Bryan Brothers Incorporated v. Continental , 419 F. App'x 422 ( 2011 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1439
BRYAN BROTHERS INCORPORATED, a Virginia corporation; JOSEPH
KOBER; DORIS LANSING; KARL SCHOELLER; MILDRED SCHOELLER,
Plaintiffs - Appellants,
v.
CONTINENTAL CASUALTY COMPANY, an Illinois corporation,
Defendant - Appellee.
Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond. Henry E. Hudson, District
Judge. (3:09-cv-00675-HEH)
Argued: January 25, 2011 Decided: March 24, 2011
Before MOTZ and WYNN, Circuit Judges, and Irene C. BERGER,
United States District Judge for the Southern District of West
Virginia, sitting by designation.
Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Motz and Judge Berger concurred.
ARGUED: Collin Jefferson Hite, MCGUIREWOODS, LLP, Richmond,
Virginia, for Appellants. Richard A. Simpson, WILEY REIN, LLP,
Washington, D.C., for Appellee. ON BRIEF: Kenneth W. Abrams,
MCGUIREWOODS, LLP, Richmond, Virginia, for Appellants. Charles
C. Lemley, Kimberly A. Ashmore, WILEY REIN, LLP, Washington,
D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.
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WYNN, Circuit Judge:
In this appeal, accounting firm Bryan Brothers
Incorporated, seeks coverage under a professional liability
insurance policy issued by Continental Casualty Company for
liability arising from illegal acts of a former Bryan Brothers’s
employee. Under the policy, it is a condition precedent to
coverage that no insured has knowledge, prior to the inception
of the policy, of an act that is reasonably likely to become the
basis for a claim. Because Bryan Brothers had such knowledge,
we conclude that the claims at issue are not covered.
Therefore, we affirm the district court’s grant of summary
judgment to Continental Casualty Company.
I.
The parties stipulated all material facts. Continental
Casualty Company issued a professional liability insurance
policy effective from July 1, 2008 to July 1, 2009 to cover
certain liabilities arising from Bryan Brothers’s accounting
services. In pertinent part, the “Coverage Agreements” provide:
A. In accordance with all the terms and conditions of
this policy, we will pay on your behalf all sums
in excess of the deductible, up to our limits of
liability, that you become legally obligated to
pay as damages and claim expenses because of a
claim that is both first made against you and
reported in writing to us during the policy period
by reason of an act or omission in the performance
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of professional services by you or by any person
for whom you are legally liable provided that:
. . .
2. prior to the effective date of this policy,
none of you had a basis to believe that any
such act or omission, or interrelated act or
omission, might reasonably be expected to be
the basis of a claim . . . .
(“prior knowledge provision”).
The policy also contains the following “Exclusion”:
This Policy does not apply to:
. . .
D. any claim based on or arising out of a dishonest,
illegal, fraudulent, criminal or malicious act by
any of you. We shall provide you with a defense
of such claim unless or until the dishonest,
illegal, fraudulent, criminal or malicious act
has been determined by any trial verdict, court
ruling, regulatory ruling or legal admission,
whether appealed or not . . . .
(“bad acts exclusion”). Finally, the following appears under
the “Policy Conditions” heading:
L. Innocent Insureds
If coverage under this Policy would be excluded
as a result of any criminal, dishonest, illegal,
fraudulent, or malicious acts of any of you, we
agree that the insurance coverage that would
otherwise be afforded under this Policy will
continue to apply to any of you who did not
personally commit, have knowledge of, or
participate in such criminal, dishonest, illegal,
fraudulent or malicious acts or in the
concealment thereof from us.
(“innocent insureds provision”). The policy defines “you” as
the named insured (Bryan Brothers) and “any person who is or
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becomes a partner, officer, director, associate, or employee of
the named insured, but only for professional services performed
on behalf of the named insured.”
In February 2009, Bryan Brothers discovered that Deborah
Whitworth, the firm’s account clerk from 1999 to 2009, had
stolen funds from eight clients’ accounts. Whitworth’s thefts
began in 2002 and the last theft occurred sometime after July 1,
2008, during the policy period. The victims asserted tort
claims against Bryan Brothers.
