Title: Filak v. George

State: virginia

Issuer: Virginia Supreme Court

Document:

P
 
RESENT:  All the Justices 
CANDICE L. FILAK, ET AL. 
 
v.  Record No. 031407   OPINION BY JUSTICE BARBARA MILANO KEENAN 
 
 
                          April 23, 2004 
PAMELA S. GEORGE 
 
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY 
Herbert C. Gill, Jr., Judge 
 
 
This appeal is from a judgment for a defendant in an action 
alleging breach of contract and constructive fraud based on an 
insurance agent's alleged failure to procure a fire insurance 
policy with certain provisions.  We consider whether the circuit 
court erred in sustaining the defendant's demurrer to the 
constructive fraud claim and in granting the defendant's motion 
to strike the plaintiff's evidence on the breach of contract 
claim. 
 
The following facts are relevant to this appeal.  Christian 
B. Massey and Candice L. Filak, husband and wife, (collectively, 
the plaintiffs) owned a 36-acre horse farm in Chesterfield 
County.  The plaintiffs lived in an apartment located in a barn 
on the farm. 
In 1990, the plaintiffs began building their "dream home" 
on the property.  The plaintiffs, who both had been employed in 
the construction industry, purchased all the building materials 
and equipment required for the construction project and 
performed their own labor in building the house. 
 
The plaintiffs held a "rural fire" insurance policy on 
their property issued by Virginia Farm Bureau Mutual Insurance 
Company (Farm Bureau).  That policy provided a $150,000 limit of 
liability for the loss of a dwelling on the farm. 
 
In September 1996, while the house was still under 
construction, Filak contacted Farm Bureau, which assigned one of 
its agents, Pamela S. George, to meet with the plaintiffs.  
George informed the plaintiffs that they could obtain an "elite" 
insurance policy that would provide at least $481,000 in "total 
replacement" costs for their new house and its contents in the 
event that the house was destroyed by fire.  The plaintiffs 
agreed to purchase the "elite" policy and paid a premium to Farm 
Bureau to secure the policy. 
According to the plaintiffs, George told them that in the 
event of a "full, total, devastating loss" of the house, they 
would receive under the "elite" policy the total replacement 
costs "within a few days or the next day" after sustaining such 
a loss.  However, the "elite" policy issued by Farm Bureau 
provided that in the event of a complete loss, the plaintiffs 
were entitled to receive total replacement costs only if they 
repaired and replaced the house within six months after 
receiving payment for the "actual cash value of the damage."1
                     
 
1 This policy provision is in accord with the requirements 
of Code § 38.2-2119. 
 
2
 
In July 1997, before construction was completed, lightning 
struck the house causing a fire that completely destroyed the 
structure.  The plaintiffs filed a claim with Farm Bureau for 
the total replacement costs of the house.  Farm Bureau paid the 
plaintiffs about $190,000 for the "actual cash value" of the 
house and informed them that under the terms of their policy 
they had "180 days . . . to present a claim for any amount over 
the actual cash value" that they had been paid.  The plaintiffs 
did not rebuild the house. 
 
The plaintiffs filed a motion for judgment against Farm 
Bureau seeking recovery of the total replacement costs of their 
house.  George was not named as a defendant in this action.  The 
plaintiffs eventually settled their lawsuit with Farm Bureau for 
$100,000, which they received in addition to the earlier 
$190,000 payment representing the "actual cash value" of the 
destroyed structure. 
 
After reaching this settlement with Farm Bureau, the 
plaintiffs filed an amended motion for judgment against George 
alleging, among other things, breach of contract and 
constructive fraud.2  The plaintiffs alleged, in relevant part: 
[George] told [p]laintiffs that the insurance coverage 
would cover the full replacement cost of at least 
$481,000 for the house and building materials while 
                     
 
2 The plaintiffs also asserted against George claims of 
actual fraud and "malpractice."  The circuit court ultimately 
dismissed these claims, which are not before us in this appeal. 
 
