A & E SUPPLY CO. v. Nationwide Mut. Fire Ins. Co.

• Decision Date: 15 June 1984
• Docket Number: Civ. A. No. 81-0140-B.
• Citation: 589 F. Supp. 428
• Court: U.S. District Court — Western District of Virginia
• Parties: A & E SUPPLY COMPANY, INC., Plaintiff, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Defendant.

589 F. Supp. 428

A & E SUPPLY COMPANY, INC., Plaintiff, v. NATIONWIDE MUTUAL FIRE INSURANCE COMPANY, Defendant.

Civ. A. No. 81-0140-B.

United States District Court, W.D. Virginia, Big Stone Gap Division.

June 15, 1984.

Eugene K. Street, Thomas R. Scott, Jr., Grundy, Va., for plaintiff.

Howard C. McElroy, Abingdon, Va., for defendant.

MEMORANDUM OPINION

GLEN M. WILLIAMS, District Judge.

The plaintiff, A & E Supply Company, Incorporated (hereinafter "A & E"), brought this action against the defendant, Nationwide Mutual Fire Insurance Company (hereinafter "Nationwide"), in the Circuit Court of Buchanan County, Virginia, alleging that Nationwide breached its insurance agreement by denying the plaintiff's fire loss and that the defendant's actions in handling the claim were malicious and wanton and violated good faith and fair dealing. The defendant petitioned the court for removal of the case pursuant to 28 U.S.C. § 1441(a). A & E is a corporation organized under the laws of the Commonwealth of Virginia with its principal place of business in Buchanan County; Nationwide is incorporated under the laws of the State of Ohio with its principal place of business in Columbus, Ohio. The amount in controversy, excluding interest and costs, exceeds ten thousand dollars ($10,000). Thus, the court has jurisdiction over this suit based upon 28 U.S.C. §§ 1332 and 1441(a).

At a hearing on May 9, 1984, the court denied the plaintiff's motion for partial summary judgment and gave the plaintiff ten (10) days in which to amend its complaint to state, in separate counts, any independent torts originally alleged in the first complaint. Kamlar Corp. v. Haley, 224 Va. 699, 707, 299 S.E.2d 514, 518 (1983). This case now is before the court on the plaintiff's motion to alter or amend the denial of summary judgment pursuant to Rule 59(e) of the Federal Rules of Civil Procedure.

I. FACTS

The relevant facts are undisputed. Nationwide issued a fire insurance policy numbered 53SM 367-494-A005 to the plaintiff on June 6, 1979. Under the policy, the building had $150,000 worth of property coverage, and the personal property had $250,000 worth of coverage. Liability coverage for bodily injury and property damage was $300,000 per occurrence. The listed mortgagee of the realty was Cumberland Bank & Trust Company in Grundy, Virginia. Effective March 7, 1980, the policy was amended so that Borg-Warner Acceptance Corporation, lienholder on the inventory, became a named loss payee. The loss payable clause stated: "Loss, if any, shall be adjusted with the Insured A & E and Borg-Warner Acceptance Corporation, 400 Allen Drive, P.O. Box 6731, Charleston, W. Va. 25302, as their interests may appear." This policy was in effect from April 25, 1979 to May 3, 1981.

On October 27, 1980, a fire totally destroyed the insured's building and its contents. After conducting a detailed investigation, the representatives of Nationwide concluded that the cause of the fire was arson by the two principals of the corporate plaintiff, Larry Fletcher and Terry Fletcher. Under the insurance contract Nationwide could pay the mortgagee and would be subrogated to all the rights of the bank. Consequently, the insurer paid the mortgagee. Another provision of the policy which listed the exclusions from coverage explicitly precluded insurance coverage for any criminal, fraudulent, or dishonest act that the insured or its officers instigated. On March 12, 1981, Nationwide denied liability for the plaintiff's claim because the insurer concluded the officers of A & E set the fire, and A & E began the present action about a month later. Nationwide, in its answer, raised the defenses of arson and misrepresentation as to the cause of the fire and amount and value of the personalty involved in the fire. Then in May, 1981, Nationwide paid the sum of $66,000 to Borg-Warner, the co-loss payee, to settle its claim; Borg-Warner was to assign its security and instruments of indebtedness to Nationwide.