In turn, Bryan Brothers filed for insurance coverage of the
victims’ claims but Continental Casualty Company denied Bryan
Brothers’s claim for coverage by letter dated March 16, 2009.
Continental Casualty Company indicated that Whitworth fit within
the policy’s definition of “you” because she committed the
thefts as an employee performing professional services for Bryan
Brothers. Because Whitworth “had reason to believe as early as
2002, before the inception of the policy on [7]-1-08, that her
acts might be the basis of a claim, the terms of the coverage
agreements are not met and coverage is precluded on that basis.”
In other words, Continental Casualty Company denied coverage
under the prior knowledge provision because Whitworth had reason
to believe, before the effective date of the policy, that her
thefts might become the basis for claims. Bryan Brothers later
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settled with its affected clients and brought this suit for
coverage under the policy.
The parties filed cross-motions for summary judgment.
Bryan Brothers argued that the prior knowledge provision was an
exclusion from, as opposed to a condition precedent to,
coverage. Bryan Bros. Inc. v. Cont’l Cas. Co., 704 F. Supp. 2d
537, 540-41 (E.D. Va. 2010). And because Whitworth was the only
person with prior knowledge of her thefts, the innocent insureds
provision saved coverage for any insured other than Whitworth.
Id. Continental Casualty Company, on the other hand, argued
that the prior knowledge provision was a condition precedent
that precluded coverage if unfulfilled. Id. at 540. Further,
Continental Casualty Company argued that coverage was not denied
because Whitworth’s acts were “illegal” under the bad acts
exclusion; consequently, the innocent insureds provision was not
triggered to save coverage otherwise precluded by the prior
knowledge provision. Id. at 541.
The district court granted summary judgment to Continental
Casualty Company based on Whitworth’s prior knowledge. The bad
acts exclusion and the innocent insureds provision were
therefore not applicable. * The court also found these provisions
*
The district court also held that Whitworth’s thefts
during the policy period were “interrelated” to her pre-policy
thefts. Therefore, the district court determined that claims
(Continued)
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to be unambiguous, rejecting Bryan Brothers’s argument that they
were ambiguous and must be construed in favor of coverage. Id.
at 542. Bryan Brothers appeals.
II.
We review a grant of summary judgment de novo, viewing all
facts and inferences in favor of the nonmoving party.
Providence Square Assocs., L.L.C. v. G.D.F., Inc., 211 F.3d 846,
850 (4th Cir. 2000). Summary judgment is appropriate if “there
is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a).
Virginia law governs this insurance dispute. Virginia
courts “‘interpret insurance policies, like other contracts, in
accordance with the intention of the parties gleaned from the
words they have used in the document.’” Transcon. Ins. Co. v.
RBMW, Inc., 262 Va. 502, 512, 551 S.E.2d 313, 318 (2001)
(quoting Floyd v. N. Neck Ins. Co., 245 Va. 153, 158, 427 S.E.2d
193, 196 (1993)). “Because insurance policies usually are
drafted by insurers, [Virginia courts] construe ambiguous policy
based on thefts during the policy period were also precluded
because of Whitworth’s prior knowledge. Id. at 542-43. Bryan
Brothers does not challenge that ruling on appeal.
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language purporting to exclude certain occurrences from coverage
most strongly against the insurer.” Va. Farm Bureau Mut. Ins.
Co. v. Williams, 278 Va. 75, 81, 677 S.E.2d 299, 302 (2009).
Virginia has long followed the rule that if the insured
fails to fulfill a condition of an insurance policy, the
insurer’s coverage obligation is not triggered. See State Farm
Mut. Auto. Ins. Co. v. Arghyris, 189 Va. 913, 924-25, 55 S.E.2d
16, 21 (1949); Combs v. Hunt, 140 Va. 627, 643, 125 S.E. 661,
666 (1924); Va. Fire & Marine Ins. Co. v. J.I. Case Threshing
Mach. Co., 107 Va. 588, 590-91, 59 S.E. 369, 369-70 (1907).
“[I]f the condition is broken the policy is terminated, if the
insurer so elects.” Arghyris, 189 Va. at 927, 55 S.E.2d at 22;
accord Fidelity-Phenix Fire Ins. Co. of N.Y. v. Pilot Freight
Carriers, Inc., 193 F.2d 812, 815-16 (4th Cir. 1952) (discussing
the operation of conditions precedent to coverage under North
Carolina law).