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the house was under construction.  [George] stated 
that should [p]laintiffs' house burn to the ground, 
under the insurance she would procure on their behalf, 
[Farm Bureau] would promptly write them a check for 
the full replacement cost. 
 
The plaintiffs also asserted that the settlement with Farm 
Bureau resulted in a total payment that was "at least $200,000 
less than the replacement costs of the house." 
 
The plaintiffs further alleged that they "placed their 
trust and confidence in [George] to advise them properly" and to 
procure for them "the appropriate insurance coverage," and that 
they agreed to purchase insurance from her based on her 
"representations to them and undertakings on their behalf."  The 
plaintiffs asserted that George "misrepresented the procurement 
. . . of appropriate and adequate coverage, and the terms of the 
coverage procured," and that they reasonably relied on those 
misrepresentations to their detriment.  The plaintiffs further 
alleged that George's "misrepresentations" constituted a "breach 
of [her] duty" to the plaintiffs. 
 
George filed a demurrer to the amended motion for judgment.  
The circuit court sustained the demurrer to the constructive 
fraud claim based on the plaintiffs' "inability to clearly 
allege the existence of a common law duty."  Citing the 
"economic loss rule," the circuit court further held that a 
claim for constructive fraud is not actionable when such a claim 
essentially alleges negligent performance of contractual duties. 
 
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At a jury trial on the contract claim, Massey testified 
that George stated that the "elite" policy would provide 
coverage to Filak and Massey in the event of a "full, total, 
devastating loss."  According to Massey, George explained that 
if, for example, the house "burned to the ground and there's 
nothing left," then "the next day, if everything was totally 
gone, she would pay us the $481,000."  Massey also stated that 
George told him that the policy would provide payment 
"immediately [for] replacement [costs] for my home the moment it 
was lost." 
Massey testified that when he received the written "elite" 
policy from Farm Bureau, he did not review the policy "that 
closely" because he relied on George's representations 
concerning the policy contents.  Massey stated that he did not 
have any concerns about the policy because George had explained 
the policy "very thoroughly."  With regard to the plaintiffs' 
alleged damages, Massey conceded that the damages claimed 
against George were "exactly the same damages that [the 
plaintiffs] claimed in the Farm Bureau case." 
 
Filak testified that George stated that she would procure 
an insurance policy for the plaintiffs that would provide 
$481,000 in total replacement costs for the house and that "in 
the event of a total loss, we would be paid immediately.  As a 
 
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matter of fact, she said within a few days or the next day they 
would come out and pay us." 
 
At the end of the plaintiffs' case, George moved to strike 
the evidence on the contract claim on various grounds relating 
to the sufficiency of the evidence.  The circuit court sustained 
the motion to strike and dismissed the plaintiffs' case with 
prejudice.  The plaintiffs appeal. 
 
The plaintiffs argue that the circuit court erred in 
sustaining George's demurrer to their constructive fraud claim.  
The plaintiffs note that they alleged George made material 
misrepresentations, which caused them to enter into both the 
alleged oral contract with George and the insurance contract with 
Farm Bureau, and that the plaintiffs reasonably relied on George's 
misrepresentations to their detriment.  The plaintiffs contend 
that the "economic loss rule" does not bar their constructive 
fraud claim because George had a "common law duty" to be truthful 
to them.  We disagree with the plaintiffs' arguments. 
 
