Town Crier, Inc. v. Hume

• Decision Date: 14 September 1989
• Docket Number: Civ. A. No. 89-0323-A.
• Citation: 721 F. Supp. 99
• Parties: TOWN CRIER, INC., d/b/a Townside Partners Realtors, and Carter V. Boehm, Plaintiffs, v. John Barrington HUME, Authorized Representative Member for Each and Every Member of Syndicate 553 of Lloyd's, London, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

721 F. Supp. 99

TOWN CRIER, INC., d/b/a Townside Partners Realtors, and Carter V. Boehm, Plaintiffs, v. John Barrington HUME, Authorized Representative Member for Each and Every Member of Syndicate 553 of Lloyd's, London, Defendant.

Civ. A. No. 89-0323-A.

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

September 14, 1989.

Jeffrey Rosenfeld, Cynthia T. McLaughlin, Falcone & Rosenfeld, Ltd., Fairfax, Va., for plaintiffs.

Beverly W. Snukals, Mezzullo, McCandlish & Framme, Richmond, Va., for defendant.

MEMORANDUM OPINION

ELLIS, District Judge.

Background

An insurer's duty to defend is unquestionably broader than its duty to indemnify. The limits of this broader duty are often difficult to discern. This case presents just such a question. More specifically, the question presented here is whether the issuer of a professional errors & omissions liability policy is obligated to defend an insured against claims of intentional tortious conduct where the policy excludes such claims.

Plaintiff Town Crier is a Virginia corporation engaged in the real estate business. Plaintiff Boehm is a real estate broker licensed by the Virginia Real Estate Commission. He is also an executive officer, a member of the Board of Directors, and a stockholder of Town Crier, Inc.

Defendant is the authorized representative for Syndicate 553 of Lloyd's of London (the "Syndicate")¹. In 1986, the Syndicate issued a professional liability policy to Town Crier. The policy was effective retroactively from Jan. 16, 1984 to Jan. 16, 1987 and covered the actions of "the organization ... and any executive officer, members of the board of trustees, directors or governors or stockholders thereof, but only while acting within scope of his duties as such." Both plaintiffs (the "Insureds") meet the definition of "insured" under the policy.

The express terms of the policy are central to the resolution of this case. The policy provides $100,000 in liability coverage for damages "arising only out of the negligent act(s), error(s) or omission(s)" in the performance of the Insureds' normal professional business operations.² Also included in this policy is a duty on the part of the Syndicate to defend the Insured in any claim pertaining to the subject matter of the policy.³ Importantly, however, both the liability coverage and the duty to defend are subject to several exclusions, violation of which extinguishes the Syndicate's obligations with respect to that specific claim. These exclusions include any claims against the Insureds arising from "any intentional, dishonest, fraudulent, criminal, malicious, or knowingly wrongful acts" or "the violation of any law, statute, ordinance or regulation of ... State ... government...."⁴

On Oct. 21, 1986, the Insureds and seven others were sued in Arlington County Circuit Court by two individuals and their three limited partnerships. The claims in the state suit stem from sales of apartments in an Arlington real estate cooperative. The state plaintiffs purchased ownership interests in various apartments in the cooperative.⁵ It appears the state plaintiffs subsequently defaulted on their obligations to the cooperative. Foreclosure proceedings followed. The state suit was brought in response to the foreclosure proceedings. In the state suit motion for judgment, the aggrieved parties sought relief for various intentional acts, including fraud, unconscionability, and conspiracy to injure plaintiff's business, trade or profession. The Insureds were named as state defendants because they had acted as brokers for the transactions and had actively participated in the negotiations.

Once served, the Insureds notified the Syndicate (through its agent) of the state suit. The Syndicate responded, denying any duty to defend or indemnify the Insureds because the state suit alleged "intentional acts and therefore did not appear to arise out of negligent acts, errors or omissions as required under the policy." Additionally, the letter indicated that some of the acts complained of occurred before the policy's retroactive date of January 16, 1984. Faced with the Syndicate's refusal to defend the state action, the Insureds retained private counsel to conduct their defense. Now they seek recovery of their defense expenses to date plus pre- and post-judgment interest, attorney's fees, and costs. They also seek a judgment declaring defendants liable to defend and indemnify plaintiffs in the state suit.⁶

The case is before the Court on cross motions for summary judgment.⁷ As there are no genuinely disputed material facts, disposition by way of summary judgment is appropriate. Rule 56, Fed.R.Civ.P.. For the reasons set forth here, the Court concludes that defendant has no duty to defend the plaintiffs in their state action. Therefore, the defendants motion for summary judgment is granted and plaintiffs motion for summary judgment is denied.

