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, 2018 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, Fairfax, 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 defenses by failing to 

promptly inform Gateway of its coverage denial. See Va. Code Ann. § 38.2-2226. The 

district court was unpersuaded and, for reasons that follow, we affirm.

I.

A.

This insurance dispute started with two broken generators in an Alexandria, 

Virginia, apartment complex. Gateway, the building’s owner, had hired a local 

contractor, Mechanical Design Group (MDG), to provide various engineering and design 

services. Among MDG’s jobs was to install two “life and safety power generators” in the 

garage. J.A. 208. MDG apparently didn’t install the generators very well, though, for 

when they started up in August 2014, they caught fire, wrecking the generators and 

delaying 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 in September 2014, MDG went out of business.

Before starting 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 provided 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 point, 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 told Illinois Union about Gateway’s potential claim before 

its insurance policy expired in 2015. 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 claim. 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. 294, 296. A couple of weeks later, Gateway’s counsel received a 

copy of Illinois Union’s denial letter from MDG’s insurance broker. Chubb, however,

didn’t contact Gateway directly about its coverage denial until January 23, 2017.

In the meantime, Gateway’s lawsuit against MDG proceeded in state court. MDG 

never appeared, 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 Eastern 

District of Virginia, invoking that court’s diversity jurisdiction. (Gateway is a citizen of 

Virginia and Maryland, whereas Illinois Union is a citizen of Pennsylvania and Illinois.) 

Gateway moved unsuccessfully to remand. See Gateway Residences at Exch., LLC v. Ill. 

Union Ins. Co., No. 1:17-cv-629, 2017 WL 7805743, at *2 (E.D. Va. Sept. 11, 2017).

Following discovery, the 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 and 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.” 

Federal courts have original jurisdiction over suits for more than $75,000 between 

“citizens of different States.” 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 place 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 sweeps broadly, potentially covering any lawsuit in 

which a third 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 narrower meaning. Specifically, it refers to a suit in which the plaintiff sues 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 7A Couch on Insurance § 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. Rep. 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 establish
7

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 different from the plaintiff’s. And as a 

result, what were essentially tort disputes between local residents would end up in federal 

court. See H.R. Rep. No. 88-1229, at 1–2 (1964); cf. Lumbermen’s Mut. Cas. Co. v. 

Elbert, 348 U.S. 48, 56–57 (1954) (Frankfurter, J., concurring) (bemoaning “direct 

action” forum-shopping). In response, Congress amended § 1332(c) to provide that the 

defendant insurer adopts the insured’s citizenship in such cases, 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 diverse citizenship forces the state tort claim into state 

court. It’s only when the plaintiff skips this step and sues 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. Virginia doesn’t 

have a direct action statute but instead requires a third-party claimant to first obtain a 

judgment against the insured. The claimant may then sue the insurer on the policy to 

collect the judgment. Va. Code Ann. § 38.2-2200; Richmond, Fredericksburg, & 
8

Potomac R.R. Co. v. Hughes-Keegan, Inc., 152 S.E.2d 28, 33–34 (Va. 1967). And that 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 not (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 

previously used the words “direct action” to describe, under Virginia law, a lawsuit

against an insurer to enforce a judgment against its insured. See Morrel v. Nationwide 

Mut. Fire Ins. Co., 188 F.3d 218, 221–22 (4th Cir. 1999). But in Morrel, we used “direct 

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. Pa. Lumbermen’s Mut. Ins. Co., 21 F. Supp. 2d 543, 544–

45 (D. Md. 1998) (quoting Prendergast 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 

plainly 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 lawsuit, 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 lawsuit 
9

instead pits a Virginia plaintiff against an Illinois defendant, the district court had 

diversity 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 the 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, whichever 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 the 
10

statue (or its precursor) doesn’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. Middleton, 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” presupposes the insurer’s existing obligation to provide coverage.

With this understanding, we conclude that the statute doesn’t apply in this case. 

Illinois Union hasn’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 occurrence 

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). Coverage usually attaches to a 

claim made during the policy period regardless of when the events underlying the claim 

took place. Id. See generally 7 Couch, supra, § 102:22 (describing different liability 

policies).
11

Claims-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, 1282 

(Md. 2011). If no claim is reported, no coverage is triggered, 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, 418 (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 during 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. There was no “breach” because, after February 2015, there was no policy to be 

breached; there is no “defense” because, after February 2015, Illinois Union had 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-andreported policy “resulted from the terms of coverage” and “is 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-andreported policy, the 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, claimtriggering reporting allows it to “close its books on a policy at its expiration and therefore 

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 single word ignores the broader statutory language. The 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-occurrence 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 confer 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 

terms 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 misconstrues the 

insurance contract at issue. Gateway says its demand on MDG in August 2014 triggered 

coverage under the policy and obligated MDG to report that claim to its insurer. MDG’s 

failure to make that report, Gateway says, was a “breach of the reporting condition.” 

Appellant’s Br. at 30. But under 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 didn’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 226–27 (insurer waived defense based on insured’s failure 
14

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 Illinois Union during the policy period. MDG did not “breach” the 

policy by not reporting Gateway’s 2014 demand any more than one breaches a fire 

insurance policy by incurring damage from a flood.

Applying 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 give 

notice. And since the policy by its clear terms does not cover Gateway’s posttermination 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 less than 45 days after making its claim.