Midlothian Enters., Inc. v. Owners Ins. Co.

• Decision Date: 20 February 2020
• Docket Number: Civil Action No. 3:19-cv-51
• Citation: 439 F.Supp.3d 737
• Parties: MIDLOTHIAN ENTERPRISES, INC., Plaintiff, v. OWNERS INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

439 F.Supp.3d 737

MIDLOTHIAN ENTERPRISES, INC., Plaintiff,

v.OWNERS INSURANCE COMPANY, Defendant.

Civil Action No. 3:19-cv-51

United States District Court, E.D. Virginia, Richmond Division.

Signed February 20, 2020

John Anthony Conrad, The Conrad Firm, Richmond, VA, for Plaintiff.

Stanley Paul Wellman, Thomas Simpson Garrett, Laura Lee Miller, Harman Claytor Corrigan & Wellman, Richmond, VA, for Defendant.

OPINION

John A. Gibney, Jr., United States District Judge

In October, 2018, JoAnne Davis, an employee of Midlothian Enterprises, Inc. ("Midlothian"), received an email from the Midlothian president and shareholder, E. Bryce Powell, asking her to wire thousands of dollars from Midlothian's bank account to a bank account in Alabama. After she wired the funds, Midlothian discovered that hackers, not Powell, had sent Davis the email and had stolen the money. Midlothian submitted a claim to Owners Insurance Company ("Owners"), asking Owners to cover the loss under its insurance policy ("the policy"). Owners denied coverage.

Midlothian sued Owners in the Henrico County Circuit Court, arguing that Owners must cover the loss under two endorsements in the policy. Midlothian also alleged that Owners acted in bad faith in denying coverage. Owners removed the case to this Court. The parties have both moved for summary judgment. Because neither endorsement covers the loss and Owners did not act in bad faith, the Court will grant Owners' motion for summary judgment and will deny Midlothian's motion for summary judgment.

I. BACKGROUND

A. Policy Endorsements

Midlothian purchased an insurance policy from Owners effective May 1, 2018, through May 1, 2019. The standard policy does not cover "[a]ccounts, bills, currency, food stamps[,] or other evidences of debt, money, notes[,] or securities." (Dk. No. 9-4, at 20.) Midlothian, however, purchased endorsements to supplement the standard policy, two of which are at issue here.

First, the "money and securities endorsement" provides,

A. COVERAGE is amended as follows:

1. Under 2. Property Not Covered , a. is deleted and replaced by the following for this endorsement only:

b. Accounts, bills, currency, food stamps[,] or other evidences of debt, money, notes[,] or securities. Lottery tickets held for sale are not securities.

However, "money" and "securities" are covered as provided by this endorsement.

2. Under 4. Additional Coverages , the following Additional Coverage is added:

Money And Securities

a. Inside The Premises

(1) We will pay for loss of "money" and "securities" inside the "premises" or a "banking premises" resulting directly from:

(a) "Theft"; or

(b) Disappearance or destruction.

(Id. at 14.) The money and securities endorsement includes a "voluntary parting exclusion," which provides:

2. We will not pay for loss caused by any of the following:...

... n. Voluntary Parting Of Title To Or Possession Of Property: Loss resulting from your, or anyone acting on your express or implied authority, being induced by any dishonest act to voluntarily part with title to or possession of any property.

(Id. at 15.)

Second, the "forgery or alteration endorsement" provides,

A. COVERAGE

We will pay for loss involving Covered Instruments resulting directly from Covered Causes of Loss.

1. Covered Instruments: Checks, drafts, promissory notes, or similar written promises, orders[,] or directions to pay a sum certain in "money" that are:

a. Made or drawn by or drawn upon you;

b. Made or drawn by one acting as your agent; or that are purported to have been so made or drawn.

2. Covered Cause of Loss: Forgery or alteration of, on[,] or in any Covered Instrument.

(Id. at 8.)

B. The Fraud

On October 5, 2018, hackers sent an email to Davis from Powell's email account, directing her to wire money to a specified bank account to purchase a subscription and a membership interest in Fanalter LLC ("the LLC subscription"). As part of her job, Davis would wire money from Midlothian's bank account to other bank accounts when Powell asked her to do so. Thus, believing that Powell had sent the email, Davis wired $42,302.46 to a bank account in Alabama ("the loss"). After Davis wired the money, Midlothian discovered that hackers, not Powell, had sent the fraudulent email to Davis and had stolen the money she wired.¹

On October 11, 2018, Midlothian submitted a claim for the loss under the policy. On October 18, 2018, Owners denied overage for the loss based on the voluntary parting exclusion in the money and securities endorsement. Midlothian then asked Owners to cover the loss under the forgery or alteration endorsement. Owners, however, declined to do so.

On December 27, 2018, Midlothian filed this case in the Henrico County Circuit Court, seeking a declaratory judgment pursuant to Virginia Code § 8.01.184 that the policy covered the loss, and alleging that Owners acted in bad faith by not expressly considering coverage under the forgery or alteration endorsement in violation of Virginia Code § 38.2-209. Owners removed the case to this Court. The parties have both moved for summary judgment, asking the Court to decide whether the policy covers the loss and whether Owners acted in bad faith.

