UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

No. 04-1441

AMERICAN AUTOMOBILE INSURANCE COMPANY,

Plaintiff - Appellant,

versus

ARNOLD H. VALENTINE; LEWIS H. WADE; MICHAEL

REQUA,

Defendants - Appellees,

CHRISTOPHER HOLROYD; GILLIAN HOLROYD; AMERICAN

AVK COMPANY; MARY B. GUNNELLS; WILLIAM A.

GUNNELLS; MARY PARKER; STYLON OF CHARLESTON;

NANCY STANLEY, JR.; JAMES E. WISE; MARK B.

BUXTON; OAKLAND CLUB; LAZER CONSTRUCTION

COMPANY INCORPORATED,

Intervenors/Defendants - Appellees.

Appeal from the United States District Court for the District of

South Carolina, at Charleston. Patrick Michael Duffy, District

Judge. (CA-00-2952-23-2)

Argued: February 4, 2005 Decided: May 13, 2005

Before NIEMEYER and MICHAEL, Circuit Judges, and Samuel G. WILSON,

United States District Judge for the Western District of Virginia,

sitting by designation.

Reversed and remanded by unpublished per curiam opinion.
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ARGUED: Sandra Denise Hauser, SONNENSCHEIN, NATH & ROSENTHAL,

L.L.P., New York, New York, for Appellant. Justin O’Toole Lucey,

Mount Pleasant, South Carolina; Justin S. Kahn, Charleston, South

Carolina, for Appellees. ON BRIEF: Martin P. Michael, Robert P.

Mulvey, SONNENSCHEIN, NATH & ROSENTHAL, L.L.P., New York, New York;

Susan Batten Lipscomb, NEXSEN, PRUET, ADAMS, KLEEMEIER, L.L.C.,

Columbia, South Carolina, for Appellant. Christian H. Hartley,

RICHARDSON, PATRICK, WESTBROOK & BRICKMAN, L.L.C., Charleston,

South Carolina; Robert Waldrep, Jr., WALDREP & STODDARD, Anderson,

South Carolina; Mary Leigh Arnold, Mt. Pleasant, South Carolina; J.

Calhoun Watson, Columbia, South Carolina, for Appellees.

Unpublished opinions are not binding precedent in this circuit.

See Local Rule 36(c).
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PER CURIAM:

American Automobile Insurance Company (AAIC) sued three

insurance brokers with whom it had entered into insurance

contracts. AAIC sought a declaratory judgment that it had no

obligations under the insurance contracts to provide professional

liability coverage for suits brought against the brokers by their

former clients. After a trial before the district court and an

advisory jury, the court entered an order concluding that AAIC was

obligated under the insurance contracts to defend and indemnify the

brokers. For the following reasons, we reverse and remand.

I.

AAIC provides errors and omissions and professional liability

insurance coverage to insurance brokers. The defendants in this

case are three insurance brokers who entered into insurance

contracts with AAIC. The insuring clause in the contracts provides

that AAIC shall pay “all sums which the INSURED shall become

legally obligated to pay as DAMAGES because of . . . any act,

error, or omission of the INSURED . . . in rendering or failing to

render PROFESSIONAL SERVICES,” J.A. 46, and that AAIC shall defend

the brokers from lawsuits relating to their errors and omissions.

The contracts also contain exclusionary clauses, three of which are

relevant in this case. These clauses provide that there is no

coverage for 
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[1] Any claim arising out of the insolvency,

receivership, bankruptcy, liquidation or financial

inability to pay of any organization in which the INSURED

has (directly or indirectly) placed or obtained coverage

or in which an INSURED has (directly or indirectly)

placed the funds of a client or account or in which any

person has invested as a result of consultation with

INSURED.

[2] Any claim arising from or contributed to by the

placement of coverage with Multiple Employer Welfare

Arrangements as defined in the Employee Retirement Income

Security Act of 1974 (and any amendments thereto).

[3] Any claim arising from or contributed to by the

placement of a client’s coverage or funds directly or

indirectly with any organization which is not licensed to

do business in [South Carolina].

