Title: Commercial Underwriters Ins. v. Hunt & Calderone
Citation: N/A
Docket Number: 000474
State: Virginia
Issuer: Virginia Supreme Court
Date: January 12, 2001

Present:  All the Justices 
 
COMMERCIAL UNDERWRITERS INSURANCE COMPANY 
 
v.  Record No. 000474     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
January 12, 2001 
HUNT & CALDERONE, P.C., ET AL. 
 
 
FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS 
Edward L. Hubbard, Judge 
 
This appeal arises from a declaratory judgment action 
regarding coverage under a professional liability, claims made 
insurance policy. 
 
On May 8, 1997, Hunt & Calderone, P.C. (H&C), an 
accounting firm, filed a renewal application for professional 
liability insurance with Commercial Underwriters Insurance 
Company (CUIC).  On May 9, Dian T. Calderone, a partner in 
H&C, realized that she had missed a filing deadline for one of 
the firm's clients, Michael Atalay.  Calderone knew that her 
error could potentially result in a loss of a $125,000 tax 
credit for the client, but she did not think that a claim 
would result because she was told by an administrator of the 
government tax credit program that sufficient funds would 
likely be available after all the timely applications had been 
processed.  Furthermore, when told of the error, Atalay said 
he was satisfied with the assurances made by the government 
administrator.  H&C did not inform CUIC of the error during 
the time the insurance application was pending. 
After the CUIC policy became effective, H&C learned that 
sufficient funds were not available for Atalay's tax credit.  
In August 1997, Atalay notified H&C that he intended to hold 
H&C responsible for the lost tax credit.  Because the CUIC 
policy was a claims made policy, H&C requested coverage from 
CUIC for Atalay's claim.  CUIC denied coverage to H&C for the 
claim and refused to provide a defense for H&C in an action 
subsequently filed by Atalay against H&C.  CUIC based its 
position on three separate grounds:  (1) H&C failed to meet a 
condition precedent of the policy which required that, at the 
inception of the policy, H&C have no knowledge of an error or 
any other basis to reasonably anticipate a claim that would be 
covered by the policy; (2) the claim fell under an exclusion 
of the policy which disallowed coverage for a claim arising 
out of any error likely to give rise to a claim of which the 
insured had knowledge or a reason to anticipate prior to the 
policy's inception; and (3) H&C's failure to inform CUIC of 
Calderone's error during the pendency of the application 
constituted a material misrepresentation, voiding the policy. 
 
H&C filed a motion for declaratory judgment, seeking a 
declaration that CUIC was required to defend the claim and 
provide coverage under the policy.  The trial court entered 
judgment in favor of H&C, holding that H&C provided sufficient 
evidence to show that it complied with the condition precedent 
 
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to establish coverage, that coverage was not foreclosed under 
the policy exclusion, and that the policy was not void based 
on a misrepresentation of a material fact in the application.  
We awarded CUIC an appeal. 
 
CUIC's five assignments of error present two primary 
issues.  The first is whether the policy was void because H&C 
failed to inform CUIC of Calderone's error prior to the 
inception of the policy.  The second is whether, prior to the 
inception of the policy, H&C had any basis to reasonably 
anticipate that Calderone's error would result in a claim 
otherwise covered by the policy.  We will address these issues 
in order. 
I. 
Question number ten of the insurance policy application 
asked, "After inquiry, does the Applicant . . . have knowledge 
of any actual or alleged act, error, omission or circumstance 
which may result in a claim being made against them or any 
other basis to reasonably anticipate a claim being made 
against them."  H&C answered no to this question.  The 
application also contained a notice that the Applicant had a 
continuing duty to update the insurance company, in writing, 
of any change to the application that may occur between the 
filing of the application and the proposed effective date.  
Finally, the policy itself recited in several places that the 
 
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representations made in the application were material to the 
acceptance of the risk and the underwriting of the policy. 
Based on these policy provisions, CUIC asserts that the 
policy was void because H&C failed to notify CUIC of 
Calderone's error in a timely fashion and that such failure 
was a material misrepresentation as stated in the policy.  The 
trial court, relying on Harrell v. North Carolina Mutual Life 
Insurance Co., 215 Va. 829, 213 S.E.2d 792 (1975), held that 
even if H&C's failure to update CUIC did constitute a 
misrepresentation, CUIC failed to prove that it was a material 
misrepresentation. 
We have construed Code § 38.2-3091 and its predecessors to 
require an insurance company contesting a claim on the basis 
of an insured's alleged misrepresentation to show, by clear 
proof, two facts:  (1) that the statement on the application 
was untrue; and (2) that the insurance company's reliance on 
the false statement was material to the company's decision to 
undertake the risk and issue the policy.  Harrell, 215 Va. at 
                     
1 Code § 38.2-309 provides in pertinent part:  
 
No statement in an application [for an 
insurance policy] . . . made before or after 
loss under the policy shall bar a recovery 
upon a policy of insurance unless it is 
clearly proved that such answer or statement 
was material to the risk when assumed and was 
untrue. 
 
 
4
831-32, 213 S.E.2d at 794-95.  To prove the falsity is not 
sufficient; the company must prove clearly that truthful 
answers would have reasonably influenced the company's 
decision to issue the policy.  See Mut. of Omaha Ins. Co. v. 
Echols' Adm'rs, 207 Va. 949, 953-54, 154 S.E.2d 169, 172 
(1967)(defining "material"). 
 