II. DISCUSSION ²

A. Applicable Law

A court applies normal contract interpretation principals when interpreting an insurance policy and must interpret the policy in accordance with "the plain meaning that reasonable insurers and insureds likely would have attributed to the words" of the policy. See Erie Ins. Exch. v. EPC MD 15, LLC , 297 Va. 21, 27-28, 822 S.E.2d 351, 354-55 (2019). Thus, when deciding a motion for summary judgment, a court must first determine whether the policy is ambiguous or unambiguous. See Harleysville Mut. Ins. Co. v. Dollins , 201 Va. 73, 77, 109 S.E.2d 405, 409 (1959). If the policy is unambiguous, a court must enforce it as written. See State Farm Fire & Cas. Co. v. Walton , 423 S.E.2d 188, 191, 244 Va. 498, 502 (1992) ; see also Hill v. State Farm Mut. Auto. Ins. Co. , 375 S.E.2d 727, 729, 237 Va. 148, 152 (1989). If "the language is ambiguous or doubtful..., it must be interpreted more strongly against the insurer." Harleysville Mut. Ins. Co. , 109 S.E.2d at 409, 201 Va. at 77 ; see also Erie Ins. Exch. , 297 Va. at 29, 822 S.E.2d at 355.

A court "must not strain to find ambiguities." Admiral Ins. Co. v. G4S Youth Servs. , 634 F. Supp. 2d 605, 612 (E.D. Va. 2009). "[C]onflicting interpretations [of an insurance policy] reveal an ambiguity only where they are reasonable." Erie Ins. Exch. , 297 Va. at 29, 822 S.E.2d at 355. The fact that a word has more than one definition or a party can "hypothesize" about another interpretation does not render a policy provision ambiguous. Id. at 29-30, 822 S.E.2d at 355-56. Rather, "[a] reasonable or fairly claimed interpretation is one of two competing interpretations that are equally possible given the text and context of the disputed provision." Id. at 29, 822 S.E.2d at 355 (quotations omitted).

Moreover, a court should "not myopically focus on a word here or a phrase there," but should "look[ ] at a word in the context of a sentence, a sentence in the context of a paragraph, and a paragraph in the context of the entire agreement." Id. at 28, 822 S.E.2d at 355. Relatedly, a court must not treat part of a policy as meaningless if it can give that part "any meaning ... reasonably consistent with other parts of the contract." SunTrust Mortg., Inc. v. AIG United Guar. Corp. , 800 F. Supp. 2d 722, 731 (E.D. Va. 2011). Virginia courts "will not read contracts to produce absurd results." Levine v. Emp'rs Ins. Co. of Wausau , 887 F.3d 623, 632 (4th Cir. 2018) (applying Virginia law). "Common sense is as much a part of contract interpretation as is the dictionary or the arsenal of canons." Mount Aldie, LLC v. Land Tr. of Va., Inc. , 293 Va. 190, 200, 796 S.E.2d 549, 555 (2017).

B. Application

1. Money and Securities Endorsement

Owners concedes that the money and securities endorsement applies to loss of money, but it argues that the voluntary parting exclusion precludes Midlothian from recovering the loss based on the plain language of the exclusion.³ Under the voluntary parting exclusion, Owners does not cover a "[l]oss resulting from [Midlothian's], or anyone acting on [Midlothian's] express or implied authority, being induced by any dishonest act to voluntarily part with title to or possession of any property." (Dk. No. 9-4, at 15.)

The plain language of this exclusion unambiguously includes Midlothian's loss. Davis, acting on behalf of Powell, wired money from Midlothian's bank account to the hackers' bank account. Although Powell did not make the request, that does not change the voluntariness of the transfer itself. See, e.g., Martin, Shudt, Wallace, Dilorenzo & Johnson v. Travelers Indem. Co. of Conn. , No. 1:13-CV-0498 LEK/CFH, 2014 WL 460045, at *3 (N.D.N.Y. Feb. 5, 2014) (collecting cases and concluding that the fact "[t]hat [the] [p]laintiff wired the money in reliance on misrepresentations or false pretenses does not alter the voluntariness of that parting"). Davis had the authority to make these types of transfers based on Midlothian's normal business practices, and she freely transferred the money once she believed she had received instructions to do so. Moreover, the exclusion applies to any voluntary parting "induced by any dishonest act"—a broad category that certainly includes fraud. (Dk. No. 9-4, at 15 (emphasis added).)

Midlothian, however, argues that the Court cannot reasonably read the exclusion to apply to the loss. First, Midlothian tries to create ambiguities in the voluntary parting exclusion by pointing to terms "with more than one meaning or interpretation that conclude in different results in the interpretation of the exclusion." (Dk. No. 10, at 14.) The fact that a word or phrase has more than one dictionary definition, however, does not make a provision ambiguous. See Erie Ins. Exch. , 297 Va. at 29, 822 S.E.2d at 355. Instead, the Court considers the words of the...