Opinion
45618 Record No. 850315
April 22, 1988
Present: All the Justices
Since an excess insurers contractual commitment to provide a supplemental defense was no broader than its qualitative and quantitative coverage commitment, the judgment holding it liable is reversed and final judgment is entered for the excess insurer.
Insurance — General liability — Primary Insurer — Excess Liability Coverage — Obligation to Defend — Ad Damnum — Punitive images — Public Policy
Defendant builder constructed a residence which was later damaged by fire. The owner filed a motion for judgment alleging that the fire was the result of a defect in construction and seeking $175,000 compensatory damages and $350,000 punitive damages. The owner claimed more than $94,000 for loss of personal property. A jury awarded the owner a verdict of $85,000 and the court entered judgment on the verdict. The builder was the named insured in two liability insurance policies, one a primary policy and the other an excess liability policy. The excess policy covered losses in excess of $100,000 and promised to pay the ultimate net loss in excess of the retained limit, which the insured warranted to be underlying insurance for property damage of $100,000. However, contrary to the warranty, the primary insurance was for only $50,000. The primary insurer defended the builder against the owner's suit. When the secondary insurer learned that the owner's claim for personal property loss was less than $100,000, it declined to provide the insured with a defense. After the judgment was entered against it, the builder filed an action against the excess insurer, contending that it had breached its contractual duty to defend and demanding recovery of the attorney's fees the lead counsel had charged. The trial court ruled that an insurer who fails to defend is liable to the insured for the costs of defense where the motion for judgment alleges a loss which, if proven, would bring the allegations within the policy coverage. The trial court entered judgment for the builder in the sum of $6,243.75 and the excess insurer appeals.
1. The excess insurer here covenanted to defend only with respect to occurrences not covered, as warranted, by the underlying policies but covered by the terms and conditions of the excess policy.
2. While the negligent destruction of personal property was a claim of a quality covered by the terms of the excess insurer's policy, the quantum of the loss asserted by the owner was less than $100,000 and therefore did not satisfy the terms and conditions of the insurance the excess insurer had contracted to provide.
3. While the owner's pleadings sought $350,000 in punitive damages, when the allegations of the motion for judgment leave doubt whether the claim alleged is covered by the policy, the refusal of the insurance company to defend is at its own risk. If the insurer resolves the doubt in its favor, it is liable for breach of its covenant to defend if it turns out that the case is covered by the policy.
4. The legislative statement that it is not against public policy for any person to purchase insurance providing coverage for punitive damages arising out of the death or injury of any person as a result of negligence, including willful and wanton negligence, but excluding intentional acts, does not expressly extend to awards of punitive damages in property damage cases.
5. Consequently the question whether the excess policy covered the owner's claim against the builder for punitive damages was in doubt and because the development of the facts in the trial failed to prove the punitive damages case, the excess insurer is not liable for its refusal to defend.
Appeal from a judgment of the Circuit Court of the City of Virginia Beach. Hon. Robert S. Wahab, Jr., judge presiding.
Reversed and final judgment.
C. Jay Robbins, IV, for appellant.
Michael Wayne Price for appellee.
We granted this appeal to consider whether an insurer had a duty under an "excess" general liability insurance policy to defend a motion for judgment filed against the insured when the "primary" insurer had provided such a defense. The trial court ruled that the excess insurer was obligated to defend because the ad damnum clause exceeded the primary coverage limits required by the excess policy.
Aspen Building Corporation (Aspen) constructed a residence acquired by George McCadden. The home and its contents were damaged by fire. Alleging that the fire resulted from a defect in the construction of a fireplace and chimney, McCadden filed a motion for judgment against Aspen seeking $175,000 in compensatory damages and $350,000 in punitive damages. In answers to interrogatories, McCadden claimed, inter alia,$94,045.49 for loss of personal property. A jury awarded McCadden a verdict for $85,000, and the court entered judgment on the verdict.
Aspen was the named insured in two general liability insurance policies. One was a "primary" policy issued by Insurance Company of North America (INA). The other, an "excess" policy, was issued by United States Fire Insurance Company (USFIC). The USFIC policy covered losses in excess of $100,000 up to a maximum of $5,000,000. Specifically, USFIC promised "to pay on behalf of the insured the ultimate net loss in excess of the retained limit". Insofar as relevant here, the term "retained limit" was defined as "the applicable limits of the underlying policies listed in Schedule A". As a party to the excess contract, Aspen "warranted . . . that the underlying policies listed in Schedule A shall be maintained in force during the currency of this policy". Schedule A required "underlying insurance" for "property damage" of "$100,000". Contrary to its warranty, Aspen had acquired a primary policy from INA providing underlying insurance of only $50,000.
