PUBLISHED
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 18
- 1491

GATEWAY RESIDENCES AT EXCHANGE, LLC , Plaintiff − Appellant ,

v. ILLINOIS UNION INSURANCE COMPANY, d/b/a ACE American Insurance Company, d/b/a ACE Environmental, d/b/a Ace USA, d/b/a ACE USA Companies , Defendant

– Appellee

. Appeal from the United States District Court for the Eastern District of Virginia , at Alexandria

. Liam O ’ Grady , District Judge. ( 1:17

- cv - 00629

- LO

- JFA )
Argued : December 12 , 201 8 Decided: February 28, 2019

Before AGEE, DIAZ , and HARRIS, Circuit Judges.

Affirmed by published opinion. Judge Diaz wrote the opinion, in which Judge Agee and Judge Harris joined.

ARGUED: C. Thomas Brown, SILVER & BROWN, Fair fax, Virginia, for Appellant. Douglas Aaron Winegardner, SANDS ANDERSON, PC, Richmond, Virginia, for Appellee. ON BRIEF: Eric B. Lawson, SILVER & BROWN, Fairfax, Virginia, for Appellant.2 DIAZ, Circuit Judge: Having been awarded more than $900,000 for a contractor’s faulty workmanship, Gateway Residences at Exchange, LLC, sued to collect the judgment from the contractor’s liability insurer, Illinois Union Insurance Company. The relevant policy, however, covered only claims reported to the insurer during the policy period, and that policy expired 19 months before Illinois Union learned about Gateway’s claim. That should end this case . But Gateway claims it may nonetheless recover on the policy because , by Virginia statute, Illinois Union waived certain defense s by failing to promptly inform Gateway of its coverage denial. See Va. Code Ann. § 38.2

- 2226. The district court was unpersuaded and, f or reasons that follow, we affirm.

I.
A. This insurance dispute started with two broken generators in an Alexandria, Virginia, apartment complex. Gateway, t he building’s owner, had hired a local
contractor, Mechanical Design Group (MDG) , to provide various engineering and design services

. A mong MDG’s jobs was to install two “life and safety power generators” in the garage. J.A. 208. MDG apparently did n’t install the generators very well , though , for

w hen the y start ed up i n August 2014, they caught fire , wreck ing the generators and delay ing the 217

- unit building’s opening.3 Blaming MDG for the damage, Gateway demanded that its contractor “cure the negligent design and installation” of the generators. J.A. 209. But it didn ’ t sue MDG , at least initially

. And i n September 2014 , MDG went out of business. Before start ing work on the Gateway project, MDG had bought liability insurance
from Illinois Union. Under the policy , Illinois Union had agreed to indemnify MDG for legal claims that might arise from the Gateway job

. The front page of the policy advised that it provid ed liability coverage “ ON A CLAIMS
- MADE AND REPORTED BASIS ,” meaning that it covered “ ONLY CLAIMS FIRST MADE AGAINST THE INSURED AND REPORTED TO THE INSURER, IN WRITING, DURING THE POLICY PERIOD .” J.A. 256 (typeface in original). To further stress the po int, the policy made it a “condition precedent to coverage” that any claim be reported to the insurer during the policy period. J.A. 259. The policy period began on February 1, 2014 , and ended one year later on February 1, 2015. 1 MDG apparently never t old Illinois Union about Gateway’s potential claim before its insurance policy expired in 201 5 . Instead, Illinois Union first heard about the generator incident on September 6, 2016 , after Gateway notified MDG’s insurers that it intended to sue

. Ten days later, Gateway sued MDG in Virginia state court alleging negligence and breach of contract.

1 The policy also provided a 60

- day “extended reporting period,” subject to various conditions. J.A. 269. These provisions have no bearing on this appeal.4 In early October 2016 , MDG learned that Illinois Union had denied it coverage for Gateway’s cl aim. The denial letter , sent by Chubb North American Claims “on behalf of” Illinois Union , 2 explained that because the claim was first reported in September 2016 there was “no coverage for this matter as no claims were made and reported during the policy period.” J.A. 2 94, 2 96. A couple of weeks later, Gateway’s counsel received a copy of Illinois Union’s denial letter from MDG’s insurance broker. Chubb , however, did n’t contact Gateway directly about its coverage denial until January 23, 2017. In the m eantime , Gateway’s lawsuit against MDG proceeded in state court. MDG

never appear ed , so the court entered a default judgment awarding Gateway $910,148 in damages and $22,580 in costs and attorneys’ fees.
B. Having obtained this judgment, Gateway filed the present lawsuit seeking to collect from Illinois Union under MDG ’s liability policy

