Nationwide Ins. Co. v. Patterson, 820908

• Decision Date: 14 June 1985
• Docket Number: No. 820908,820908
• Citation: 331 S.E.2d 490,229 Va. 627
• Parties: NATIONWIDE INSURANCE COMPANY, et al. v. Edward N. PATTERSON, D/B/A, etc. Record
• Court: Virginia Supreme Court

Page 490

331 S.E.2d 490

229 Va. 627

NATIONWIDE INSURANCE COMPANY, et al. v. Edward N. PATTERSON, D/B/A, etc.

Record No. 820908.

Supreme Court of Virginia.

June 14, 1985.

John D. Eure, Roanoke, (Ronald M. Ayers, Woods, Rogers, Muse, Walker & Thornton, Roanoke, on briefs), for appellants.

W. Wayne Heslep, Lexington, (Ganas & Natkin, Lexington, on brief), for appellee.

Present: All the Justices.

THOMAS, Justice.

This dispute centers on an insurance agent's representations concerning the meaning of certain language in an insurance policy. Based on those representations, the customer purchased the policy. The agent's representations were incorrect. The customer sued the insurance company and the agent, alleging constructive fraud. The trial court ruled in favor of the customer. The insurer and its agent appealed.

The facts are these: In 1976, Edward Patterson, doing business as Patterson Equipment Company, secured a group life and health insurance policy from Nationwide Insurance Company through Nationwide's local representative and agent, E. Bolivar Huffman. That policy remained in effect through late 1979. In October 1979, Nationwide made changes in the policy. It sent documents, to Huffman, reflecting these changes. Huffman was directed to deliver the documents to Patterson.

Huffman visited Patterson's business. He explained the changes. He advised Patterson that Patterson could either accept the changes or secure insurance elsewhere. In his conversation, Huffman discussed the so-called "stop loss" payment feature of the new policy. He told Patterson that pursuant to the stop loss feature, once Patterson had paid $1,000 in major medical expenses, the policy would pay all additional expenses. This representation by Huffman was in error. In fact, the policy did not say it would pay all additional expenses but that it would pay "100% of all eligible expenses." (Emphasis added.)

Based on Huffman's representations, Patterson accepted the new policy, which meant an increase in premium payments for Patterson. In the summer of 1980, Patterson became ill; he was hospitalized; and his bills exceeded $1,000. Nationwide refused to pay all expenses in excess of $1,000. Patterson sued Nationwide and Huffman on theories of fraud and breach of contract.

The trial court, sitting without a jury, ruled that Patterson proved a case of constructive fraud and was therefore entitled to recover the amounts claimed. The trial court did not rule on the contract claim.

On appeal, Nationwide and Huffman raise three issues. First, they contend Patterson did not prove all the elements of constructive fraud. Second, they contend Patterson failed to prove his claim of breach of contract. Third, Nationwide argues that, as an innocent principal, it cannot be liable for Huffman's misrepresentation. In the view we take of the case, we need not consider the contract issue. We will confine our review to the constructive fraud and agency issues.

In order to establish constructive fraud one must prove the following by clear, cogent, and convincing evidence: that there was a material false representation, that the hearer believed it to be true, that it was meant to be acted on, that it was acted on, and that damage was sustained. See Jefferson Stand. Ins. Co. v. Hedrick, 181 Va. 824, 833-34, 27 S.E.2d 198, 202 (1943); Mears v. Accomac Banking Co., 160 Va. 311, 321, 168 S.E. 740, 743 (1933); Cerriglio v. Pettit, 113 Va. 533, 544, 75 S.E. 303, 308 (1912).

Nationwide argues that Patterson failed to establish reliance. It cites testimony from Patterson on cross-examination where he was asked what he would have done had he known the true facts before he accepted the changed policy. Patterson said he did not know what his decision might have been under those circumstances. Nationwide argues that this statement shows that Patterson did not rely on Huffman's misrepresentation. Nationwide's argument displays a misunderstanding of the proper test for reliance. The question is not whether Patterson might have acted otherwise had he known the truth. The question is whether Patterson, in fact, relied on Huffman's misrepresentation. The evidence plainly shows that Patterson relied on Huffman's misrepresentation in accepting the revised policy. On direct examination, Patterson testified as follows: "I was particularly concerned with the fact that after we paid a thousand dollars out of pocket then the rest of our expenses would be covered one hundred percent by Nationwide and that was the main reason that we went along with the major medical part of the policy."

Nationwide next argues that prior to the 1979 policy change instituted by Nationwide, Huffman suggested that Patterson increase his hospital room and board coverage from $40 per day to $100 per day. Patterson rejected this idea because he thought the cost was too high. Nationwide argues that had Patterson purchased the additional coverage suggested by Huffman, most of the hospital costs here in dispute would have been covered. Thus, argues Nationwide, Patterson's own decision, not any misconduct by Nationwide or Huffman, was the direct cause of his loss. This argument is without merit. This was a factual dispute that was resolved against Nationwide and Huffman. Upon our review of the record, it is clear that the evidence was sufficient to support the court's conclusion.

Nationwide also argues that Patterson cannot recover because he had available the means of acquiring the correct information about the meaning of the policy. There are several responses to this contention. First, the cases relied on by Nationwide in making this argument are inapposite. Gen. Appl. Co. v. RF & P, 221 Va. 176, 267 S.E.2d 161 (1980), concerned the termination of a commercial lease and turned on principles of estoppel. Coleman v. Nationwide Life Ins. Co., 211 Va. 579, 179 S.E.2d 466 (1971), concerned whether an insurance company was estopped from asserting the lapse of a policy. Gallimore, Inc. v. Home Indemnity Co., 432 F.Supp. 434 (W.D.Va.1977), was a suit based on a contractor's bond; it also concerned estoppel. Second, the written information supplied to Patterson by Huffman stated that if Patterson had any questions he was to contact...