INA employed Douglas B. Smith as lead counsel in the defense of McCadden's suit. John B. Dinsmore, Aspen's corporate counsel, participated in the trial in defense of Aspen's exposure in the $50,000 coverage "gap". When USFIC learned that McCadden's claim for personal property loss (the only part of the loss USFIC considered covered by its policy) was less than $ 100,000, it declined to provide Aspen a defense.
USFlC anticipated our decision in Nationwide Mutual Ins. v. Wenger, 222 Va. 263, 266, 278 S.E.2d 874, 875-76 (1981), construing coverage and exclusionary provisions of a general liability policy similar to those in USFIC's policy.
After the $85,000 judgment was entered against it, Aspen filed an action against USFIC. Aspen contended that USFIC had breached its contractual duty to defend and demanded recovery of the attorney's fee Dinsmore had charged. The trial court ruled that an insurer who fails to defend is liable to the insured under the general policy to afford a defense where the . . . motion for judgment . . . alleges . . . [a loss] which if proven would bring the allegations within the scope of the policy coverage." Applying that ruling, the court entered judgment for Aspen in the sum of $6,243.75, and we granted USFIC an appeal.
As appears from an answer to a request for admissions, Aspen brought a separate suit against INA and its insurance agent seeking recovery of "that Portion of judgment rendered against [Aspen] in excess of $50,000.00 and for attorney's fees."
In several cases, we have applied the rule the trial court invoked. See, e.g., Parker v. Hartford Fire Ins. Co., 222 Va. 33, 35, 278 S.E.2d 803, 804 (1981); Lerner v. Safeco, 219 Va. 101, 104, 245 S.E.2d 249, 251 (1978); Travelers v. Obenshain, 219 Va. 44, 46, 245 S.E.2d 247, 249 (1978); London Guar. Co. v. White Bros., 188 Va. 195, 199-200, 49 S.E.2d 254, 256 (1948). Significantly, the dispute in these cases questioned the duty of a primary liability insurer to defend a suit against its insured; we never before have been asked to determine the scope of an excess liability insurer's duty to defend its insured. Necessarily, any such determination entails a contract analysis.
In support of its argument on appeal, Aspen invokes the language in USFIC's policy which provides that the company shall "defend any suit against the insured . . . even if such suit is groundless, false or fraudulent". Aspen suggests that the reason USFIC declined to defend was because "apparently [it] determined that the suit for $175,000 in compensatory damages was groundless." Aspen neglects to quote the policy provision in full. USFIC covenants to defend only "[w] ith respect to any occurrence not covered, as warranted, by the underlying policies. but covered by the terms and conditions of this policy".
Because Aspen's exposure exceeded $50,000, the "occurrence" was "not covered, as warranted, by the underlying policies". And the occurrence, a negligent destruction of personal property, was of a quality "covered by the terms and conditions of [USFIC's] policy". However, as fixed by McCadden before trial, the quantum of the loss arising from that occurrence was less than $100,000. The occurrence, therefore, did not satisfy the terms and conditions of the coverage USFIC had contracted to provide.
In an alternative argument advanced on appeal, Aspen points out that, in one count of the motion for judgment, McCadden had claimed $350,000 in punitive damages. Aspen contended on brief that "this aspect alone would seem to demand defense of Aspen under [USFIC's] policy." We disagree. When the allegations of the motion for judgment "leave it in doubt whether the case alleged is covered by the policy, the refusal of the insurance company to defend is at its own risk". London Guar. Co., 188 Va. at 199-200, 49 S.E.2d at 256. If the insurer resolves the doubt in its favor, it is liable for breach of its covenant to defend "if it turns out on development of the facts that the case is covered by the policy". Id. at 200, 49 S.E.2d at 256.
This Court has deferred to the legislature the question whether public policy prohibits a person from insuring himself against liability for punitive damages. Lerner, 219 Va. at 103, 245 S.E.2d at 251. The General Assembly, apparently reacting to Lerner, enacted a statute, Acts 1983, c. 353, providing that "[i]t is not against the public policy of the Commonwealth for any person to purchase insurance providing coverage for punitive damages arising out of the death or injury of any person as the result of negligence, including willful and wanton negligence, but excluding intentional acts." Former Code Sec. 38.1-42.2 (now, Code Sec. 38.2-227). The statute, however, did not extend to awards of punitive damages in property damage cases.
Consequently, the question whether USFIC's policy covered McCadden's claim against Aspen for punitive damages was in doubt. Because the "development of the facts" in McCadden's trial failed to prove "the [punitive-damages] case alleged", USFIC is not liable for its refusal to defend.
Finding that USFIC's contractual commitment to provide a supplemental defense was no broader than its qualitative and quantitative coverage commitment, we will reverse the judgment and enter final judgment for USFIC.
Reversed and final judgment.