. Gateway first sued in Virginia
state court , but Illinois Union removed the case to the U.S. District Court for the Easter n District of Virginia, invoking that court’s diversity jurisdiction. (Gateway is a citizen of Virginia and Maryland, wh ereas Illinois Union is a citizen of Pennsylvania and Illinois.) Gateway moved unsuccessfully to remand

. See Gateway Residences at Ex ch., LLC v. Ill.
Union Ins. Co. , No. 1:17

- cv - 629, 2017 WL 7805743 , at *2 (E.D. Va. Sept. 11, 2017). Following discovery, t he district court granted summary judgment to Illinois Union because its policy didn ’ t cover claims first reported after the policy period ended

2 Illinois Union’s parent company, ACE USA, merged with Chubb in 2016.5 in February 2015

. The court also rejected Gateway’s contention that Illinois Union had waived this noncoverage argument because it gave Gateway untimely notice of its denial

. Gateway Residences at Exch

. , LLC v. Ill

. Union Ins. Co. , No . 1:17

- cv - 629,
2018 WL 1629107, at *2

– 4 (E.D. Va. Apr. 3, 2018). This appeal followed.

II. Gateway challenges the district court’s refusal to remand the case and its entry of judgment in Illinois Union ’s favor

. We have reviewed both issues de novo an d find no

error. A. Gateway first argues that the district court lacked subject matter jurisdiction and should have remanded this case to Virginia state court. It contends that the present suit is a “direct action” against an insurer and that Illinois Union therefore assumes the citizenship of its insured under 28 U.S.C. § 1332(c)(1). Were that true, the court would lack diversity jurisdiction because both Gateway and Illinois Union ’s insured , MDG , are citizens of Virginia

. We disagree, however, that Gateway’s lawsuit is a “direct action

. ”
F ederal courts have original jurisdiction over suits for more than $75,000 between
“citizens of different S tates.” 28 U.S.C. § 1332(a)(1). For diversity jurisdiction
purposes , a corporation is a citizen of any state in which it is incorporated, plus the state or foreign country “ where it has its principal pla ce of business.” Id. § 1332(c)(1). But § 1332(c) has an extra citizenship rule for insurance companies . Namely:6 [I] n any direct action against the insurer of a policy or contract of liability insurance

. . . to which action the insured is not joined as a party

- defendant, such insurer shall be deemed a citizen of . . . every State and foreign state of which the insured is a citizen. Id. § 1332(c)(1)(A). In other words, if a plaintiff brings a “direct action” against a wrongdoer’s liability insurer, the insurer assumes the citizenship of the insured. Kong v. Allied Prof ’ l Ins. Co. , 750 F.3d 1295, 1299 (11th Cir. 2014). On its face, this language sweep s broadly, potentially covering any lawsuit in which a thir d party sues a liability insurer over its insured’s conduct . But the unanimous understanding of our sister circuits has been that “direct action ” as used in § 1332(c) has

a much narrow er meaning. Specifically, it refers to a suit in which the plaintiff s ues a wrongdoer’s liability insurer without joining or first obtaining a judgment against the insured

. Kong , 750 F.3d at 1300; accord Hyland v. Liberty Mut

. Fire Ins. Co. , 885 F.3d 482, 484

– 85 (7th Cir. 2018); Rosa v. Allstate Ins. Co. , 981 F.2d 669, 675 (2d Cir. 1992); Beckham v. Safeco Ins. Co. of Am. , 691 F.2d 898, 901

– 02 (9th Cir. 1982); see Velez v. Crown Life Ins. Co. , 599 F.2d 471, 473 ( 1st Cir. 1979) ; Henderson v. Selective Ins. Co. , 369 F.2d 143, 149 (6th Cir. 1966) ; see also 7 A Couch on Ins urance § 107 : 4 ( 3d ed. updated 2018 ) (collecting additional cases). Section 1332(c) ’s legislative history strongly supports this reading

. In 1964, Congress added language to the diversity jurisdiction statute to address “direct action” lawsuits allowed by the laws of Louisiana and Wisconsin. See S. R ep . No. 88

- 1308, at
1

– 2 (1964) ; see also Velez , 599 F.2d at 473. Under these laws, a plaintiff may sue a tortfeasor’s liability insurer without joining the tortfeasor as a defendant and establish7 both the insured’s liability and the insurer’s obligation in a single suit. See La. Stat. Ann. § 22: 1269 (B) ; Wis. Stat. Ann. § 632.24

