**UN PUBLISHED** 
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

**No. 13**  **- 1517** 

ROBERT E. GRAHAM, Plaintiff

– Appellant,

v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant

– Appellee.

Appeal f rom the United States District C ourt for the Southern District of West Virginia , at Bluefield
. David A. Faber , Senior District Judge. ( 1:10

- cv - 00453 )
Argued : December 10 , 201 3 Decided: February 3, 2014

Before KING, GREGORY , and FLOYD , Circuit Judges
. Affirmed in part, vacated in part , and remanded by unpublished per curiam opinion
.

**ARGUED** : Michael W. Carey , CAREY, SCOTT, DOUGLAS & KESSLER, PLLC, Charleston, West Virginia, for Appellant. Don C.A. Parker , SPILMAN, THOMAS & BATTLE, PLLC, Charleston, West Virginia, for Appellee. **ON BRIEF** : John A. Kessler, David R. Pogue, CAREY, SCOTT, DOUGLAS & KESSLER, PLLC, Charleston, West Virginia , for Appellant. Glen A. Murphy, SPILMAN THOMAS & BATTLE, PLLC, Charleston, West Virginia, for Appellee.
Unpublished opinions are not b inding precedent in this circuit.2 PER CURIAM: This appeal presents two question s of West Virginia law pertaining to the enforcement of insurance contracts. The first is whether an insured may recover damages for aggravation and inconvenience where his i nsurer, in breach of the policy, has refu sed to defend him from potential liability arising from a lawsuit. The resultant need of the insured to obtain alternative representation l eads to the second question: whether prejudgment interest should accrue on the attorney fees thereby incurred , for which the insurer is subsequently adjudged responsible. The district court answered both questions in the negative, pursuant to which it en tered judgment for the plaintiff, Robert E. Graham, against the defendant, National Union Fire Insurance Co. of Pittsburgh, Pennsylvania , for the reduced sum of $278,273.56 . Three

- quarters of t he judgment was awarded to reimburse Graham for his attorney f ees in connection with the
precursor liability action , with the balance intended to

co mpensate him for the fees earned b y counsel in the litigation below to enforce the policy . The court entered its judgment on remand from our prior decision on the merits , see Graham v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania , 474 F . App’x 956 (4th Cir. 2012) (unpublished) , in which we3 rejected National Union’s defense s to Graham’s allegations of breach
. In the aftermath of our remand , National Union sought a specific demand from Graham as a catalyst for negotiations and possible settlement. By letter from his counsel dated Sept ember 20, 2012, Graham asserted entitlement to the aforeme ntioned attorney fees, plus $160,083.5 7 in prejudgment interest on that portion of the fee award associated with the threshold liability proceedings. He also demanded $368,788. 74 for aggravation and inconvenience. Though National Union acceded to the proposed award of attorney fees , the parti es could not otherwise agree on the proper amount due Graham. The issue thereafter arose on

cross - motions for summary judgment, and, by its Memorandum Opin ion and Order of March 7, 2013, the district court ruled in National Union’s favor on the disputed i tems of damages. See Graham v. Nat’l Union Ins. Co. of Pittsburgh, Pa. , No. 1:10

- cv 00453 (S.D. W. Va. Mar. 7, 2013) (the “Opinion”). 1 On March 14, 2013, the court entered the conforming judgment described above. Graham timely not ed this appeal on March 29, 2013. We conclu de that, the district court correctly denied Graham prejudgment interest on his attorney fees. We therefore

1 The Opinion is found at J.A. 210

- 30. ( Citations herein to “J.A. _

__” refer to the contents of the Joint Appendix file d by the parties to this appeal.)4 affirm that aspect of the court’s judgment. The court erred, however, in denying Graham the opportunity to prove damages for aggravation and inconvenience. We thus vacate t hat aspect of the court’s judgment a n d again remand for further proceedings
.

