Title: American Spirit Insurance Co. v. Owens

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  Carrico, C.J., Lacy, Keenan, Koontz, Kinser, and 
Lemons, JJ. 
 
AMERICAN SPIRIT INSURANCE COMPANY 
 
OPINION BY 
v.  Record No. 000767 
JUSTICE LAWRENCE L. KOONTZ, JR. 
 
March 2, 2001 
 
FOY OWENS, D/B/A PATRICK HENRY 
INSURANCE AGENCY 
 
FROM THE CIRCUIT COURT OF HENRY COUNTY 
David V. Williams, Judge 
 
In this appeal, we consider whether the indemnification  
provisions contained in an agency agreement between an insurance 
company and its agent provide for recovery of attorney’s fees 
and other expenses related to litigation of claims made on an 
insurance policy issued by the agent in breach of the agency 
agreement. 
BACKGROUND 
The parties do not dispute the material facts.  On July 4, 
1994, American Spirit Insurance Company (American Spirit) 
entered into an agency agreement with Foy B. Owens, doing 
business as Patrick Henry Insurance Agency (Owens).  The agency 
agreement permitted Owens to bind American Spirit on insurance 
policies issued by American Spirit “for risks that meet the 
requirements of [the] Company’s current rates and written 
underwriting guidelines.” 
Relevant to the issue raised in this appeal, the agency 
agreement contained the following provisions for indemnifying 
American Spirit for damages arising from a breach of the 
agreement by Owens: 
V. INDEMNIFICATION 
 
. . . . 
 
4. [Owens] shall indemnify and hold harmless [American 
Spirit] against any liabilities [American Spirit] 
may incur as a result of any act of [Owens] in 
violation of this Agreement or outside the scope of 
authority granted to [Owens] pursuant to this 
Agreement or any action of [Owens] which is in 
violation of any law or regulation, except to the 
extent [American Spirit] has caused, contributed to, 
or compounded such failure. 
 
5. [Owens] shall also reimburse [American Spirit] for 
any legal or other expenses reasonably incurred by 
[American Spirit] in connection with investigating 
any such liabilities. 
 
6. [Owens] shall promptly notify [American Spirit] 
upon receipt of notice of the commencement of any 
action relating to such liabilities, and [Owens] 
shall be entitled to participate in such action, or 
to assume the defense of such action with counsel of 
[his] own selection.  If [Owens] assumes defense of 
any such action, [he] shall not be liable to 
[American Spirit] for any legal or other expenses 
subsequently incurred by [American Spirit] in 
connection with such action. 
 
On August 19, 1994, Owens accepted an application for 
insurance on a house owned by Douglas D. Tyler that bound 
American Spirit to coverage of $65,000 for the structure and 
$45,500 for the contents.  Owens had visited the property and 
was aware that the house was in a dilapidated state.  He relied 
 
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upon Tyler’s representation that Tyler was in the process of 
making major renovations to the house.  Owens also based the 
value of the structure and its contents solely on Tyler’s 
representations.  He subsequently admitted that on the date the 
policy was written the market value of the property “wasn’t very 
high,” and that the structure did not meet the requirements of 
American Spirit’s underwriting guidelines. 
On September 14, 1994, Tyler’s property was destroyed by 
fire.  On May 31, 1995, after an extensive investigation, 
American Spirit denied Tyler’s claims for loss of the structure 
and its contents under the policy obtained for him by Owens.  
American Spirit based this denial on its conclusions that Tyler 
had set the fire or caused it to be set and that he had made 
material misstatements on the application for insurance. 
Tyler and his wife filed suit against American Spirit 
alleging breach of contract.  In that case, the jury found that 
Tyler had been responsible for the fire and had made false 
statements on the application for insurance.  However, the jury 
further found that Tyler’s wife was a resident of the house as 
defined by the policy and that she was entitled to recover 
$28,500 for the losses she suffered as a result of the fire.  
Subsequently, on June 5, 1997, American Spirit and the Tylers 
entered into a settlement in which the Tylers received $18,000 
in satisfaction of their claims. 
 
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On April 16, 1998, American Spirit filed a motion for 
judgment against Owens alleging that he had breached the agency 
agreement and seeking indemnification for the expenses it 
incurred in the investigation and litigation of the claims made 
under Tyler’s policy.  American Spirit specifically sought to 
recover the $18,000 paid to the Tylers and “attorney’s fees, 
legal expenses and expert witness expenses and costs in excess 
of $45,000.”  Owens filed grounds of defense denying that he had 
breached the agency agreement. 
On September 13, 1999, the parties filed cross-motions for 
summary judgment with supporting briefs.  By agreement of the 
parties, the case was submitted to the trial court on the record 
and discovery depositions.  In a letter opinion to counsel dated 
September 21, 1999, the trial court ruled that Owens had 
“committed a material breach of the Agency Agreement” and, thus, 
Owens would be required to indemnify American Spirit for the 
$18,000 paid to settle the Tylers’ claims.  The trial court 
further ruled that “American Spirit would be entitled to legal 
fees and expert fees incurred in the investigation of the matter 
but not for expenses incurred in the trial of the Tyler 
lawsuit.” 
In a subsequent letter opinion dated November 12, 1999, the 
trial court, in response to American Spirit’s motion for 
reconsideration, adhered to its prior ruling and awarded 
 
