Great American Ins. Co. v. Gross
| Decision Date | 30 October 2006 |
| Docket Number | No. 05-2069.,05-2069. |
| Citation | 468 F.3d 199 |
| Parties | GREAT AMERICAN INSURANCE COMPANY, Plaintiff-Appellant, v. Alfred W. GROSS, Commissioner of Insurance, Bureau of Insurance, State Corporation Commission of the Commonwealth of Virginia, as Deputy Receiver of The Reciprocal Group and Reciprocal of America, in Receivership; Paula A. Flowers, Commissioner of Commerce and Insurance for the State of Tennessee, as Liquidator for Doctors Insurance Reciprocal, American National Lawyers Insurance Reciprocal and the Reciprocal Alliance; Kenneth R. Patterson; Carolyn B. Hudgins; John William "B" Crews; Judith A. Kelley; Richard W.E. "Dick" Bland; Ronald K. Davis, M.D.; Gordon D. McLean; Thomas K. Smith; Gerald R. Wages; William T. Sugg; John N. Bethay, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Fourth Circuit |
ARGUED: Peter Francis Lovato, III, Boundas, Skarzynski, Walsh & Black, L.L.C., Chicago, Illinois, for Appellant. J. Jonathan Schraub, Sands, Anderson, Marks & Miller, McLean, Virginia, for Appellees. ON BRIEF: Ellen D. Jenkins, Boundas, Skarzynski, Walsh & Black, L.L.C., Chicago, Illinois; James Skarzynski, Cecilia W. Kaiser, Boundas, Skarzynski, Walsh & Black, L.L.C., New York, New York; John M. Claytor, Elizabeth E.S. Skilling, Harman, Claytor, Corrigan & Wellman, Richmond, Virginia, for Appellant. Danny M. Howell, Paige A. Levy, Timothy K. Halloran, Sands, Anderson, Marks & Miller, McLean, Virginia, for Appellees John William "B" Crews, Judith A. Kelley, and Gordon D. McLean; Patrick H. Cantilo, Pierre J. Riou, Susan E. Salch, Cantilo & Bennett, L.L.P., Austin, Texas, John Conrad, JoAnne L. Nolte, The Conrad Firm, P.C., Richmond, Virginia, for Appellee Alfred W. Gross, Commissioner of Insurance, Bureau of Insurance, State Corporation Commission of the Commonwealth of Virginia, as Deputy Receiver of the Reciprocal Group and Reciprocal of America, in Receivership; Charles F. Witthoefft, Michael P. Falzone, Hirschler Fleischer, P.C., Richmond, Virginia, for Appellees Kenneth R. Patterson and Carolyn B. Hudgins; Robert M. Tyler, Christine D. Mehfoud, McGuirewoods, L.L.P., Richmond, Virginia, Robert F. Northcutt, Capell & Howard, P.C., Montgomery, Alabama, for Appellee John N. Bethay; Russell H. Roberts, Fredericksburg, Virginia, for Appellee Richard W.E. "Dick" Bland; Curtis G. Manchester, Reed Smith, L.L.P., Richmond, Virginia, William H. Farmer J.W. Luna, Farmer & Luna, P.L.L.C., Nashville, Tennessee, for Appellee Paula A. Flowers, Commissioner of Commerce and Insurance for the State of Tennessee, as Liquidator for Doctors Insurance Reciprocal, American National Lawyers Insurance Reciprocal and THE Reciprocal Alliance; Dana J. Finberg, Leclair Ryan, P.C., Richmond, Virginia, for Appellee Thomas K. Smith; David N. Anthony, Mark C. Shuford, Kaufman & Canoles, P.C., Richmond, Virginia, G. Brian Jackson, Robert L. Trentham, Taylor B. Mayes, Miller & Martin, P.L.L.C., Nashville, Tennessee, for Appellee William T. Sugg; Frank N. Cowan, Deborah S. O'Toole, Cowan & Jowen, P.C., Richmond, Virginia, for Appellee Ronald K. Davis; David M. Harris, Ryan J. Gavin, Andrew Margrabe, Greensfelder, Hemker & Gale, P.C., St. Louis, Missouri, Bruce M. Marshall, Durrettebradshaw, P.L.C., Richmond, Virginia, for Appellee Gerald R. Wages.
Before WILLIAMS, Circuit Judge, HAMILTON, Senior Circuit Judge, and RICHARD L. VOORHEES, United States District Judge for the Western District of North Carolina, sitting by designation.
Vacated and remanded by published opinion. Senior Judge HAMILTON wrote the opinion, in which Judge WILLIAMS and Judge VOORHEES joined.