J.A. 56.

The brokers sold and marketed to various individuals a health

insurance and dental plan (the Plan). The Plan was marketed in

South Carolina from approximately August 1996 to June 1999, and

premiums under the Plan were paid to the International Worker’s

Guild Health & Welfare Trust Fund (the Fund), which was

administered by The Fidelity Group, Inc. Though the Plan was

marketed as a valid ERISA plan, it was really a Multiple Employer

Welfare Arrangement (MEWA), a much riskier type of health insurance

plan. In South Carolina an organization that wishes to sell a

self-insured MEWA like the Plan here is required to maintain

certain reserve levels, obtain stop-loss insurance to protect

against catastrophes, and have a certain number of trustees to

provide oversight and protection. It appears that the Fund

asserted that the Plan was a valid ERISA plan in order to avoid
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these requirements. Further, the Fund was never licensed to

transact insurance business in South Carolina. 

The Fund eventually became insolvent, having assets of less

than $250,000 and liabilities of $30,000,000. J.A. 235. The

participants, left with no coverage for their medical claims, sued

the brokers, the ones who had sold them coverage under the Plan.

The participants brought a number of different suits (hereinafter

referred to as “the underlying suits”) against the brokers, all

seeking recovery of unpaid medical claims and related damages. The

participants allege that the brokers engaged in fraud and

negligence and in other violations of state and federal law in

their marketing and selling of the Plan. 

After the underlying suits were brought, AAIC filed its own

suit against the brokers in the United States District Court for

the District of South Carolina. AAIC, relying on the exclusionary

clauses, sought a declaratory judgment that AAIC (1) “has no

obligation [under the insurance contracts] to pay any further

amounts to [the brokers] for any defense in connection with the

underlying [suits] at issue or any future related [suits] for which

the [the brokers] may claim coverage,” and (2) “has no obligation

to defend or pay any amounts to [the brokers] for any

indemnification of them in connection with the underlying claims or

any future related claims.” J.A. 43-44. AAIC also sought a

judgment “providing for a reimbursement of any and all defense
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costs already expended by [AAIC] in connection with the underlying

[suits]” as well as attorney’s fees, costs, and disbursements in

the present action. J.A. 43-44. Jurisdiction was based on the

diversity of the parties. See 28 U.S.C. § 1332(a).

The case was eventually tried before a jury, although in midtrial the district court designated it an advisory jury under Fed.

R. Civ. P. 39(c). The jury found that the underlying suits arose

out of (1) the insolvency of the Fund, (2) the brokers’ placement

of coverage with a MEWA, and (3) the brokers’ placement of coverage

with an organization not licensed to do business in South Carolina.

Nevertheless, the jury returned a verdict for the brokers because

it determined that none of these causes was the “dominant,

efficient cause” of the underlying suits. J.A. 2319-2322. The

district court then made its own factual findings, consistent with

the jury’s, and determined that the exclusionary clauses do not bar

coverage of the underlying suits. Because the underlying suits are

covered by the insuring provision of the contract, the district

court concluded, AAIC has a duty to defend and indemnify the

brokers. AAIC now appeals. 

II. 

On appeal AAIC argues that the district court misconstrued

South Carolina law regarding exclusionary clauses in insurance

contracts. For the following reasons, we agree and reverse the

district court’s order. 
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A.

Under South Carolina law “[p]arties to a contract of insurance

have the right to make their own contract.” Sphere Drake Ins. Co.

v. Litchfield, 438 S.E.2d 275, 277 (S.C. Ct. App. 1993). Because

insurance policies are contracts, the “cardinal rule” in

interpreting them is “to ascertain and give effect to the intention

of the parties and, in determining that intention . . . [to] look[]

to the language of the contract.” Id. The language in an

exclusionary clause is accorded its ordinary meaning. See Long

Motor Lines, Inc. v. Home Fire & Marine Ins. Co. of Cal., 67 S.E.2d

512, 516 (S.C. 1951). “[A]n insurer has no duty to defend an

insured where the damage was caused for a reason unambiguously

excluded under the policy.” B.L.G. Enters., Inc. v. First Fin.