I. Graham was the Executive Director of two West Virginia nonprofit corporations that used state and federal funds to provide services to senior citizens. In 2004, the State of West Virginia sued Graham and his employers i n the Circuit Court of Kanawha Count y, maintaining that Graham had manipulated the members of each corporation’s Board of Directors to pay himself

e xorbitant sa laries and benefits. Th at alleged malfeasance, according to the State, entitled it to a writ of quo warranto ordering Graham’s removal and the disgorgement of his ill

- gotten gains. 2 One of the corporations, Council on Aging, Inc., was designated a “municipality” and named as an ad ditional insured

2 At common law, the writ of quo warranto (and the attendant extraordinary proceeding) is “designed to test whether a person exercising power is legally entitled to do so.” Black’s Law Dictionary 1256 (6th ed. 1990). In West Virginia, “[a] writ of quo warranto may be awarded and prosecuted in the name of the State” against, inter alios , “ a corporation for a misuse or nonuse of its corporate privileges and franchises, or for the exercise of a priv ilege or franchise not conferred upon it by law.” W. Va. Code § 53

- 2

- 1.5 on a policy issued by National Union to the State . For an annual premium just in excess of $20,000, the policy purported to afford , among other things, general comp rehensive liability
coverage. Under the terms of the policy, that coverag e extended to “[a]ny elected or appointed official, executive officer, commissioner, director, or member of the ‘Named Insured’ while acting within the scope of his duties as such.” Dist. Ct. ECF 13

- 5, at 6. Council on Aging notified National Union’s c laims agent of the State litigation, but the insurer denied coverage and refused to tender a defense. Graham thus defended himself against the lawsuit at his own expense. The action persisted until 2009, when the circuit court dismissed it as moot. The dismissal came after the b oards of both corporations voted to remove Graham and prohibit his futu re involvement in their affairs, in connection with which Graham and the corporations executed a mutual release of liability. Victory at last in hand, Graham f iled the underlying Complaint on March 3, 2010, in the Circuit Court of Mercer County, alleging that National Union had breached its duty under the insurance contract to provide him with a defense to the State action. National Union removed the matter to the Southern District of West Virginia, where, on February 17, 2011, the insurer was granted summary judgment after the district court6 determined that certain policy exclusions supported the denial of coverage. Our reversal of that judgment engendered the proceedin gs on remand , which in turn led to the second appeal now before us
. The parties being citizens of different states and the amount in controver sy exceeding $75,000, jurisdiction existed in the district court pursuant to 28 U.S.C. § 1332(a)(1). W e possess appellate final order jurisdiction as prescribed by 28 U.S.C. § 1291.

II. The facts of record in this diversity proceeding are not in dispute, with the result that the issues on appeal are confined strictly to the proper interpretation of West Virginia law. As such, our review of the final judgment below is de novo. See
Mort Ranta v. Gorman , 721 F.3d 241 , 250 (4th Cir. 2013)
.

III.

A. 1. The body of law de veloping the remedies afforded West Virginia insureds for an insurer’s breach of contract traces its origin to Aetna Casualty & Surety Co. v. Pitrolo , 342 S.E.2d 156 (W. Va. 1986). In that case, Aetna filed a declaratory j udgment action to determine whether it was obliged to defend its7 insured, Pitrolo, who had been sued in three separate proceedings stemmin g from an automobile accident. Aetna denied coverage, compelling Pitrolo to retain a priv ate attorney to represent hi m. After a jury found coverage to exist under the policy, the circuit court ordered Aetna to take over Pitrolo’s defense in the underlying matters and reimburse him for his attorney fees
. On review of the circuit court’s order, t he Supreme Court of Appea ls of West Virginia ( the “ Court”) determined that Aetna was liable not only for the attorney fees relating to the three negligence proceedings, but also for the fees Pitrolo incurred in the declaratory judgment action. In so ruling, the Court deemed it ir relevant that Aetna had, perhaps, reasonably denied coverage and had otherwise acted in good faith: “After all, the insurer had contracted to defend the insured, and it failed to do so. It guessed wrong as to its duty, and should be compelled to bear the consequences thereof.” Pitrolo , 342 S.E.2d at 161 (citation and internal quotation marks omitted). 3
Aetna was not , as it happens , adjudged liable for Pitrolo’s aggravation and inconvenience , a circum stance seized upon by