Based upon this payment, the plaintiff filed a motion for partial summary judgment on the defendant's defenses of arson and misrepresentation, alleging that it had waived or was estopped to assert these defenses when it paid the co-loss payee. After both parties submitted memoranda to support their positions and argued the motion, the court denied the motion on the arson defense. Having reconsidered its judgment, the court vacates the previous Order denying the motion and enters partial summary judgment in favor of the plaintiff.

II. DISCUSSION

The issue presented is whether the defenses of arson and misrepresentation may be impliedly waived by paying a co-loss payee under Virginia law. The general rule is: "An insurer which, with knowledge of a breach of condition, pays the full amount of loss to the insured thereby waives the breach of condition or the right to declare a forfeiture." 44 Am.Jur.2d Insurance § 1672 at 663 (1982). The Virginia Supreme Court adopted this rule in the case of Hartford Fire Ins. Co. v. Mutual Savings & Loan Co., 193 Va. 269, 68 S.E.2d 541 (1952). The case involved an automobile insurance policy excluding coverage when the car was encumbered unless the security interest was noted in the policy. The insurance company paid a third party for the loss of the car and later contended it had no knowledge of the bank's lien. The Virginia Supreme Court held that the insurer was charged with knowledge of the lien and receipt of notice of the lien and that the insurance company waived the breach of the condition or its right to declare a forfeiture by paying the full amount to the insured.

Where a right to rely upon a forfeiture has been once waived, it cannot be revived. Monger v. Rockingham Home Mutual Fire Ins. Co., 96 Va. 442, 444, 31 S.E. 609. The general rule is "where an insurer, with knowledge of the breach of a condition, pays the amount of loss ascertained by appraisers into court on an interpleader, or pays or partially pays any loss under the policy, it recognizes the policy as still in existence and must be considered to have waived its defense, unless the policy is severable so that under the law it would be only forfeitable in part and the payment is made on the nonforfeitable portion." 26 C.J. Insurance § 425 at 338; 45 C.J.S. Insurance § 743 at 754.

Id. at 276, 68 S.E.2d at 545. In reaching this conclusion the state court relied upon a Texas case, Fidelity Lloyds of America v. Geddie, 116 Tex. 656, 296 S.W. 500 (1927). The facts revealed that Geddie purchased an insurance policy protecting him against the theft of his car provided it was locked. The car was stolen while unlocked and unattended. Under a loss payable clause the insurer paid the investment company but refused to pay the balance to the insured because he forfeited the right to recover when he left the car unsecured. The Texas Supreme Court concluded that under the singlke, indivisible contract the insurance company waived the forfeiture by paying the investment company. Id. at 658, 296 S.W. at 502, quoted in Hartford Fire Ins. Co. v. Mutual Savings and Loan Co., 193 Va. at 276-77, 68 S.E.2d at 545-46.

Only one generally accepted exception exists to this rule: "The principles of estoppel and implied waiver do not operate to extend coverage of an insurance policy after the liability has been incurred or the loss sustained." Insurance Co. of North America v. Atlantic Nat'l. Ins. Co., 329 F.2d 769, 775 (4th Cir.1964) (citation omitted). In that case Atlantic filed a SR21 form with the Virginia Commissioner of Motor Vehicles stating that its policy was in effect at the time of the accident. Atlantic subsequently denied liability based upon two specific exclusions: Operation of the vehicle outside of New York without written permission and liability only for bodily injury to the passenger. North American contended that Atlantic waived or was estopped to rely on these exclusions because it filed a SR21 form representing that the policy was effective on the day of the accident. The Fourth Circuit Court of Appeals concluded that the Virginia Supreme Court would hold that Atlantic would not be estopped from relying on its policy exclusions despite the filing of the SR21 and the representations in it. Id. at 774. It is well-settled that "the doctrines of implied waiver and of estoppel, based upon the conduct or action of the insurer, are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom, and the application of the doctrines in this respect is therefore to be distinguished from the waiver of, or estoppel to assert, grounds of forfeiture." Id. at 775 (citation omitted). The plaintiff is not...