. Such statutes often created federal diversity jurisdiction when the insurer ’s citizenship was d ifferent from the plaintiff’s. And a s a result, what were essentially tort disputes between local residents would end up in federal
court

. See H.R. Rep. No. 88

- 12 2 9, at 1

– 2 (1964) ; cf. Lumbermen’s Mut. Cas. Co. v. Elbert , 348 U.S. 48, 5 6

– 57 (1954) (Frankfurter, J., concurring ) (bemoaning “direct action” forum

- shopping)

. In response, Congress amended § 1332(c) to p rovid e that the defendant insurer adopts the insured’s citizenship in such case s , thereby destroying diversity and ensuring that the merits of the tort claim would be resolved in state court

. Given this provision ’s background , we agree with the Eleventh Circuit that the “key feature” of a direct action is “the plaintiff’s ability to skip suing the [ tortfeasor ] and

sue directly his insurance carrier.” Kong , 750 F.3d at 1300

– 01 ( internal quotation marks omitted )

. When a plaintiff must either join the local tortfeasor or first obtain a separate judgment against it , the lack of divers e citizenship forces the state tort claim in to state
court. It’s o nly when the plaintiff skips this step and su es the insurer directly that the concerns behind Congress’s “direct action” amendments are implicated

. See Kong , 750 F.3d at 1300

– 01 (no direct action when plaintiff sued insurer after obtaining judgment from insured); Hyland , 885 F.3d at 485 (same)

. Under this definition, Gateway’s lawsuit is not a direct action. Virgin ia does n’t have a direct action statute but instead requires a third

- party claimant to first obtain a judgment against the insured

. T he claimant may then sue the insurer on the policy to collect the judgment. Va. Code Ann. § 38.2

- 2200; Richmond, Frederick sburg, &8 Potomac R.R. Co. v. Hughes

- Keegan, Inc. , 152 S.E.2d 28 , 33

– 34 (Va. 1967). And t hat is just what happened here

. Gateway obtained a default judgment against MDG in state
court then sued to collect that judgment under Illinois Union’s liability policy. Gateway did n o t (and could not) skip the tortfeasor , the insured

. Its present lawsuit is therefore not a direct action within the meaning of § 1332(c) (1). Gateway’s arguments do not persuade otherwise . First, it notes that we have
prev iously used the words “direct action” to describe, under Virginia law, a lawsuit against an insurer to enforce a judgment against its insured

. See Morre l v. Nationwide
Mut. Fire Ins. Co. , 188 F.3d 218, 221

– 22 (4th Cir. 1999). But in Morrel , we used “dire ct action” in the generic sense of a lawsuit filed against an insurer

. We did not consider whether such a suit fits the technical meaning of § 1332(c). Second, Gateway points us
to a sprinkling of district court cases holding that suits like this one are direct actions because they essentially do “ in two steps” what Louisiana’s and Wisconsin’s statutes “ did in one. ” See, e.g. , Sherman v. P a . Lumbermen’s Mut. Ins. Co. , 21 F. Supp. 2d 543 , 544

– 45 (D. Md. 1998) (quoting P rendergast v. All. Gen. Ins. Co. , 921 F. Supp. 653 , 655 (E.D. Mo. 1996) )

. But these cases, as the weight of contrary circuit precedent shows , are plain ly wrong. It is precisely the first step of suing the insured tortfeasor (or, for that matter, the simultaneous step of joining it as a party) that funnels the tort suit into state
court and thus eases Congress’s jurisdictional and forum

- shopping concerns. This law suit, in sum, is not a direct action for purposes of § 1332(c)(1) , and Illinois Union therefore does not adopt MDG’s Virginia citizenship. Because this lawsuit9 instead pits a Virginia plaintiff against an Illinois defendant , the district court had diversi ty jurisdiction and rightly refused to remand to state court. B. On the merits, the district court awarded summary judgment to Illinois Union because its policy covered only claims made and reported during the policy period and Gateway ’s claim wasn’t reported until well after the policy had expired

. Gateway ’s main contention on appeal is that , under a Virginia statute , Illinois Union waived that argument by failing to inform Gateway of its coverage denial within 45 days of receiving th e claim. Illinois Union , in response, says the relevant statute doesn ’ t apply in this case. Gateway ’s waiver argument invokes Virginia Code Section 38.2

- 2226. Under this
statute, an insurer that wants to defend against a third

- party claimant based on its insured’s breach of the underlying policy must notify the claimant of that intention. Specifically, it provides that: Whenever any insurer on a policy of liability insurance discovers a breach of the terms or conditions of the insurance contract by the insured, the insurer shall notify the claimant or the claimant ’ s counsel of the breach. Notification shall be given within forty