On the other hand, an insured may seek coverage for an
event that is within the scope of the insuring clause but falls
under a specific exclusion. In that scenario, the policy is not
avoided and another policy provision, such as a savings clause,
may preserve coverage. See Copp v. Nationwide Mut. Ins. Co.,
279 Va. 675, 683-84, 692 S.E.2d 220, 225 (2010) (holding that
insurer had a duty to defend insured for a claim excluded by a
homeowner’s policy but covered by an exception to the exclusion
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in an umbrella policy); see also Calmar S.S. Corp. v. Scott, 345
U.S. 427, 433-35 (1953) (discussing exclusions from coverage and
exceptions in a war-risk maritime policy).
III.
Bryan Brothers argues that it is entitled to coverage under
the innocent insureds provision because it did not share prior
knowledge of Whitworth’s thefts. Bryan Brothers insists that
the prior knowledge provision is an exclusion from coverage and
that the innocent insureds provision saves coverage for the
firm. Conversely, Continental Casualty Company maintains that
the prior knowledge provision is a condition precedent that
precludes coverage if unsatisfied.
The plain language and structure of the policy convince us
that the prior knowledge provision is a condition precedent to
coverage. In the first coverage agreement clause, Continental
Casualty Company agrees to cover Bryan Brothers’s liability on
claims made during the policy period “provided that . . . prior
to the effective date of this policy, none of you had a basis to
believe that any such act or omission, or interrelated act or
omission, might reasonably be expected to be the basis of a
claim” (emphasis added). This language may be rephrased to say
that if any defined “you” knew prior to the effective date of
the policy that an act or omission might become the basis for a
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claim, any claims arising from such acts or omissions are not
covered. Here, Bryan Brothers’s lack of prior knowledge is a
condition of Continental Casualty Company’s agreement to cover
Bryan Brothers’s liability from acts predating the policy.
Because Whitworth had prior knowledge, “[t]here has been a
failure to fulfill a condition upon which [Continental Casualty
Company’s] obligation is dependent.” Arghyris, 189 Va. at 925,
55 S.E.2d at 21.
This interpretation melds with the concept of fortuity, a
fundamental premise of insurance law. Insurers do not usually
contract to cover preexisting risks and liabilities known by the
insured. Thus, it is generally the insured’s duty to provide
truthful and complete information so the insurer can fairly
evaluate the risk it is contracting to cover. See, e.g., Combs
v. Equitable Life Ins. Co. of Iowa, 120 F.2d 432, 437 (4th Cir.
1941) (holding that an insured’s failure to disclose a heart
condition breached a condition precedent to coverage on a life
insurance policy); Arghyris, 189 Va. at 929, 55 S.E.2d at 23
(holding that an insured’s failure to provide complete and
timely information breached the policy’s cooperation clause, a
condition precedent to coverage); Va. Fire & Marine Ins. Co. v.
J.I. Case Threshing Mach. Co., 107 Va. 588, 590-91, 59 S.E. 369,
369-70 (1907) (stating that the insured’s failure to disclose an
encumbrance on his property breached the condition precedent
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that the insured property be unencumbered). If the insured
fails to comply with a clear condition required by the insurer,
it is typically not liable on the policy.
Here, the prior knowledge provision essentially makes
fortuity a condition of coverage. The prior knowledge provision
indicates in clear and unambiguous language Continental Casualty
Company’s unwillingness to cover liability arising from prior
acts or omissions that any insured might reasonably expect to
result in a claim.
Because Continental Casualty Company denied Bryan
Brothers’s claim for failure of a condition precedent to
coverage, we are not persuaded by Bryan Brothers’s argument for
coverage pursuant to the innocent insureds provision. Although
the facts of this case might have supported a denial of coverage
under the bad acts exclusion, there is no indication that
coverage was denied on that basis. Thus, the innocent insureds
provision, which appears to be an exception to the bad acts
exclusion, was not implicated.
Even assuming arguendo that the innocent insureds provision
could be considered an exception to the prior knowledge
provision, it is elemental that exclusions and exceptions in an
insurance policy cannot expand the scope of agreed coverage.