3 Notwithst anding the admonition in Pitrolo that the insurer’s intent is typically not at issue, the category of common - law actions alleging the wrongful denial of coverage is, with s ome frequency, referred to in the legal vernacular as “b ad faith” insurance litigation.8 National U nion in support of its position that the district court here correctly denied those damages to Graham. We do no t ascribe great significance to this aspect of the result in Pitrolo , undiscussed by the Court. Given the nasce ncy of the cause of action recognized in that case, we suppose it most likely that the insured simply failed to make an appropriate demand. About nine months after Pitrolo , t he Court confronted a similar, but more inclusive claim in Hayseeds, Inc. v. State Farm Fire & Casualty , 352 S.E.2d 73 (W. Va. 1986). At issue in Hayseeds was whether the insurer of a restaurant business was required to relinquish the policy proceeds after the establishment was burnt down b y an arsonist. The insurer, State
Farm , refused to pay, maintaining that the husband

- and

- wife prin cipals were responsible for the fire. The business sued, and it obtained a jury verdict for the $150,000 proceeds, plus $69,000 in attor ney fees and other consequential damages, together with a punitive damages award of $50,000
. 4

4 In West Virginia, two categories of compensatory damages may be recovered by the plaintiff in a breach

- of

- contract lawsuit . “Direct” damages are “those directly flow ing from the contract breach.” Desco Corp. v. Harry W. Trushel Const. Co. , 413 S.E.2d 85, 89 (W. Va. 1991). D amages categorized as direct are distinguishable from “indirect or consequential damages that arise from the special circumstances of the contrac t.” Id. In a bad

- faith action alleging an insurer’s nonperformance under a liability policy, such as Pitrolo , the plaintiff sustains direct (Continued)9 Adhering to its analysis in Pitrolo , the Court held that “whenever a policyholder must sue his own insurance company over any property damage claims, and the policy holder substantially prevails in the action, the company is liable for the payment of the policyholder’s reasonable attorneys’ fees.” Hayseeds , 352 S.E.2d at 80. The fee recovery compensates the insured for “net economic loss caused by the dela ys in settlement,” that is, as a foreseeable consequence of the breach. Id. The insured is also entitled to additional consequential d amages in the form of “an award for aggravation and inconvenience.” Id. The Court thus affirmed the trial court’s judgment, except that it reversed the

damages as the result of being compelled to retain substitute counsel to represent him in the proceedings with respect to which the insurer has abrogated its duty to defend
. By contrast, the attorney fees incurred by the plaintiff in litigation with the insurer to e nforce the policy are properly classified as consequential damages, insofar as “at the time of the contract the parties could reasonably have anticipated that [such fees] would be a probable result of the breach.” Desco Corp. , 413 S.E.2d at 89; see United States v. Arvanitis , 902 F.2d 489, 497 (7 th Cir. 1990) ( payments to counsel by insurer invest igating defendant’ s fraudulent scheme not recoverable under statute disallowing restitution for consequential damages such as “legal fees generated in prosecuting a claim”). The attorney fee award in Pitrolo comprised both categories of damages. Hayseeds , however, did not involve a liability policy and its attendant predicate litigation, with the result that the attorney fees awarded by the jury in that case were incurred exclusively in enforcement of the policy, and thus wholly within the category of con sequential damages.10 punitive damages award as unsupported by a sufficient showing of actual malice
. See id. at 80

- 81.
He nce , whether an action on the policy is instituted by the insurer ( Pitrolo ) or by the insured ( Hayseeds ), it is settled that whenever a breach is proved of the insurer’s duty to indemnify ( Hayseeds ) or broader duty to defend ( Pitrolo ), the insured may reco ver direct damages f or attorney fees expended in any predicate proceeding (usually an adjudication of the insured’s liability to a third party), and also consequential da mages for fees incurred to enforce the policy against the insurer. The first questi on in this appeal is whether Graham
may pursue additional consequential damages for aggravation and inconvenience, like the insured in Hayseeds , notwithstanding
that the facts of his case are