Ins. Co., 514 S.E.2d 327, 330 (S.C. 1999). At the same time,

however, in order for an exclusionary clause to bar coverage, there

must exist a “causal connection” between the excluded risk and the

loss. S.C. Ins. Guar. Ass’n v. Broach, 353 S.E.2d 450, 450-51

(S.C. 1987). “The rationale of [this] rule is that ‘when the

parties made the contract of insurance, they were not inserting a

mere arbitrary provision, but it was the purpose of the insurance

company to relieve itself of liability from accidents caused by the

excluded provision.’” Id. (quoting S.C. Ins. Co. v. Collins, 237

S.E.2d 358, 361-62 (S.C. 1977)). 
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After applying these basic principles of South Carolina law to

AAIC’s insurance contract, we conclude that the exclusionary clause

dealing with insolvency unambiguously bars coverage with respect to

the underlying suits. This clause excludes coverage for 

Any claim arising out of the insolvency, receivership,

bankruptcy, liquidation or financial inability to pay of

any organization in which the INSURED has (directly or

indirectly) placed or obtained coverage or in which an

INSURED has (directly or indirectly) placed the funds of

a client or account or in which any person has invested

as a result of consultation with INSURED. 

J.A. 56. The plain terms of this exclusionary clause make it

clear that AAIC and the brokers intended that insurance coverage

should not extend to suits against the brokers premised on their

placement of client funds with an insurance company that is unable

to pay the participants’ claims for coverage. And that is exactly

the basis for the underlying suits against the brokers. While the

participants allege a host of legal claims, they are, at bottom,

seeking damages for unpaid medical claims, claims that went unpaid

because the Fund became insolvent. Because a causal connection

exists between the excluded risk (the placement of clients funds

with an insolvent organization) and the underlying suits, we

conclude that the brokers’ claims for coverage fit squarely within

the exclusionary clause relating to insolvency. See Broach, 353

S.E.2d at 451. Therefore, the brokers are not entitled to coverage

for the underlying suits.
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The district court reached the opposite conclusion, and we

will explain why we disagree with that court’s analysis. The

district court properly found that the brokers (1) placed client

funds with an insolvent organization, (2) placed client funds with

a MEWA, and (3) placed client funds with an organization not

licensed to do business in the state of South Carolina. The

district court concluded, however, that AAIC was not protected by

any of the exclusionary clauses because AAIC failed to establish

that the excluded risks were the proximate cause of the

participant’s losses. Relying on Lesley v. American Security

Insurance Co., 199 S.E.2d 82 (S.C. 1973), the district court

interpreted South Carolina law as requiring an insurance company to

prove that the excluded risk was the proximate cause of the losses

suffered by the insured in order for an exclusionary clause to bar

coverage. To establish proximate cause, the district court

reasoned, the insurance company must establish that the excluded

risk was the dominant cause (the cause that sets in motion the

other causes). After finding that AAIC had failed to establish

that the excluded risks were the dominant cause of the brokers’

losses, the district court held that AAIC was required to provide

coverage for the underlying suits.

The district court erred because South Carolina law does not

require an insurance company to establish that a specifically

excluded risk was the proximate cause of the loss suffered by the
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insured in order for an exclusionary clause to apply. The district

court’s reliance on Lesley is misplaced because that case concerned

the interpretation of an insuring clause, not an exclusionary

clause. In Lesley a farmer’s chickens died from excessive heat

when the fans in his chicken house failed for about four hours.

199 S.E.2d at 84. The fans failed because a severe thunderstorm

(and related lightning) had interrupted the supply of electrical

power. The issue was whether the farmer’s loss fell within the

insuring clause, which provided coverage for losses “immediately

resulting from . . . lightning.” Id. The court stated that in

order to be covered, the farmer had to prove that the lightning

proximately caused the death of the chickens. An insured, the

court reasoned, could prove proximate cause by demonstrating that

the peril insured against was either the nearest efficient cause

(the cause closest in time or place) or the dominant cause of the

loss. Id. at 85. The court held that there was sufficient

evidence to conclude that the dominant cause of the farmer’s loss

was the lightning, as it caused the power failure. Id. 84-85.