Before its financial collapse in 2003, Reciprocal of America (ROA) was a reciprocal insurer and reinsurer of a variety of insurance risks. The Reciprocal Group (TRG), which suffered a similar collapse in 2003, served as the management company and attorney-in-fact for ROA. In January 2000, Great American Insurance Company (Great American) issued ROA and TRG a $10,000,000 directors' and officers' liability policy (The Policy) and, in May 2001, granted a request to increase the limit of liability (the Increased Limit) to $20,000,000. The collapse of both ROA and TRG spawned a series of civil lawsuits in Alabama state court and numerous federal district courts, as well as criminal proceedings against two officers of ROA and TRG in the United States District Court for the Eastern District of Virginia. Following the guilty pleas in the criminal proceedings, Great American brought this action in the United States District Court for the Eastern District of Virginia against, inter alia, numerous officers and directors of ROA and TRG, seeking rescission of the Policy and the Increased Limit, recovery of certain defense costs advanced in the pending civil litigation, and a variety of declarations. Relying on its concern that allowing Great American's case to proceed would result in unnecessary entanglement with the civil actions in state and federal court, the district court abstained from entertaining Great American's suit and dismissed the case without prejudice. Great American appeals, and we now vacate the district court's judgment and remand for further proceedings.
As reciprocal insurers and reinsurers transacting or licensed to transact business in Virginia, ROA and TRG were subject to regulation by Virginia law.1 ROA initially provided reinsurance only to hospitals, but later began to reinsure physicians and lawyers and to provide reinsurance coverage for various other lines of business.
Reciprocal insurance results from the mutual exchange of insurance contracts among "persons" in an unincorporated association under a common name through an attorney-in-fact having authority to obligate each subscriber both as insured and insurer. Va.Code Ann. § 38.2-1201(A). As a reciprocal insurer, ROA operated through its attorney-in-fact, TRG. Attorneys-in-fact act on behalf of reciprocal insurance companies to perform management duties. Thus, TRG had the authority to obligate ROA's subscribers on reciprocal insurance contracts and to act for and bind each and every ROA subscriber in all transactions relating to, or arising out of, the operations of ROA. Id. § 38.2-1201(B).Under Virginia law, ROA was required to submit annual financial statements prepared in accordance with statutory accounting practices. Id. § 38.2-1300(A). The purpose of this requirement was to ensure that ROA maintained a sufficient financial cushion to enable it to pay claims through difficult financial times. This cushion was required to be maintained through statutory surplus capital requirements.
In late 1999, ROA/TRG submitted to Great American a request for renewal of their directors' and officers' liability insurance policy. As part of the underwriting process, Great American undertook a comprehensive review of ROA and TRG. Specifically, in connection with the underwriting of the Policy, Great American received and reviewed a copy of the proposal form (Policy Proposal Form) that was signed by the president and CEO of both ROA and TRG, Kenneth Patterson, on or about January 4, 2000, and submitted to Great American in connection with ROA's and TRG's procurement of the Policy.
Attached to the Policy Proposal Form were, among other things, the audited financial statements of ROA and TRG for the most recent three years and their most recent interim financial statements. The Policy Proposal Form stated that these financial statements were made a part of the proposal. The Policy Proposal Form also represented that the statements made therein were true and correct and that reasonable efforts had been made to obtain sufficient information from each and every director or officer to facilitate the proper and accurate completion of the Policy Proposal Form.
Based on its review of the completed Policy Proposal Form and financial statements, Great American issued the Policy in early 2000 to ROA and TRG for the period of December 1, 1999 to December 1, 2002. By endorsement, the Policy period was extended to December 31, 2003 for wrongful acts committed before December 31, 2002. The Policy as originally issued had an aggregate limit of liability of $10,000,000. According to Great American, it issued the Policy in reliance upon, among other things, the accuracy and integrity of the Policy Proposal Form and the financial statements signed by ROA's and TRG's directors and officers and filed with the Virginia Commissioner of Insurance.
Before agreeing to the Increased Limit in May 2001, Great American required ROA and TRG to answer the following question appearing on a proposal form (the Increased Limit Proposal Form):
Is the undersigned or any Director or Officer proposed for the increased Limit of Liability aware of any fact, circumstance or situation involving the Company or its Subsidiaries or the Directors or Officers of the Company or its Subsidiaries which he has reason to believe might result in any future Claim which would fall within the scope of the Increased Limit of Liability? If "Yes," provide details.
(J.A. 118-19). Patterson, who signed the Increased Limit Proposal Form in mid to late April 2001, responded "No" to this question. (J.A. 118).
The Increased Limit Proposal Form Patterson signed includes the following statement:
The undersigned . . . declare that to the best of their knowledge the statements set forth herein are true and correct and that reasonable efforts have been made to obtain sufficient information from each and every Director or Officer proposed for this Endorsement for the increase in coverage to facilitate the proper and accurate completion of this Proposal Form. The undersigned further agrees that if any significant adverse change in the condition of the applicant is discovered between the date of this Proposal Form and the effective date of the Endorsement for the increase in coverage, which...
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