Title: Ohio Casualty Insurance v. State Farm Fire & Casua

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Lacy, Keenan, Koontz, Kinser, and 
Lemons, JJ., and Compton, S.J. 
 
OHIO CASUALTY INSURANCE COMPANY 
 
v.  Record No. 001914    OPINION BY JUSTICE DONALD W. LEMONS 
 
 
 
June 8, 2001 
STATE FARM FIRE AND CASUALTY COMPANY 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
Henry E. Hudson, Judge 
 
 
In this appeal, we consider a coverage dispute between 
two insurance carriers, arising from the damage by fire of two 
adjacent homes under construction by the same builder. 
I. Facts and Proceedings Below 
 
State Farm Fire and Casualty Company (“State Farm”) 
issued separate and nearly identical homeowner’s insurance 
policies to Jerome and Gail Kozak (“Kozaks”) and Stephen and 
Mary Kitchen (“Kitchens”).  The Kozaks and the Kitchens 
separately contracted with Talton Brothers Construction 
Company, Inc. (“Talton Brothers”) for the construction of 
their respective homes on adjacent lots.  Ohio Casualty 
Insurance Company (“Ohio Casualty”) issued a builder’s risk 
insurance policy to Talton Brothers, covering both dwellings 
and properties.  Although construction was not complete and 
residential use permits had not been approved or issued, title 
to the properties in question passed to the respective 
homeowners prior to a fire that caused considerable damage to 
both properties. 
 
The Kozaks and the Kitchens made claims against State 
Farm under their respective homeowner’s insurance policies. 
State Farm paid the Kozaks $86,081.00, and paid the Kitchens  
$572,749.76.  Thereafter, State Farm brought a bill of 
complaint for declaratory judgment against Ohio Casualty 
seeking a declaration that Ohio Casualty’s policy provided 
coverage for the losses and that Ohio Casualty’s policy “is 
primary and should be paid in full.”  The parties stipulated 
to the facts and upon cross-motions for summary judgment, 
submitted the case to the trial court on briefs and oral 
argument. 
 
The trial court held that State Farm was entitled to 
equitable contribution from Ohio Casualty in the amount of 
one-half of the claims paid and denied State Farm’s request 
for pre-judgment interest.  Ohio Casualty appeals the judgment 
of the trial court, maintaining that the trial court erred in 
ordering equitable contribution because the builder’s risk 
insurance policy and the homeowner’s insurance policies named 
different insureds.  Ohio Casualty further contends that even 
if its policy afforded coverage for these losses, it only 
provided coverage excess to other insurance coverage.  State 
Farm assigns cross-error and maintains that the trial court 
erred in failing to hold that Ohio Casualty’s policy was 
primary and in failing to require full reimbursement of all 
 
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claims paid by State Farm.  Also, State Farm assigns cross-
error to the trial court’s denial of pre-judgment interest. 
II. Standard of Review 
 
The trial court based its findings of fact upon 
stipulated facts rather than upon an ore tenus hearing.  
Therefore, the court’s findings, although highly persuasive 
and entitled to great weight, are not binding on appeal.  
Johnson v. Insurance Co. of No. America, 232 Va. 340, 345, 350 
S.E.2d 616, 619 (1986).  However, we will not reverse the 
trial court’s judgment on appeal unless it is plainly wrong or 
without evidence to support it.  State Farm Mut. Auto. Ins. 
Co. v. Weisman, 247 Va. 199, 202, 441 S.E.2d 16, 18 (1994). 
See also Code § 8.01-680. 
III. Analysis 
 
On appeal, State Farm premises its entitlement to 
recovery upon theories of subrogation and contribution.  
Neither theory is applicable to this case.  In a subrogation 
action, the rights of a subrogated insurer can rise no higher 
than the rights of its insured.  See Nationwide Mut. Ins. Co. 
v. Minnifield, 213 Va. 797, 800, 196 S.E.2d 75, 78 (1973).  
Consequently, in this case, in order to recover based upon a 
theory of subrogation, State Farm must establish that Ohio 
Casualty had an obligation to pay the Kozaks and the Kitchens 
under the builder’s risk insurance policy.  The evidence does 
 
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not support such recovery.  The Kozaks and the Kitchens were 
not named as additional insureds or loss payees under Ohio 
Casualty’s policy; consequently, they have no express 
contractual right to receive payment from Ohio Casualty. 
 
