Potesta v. US Fidelity & Guaranty Co.

Decision Date15 May 1998
Docket NumberNo. 24441.,24441.
Citation504 S.E.2d 135,202 W.Va. 308
CourtWest Virginia Supreme Court
PartiesKaren L. POTESTA, Cynthia P. Keane, dba C & K Associates, a General Partnership; and Bossio Enterprises, Incorporated, a Corporation, Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY COMPANY, a Corporation, Defendant. Karen L. POTESTA, Cynthia P. Keane, dba C & K Associates, a General Partnership; and Bossio Enterprises, Incorporated, a Corporation, Plaintiffs, v. UNITED STATES FIDELITY & GUARANTY COMPANY, a Corporation, Defendant.

Avrum Levicoff, Joseph E. Starkey, Jr., Brown & Levicoff, L.C., Pittsburgh, PA, for Plaintiffs.

John E. Busch, Peter G. Zurbuch, Busch & Talbott, L.C., Elkins, for Defendant. DAVIS, Chief Justice:

The United States Court of Appeals for the Fourth Circuit presents us with two certified questions involving the application of the doctrines of waiver and estoppel when an insurer has initially stated one reason for denying coverage to its insured and, in subsequent litigation, has attempted to assert another, previously unarticulated reason for denying coverage. We conclude that, in order to establish that an insurer has impliedly waived its right to assert a previously unarticulated reason for denying coverage, the insured must show that the insurer intentionally relinquished a known right. Alternately, in order to apply the doctrine of estoppel, the insured must prove that s/he relied to her/his detriment on the initially stated ground for denial. We further hold that the doctrine of waiver may not be applied to extend insurance coverage beyond that contracted for by the parties; however, under the appropriate circumstance, the doctrine of estoppel may be so applied.

I.

FACTUAL AND PROCEDURAL HISTORY

The essential facts underlying this case are undisputed. C & K Associates owned a commercial building in Morgantown, West Virginia, which it leased to Bossio Enterprises, Inc. On April 15, 1993, Bossio subleased this building to Finial, Inc., and Robert Lloyd Vecchio, the owner and president of Finial. Included within the terms of the sublease were an indemnity clause, holding Finial liable for any losses occasioned by Finial's use and occupation of the building, and a requirement that Finial obtain and maintain liability insurance on the property. In compliance with the sublease's insurance requirement, Finial obtained a businessowners insurance policy from USF & G, providing coverage from May 19, 1993, to May 19, 1994.1

In early May, 1993, allegedly before coverage under the USF & G policy had gone into effect, Finial undertook extensive renovations of the building to make it better suited to its business purposes. These renovations included power washing the exterior of the building, for which Finial contracted with Jackson's Wash-On-Wheels on May 5, 1993. It appears that the exterior cleaning was completed around May 8, 1993. Presumably as a result of both the renovations and the exterior power washing, severe and irreparable damage occurred to the building's brick facade and its basic structural soundness, including weakening, deterioration, cracking, and movement of the exterior walls, destruction of mortar joints, and varying degrees of water damage. Consequently, C & K had the building demolished on May 24, 1993.

On September 29, 1993, C & K filed a civil action against Finial, Vecchio, and Jackson's Wash-On-Wheels,2 in the Circuit Court of Monongalia County, seeking to recover damages resulting from the demolished building. USF & G, Finial's insurer, retained counsel to represent Finial. After three months of such representation, on December 30, 1993, USF & G sent Finial a reservation of rights letter, informing Vecchio that there were "some questions of coverage provided in the coverage forms of your liability coverage." The letter specifically referenced "exclusions [sic] M on page 3 of 10; exclusions 1, 5 and 6." The referenced exclusions, which are part of the Liability Coverage Form, state:

2. Exclusions.

This insurance does not apply to:
....
m. "Property damage" to:
(1) Property you own, rent or occupy;
....
(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or ...
(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

In addition, the letter expressly stated "[b]ecause of the question of coverage and for any other reasons as they may appear, any investigation made or action taken by ourselves or other representatives of USF & G will not constitute a waiver of any rights USF & G may have under the policy." Shortly thereafter, on January 24, 1994, USF & G formally denied coverage based upon USF & G's determination that "the allegations in the complaint are excluded under Exclusion M in our policy." USF & G further notified Finial of its intent to withdraw its representation of Finial.