A demurrer admits the truth of all facts alleged in a motion 
for judgment but does not admit the correctness of the pleader's 
conclusions of law.  Blake Constr. Co. v. Upper Occoquan Sewage 
Auth., 266 Va. 564, 570-71, 587 S.E.2d 711, 714-15 (2003); 
Yuzefovsky v. St. John's Wood Apartments, 261 Va. 97, 102, 540 
S.E.2d 134, 136-37 (2001).  The function of a demurrer is to test 
the legal sufficiency of the facts alleged.  Glazebrook v. Bd. of 
 
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Supervisors, 266 Va. 550, 554, 587 S.E.2d 589, 591 (2003); W.S. 
Carnes, Inc. v. Bd. of Supervisors, 252 Va. 377, 384, 478 S.E.2d 
295, 300 (1996).  Because our review of a circuit court's decision 
sustaining a demurrer addresses that same legal question, we 
review the circuit court's judgment de novo.  Glazebrook, 266 Va. 
at 554, 587 S.E.2d at 591. 
 
Applying these principles, we conclude that the circuit court 
properly sustained George's demurrer to the constructive fraud 
claim under the "economic loss rule."  As we explained in 
Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va. 
419, 425, 374 S.E.2d 55, 58 (1988), losses suffered as a result of 
the breach of a duty assumed only by agreement, rather than a duty 
imposed by law, remain the sole province of the law of contracts.  
The rationale for this rule lies in the distinctly different 
policy considerations distinguishing the law of torts from the law 
of contracts. 
The primary consideration underlying tort law is the 
protection of persons and property from injury, while the major 
consideration underlying contract law is the protection of 
bargained for expectations.  Id.  Thus, when a plaintiff alleges 
and proves nothing more than disappointed economic expectations 
assumed only by agreement, the law of contracts, not the law of 
torts, provides the remedy for such economic losses.  Willard v. 
Moneta Bldg. Supply, Inc., 262 Va. 473, 480, 551 S.E.2d 596, 599 
 
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(2001); Ward v. Ernst & Young, 246 Va. 317, 325, 435 S.E.2d 628, 
632 (1993); Rotonda Condo. Unit Owners Ass'n v. Rotonda Assocs., 
238 Va. 85, 90, 380 S.E.2d 876, 879 (1989); Sensenbrenner, 236 Va. 
at 425, 374 S.E.2d at 58. 
Here, the plaintiffs' claim against George merely sought 
recovery for losses allegedly suffered as a result of George's 
failure to fulfill her oral contract to procure a policy that 
would pay the total replacement costs of the plaintiffs' home 
within a few days after sustaining a total loss.  The purely 
economic nature of this alleged loss is illustrated by Massey's 
testimony in which he conceded that the plaintiffs sought to 
recover the very same damages in their separate lawsuits against 
George and Farm Bureau. 
Further, contrary to the plaintiffs' assertion, George did 
not have a common law duty to the plaintiffs arising out of the 
parties' dealings.  The law of torts provides redress only for the 
violation of certain common law and statutory duties involving the 
safety of persons and property, which are imposed to protect the 
broad interests of society.  See Ward, 246 Va. at 324, 435 S.E.2d 
at 631; Sensenbrenner, 236 Va. at 425, 374 S.E.2d at 58; Blake 
Constr. Co. v. Alley, 233 Va. 31, 34-35, 353 S.E.2d 724, 726 
(1987); Kamlar Corp. v. Haley, 224 Va. 699, 706, 299 S.E.2d 514, 
517 (1983).  Therefore, we hold that the plaintiffs did not assert 
a valid claim of constructive fraud against George because 
 
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whatever duties George may have assumed arose solely from the 
parties' alleged oral contract.3  
The plaintiffs also argue that the circuit court erred in 
sustaining George's motion to strike their claim for breach of 
contract.  Among other arguments, the plaintiffs address the 
element of damages and assert that as a result of George's breach 
of her oral agreement, their Farm Bureau policy effectively was 
worth only $290,000, the amount they actually recovered from Farm 
Bureau.  The plaintiffs contend that, therefore, they sustained 
damages measured by the difference between the full replacement 
costs of their home and the amount they actually were paid by Farm 
Bureau.  We disagree with the plaintiffs' arguments and conclude 
that they failed as a matter of law to establish any damages 
resulting from George's alleged breach of contract. 
 
