A & E Supply Co., Inc. v. Nationwide Mut. Fire Ins. Co.

• Decision Date: 15 August 1986
• Docket Number: Nos. 85-1759,s. 85-1759
• Citation: 798 F.2d 669
• Parties: A & E SUPPLY COMPANY, INC., Appellee, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Appellant. A & E SUPPLY COMPANY, INC., Appellant, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Appellee. (L), 85-1780.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 669

798 F.2d 669

A & E SUPPLY COMPANY, INC., Appellee, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Appellant.

A & E SUPPLY COMPANY, INC., Appellant, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Appellee.

Nos. 85-1759(L), 85-1780.

United States Court of Appeals,

Fourth Circuit.

Argued Feb. 6, 1986.

Decided Aug. 15, 1986.

W. Charles Waddell, III and S.D. Roberts Moore (Guy M. Harbert, III, Gentry, Locke, Rakes & Moore, Roanoke, Va., Howard C. McElroy, White, Elliott & Bundy, Abingdon, Va., on brief) for appellant/cross-appellee;

Eugene K. Street (Thomas R. Scott, Jr., Street, Street, Street, Scott & Bowman, Grundy, Va., on brief), for appellee/cross-appellant.

Before ERVIN and WILKINSON, Circuit Judges, and HOUCK, United States District Judge for the District of South Carolina, sitting by designation.

WILKINSON, Circuit Judge:

This case presents a familiar problem in insurance law. The insured sustained a financial loss for which the policy promised indemnification. The insurer denied coverage, contending without factual support that the insured was responsible for the catastrophe. In the subsequent lawsuit, the insured recovered the proceeds due and also received punitive damages, which it had sought on the theory that the insurer's breach constituted several independent, wilful torts. The insurer now appeals from this punitive, noncontractual award. We find that the insured did not prove the alleged fraud or the alleged conversion and that Virginia law would not recognize either the tort of bad faith refusal to honor a first-party insurance obligation or an implied private right of action under the state's unfair insurance practices statute. We therefore reverse that portion of the judgment awarding punitive damages.

I.

In the late evening of October 27 and the early morning of October 28, 1980, a fire completely destroyed the building of the A & E Supply Company, a mining equipment business in Buchanan County, Virginia. Owned and operated by brothers Larry Fletcher and Terry Lee Fletcher, A & E had purchased from the Nationwide Mutual Fire Insurance Company a policy that provided $150,000 in protection for the building and $250,000 in protection for its contents. A & E immediately notified Nationwide of the loss and gave to Nationwide what invoices, receipts, and tax returns had survived the fire. Nationwide examined these documents and investigated the events of October 27-28. On March 12, 1981, Nationwide unreasonably refused to pay A & E, charging that the Fletchers had intentionally set the fire.

Nationwide did not relay its unfounded suspicions to law enforcement authorities for proper investigation, an admitted violation of the Arson Reporting Immunity Act. Va. Code Sec. 27-85.3 et seq. Nationwide did, however, tell the creditors of A & E that the Fletchers had burned the building to collect on their insurance policy. These allegations severely limited the Fletchers' access to credit while Nationwide's cancellation of all A & E policies limited the Fletchers' access to insurance and Nationwide's refusal to return the A & E documents limited the Fletchers' access to information. Together the actions prevented resuscitation of the mine supply business and pressured the Fletchers to settle the A & E insurance claim quickly and unfavorably.

Instead, A & E sued Nationwide for breach of the insurance contract, conversion of the business records, acquisition of the records by false pretenses, fraud, slander, trespass, intentional infliction of emotional distress, bad faith dishonor of a first-party insurance obligation, and violation of the Virginia Unfair Insurance Practices Act, Va.Code Sec. 38.1-49 et seq. ¹ Because Nationwide had in May 1981 remitted $66,000 on the policy to the co-insured Borg-Warner Acceptance Corporation, the district court held that Nationwide had waived its arson defense, and the court accordingly granted a partial summary judgment of liability on the contract claim. A & E Supply Co. v. Nationwide Mutual Fire Insurance Co., 589 F.Supp. 428 (W.D.Va.1984). Nationwide does not appeal from this ruling. Also before trial, the district court dismissed as improperly pleaded the A & E claims of slander, trespass, and intentional infliction of emotional distress. A & E does not appeal from those rulings.