- five days after discovery by the insurer of the breach or of the claim, w hichever is later

. Va. Code. Ann. § 38.2

- 2226. Failure to give the required 45 days’ notice “will result in a waiver of the defense based on such breach to the extent of the claim by operation of law.” Id. The statute ’s text makes two things clear : it covers denials based on the insured’s

“ breach ” of the terms and conditions of the policy and applies to arguments properly characterized as waivable “ defenses

. ” Courts have therefore rightly held that that the10 statue (or its precursor) does n’t apply when an insurer denies coverage because the claim falls outside the scope of policy coverage

. See Cheatham v. NGM Ins. Co. , No. 3:12cv263

- HEH, 2013 WL 509049, at * 5 (E.D. Va. Feb. 11, 2013); Berry v. State Farm
Mut. Auto Ins. Co. , 340 F. Supp. 228, 231 (E.D. Va. 1972) ; Jackson v. Mi dd leton , 90 Va. Cir. 279 , 2015 WL 10765161 , at * 3

– 4 (Va. Cir. Ct. 2015 ). The argument that a claim is outside the scope of coverage is not about an insured’s “breach ” of contract. A “breach” assumes a legal duty on the insured’s part, but the insured obviously has no legal duty to incur covered claims. Likewise , a denial based on scope of coverage is not a “defense , ” as a “defense” pre supposes the insurer’s existing obligation to pr ovide coverage. With this understanding, w e conclude that the statute does n’t apply in this case. Illinois Union has n’t denied coverage because of MDG’s breach. Rather, it asserts

— correctly

— that the present claim is simply not covered by the policy

. As the policy’s bold, all

- caps preface makes clear, Illinois Union sold MDG a “claims

- made

- and

- reported” policy. This is a type of “claims

- made” policy, which differs from an ordinary “occurrence” policy in the type of risk it insures. An occur rence policy insures against a specific occurrence ( say, a car accident or building fire ) , and usually doesn ’ t depend on when the claim itself is filed. In contrast, under a claims

- made policy, the making of the claim itself is the peril being insured

. First Am. Title Ins. Co. v. Cont’l Cas. Co. , 709 F.3d 1170, 1174 n.2 (5th Cir. 2013). C overage usually attaches to a claim made during the policy period regardless of when the events underlying t he claim took place. Id. See generally 7 Couch , supra , § 102:22 (describing different liability policies).11 C laims

- made

- and

- reported policies, like the one Illinois Union sold MDG , are a distinct brand of claims

- made policies. A claims

- made

- and

- reported policy usually “requires the claim both be made against the insured and reported to the insurer during the policy period.” Sherwood Brands, Inc. v. Great Am. Ins. Co. , 13 A.3d 1268, 1 2 82 (Md. 2011) . If no claim is reported , no c overage is triggere d, even if the events underlying the claim took place during the policy period . And after the policy expires, “the insurer’s potential liability ends.” T.H.E. Ins. Co. v. P.T.P. Inc. , 628 A.2d 223, 227 (Md. 1993) (quoting St. Paul Fire & Marine Ins. Co. v. House , 554 A.2d 404, 41 8 (Md. 1989) (Murphy, C. J., dissenting) ). We do not think Virginia Code Section 38.2

- 2226 applies when , as here, an insurer denies coverage under a claims

- made

- and

- reported policy because no claim was reported d uring the policy period. Illinois Union’s potential liability under this policy ended when it expired in February 2015 , so the policy simply can ’t cover a claim first reported to the insurer a full 19 months later in September 2016 . Illinois Union is therefore not raising a “defense based on [an insured’s] breach.” Va. Code. Ann. § 38.2

- 2226. T here was no “breach” because , after February 2015, there was no policy to be breach ed ; t here is no “defense” because , after February 2015, Illinois Union ha d no coverage obligation to defend against. See T.H.E. , 628 A.2d at 227, 230 (holding, under similar Maryland statute, that denial of claim made after expiry of claims

- made

- and

report ed policy “resulted from the terms of coverage” and “i s not attributed to a ‘ breach ’ ” by the insured) ; Minn. Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC , 531 F. App’x
312 , 325 (4th Cir. 2013) (Thacker, J., dissenting) (“ If [the act triggering coverage]12 occurred after the expiration of the liability policy

. . . there is simply no policy which the insured can breach when it fails to notify the insurer of the claim .”)