Following USF & G's denial of coverage, C & K and Finial entered negotiations whereby C & K planned to move for summary judgment against Finial, with no opposition from Finial, in order to ultimately recover its losses from USF & G.3 To effectuate this arrangement, Finial apparently assigned all of its rights under the USF & G policy to C & K.4 On February 8, 1995, C & K filed its motion for summary judgment, which the circuit court granted by order entered March 21, 1995. The circuit court determined that Finial was contractually liable to C & K, under the indemnification terms of Finial's sublease, in the amount of $294,292.50.

C & K then filed a declaratory judgment action against USF & G in the Circuit Court of Monongalia County. Citing diversity jurisdiction, USF & G successfully removed the action to the United States District Court for the Northern District of West Virginia. C & K then moved for summary judgment, on September 13, 1995, alleging, in part, that USF & G's reliance upon "Exclusion M" of the Liability Coverage Form as a reason for denying coverage was misplaced. USF & G cross-moved for summary judgment, conceding that it had, indeed, chosen an incorrect reason for denying coverage.5 However, USF & G contended that it still had a valid reason for denying coverage. USF & G now cited provisions contained in the Property Coverage Part of the Businessowners Policy as appropriate grounds for denying coverage. USF & G explained that the Property Coverage Part of the Businessowners Policy applied because it was incorporated, by reference, into the Tenant Liability provisions of the policy. The exclusion contained in the Property Coverage Part of the underlying Businessowners Policy, upon which USF & G now asserts denial of coverage to Finial was proper, provides, in relevant part:6

4. We will not pay for loss or damage caused by or resulting from any of the following. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.
....
b. Negligent Work. Faulty, inadequate or defective:
....
2. Designing, specification, workmanship, repair, construction, renovation, remodeling, grading, compaction;
3. Materials used in repair, construction, renovation or remodeling[.]7

The district court referred the parties' motions for summary judgment to a United States Magistrate for findings of fact and conclusions of law. The magistrate judge surmised that the Supreme Court of Appeals of West Virginia would most likely rely upon the case of McLaughlin v. Connecticut Gen. Life Ins. Co., 565 F.Supp. 434, 451-52 (N.D.Cal.1983), in deciding the case presented by C & K and USF & G. Accordingly, the magistrate adopted the "McLaughlin rule," which states that where an insurer relies upon specific grounds for denying a claim, the insurer is thereafter deemed, with respect to subsequent litigation, to have waived any and all additional reasons, apparent from a reasonable investigation, that it may have asserted in support of its earlier denial.8 In other words, the magistrate recommended that, because USF & G had not relied upon the exclusions contained in the Property Coverage Form in initially denying coverage to Finial, USF & G had waived its right to assert these exclusions and could not now, in subsequent litigation, base its declination of coverage upon these previously unstated reasons.

Accordingly, the magistrate judge recommended granting, and the district judge granted, C & K's motion for summary judgment. Both parties then appealed the district court's decision to the United States Court of Appeals for the Fourth Circuit. Recognizing the imprecise nature of the law in West Virginia with respect to the issues raised by the parties, the Fourth Circuit Court certified to this Court the two following questions:

Question 1

Does West Virginia law require a showing of detrimental reliance by the insured in order to assert waiver or estoppel against an insurer who initially denies coverage on a specific ground, but then attempts to rely on an alternate ground for the denial of coverage in subsequent litigation?

Question 2

Does the Supreme Court of Appeals of West Virginia adopt the statement of West Virginia law in Insurance Co. of North America v. National Steel Service Center, Inc., 391 F.Supp. 512, 517-22 (N.D.W.Va. 1975)—i.e., the principles of waiver and estoppel do not operate to extend insurance coverage beyond the terms of the insurance contract, except if the insurer expressly relinquishes his right to deny coverage or if the insured detrimentally relies on an insurer's unconditional defense of an action brought against the insured?

We proceed now to a review of the parties' arguments and an analysis of the applicable law in response to the certified questions placed before us. Pursuant to our authority to do so, we rephrase the certified...

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