Analysis

State law applies in this diversity action. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). And it is Virginia law that applies because all relevant acts occurred here: the Syndicate issued the insurance policy in Virginia,⁸ the Insureds' alleged misconduct occurred in Virginia, and the third party state suit was filed in Virginia. See, Maryland Casualty Co. v. Burley, 345 F.2d 138, 139 (4th Cir.1965) (Virginia law applied where insurance policies issued and incident occurred there); American & Foreign Ins. Co. v. Church Schools, 645 F.Supp. 628, 631 (E.D.Va.1986) (same).

In Virginia, courts interpreting insurance policies apply the standard rules of contract construction, subject, of course, to the statutory measures unique to insurance. Harleysville Mutual Ins. Co. v. Dollins, 201 Va. 73, 109 S.E.2d 405, 409 (1959). Because insurers typically author the policy language, however, Virginia courts routinely construe ambiguous language favorably to policy holders. Thus, ambiguous coverage clauses are generally construed to grant coverage rather than deny it. Similarly, ambiguities in coverage exclusions are construed against the insurer. Johnson v. Insurance Co. of North America, 232 Va. 340, 350 S.E.2d 616, 619 (1986); St. Paul Fire & Marine Ins. Co. v. S.L. Nusbaum & Co., 227 Va. 407, 316 S.E.2d 734, 736 (1984); Ayres v. Harleysville Mut. Casualty Co., 172 Va. 383, 2 S.E.2d 303, 305 (1939). Additionally, the insurer bears the burden of proof that an exclusion applies. Johnson, 350 S.E.2d at 619; White v. State Farm, 208 Va. 394, 157 S.E.2d 925, 927 (1967). But, these rules do not authorize a court to rewrite the policy for the parties, nor to construe a policy contrary to its plain language or to the parties' intent. Ocean Accident & Guar. Corp. v. Washington Brick & Terra Cotta Co., 148 Va. 829, 139 S.E. 513, 517 (1927) (hereinafter Washington Brick). This discussion of insurance policy construction rules is pertinent here because, at common law, an insurer does not have a duty to defend.⁹ The duty to defend is purely contractual.

In general, insurance contracts contain three main duties: the insurer's duty to indemnify, the insurer's duty to defend, and the insured's duty to pay premiums. These duties are the essence of the bargain. The insurer's two duties are separate responsibilities, and, for sound policy reasons, the scope of coverage for each is different. Thus, courts interpreting insurance policies have consistently construed the duty to defend as being broader than the duty to indemnify. This construction, from the insurer's perspective, is both sensible and desirable. It reflects the insurer's strong interest in minimizing its exposure in any case in which it may have a duty to indemnify. Insurers can best vindicate this interest by having the right to conduct, or to participate in, the defense of the claims. But this interest manifestly disappears if, assuming the claims were to succeed, the insured would have no duty to indemnify. Thus, the duty to defend, even though broader than the duty to indemnify, has, at some point, a limit. Defining that limit in the context of multiple claims is the issue presented here.

The seminal Virginia decision on this issue appears to be Washington Brick, a tort suit against an employer for the death of an employee — an underage child. The insurance policy there in issue provided both a duty to indemnify and a duty to defend such tort claims. Yet the policy also explicitly excluded coverage in the event the employee had been illegally employed.¹⁰ This was important because the underlying claim was based solely on the violation of the child labor statute. 139 S.E. at 516-17. On these facts, the Virginia Special Court of Appeals held that the insurer had no duty to defend the suit. In reaching this decision the court cited with approval decisions of other states involving cases with multiple negligence claims arising from the same transaction, but alleging different theories of recovery. Under some of these theories, coverage was provided; under others, it was not. Courts in these cases had held that the insurance companies had a right and a duty to participate in the defense, at least as to the claims covered by the policy, due to the potential liability arising from their duty to indemnify. Id. at 516. The Special Court of Appeals in effect distinguished these decisions on the ground that the policy then before it covered none of the claims. Under this circumstance, the Court reasoned that it would be illogical to force an insurer to defend a suit in which there was no possibility of an indemnification. Should the insurer do so, it was possible that it could be held liable for any judgment against the insured.¹¹ The wiser course in such situations, the court stated, was for the insurer to "refrain from interfering in any way with the insured in respect to its defense of the case." Id. at 517.

Virginia courts have consistently followed the Washington Brick rule and rationale....