In support of its argument that subrogation is proper in 
this action, State Farm cites our opinion in Federal Land Bank 
v. Joynes, 179 Va. 394, 18 S.E.2d 91 (1942), and states that 
the doctrine of subrogation “is a creature of equity which 
arises by operation of law; it is not dependent upon contract 
or privity between the parties, but rather is a creature of 
equity and is founded upon the principles of natural justice.”  
State Farm’s rough paraphrase from our opinion ignores the 
sentence that precedes the paraphrased passage, where we 
clearly stated: “Subrogation is the substitution of another 
person in the place of the creditor to whose rights he 
succeeds in relation to the debt.”  Id. at 401, 18 S.E.2d at 
920.  Simply stated, in this case, since the Kozaks and the 
Kitchens could not maintain a direct action against Ohio 
Casualty, under the doctrine of subrogation, neither could 
State Farm. 
Additionally, State Farm argues that it is entitled to 
equitable contribution.  The right of equitable contribution 
does not arise out of an express contract or agreement between 
the parties to indemnify each other.  Allstate Ins. Co. v. 
 
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United Servs. Auto. Ass’n, 249 Va. 9, 12, 452 S.E.2d 859, 861 
(1995).  Rather, it is based upon equitable principles that 
imply a contract between the parties to contribute ratably 
toward the discharge of a common obligation.  Id.  We have 
previously stated: 
Thus where two or more persons are liable 
to pay a claim and one or more of them 
pays the whole of it, or more than his or 
her share, the one so paying may generally 
recover from the others the ratable 
proportion of the claim that each ought to 
pay. 
 
Midwest Mut. Ins. Co. v. Aetna Cas. and Sur. Co., 216 Va. 926, 
929, 223 S.E.2d 901, 904 (1976)(quoting Wiley N. Jackson Co. 
v. City of Norfolk, 197 Va. 62, 66, 87 S.E.2d 781, 784 
(1955)). 
 
In the context of insurance coverage, proof that the 
policies insure the same property is not sufficient to 
establish a common obligation; the policies in question must 
afford coverage for the same insureds, and the same risk.  See 
Minnifield, 213 Va. at 801, 196 S.E.2d at 78 (citing American 
Employers’ Ins. Co. v. Maryland Cas. Co., 218 F.2d 335, 340 
(4th Cir. 1954)).  There was no common obligation in this case 
because Ohio Casualty had no obligation to pay the claims of 
the Kozaks or the Kitchens, and State Farm had no obligation 
to pay the claims of Talton Brothers. 
 
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Two cases remarkably similar to the case before us 
illustrate the concept.  In Reliance Ins. Co. v. Liberty Mut. 
Fire Ins. Co., 13 F.3d 982 (6th Cir. 1994), two insurance 
carriers insured a building that was damaged by fire.  
Reliance had issued a builder’s risk insurance policy to the 
builder and Liberty Mutual had issued a builder’s risk 
insurance policy to the building’s owner.  Neither policy 
named the other party as an additional insured or loss payee.  
Upon claim made by the owner, Reliance paid the loss and 
thereafter, sought contribution from Liberty Mutual.  The 
Court of Appeals held that there was no right of contribution 
because a common obligation “only exists where ‘both policies 
were on the same property, on the same interest in the 
property, against the same risks, and payable to the same 
parties.”  Id. at 983 (quoting Lubetsky v. Standard Fire Ins. 
Co., 187 N.W. 260 (Mich. 1922)).  The court specifically noted 
that it could find “no authority for the proposition that an 
insurance contract which insures only a property owner’s 
interest insures the ‘same interest’ as a policy which only 
insures a contractor’s interest.”  Id. at 984.  In a later 
case, the Court of Appeals summarized its holding in Reliance 
by stating: “Simply put, because each policy covered a 
different insured and neither named the other as an additional 
insured under their respective policies, contribution was not 
 
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a proper remedy.”  State Farm Fire & Cas. Co. v. Zurich Ins. 
Co., 111 F.3d 42, 45 (6th Cir. 1997). 
 
The case of Lititz Mut. Ins. Co. v. Lengacher, 248 F.2d 
850 (7th Cir. 1957), involved a dispute between an insurer 
that issued a builder’s risk insurance policy to a builder and 
an insurer that issued a fire insurance policy to the owner.  
After the property was damaged by fire, the builder sued his 
carrier for the loss.  Holding that the builder’s insurer must 
pay the claim because the named insured “had the right to rely 
solely upon the policy he had purchased,” the court further 
held that the builder’s insurer had no right of contribution 
from the owner’s insurer because “the two insurance companies 
insured separate and distinct interests in the same property.”  
Id. at 853-54. 
IV. Conclusion 
 
We hold that the trial court erred in ruling that “both 
carriers share a concurrent insurance obligation for the 
damage occasioned by the fire.”  Consequently, it is 
unnecessary to address the remaining assignments of error and 
cross-error.  Accordingly, we will reverse and vacate the 
judgment of the trial court and will enter final judgment in 
favor of Ohio Casualty. 
Reversed and final judgment. 
 
 
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