— at least superficially

— more analogous to those in Pitrolo
. 5
F rom the insured’s perspective , he is bound to suffer the same aggravation and inconvenience regardless of how the insurer breaches the policy : either by unjustifiably refusing to provide a defense against liability or by wrongfully withholding

5 As in Pitrolo , the litigation before the district court sought to resolve an insurer’s duty to defend its insured from liability. T he only notable difference

— albeit a legally immaterial one

— is that the case at bar was filed by the insured, while Pitrolo was a declaratory judgment action initiated by the insurer.11 indemnification from property loss. And there is no logical reason to authorize an award for one item of consequential damages

— attorney fees in the enforcement litigation

— while simultaneously denying recovery for aggravation and inconvenience, which a re merely other items in the same category. We theref ore conclude that , in West Virginia, i nsu reds in Graham’s position may be compensated for aggravation and inconvenience (subject to adequate proof thereof), insofar as those items of consequential damag es are permitted generally
. 2. The district court reached the contrary result by distinguishing between liability policies

— implicating both the duty to defend and the duty to indemnify

— and those simply providing indemnification from loss. The court d enominated the former type (at issue here and in Pitrolo ) “third

- party insurance,” Opinion 13, and the latter type (discussed in Hayseeds ) “first

- party insurance,” id. at 13. Justice Benjamin made the same distinction , espousing the minority viewpoint in Loudin v. Nationa l Liab ility & Fire Insurance Co. : “First

- party insurance is a contract between the insurer and the insured to protect the insured from its own actual losses and expenses

. . . . Third

- party insurance is a contract to protect the insured from losses resulting from actual or potential liability to a third party.” 716 S.E.2d 696, 707 (W. Va. 2011) (Benjamin,12 J., dissenting) (quoting Couch on Insurance 3d § 198:3 (2005) (internal quotation marks omitted ) )
. 6 Loudin is not particularly useful to our analysis, however, because the issue in that case was a broad one, namely, whether the plaintiffs had a sufficient contractual (first

- party) relationship with the insurer such that a bad

- faith action could be mainta ined to begin with. See Elmore v . State Farm Mut.
Auto. Ins. Co. , 504 S.E.2d 893, 897 (W. Va. 1998) (“[T]he common law duty of good faith and fair dealing . . . runs between insurers and insureds and is based on the existence of a contractual relationship. [T]here is simply nothing to s upport a common law duty of good faith and fair dealing on the part of insurance carriers toward third

- party claimants.”)
. Here, by contrast, Graham is an acknowl edged insured in privity with National Union under the latter’s liability policy; he is no stranger to the contract. Moreover, t he question presented is considerably more narro w than in Loudin , i.e. , whether Graham is entitled to the full array of consequent ial damages ordinarily available to the insured in a breach

- of

contract proceeding. The answer is “yes, ” and it depends naught

6 S e e also Marshall v. Saseen , 450 S.E.2d 791, 797 (W. Va. 1994) (“First party insurance means that the insurance carrier has direct ly contracted with the insured to provide coverage and to reimburse the insured for his or her damages up to the policy limits.”).13 on the characterization of the insurance as first

- party or third

- party. Rather, consequential damages are part and parcel of the remedies obtainable in a bad

- faith action against an insurer, which, as set forth in the above

- cited passage from Elmore , can only be initiated and maintained by an insured, that is , a first

- party claimant
. Indeed, the Loudin majority framed the primary issue before it as “whether the circuit court properly categorized the [plaintiffs] a s third

- party claimants .” 71 6 S.E.2d at 700. The Court in Loudin was asked to determine t he insurer’s duties under a liability policy on a pickup truc k . The truck had been backed over the insured by his brother, who was operating it with permission. A l though the insured was , in a manner akin to the typical third

- party claimant, seeking recompense for the negligent operation of the covered vehicle, the Court ruled that he was nonetheless a first