From May 30, 1984 to June 12, 1984, a jury in the Western District of Virginia heard testimony and arguments about the compensatory damages due on the policy and about the punitive damages sought on the basis of Nationwide's conduct. The jury returned a directed verdict for $32,069.79 in coverage on the stipulated value of the building and returned a verdict for $188,966.09 in coverage on the contested value of the inventory. The jury also found in special verdicts that Nationwide had converted the business records of A & E, had obtained these records by false pretenses, had committed fraud, had acted in bad faith, and had engaged in unfair trade practices. Finding further that Nationwide had been malicious, the jury granted the request of A & E for $500,000 in punitive damages. ²

Nationwide moved on all counts for a new trial or for judgment notwithstanding the verdict. The district court conditionally granted a new trial on the count pertaining to the state unfair trade practices act and granted judgment notwithstanding the verdict on the count alleging fraud. The court denied all of Nationwide's other motions. A & E Supply Co. v. Nationwide Mutual Fire Insurance Co., 612 F.Supp. 760 (W.D. Va. 1985). ³ Nationwide now concedes the judgment for compensatory damages, costs, and interest. It appeals from the judgment for punitive damages.

II.

Damages for breach of contract in Virginia normally "are limited to the pecuniary loss sustained." Kamlar Corporation v. Haley, 224 Va. 699, 299 S.E.2d 514, 517 (1983), quoting Wright v. Everett, 197 Va. 608, 90 S.E.2d 855, 860 (1956). The measure of damages is related to the exchange of risk and obligation in the agreement itself. The duty of each party toward the other is what that party has promised and covenanted. In a sense, each party has contracted for some outer limit to its liability.

It would skew the predictability necessary for stable contractual relations if a breaching party were suddenly subject to the more open and unanticipated duties and damages imposed by the law of tort. Most courts, and certainly Virginia courts, have thus not recognized an exception to the general rule of damages, even when the breaching party acts with an alleged malicious motive. The circumstances surrounding the dissolution of contractual relations are so frequently beset by strain and suspicion that perceptions of improper motive on the part of an opposing party are commonplace. Breach of contract would thus routinely give rise to an action in tort, with its attendant incentive of a punitive award. The Virginia Supreme Court has noted that "the overwhelming weight of authority continues to resist this tendency." Kamlar Corp. v. Haley, 299 S.E.2d at 517.

The general rule of contractual damages in Virginia admits but one exception. Only if the breach establishes the elements of "an independent, wilful tort," may it support an award of punitive damages. Id. In this case, the societal interest in the deterrence and punishment of wrongdoing may be implicated apart from any breach of contract. Viewed from this perspective, an "independent tort" is one that is factually bound to the contractual breach but whose legal elements are distinct from it.

A & E Supply has sought in this litigation to establish "an independent, wilful tort" on the part of Nationwide and to place itself within the exception. It argues that the jury and the district court correctly identified two such independent wilful torts--conversion and bad faith refusal to pay a first-party insurance claim--and contends that the district court erred in overturning the jury on two others--fraud and violation of the Virginia Unfair Insurance Practices Act. While we sympathize with the plight of plaintiff and agree with the district court that the conduct of Nationwide Mutual Fire Insurance Company was discreditable, we cannot find in the above litany of torts one that both applies to the circumstances of this case and that Virginia law would recognize as an independent basis for the award of punitive damages.

III.

A & E first seeks to uphold the award of punitive damages through proof of the familiar independent, wilful torts of fraud and conversion. Virginia law defines actual fraud as the knowing misrepresentation of a material fact to another person, whose reasonable reliance on the misrepresentation results in damage. Packard Norfolk, Inc. v. Miller, 198 Va. 557, 95 S.E.2d 207, 210 (1956). "The general rule is that fraud must relate to a present or a pre-existing fact, and cannot ordinarily be predicated on unfulfilled promises or statements as to future events." Soble v. Herman, 175 Va. 489, 9 S.E.2d 459, 464 (1940). A plaintiff may recover for actual fraud by showing reasonable reliance on a promise made by a defendant who had no intention of performing, Colonial Ford Truck Sales, Inc. v. Schneider, 228 Va. 671, 325 S.E.2d 91 (1985), but the plaintiff must prove all of the elements of fraud by clear and convincing evidence, Martin v. Williams, 194 Va. 437, 73 S.E.2d 355, 359 (1952).

That evidence is absent here. A & E argues that Nationwide's agent made fraudulent misrepresentations immediately after the fire to Larry Fletcher that "I think we can help you" and that Nationwide might "possibly" pay quickly on the claim. A & E also says that it entrusted its records to Nationwide in the belief that "as quick as they can get these records established, that they would have a settlement, or a partial settlement for us to where we could get back in business quickly." But such tentative statements to Larry Fletcher, made soon after the fire had ended and the investigation had...