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American Spirit judgment in the amount of $21,887.70, including 
$3,887.70 in expenses incurred in the investigation of the 
claims made on Tyler’s policy.  By order dated January 6, 2000, 
the trial court entered a judgment embodying those dispositions.  
We awarded American Spirit this appeal. 
DISCUSSION 
In Southern Railway Co. v. Arlen Realty, 220 Va. 291, 296, 
257 S.E.2d 841, 844 (1979), where the right of the indemnitee 
was based upon an express contract, we adopted “the rule 
followed in the great majority of other jurisdictions . . . that 
the indemnitee may recover reasonable attorney’s fees and 
expenses of litigation spent in defense of the claim indemnified 
against.”  The indemnitee’s right to recover is based upon the 
express terms of the contract, and where “no provision of the 
contract provides otherwise,” that right extends to any expense 
reasonably incurred as a result of the breach, including the 
proper legal costs and expenses incurred in defending an 
indemnified claim made by a third party against the indemnitee.  
Id.; see also Appalachian Power Co. v. Sanders, 232 Va. 189, 
196, 349 S.E.2d 101, 106 (1986). 
In order to determine whether the agency agreement between 
American Spirit and Owens in this case provides for recovery of 
attorney’s fees and expenses of litigation of an indemnified 
claim, we look to the parties’ intentions as expressed in the 
 
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terms of that agreement.  Familiar principles govern our 
resolution of this issue.  First, where the terms of the 
contract are clear and unambiguous, we will construe those terms 
according to their plain meaning.  Bridgestone/Firestone v. 
Prince William Square, 250 Va. 402, 407, 463 S.E.2d 661, 664 
(1995).  “Additionally, we will not insert by construction, for 
the benefit of a party, a term not express in the contract.”  
Lansdowne Development Co. v. Xerox Realty, 257 Va. 392, 400, 514 
S.E.2d 157, 161 (1999).  Finally, we construe the contract as a 
whole, without giving emphasis to isolated terms.  Id. at 401, 
514 S.E.2d at 161; see also Vega v. Chattan Associates, 246 Va. 
196, 199, 435 S.E.2d 142, 143 (1993). 
Owens contends that paragraphs 4, 5, and 6 of the 
indemnification section of the agency agreement are in conflict 
and ambiguous, and must be construed against American Spirit.  
We disagree.  We find nothing ambiguous in the terms of the 
agreement.  Rather, these three paragraphs, and the three 
paragraphs that precede them, which provide indemnification for 
the agent in reciprocal circumstances of liabilities arising 
from a breach by the company, constitute a comprehensive scheme 
for indemnifying each party for any loss occasioned by the 
breach of the other. 
Specifically with respect to the claim for indemnity made 
by American Spirit, paragraph 4 expressly provides 
 
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indemnification for “any liabilities” American Spirit incurred 
as a result of Owens’ breach of the agency agreement.  Paragraph 
5 provides indemnification for “any legal or other expenses 
. . . incurred . . . in connection with investigating any such 
liabilities.” 
Owens contends that because paragraph 5 makes specific 
reference to legal expenses, those expenses are by implication 
necessarily excluded from the term “any liabilities” in 
paragraph 4.  We disagree.  By its express terms, paragraph 5 
relates only to additional expenses incurred in the 
investigation of claims arising from the liabilities incurred by 
the company as a result of the agent’s breach.  Nothing in the 
paragraph, expressly or by implication, manifests an intent to 
limit the meaning of the term “any liabilities” in paragraph 4, 
and we will not by construction supply such limitations. 
Owens further contends that paragraph 6 expressly 
stipulates the conditions under which indemnification of 
litigation expenses will be available to American Spirit and, 
thus, is the “provision of the contract provid[ing] otherwise” 
which was absent in Southern Railway Co.  He further contends 
that because the record does not demonstrate that he was given 
the opportunity to join in the defense of the Tylers’ lawsuit 
against American Spirit, American Spirit is barred from seeking 
 
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indemnification of the litigation expenses it incurred in that 
lawsuit. 
Paragraph 6 provides a mechanism for the agent to avoid 
indemnification of the company’s litigation expenses if he 
elects to participate in the defense “of any action relating to 
such liabilities.”  That mechanism requires the agent to notify 
the company upon his receipt of notice of any action relating to 
the liabilities indemnified by the agent and permits him to 
elect to join in or assume the defense of such action.  However, 
nothing in paragraph 6, or elsewhere in the agreement, imposes a 
reciprocal duty on the company to notify the agent of such 
actions.  Nor do the terms of paragraph 6 expressly or by 
implication limit the company’s right to recover litigation 
expenses to those instances where the agent has been afforded 
the opportunity to participate in the defense of an action and 
has declined to do so.  The circumstances were much the same in 
Southern Railway Co., where we said that “[u]nless the contract 
of indemnity provides otherwise, the indemnitee’s failure to 
give the indemnitor timely notice of and an opportunity to 
defend against the third party’s claim does not bar recovery by 
the indemnitee against the indemnitor.”  Southern Railway Co., 
220 Va. at 296, 257 S.E.2d at 844.  In the absence of such 
terms, paragraph 6 has no application to the facts of this case. 
 
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In summary, we hold that under paragraph 4 of the indemnity 
provisions of the agency agreement, American Spirit was 
indemnified for “any liabilities” it incurred as the result of 
Owens’ breach.  No express term of the agreement excludes from 
that indemnity the “reasonable attorney’s fees and expenses of 
litigation spent in defense of the claim indemnified against.”  
Accordingly, the trial court erred in failing to include such 
expenses in the judgment awarded to American Spirit. 
CONCLUSION 
Because the reasonableness of the attorney’s fees and 
expenses of litigation sought by American Spirit was not 
contested below, we will reverse the judgment of the trial court 
with respect to the denial of the claim for those expenses and 
enter final judgment for American Spirit for $65,637.89 
reflecting the $18,000 paid in settlement of the Tylers’ claims, 
$43,750.19 in attorney’s fees related to the investigation and 
defense of those claims, and $3,887.70 in other expenses related 
to the investigation and defense of those claims. 
Reversed and final judgment. 
 
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