- party claimant with standing to sue his insurer for withhol ding coverage. See id. at 703 (“[W]e now hold that, when a named policyholder files a claim with his/her insurer, alleging that a nonnamed insured under the same policy caused him/her injury, the policyholder is a first

- party claimant in any subsequent ba d faith action against the insurer arising from the handling of the policyh older’s claim.”). Neither Loudin , nor Pitrolo , nor any other West Virginia authority poses an impediment to the consequential damages14 Graham seeks. Such damages are dependent only on proof thereof by a preponderance of the evidence. Remand shall afford Graha m the opportunity to develop and present his evidence of aggravatio n and inconvenience in connection with the breach already established.
B. West Virginia law authorizes an a ward of prejudgment interest for “special or liquidated damages” from the date of their accrual. See W. Va. Code § 56

- 6

- 31(a). S pecial damages are direct in character and “include[] lost wages and income, medical expenses, damages to tangible personal property and similar out

- of

- pocket expendit ures .” Id. If an item of damages is adjudged within the statute, prejudgment interest is mandatory. See Grove v. Myers , 382 S.E.2d 536, 540 (W. Va. 1 989). Graham maintains that the attorney fees he incurred in defending against the State lawsuit are similar enough to medical expenses to be subject to prejudgment interest.
In State ex rel. Chafin v. Mingo County Commission , 434 S.E.2d 40 (W. Va. 1993), the Court affirmed the denial of prejudgment interest on a county official’s legal defense
expenses deemed re imbursable from the public fisc. In so ruling, the Court observed that “[w]e are not convinced that the lower court erred in determining that the [attorney fees] did not constitute ‘similar out

- of

- pocket e xpenditures’ and15 therefore did not qualify as an award entitling the [official] to prejudgment interest.” Id. at 44. Thereafter, in Miller v. Fluharty , 500 S.E.2d 310 (W. Va. 1997), a bad

- faith action to enforce an indemnification policy, the Court revers ed an award of prejudgment interest on litigation fees and expenses. The most compelling basis for the Court’s holding was its observation tha t attorney fees, particularly those earned on a contingency basis, are “unliquidated and unsettled until the circ uit court issues its ruling. Only after the circuit court approves the policyholder’s attorney’s fee does the amount become liquidated and established.” Id. at 325. At that point, of course, post

judgment interest will begin to accrue. The Miller Court also
note d that, because the insured is not typically liable for the contingent fees until after the verdict or settlement is paid by the insurer, such expenses are not “out

- of

- pocket” as set forth in the statute. See id. at 325

- 26. Graham correctly note s that both of the pertinent West Virginia authorities are factually distinguishable from his case, in that Chafin was not an insurance case and Miller involved only attorney fees incurred in litigation with the insurer. Graham has excluded that portion o f his attorney fees, properly classified as consequential

— not direct

— damages, from his prejudgment interest claim. Further, as Graham16 emphasizes, he agreed to pay counsel in the State lawsuit by the hour, and not on a contingency basis, a circumstance not present in Miller and one that arguably undercuts much of the rationale supporting that decision. There being no requirement that the circuit court approve any aspect of Graham’s private fee arrangement with his attorneys in the State lawsuit, it is apparent that Graham became liable for those hourly fees as t hey were incurred, up to the entry of judgment. N e ver theless, the claim remained unliquidated beyond the entry of judgment until, on remand following the first appeal in this enforcement action, National Union stipulated to the precise amount due. We conclude that, in accordance with Miller , the absence of liquidation is enough to exclude attorney fees

— even those sustained as direct damages

— from the reach of the West Virginia prejudgment int erest statute.

IV. Pursuant to the foregoing, the judgment on appeal is affirmed insofar as the court below declined to award prejudgment interest on Graham’s attorney fees. The judgment is vacated, howeve r, to the extent that Graham was denied the
oppo rtunity to prove consequential damages in the form of aggravation and inconvenience attributable to National Union’s17 breach of the insurance contract. W e remand the matter to the district court for further proceedings consistent with this opinion.
AFFIRME D IN PART, VACAT ED IN PART, AND REMANDED