms use against State Farm and Allstate. The firm that monetizes other people's litigation is now monetizing its own coverage dispute, against a carrier it created.
The trial, if it gets there, will be a strange one. A plaintiffs' firm will sit at the plaintiff's table and argue that an insurer acted in bad faith. The captive will argue it asked reasonable questions about a $116 million demand. A jury will be asked to decide whether a firm built on suing insurers was itself the victim of one. Carmody has spent a career making that argument for other clients. Now the client is the firm down the hall.
A breach win is not a bad-faith win. The two claims do not have to die together. One opinion, one captive, one plaintiffs' firm holding the policy. The wall between contract and tort just took a crack. And cracks spread.
The Executive Briefing takes 2 minutes and shows you exactly where the gaps are.
Take the Executive Briefing →Join 1,847 litigation leaders who get weekly intelligence on strategy, technology, and the data that matters.