See Scott, 345 U.S. at 435 (explaining that overlapping
exclusions and exceptions were plainly intended “to make certain
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and doubly certain that the coverage of the policy as a whole is
in no event enlarged”); Stanley Martin Cos., Inc. v. Ohio Cas.
Grp., 313 F. App’x 609, 613 n.2 (4th Cir. 2009) (unpublished)
(explaining that exclusions, and certain exceptions, could not
expand the scope of the insuring clause in a general
contractor’s liability policy) (citing Nationwide Mut. Ins. Co.
v. Wenger, 222 Va. 263, 267, 278 S.E.2d 874, 876 (1981)).
Therefore, the innocent insureds provision cannot provide
coverage that is precluded by the plain language of the prior
knowledge provision.
We reached a similar decision TIG Insurance Co. v.
Robertson, Cecil, King & Pruitt, 116 F. App’x 423 (4th Cir.
2004) (unpublished). There, a partner at a law firm represented
on a written application for professional liability insurance
that the firm was unaware of any act or omission that might
reasonably be expected to become the basis for a claim. Prior
to the application, the applicant-partner had misappropriated
client funds without the firm’s knowledge. Id. at 424-25. The
affected clients sued the firm, which sought coverage for
liability on the clients’ claims. Id. Applying Virginia law,
we held that the insurer could rescind the policy based on the
applicant-partner’s misrepresentations. Id. at 426. We
rejected the argument that coverage was saved for partners
innocent of the misrepresentation because they did not “contract
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for additional protection in the case of a partner making
misrepresentations on behalf of the partnership on the
application form.” Id. at 427. The same is true here because
Bryan Brothers was free to bargain for additional coverage
against acts of its employees.
Likewise, other courts have made the same interpretation of
identical policy language. In Professional Asset Strategies v.
Continental Casualty Co., No. 2:09-cv-1238-AKK, 2010 WL 4284991,
at *1 (E.D. Ark. Aug. 27, 2010), an investment firm’s employee
stole money from client accounts without the firm’s knowledge.
The firm acquired professional liability insurance after the
thefts. When the firm discovered the employee’s misconduct and
its clients sued, the firm sought coverage, which was denied
because the employee had prior knowledge of his thefts. Id. at
*2. The court observed that “coverage exists only if this
[prior knowledge] precondition is met, and is denied if anyone
meeting the definition of ‘you’ has knowledge of what might
reasonably be a potential claim.” Id. at *5 (first underline
added).
In other words, no coverage exists if any ‘you’ had
prior knowledge of the existence of a claim. Where
there is no prior knowledge and coverage exists, the
policy provides various exclusions, including [the bad
acts exclusion]. However, in cases where the
exclusion is because of ‘criminal, dishonest, illegal,
fraudulent or malicious’ acts of a ‘you,’ then the
‘innocent insured’ provision kicks in to restore
coverage.
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Id. at *7; accord Cont’l Cas. Co. v. Walker, No. 4:07cv00298
SWW, 2008 WL 8101840, at *4 (E.D. Ark. July 7, 2008) (rejecting
contention that an innocent insured clause provided coverage for
a claim not first made and reported during the policy period).
Finally, we decline Bryan Brothers’s request to find the
pertinent language ambiguous and construe the policy in favor of
coverage. Williams, 278 Va. at 81, 677 S.E.2d at 302 (“[I]f
disputed policy language is ambiguous and can be understood to
have more than one meaning, we construe the language in favor of
coverage and against the insurer.”). But a plain reading of the
pertinent policy language reveals that it is not susceptible to
more than one meaning. Because the language of the prior
knowledge provision is unambiguous and structured as a condition
precedent to the coverage agreement, we will not contort the
language to find an ambiguity.
IV.
In sum, we hold that the prior knowledge provision is a
clear and unambiguous condition precedent to recovery on the
policy. Because Whitworth had prior knowledge of her thefts, a
condition precedent was unfulfilled, and the coverage agreement
was not triggered. Additionally, exclusions and exceptions in
the policy cannot provide coverage that is precluded by the
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prior knowledge condition. Accordingly, we affirm the grant of
summary judgment for Continental Casualty Company.
AFFIRMED
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