Title: State Farm Fire & Casualty Co. v. Mabry

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
STATE FARM FIRE & CASUALTY COMPANY 
 
v.   Record No. 971075   OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
 
 
 
 
  February 27, 1998 
HERMOND MABRY, ET AL. 
 
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND 
James B. Wilkinson, Judge 
 
In this appeal, we consider whether the trial court 
properly determined that an insurer was estopped from 
litigating whether its insured's acts were negligent or 
intentional based on a judgment in a prior tort action in 
which the insurer provided the insured a defense under a 
reservation of rights. 
 
Helena M. Martin was injured when Hermond A. Mabry shot 
her four times using two pistols while the parties were at 
Mabry's residence.  Martin notified State Farm Fire & Casualty 
Insurance Company (State Farm), Mabry's homeowner's insurance 
carrier, of the event.  State Farm issued reservation of 
rights letters to Mabry and Martin, asserting that insurance 
coverage might not be available due to the intentional act 
exclusion in the homeowner's policy.  
 
Martin filed a motion for judgment against Mabry seeking 
recovery of $125,000 for injuries resulting from the shooting.  
In her pleadings, Martin alleged that the shootings were the 
result of negligence on the part of Mabry.  After Martin filed 
her lawsuit, State Farm sent a second reservation of rights 
letter to Mabry and a reservation of rights letter to counsel 
for Martin.  State Farm retained an attorney to provide legal 
representation for Mabry. 
State Farm, represented by another attorney, filed a 
motion for declaratory judgment to determine whether the 
intentional act exclusion in Mabry's policy applied to exclude 
coverage for Mabry's acts.  Prior to resolution of the 
declaratory judgment proceeding, Mabry, Martin, and their 
attorneys agreed to the entry of a consent judgment against 
Mabry for $95,000. 
Martin subsequently filed an answer in the declaratory 
judgment proceeding asserting that the doctrine of collateral 
estoppel precluded State Farm from litigating whether Mabry's 
acts were negligent or intentional.  Martin maintained that 
entry of the consent order "on the pleadings," as recited in 
the order, established that Mabry's acts were negligent as 
alleged in the motion for judgment in the tort action. 
Following an ore tenus hearing and post-trial memoranda, 
the trial court issued an opinion letter in which it 
determined that State Farm was estopped from litigating 
whether Mabry's actions in shooting Martin were negligent or 
intentional.  The trial court based its opinion on "the public 
policy grounds expressed by the Virginia Supreme Court in 
 
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State Farm v. Wright, 173 Va. 261 (1939), and the estoppel 
effect of a consent judgment expressed by the Virginia Supreme 
Court in Culpeper Nat'l Bank v. Morris, 168 Va. 379, 385 
(1937)."  A final order was entered on February 26, 1997, 
declaring that Mabry was entitled to coverage under the State 
Farm Policy for the claims made against him by Martin, and 
that State Farm was obligated to pay the judgment rendered in 
the tort action in favor of Martin.  We awarded State Farm an 
appeal. 
In its appeal, State Farm argues that the trial court's 
decision improperly applied the doctrine of collateral 
estoppel to preclude State Farm from arguing in the 
declaratory judgment action that Mabry's actions were 
intentional.  Mabry and Martin reply that entry of the consent 
judgment "on the pleadings" collaterally estopped State Farm 
from relitigating whether Mabry negligently or intentionally 
fired the shots that injured Martin.  
We agree with State Farm that collateral estoppel is not 
applicable in this case.  One of the elements of collateral 
estoppel is that the parties, or their privies, must be the 
same in both the prior and subsequent actions.  Angstadt v. 
Atlantic Mut. Ins. Co., 249 Va. 444, 446, 457 S.E.2d 86, 87 
(1995).  State Farm was not a party in the tort litigation; 
 
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therefore, this element of collateral estoppel could only be 
met if the requisite privity existed between it and Mabry. 
Privity requires that a party's interest be "so 
identical" with another "that he represents the same legal 
right."  Nero v. Ferris, 222 Va. 807, 813, 284 S.E.2d 828, 831 
(1981).  Whether privity exists "requires a careful 
examination of the circumstances of each case."  Angstadt, 249 
Va. at 447, 457 S.E.2d at 87.  In this case, State Farm 
reserved its right to challenge coverage under the policy 
based on the nature of Mabry's acts.  By so doing, State Farm 
established that its position diverged from that of its 
insured on this issue and that the interests of State Farm and 
Mabry with regard to coverage were adverse, not identical. 
This result was foreshadowed by our discussion in Reisen 
v. Aetna Life and Casualty Co., 225 Va. 327, 302 S.E.2d 529 
(1983).  In Reisen, we held that a declaratory judgment 
proceeding to determine coverage under an insurance policy 
could be brought by an insurer while the underlying tort 
litigation was pending, even if the ultimate factual issue in 
determining coverage was also at issue in the tort litigation.  
In the course of the opinion, we stated that "because of the 
likelihood that the insurer, after judgment in the tort 
action, would be entitled to litigate the very same coverage 
question it sought to raise before trial," the declaratory 
 