The elements of a breach of contract action are (1) a legally 
enforceable obligation of a defendant to a plaintiff; (2) the 
defendant's violation or breach of that obligation; and (3) injury 
or damage to the plaintiff caused by the breach of obligation.  
Brown v. Harms, 251 Va. 301, 306, 467 S.E.2d 805, 807 (1996); 
Fried v. Smith, 244 Va. 355, 358, 421 S.E.2d 437, 439 (1992); 
Westminster Investing Corp. v. Lamps Unlimited, Inc., 237 Va. 543, 
546, 379 S.E.2d 316, 317 (1989).  In considering the circuit 
                     
 
3 Our conclusion in this regard is applicable both to the 
plaintiffs' original motion for judgment and to their amended 
 
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court's decision striking the evidence on the contract claim, we 
view the facts in the light most favorable to the plaintiffs and 
draw all fair inferences from those facts.  See Howerton v. Mary 
Immaculate Hosp., Inc., 264 Va. 272, 273, 563 S.E.2d 671, 671 
(2002); Baysden v. Roche, 264 Va. 23, 25-26, 563 S.E.2d 725, 726 
(2002); Gina Chin & Assocs. v. First Union Bank, 260 Va. 533, 536, 
537 S.E.2d 573, 574 (2000). 
The evidence showed that George procured for the plaintiffs a 
policy providing full replacement costs of their home in the event 
that it was totally destroyed by fire.  However, contrary to their 
alleged agreement with George, the policy required the plaintiffs 
to rebuild their home within six months of receiving payment for 
the actual cash value of the damage before they were entitled to 
receive full replacement costs.  Therefore, the proper measure of 
damages in this case is the difference between the policy that the 
plaintiffs allegedly bargained for, one that would pay full 
replacement costs within a few days of a total loss, and the 
policy that the plaintiffs actually received, one that required 
them to rebuild their house within the time period specified in 
the policy before being entitled to payment of full replacement 
costs.  See Estate of Taylor v. Flair Prop. Assocs., 248 Va. 410, 
414, 448 S.E.2d 413, 416 (1994); Bryant v. Peckinpaugh, 241 Va. 
172, 178, 400 S.E.2d 201, 205 (1991). 
                                                                  
motion for judgment. 
 
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The plaintiffs, however, failed to establish any damages 
resulting from their inability to obtain full replacement costs 
within a few days after the fire.  Although the plaintiffs 
testified that they were unable to rebuild their home without 
receiving the full replacement costs within the shorter time 
period promised by George, the plaintiffs did not present any 
evidence to support this claim.  Notably, the plaintiffs failed to 
show that they attempted, but were unable, to obtain alternative 
financing to rebuild the home within the six months required by 
the policy terms.  They also failed to prove the additional cost 
of any alternative financing for which they could have qualified, 
or other "delay" damages attributable to the policy provision 
requiring them to rebuild their house before receiving full 
replacement costs. 
Based on this record, the only testimony relating to damages 
was the plaintiffs' unsupported assertion that they could not 
rebuild the house without receiving immediate payment of full 
replacement costs from Farm Bureau.  This mere assertion failed as 
a matter of law to establish damages resulting from the difference 
in the policy George allegedly agreed to procure for the 
plaintiffs and the policy that she actually obtained for them.  
Therefore, we hold that the circuit court properly struck the 
 
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evidence on the contract claim at the conclusion of the 
plaintiffs' case.4
For these reasons, we will affirm the circuit court's 
judgment. 
Affirmed.
                     
 
4 Given this resolution of the plaintiffs' contract claim, 
we need not address George's additional arguments that the 
alleged oral contract failed for lack of consideration and was 
barred under the doctrine of accord and satisfaction.  We also 
express no opinion on whether an action for breach of an alleged 
contract, such as the one asserted here, will lie against an 
employee insurance agent based solely on that employee's actions 
assisting a policyholder in the procurement of an insurance 
policy issued by her employer. 
 
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