. Because Illinois Union ’s argument is based on noncoverage, and not on MDG’s breach , Section 38.2

- 2226 does not apply

. 3 Besides being textually awkward, Gateway’s reading of Section 38.2

- 2226 would have the policy embrace claims it was never intended to cover. In a claims

- made

- and

reported policy, th e condition that claims be reported during the policy period is an essential part of the bargain between insurer and insured

. See Chas T. Main, Inc. v. Fireman’s Fund Ins. Co. , 551 N.E.2d 28, 29

– 30 (Mass. 1990). For the insurer , claim

triggering reporting allows it to “ close its books on a policy at it s expir ation and th erefore attain a level of predictability unattainable under standard occurrence policies.” First
Am

. , 709 F.3d at 1175 ( internal quotation marks omitted )

. In exchange, the insurer may accept a lower premium from the insured than it would for an occurrence policy with enduring liability. Id. ; Stine v. Cont’l Cas. Co. , 349 N.W.2d 127, 131 (Mich. 1984)

.

3 Gateway puts heavy stock in Section 38.2

- 2226’s use of the phrase “terms or conditions ” and language in Illinois Union’s policy that makes reporting a claim during the policy period a “ condition precedent to coverage.” J.A. 259 (emphasis added) . But Gateway ’s focus on this singl e word ignores the broader statutory language

. T he statute applies only to “ conditions ” that can plausibly be “breached,” and where the breach of such conditions could rightly be understood as a “defense” to coverage. That is not true about the reporting condition in a claims

- made

- and

- reported policy. See Sherwood Brands , 13 A.3d at 1288 (where notice of claim under claims

- made policy occurs only after expiration, “this non

- occu rrence of the condition precedent to coverage is not a ‘breach of the policy’”).13 Applying Section 38

. 2

- 2226 as Gateway urges , however, would expand the policy
to c onfer benefits that MDG didn’t pay for and that Illinois Union never agreed to provide. Though Virginia’s legislature clearly designed Section 38.2

- 2226 to override certain defenses, we doubt it intended the statute to effectively rewrite basic coverage
t erms of insurance contracts

. Cf. Burns v. Int’l Ins. Co. , 929 F.2d 1422, 1424

– 25 (9th Cir. 1993) (declining , for this reason, to apply a similar California rule to a claims

- made policy); Zuckerman v. Nat’l Union Fire Ins. Co. , 495 A.2d 395, 405

– 06 (N.J. 1985) (same under New Jersey law). Gateway’s effort to shoehorn this dispute into Section 38.2

- 2226 misconstrue s the insurance contract at issue

. Gateway says its demand on MDG in August 2014 triggered coverage under the policy and obligated MDG t o report that claim to its insurer. MDG’s
f

ailure to make that report, Gateway says, was a “breach of the reporting condition.” Appellant ’ s Br. at 30

. But u nder Illinois Union’s claims

- made

- and

- reported policy , the act triggering coverage was not Gateway’s 2014 demand , as Gateway claims, but rather the communication of that claim to Illinois Union , which didn ’ t happen until well after the policy expired. This case might come out quite differently had MDG reported Gateway’s demand in 2014 , or had MDG instead bought an occurrence policy . In those scenarios, coverage under the policy would likely have been triggered , leaving Illinois Union to defend, perhaps , because MDG did n’t give prompt enough notice or failed to fully cooperate with the insurer. In similar circumstances, courts have required notice under the statute at issue

. See Morrel , 188 F.3d at 22 6

– 27 (insurer waived defense based on insured’s failure14 to assist); Fed. Ins. Co. v. Nationwide Mut. Ins. Co. , 448 F. Supp. 723, 725

– 26 ( waived defense based on insured’s failure to notify “as soon as practicable” ). But those are not the facts of this case. Here, MDG bought a claims

- made

- and

- reported policy and reported no claim to Illi nois Union during the policy period. MDG did not “breach” the policy by not report ing Gateway’s 2014 demand any more than one breaches a fire insurance policy by incurring damage from a flood.
A pplying the text of the statute to the policy terms MDG and Illinois Union agreed
to , we hold that Section 38.2

- 2226 does not apply to Illinois Union’s denial of coverage. Illinois Union may therefore deny Gateway coverage despite allegedly failing to giv e notice. And s ince the policy by its clear terms does not cover Gateway’s post

termination claim, summary judgment for Illinois Union was proper. 4
III. We hold that the district court had subject matter jurisdiction and properly awarded summary judgment in Illinois Union’s favor. The judgment of the district court is therefore
AFFIRMED

.

4 Given our holding, we do not decide whether Illinois Union complied with Virginia’s notice statute because Gateway received actual (though indirect) notice of the denial les s than 45 days after making its claim.