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judgment proceeding declaring the parties' rights in advance 
was proper.  Id. at 336, 302 S.E.2d at 534.  This statement 
would be in error if the insurer was collaterally estopped 
from raising the factual issue addressed in the tort 
litigation in the subsequent proceeding determining coverage. 
Accordingly, because State Farm was not a party to the 
tort litigation nor was it in privity with Mabry regarding the 
nature of Mabry's acts, we conclude collateral estoppel does 
not apply to preclude State Farm from litigating that issue.1  
Accord, Alabama Farm Bureau Mut. Cas. Ins. Co. v. Moore, 349 
So.2d 1113, 1115-17 (Ala. 1977); Farmers Ins. Co. of Arizona 
v. Vagnozzi, 675 P.2d 703, 708 (Ariz. 1983); Spears v. State 
Farm Fire and Cas. Ins., 725 S.W.2d 835, 837-38 (Ark. 1987); 
Kelly v. Cherokee Ins. Co., 574 S.W.2d 735, 737-39 (Tenn. 
1978).  But see Miller v. United States Fidelity & Cas. Co., 
197 N.E. 75, 77 (Mass. 1935).  See generally, Comment, The 
Effect of Collateral Estoppel on the Assertion of Coverage 
Defenses, 69 Colum. L. Rev. 1459 (1969).  
                     
1 In Norman v. Insurance Co. of North America, 218 Va. 718, 
725, 239 S.E.2d 902, 906 (1978), we stated that the judgment 
entered in the tort litigation holding the insured's actions 
to be intentional "constitutes a collateral estoppel" of the 
insured's action against the insurer in which the insured 
asserted his actions were "accidental."  However, we did not 
examine the elements of collateral estoppel and specifically 
did not discuss privity.  Accordingly, Norman does not provide 
binding precedent for the principle that collateral estoppel 
 
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We also conclude that none of the other forms of estoppel 
noted by the trial court operate here to preclude State Farm 
from pursuing its declaratory judgment proceeding.  Under 
principles of estoppel and waiver, providing the insured a 
legal defense generally makes the insurer liable for amounts 
recovered against the insured because the insurer's actions 
indicate that the policy coverage applies, and, therefore, the 
insurer is estopped from subsequently seeking to avoid 
liability under the policy.  Cooper v. Employers Mut. 
Liability Ins. Co. of Wisconsin, 199 Va. 908, 916, 103 S.E.2d 
210, 216 (1958); 14 George J. Couch, Cyclopedia of Insurance 
Law § 51:239 (Mark S. Rhodes ed., 2d ed. 1982). 
If an insurer provides a reservation of rights, however, 
the insurer "is not deemed to have waived, nor be estopped to 
set up, the defense of lack of coverage" because of its 
participation in the tort litigation.  Norman v. Ins. Co. of 
N. America, 218 Va. 718, 726, 239 S.E.2d 902, 907 (1978).  As 
the trial court acknowledged, State Farm provided Mabry a 
defense under a reservation of its right to later assert its 
defenses to coverage under the policy, and, thus, these 
principles of estoppel and waiver are inapplicable. 
                                                                
would apply to insurers in the circumstances of the instant 
case.   
 
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Finally, the trial court referred to an "estoppel" based 
on its view that actions taken by State Farm in the conduct of 
the tort litigation provided the insurer with "its day in 
court," and, therefore, State Farm was not entitled to another 
opportunity to try its case on the merits, citing State Farm 
Mutual Automobile Insurance Co. v. Wright, 173 Va. 261, 3 
S.E.2d 187 (1939). 
However, here State Farm did not have "its day in court" 
in the tort proceeding.  See Farm Bureau Mut. Auto. Ins. Co. 
v. Hammer, 177 F.2d 793, 799-800 (4th Cir. 1949).  State Farm 
was not a party to the tort litigation and, therefore, could 
not independently assert its position on the nature of Mabry's 
acts in that proceeding.  Nor could it assert its position in 
conjunction with providing a defense to its insured.  The 
attorney employed by the insurer to defend the insured "is 
bound by the same high standards which govern all attorneys, 
and owes the insured the same duty as if he were privately 
retained by the insured."  Norman, 218 Va. at 727, 239 S.E.2d 
at 907.  To comply with this duty in the tort litigation, 
Mabry's attorney could not argue that Mabry's acts were 
intentional because such an argument could expose Mabry to 
punitive damages and would not be in his best interest.  Thus, 
the declaratory judgment proceeding to determine the issue of 
 
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policy coverage was State Farm's first opportunity to assert 
its coverage defense and to try its case on the merits. 
In the instant case, State Farm sent reservation of 
rights letters to its insured, Mabry, and to Martin when it 
was initially informed of Martin's claim.  Reservation of 
rights letters were again sent to Mabry and to Martin's 
counsel when the tort litigation was initiated.  Under these 
circumstances, neither waiver, estoppel, nor collateral 
estoppel precluded State Farm from raising its coverage 
defense, specifically the question whether Mabry shot Martin 
intentionally or negligently.  
Accordingly, we will reverse the judgment of the trial 
court and remand the case for further proceedings. 
Reversed and remanded. 
 
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