We agree with the trial court that Harrell controls the 
case at hand.  In Harrell, the applicant for a life insurance 
policy did not disclose that she had been hospitalized and had 
undergone operations for cancer numerous times during the five 
years prior to submitting her application.  The application 
recited that her answers " 'are each material to the risk and 
that the Company believing them to be true will rely and act 
upon them.' "  215 Va. at 830, 213 S.E.2d at 794 (emphasis 
added).  When cancer was found to be a cause of death and an 
investigation revealed her misrepresentations on the 
application, the insurance company denied the claim, relying 
upon the predecessor to Code § 38.2-309.2
 
At trial, the insurance company offered into evidence the 
application language quoted above and the testimony of several 
agents of the company, but not one agent was in a position to 
                     
2 In Harrell, this Court engaged in an analysis of Code 
§ 38.1-366, the predecessor to Code § 38.2-309.  For the 
purposes of this appeal, the two statutes contain virtually 
identical language. 
 
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testify to the materiality of the misrepresentations.  This 
Court stated:  
While it is incredible that any responsible insurance 
company would have issued a policy of life insurance to 
Mrs. Foxx with knowledge that she had recently been 
released from a hospital after a major operation for 
carcinoma of the breast, and with knowledge that she had 
a history of other hospitalizations for cancer, we will 
not take judicial notice of this fact.  The burden of 
clearly proving the affirmative defense of materiality of 
a misrepresentation is not carried when the court, to 
find the fact, must resort to assumption and conjecture. 
 
Harrell, 215 Va. at 833, 213 S.E.2d at 795-96 (first emphasis 
added). 
 
Similarly, in this case, the only evidence of materiality 
CUIC offered was the policy itself, which recited in 
boilerplate language that the representations in the 
application were material and which language we assume is 
included in every policy issued by CUIC.  Such evidence is far 
from the clear proof required to show that truthful answers 
would have reasonably influenced CUIC's decision to issue the 
policy to H&C.  Accordingly, we conclude that the trial court 
did not err in holding that CUIC failed to meet its burden of 
proof on the question of materiality. 
II. 
 
The second issue is also one of proof.  The policy 
provisions regarding a condition precedent and an exclusion 
involved a determination of whether it was reasonable for H&C 
 
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to anticipate or have any reason to anticipate that 
Calderone's error, made before the inception of the policy, 
would result in a claim under the policy.3  H&C had the burden 
to produce evidence that it met the terms of the condition 
precedent, whereas CUIC bore the ultimate burden of persuasion 
on this issue.  Erie Ins. Exch. v. Meeks, 223 Va. 287, 290-91, 
288 S.E.2d 454, 456-57 (1982).  In addition, CUIC carried the 
burden to prove that the exclusion applied.  Va. Elec. & Power 
Co. v. Northbrook Prop. & Cas. Ins., 252 Va. 265, 270, 475 
S.E.2d 264, 266 (1996).  The trial court found that H&C 
satisfied its evidentiary burden and CUIC did not. 
 
David E. Hunt, a partner in H&C, and Calderone, both of 
whom are certified public accountants and testified in that 
capacity, stated that Calderone's error was not one which 
                     
3 Section I.A.2. of the policy provided: 
 
 
All of the following conditions must be satisfied 
before coverage will apply: 
 
. . . . 
 
2.  the Insured had no knowledge of such actual or  
alleged act, error, omission, circumstance or Personal  
Injury or otherwise had no basis to reasonable [sic] 
anticipate a claim that would be insured by this Coverage  
Part at policy inception; 
 
Section II.A., relating to policy exclusions, stated in 
pertinent part that coverage would not be provided for: 
 
 
any claim arising out of any actual or alleged act, 
error, omission, Personal Injury or circumstance likely  
 
7
could reasonably be anticipated to result in a claim because 
the assurances by one of the tax credit program's 
administrators, Dan Girouard, justified a conclusion that 
funds would be available for Atalay despite the untimely 
filing of the application.  Atalay also testified at trial 
that, although he was aware of Calderone's error, after 
talking with Calderone and Girouard, he believed the matter 
"would be okay."  Atalay stated that he had no intention of 
filing a claim against H&C until July, when he learned that 
tax credits would not be available to him. 
 
CUIC's only witness was Martha Shea Hollifield, Dan 
Girouard's supervisor.  Hollifield testified that she recalled 
talking with Calderone about Atalay's application, but she did 
not recall telling Calderone funds would be available.  The 
trial court found this evidence insufficient to rebut H&C's 
evidence that two certified public accountants had no 
reasonable basis to anticipate a claim from the facts in this 
case. 
 
Although the trial court noted that H&C's testimony was 
self-serving, the court did not reject the testimony as 
incredible.  Faced with H&C's testimony, CUIC had to provide 
evidence that would challenge the reasonableness of H&C's 
                                                                
to give rise to a claim of which an Insured had 
knowledge, or otherwise had reason to anticipate might 
 
8
belief that no claim would arise.  The trial court did not 
require that such evidence be in the form of "expert 
testimony" as CUIC suggests.  Rather, the trial court 
suggested that evidence from "professionals in the field" 
would be needed to refute the evidence produced by H&C.  As 
stated by the trial court, CUIC simply failed to satisfy that 
burden. 
 
Principles of appellate review require that we affirm  
determinations of fact made by the trial court unless there is 
no support for such determinations in the record.  Quantum 
Dev. Co. v. Luckett, 242 Va. 159, 161, 409 S.E.2d 121, 122 
(1991).  Based on our review, we cannot conclude that this 
factual conclusion of the trial court is without support in 
the record. 
 
For the above reasons, we will affirm the judgment of the 
trial court. 
Affirmed.
                                                                
result in a claim, prior to the inception of this policy.   
 
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