Lesley would be relevant if this case was about whether the

brokers’ losses arose out of the insuring clause of the insurance

contract, that is, whether the losses arose out of “[a]ny act,

error, or omission . . . in rendering or failing to render

[professional services].” J.A. 46. However, the issue is not

whether the brokers are entitled to coverage under the insuring
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clause; it is whether they are barred from coverage by the

exclusionary clauses. Nothing is said in Lesley that implies that

its rule of causation applies to exclusionary clauses, nor have we

found any South Carolina case applying Lesley’s rule of causation

to exclusionary clauses. As insuring and exclusionary clauses

serve diametric purposes (one provides coverage while the other

limits it), we see no reason why the rule of causation for insuring

clauses should be applied to exclusionary clauses. Further, an

application of Lesley’s proximate cause rule to exclusionary

clauses would be inconsistent with much more recent South Carolina

precedent, which requires only that there be a “causal connection”

between the excluded risk and the loss. See Broach, 353 S.E.2d at

450-51. While the South Carolina courts have not precisely

articulated the meaning of the term “causal connection,” it appears

that the term refers to a causal relationship that may be less

direct or immediate than Lesley-type proximate cause. See, e.g.,

McPherson v. Mich. Mut. Ins. Co., 426 S.E.2d 770, 772 (S.C. 1993)

(concluding that exclusionary clause bars coverage of otherwise

covered conduct because “without the [excluded risk], there is no

link by which the [covered conduct] can be independently connected

to [the losses]”). In sum, we conclude that the exclusionary

clause relating to insolvency unambiguously bars coverage of the

broker’s claims stemming from the underlying suits and that the

district court erred in ruling to the contrary.
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B.

The brokers argue that AAIC is barred from arguing against a

requirement of proximate cause on appeal because it had earlier

agreed to jury instructions supporting such a requirement. The

proposed jury instructions were filed two weeks before trial with

the district court. AAIC correctly counters that it (1) raised

objections to the proximate cause requirement throughout trial, (2)

sought to have the instructions modified at the charge conference

before the jury was instructed, (3) raised its objections again

after the jury rendered its verdict and before it was excused, and

(4) raised its objections a final time when it moved for the

district court to reconsider its decision. We agree with AAIC that

it has not waived this argument.

Finally, the brokers offer two alternative grounds for

affirming the district court’s order. They first argue that

rulings made by the South Carolina state courts and admissions by

AAIC in those proceedings bar relitigation of the issue of

causation under the Rooker-Feldman doctrine and the doctrine of

collateral estoppel. See D.C. Ct. App. v. Feldman, 460 U.S. 462

(1983); Rooker v. Fid. Trust Co., 263 U.S. 413 (1923). They also

argue that the doctrine of reasonable expectations, which places

the burden on the insurer to clearly communicate the terms of

coverage, bars application of the exclusionary clauses. The

district court considered these arguments and committed no error in

rejecting them.
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III.

For the foregoing reasons, we reverse the district court’s

order determining that AAIC is obligated under the insurance

contract to defend the brokers against the underlying suits and to

indemnify them for any losses. Because the exclusionary clause

relating to insolvency bars coverage, AAIC is entitled to a

declaratory judgment that it (1) has no obligation under the

insurance contract to pay any further amounts to the brokers for

any defense in connection with the underlying suits or any future

related suits for which the brokers may claim coverage, and (2) has

no obligation to defend or pay any amounts to the brokers for any

indemnification in connection with the underlying suits or any

future related suits. On remand the district court should consider

AAIC’s request for (1) the reimbursement of defense costs already

expended by it in connection with the underlying suits, and (2)

attorney’s fees, costs, and disbursements in the present case.

REVERSED AND REMANDED