Court Opinion

ID: 213188
Source: CourtListenerOpinion
Date Created: 2011-03-24 19:54:31+00
Date Added: 2024-06-11T17:28:14.528805
License: Public Domain

UNPUBLISHED

                  UNITED STATES COURT OF APPEALS
                      FOR THE FOURTH CIRCUIT

                             No. 10-1439

BRYAN BROTHERS INCORPORATED, a Virginia corporation; JOSEPH
KOBER; DORIS LANSING; KARL SCHOELLER; MILDRED SCHOELLER,

                Plaintiffs - Appellants,

           v.

CONTINENTAL CASUALTY COMPANY, an Illinois corporation,

                Defendant - Appellee.

Appeal from the United States District Court for the Eastern
District of Virginia, at Richmond.  Henry E. Hudson, District
Judge. (3:09-cv-00675-HEH)

Argued:   January 25, 2011                 Decided:   March 24, 2011

Before MOTZ and WYNN, Circuit Judges, and Irene C. BERGER,
United States District Judge for the Southern District of West
Virginia, sitting by designation.

Affirmed by unpublished opinion. Judge Wynn wrote the opinion,
in which Judge Motz and Judge Berger concurred.

ARGUED: Collin Jefferson Hite, MCGUIREWOODS, LLP, Richmond,
Virginia, for Appellants. Richard A. Simpson, WILEY REIN, LLP,
Washington, D.C., for Appellee.   ON BRIEF: Kenneth W. Abrams,
MCGUIREWOODS, LLP, Richmond, Virginia, for Appellants. Charles
C. Lemley, Kimberly A. Ashmore, WILEY REIN, LLP, Washington,
D.C., for Appellee.
Unpublished opinions are not binding precedent in this circuit.

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WYNN, Circuit Judge:

     In      this      appeal,       accounting          firm     Bryan        Brothers

Incorporated,       seeks     coverage    under      a   professional        liability

insurance    policy        issued   by   Continental       Casualty     Company    for

liability arising from illegal acts of a former Bryan Brothers’s

employee.      Under the policy, it is a condition precedent to

coverage that no insured has knowledge, prior to the inception

of the policy, of an act that is reasonably likely to become the

basis for a claim.           Because Bryan Brothers had such knowledge,

we   conclude       that     the    claims      at   issue      are   not      covered.

Therefore,    we     affirm    the    district       court’s    grant     of   summary

judgment to Continental Casualty Company.

                                          I.

     The    parties    stipulated        all    material     facts.       Continental

Casualty     Company       issued    a   professional        liability       insurance

policy effective from July 1, 2008 to July 1, 2009 to cover

certain    liabilities       arising     from    Bryan     Brothers’s       accounting

services.    In pertinent part, the “Coverage Agreements” provide:

     A.     In accordance with all the terms and conditions of
            this policy, we will pay on your behalf all sums
            in excess of the deductible, up to our limits of
            liability, that you become legally obligated to
            pay as damages and claim expenses because of a
            claim that is both first made against you and
            reported in writing to us during the policy period
            by reason of an act or omission in the performance

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          of professional services by you or by any person
          for whom you are legally liable provided that:
          . . .
           2.   prior to the effective date of this policy,
                none of you had a basis to believe that any
                such act or omission, or interrelated act or
                omission, might reasonably be expected to be
                the basis of a claim . . . .

(“prior knowledge provision”).

     The policy also contains the following “Exclusion”:

     This Policy does not apply to:

     . . .

     D.      any claim based on or arising out of a dishonest,
             illegal, fraudulent, criminal or malicious act by
             any of you. We shall provide you with a defense
             of such claim unless or until the dishonest,
             illegal, fraudulent, criminal or malicious act
             has been determined by any trial verdict, court
             ruling, regulatory ruling or legal admission,
             whether appealed or not . . . .

(“bad acts exclusion”).       Finally, the following appears under

the “Policy Conditions” heading:

     L.   Innocent Insureds

             If coverage under this Policy would be excluded
             as a result of any criminal, dishonest, illegal,
             fraudulent, or malicious acts of any of you, we
             agree that the insurance coverage that would
             otherwise be afforded under this Policy will
             continue to apply to any of you who did not
             personally   commit,   have  knowledge   of,   or
             participate in such criminal, dishonest, illegal,
             fraudulent   or   malicious  acts   or   in   the
             concealment thereof from us.

(“innocent insureds provision”).       The policy defines “you” as

the named insured (Bryan Brothers) and “any person who is or

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becomes a partner, officer, director, associate, or employee of

the named insured, but only for professional services performed

on behalf of the named insured.”

       In February 2009, Bryan Brothers discovered that Deborah

Whitworth,     the     firm’s   account       clerk   from    1999    to   2009,    had

stolen funds from eight clients’ accounts.                    Whitworth’s thefts

began in 2002 and the last theft occurred sometime after July 1,

2008,    during   the    policy   period.         The   victims      asserted      tort

claims against Bryan Brothers.

       In turn, Bryan Brothers filed for insurance coverage of the

victims’ claims but Continental Casualty Company denied Bryan

Brothers’s claim for coverage by letter dated March 16, 2009.

Continental Casualty Company indicated that Whitworth fit within

the    policy’s   definition      of   “you”      because     she    committed     the

thefts as an employee performing professional services for Bryan

Brothers.     Because Whitworth “had reason to believe as early as

2002, before the inception of the policy on [7]-1-08, that her

acts might be the basis of a claim, the terms of the coverage

agreements are not met and coverage is precluded on that basis.”

In    other   words,    Continental    Casualty       Company       denied   coverage

under the prior knowledge provision because Whitworth had reason

to believe, before the effective date of the policy, that her

thefts might become the basis for claims.                    Bryan Brothers later

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settled      with   its    affected      clients         and    brought    this    suit    for

coverage under the policy.

       The    parties      filed       cross-motions           for   summary      judgment.

Bryan Brothers argued that the prior knowledge provision was an

exclusion      from,      as     opposed       to    a     condition       precedent      to,

coverage.      Bryan Bros. Inc. v. Cont’l Cas. Co., 704 F. Supp. 2d

537, 540-41 (E.D. Va. 2010).               And because Whitworth was the only

person with prior knowledge of her thefts, the innocent insureds

provision saved coverage for any insured other than Whitworth.

Id.        Continental Casualty Company, on the other hand, argued

that the prior knowledge provision was a condition precedent

that precluded coverage if unfulfilled.                          Id. at 540.       Further,

Continental Casualty Company argued that coverage was not denied

because      Whitworth’s        acts    were       “illegal”      under    the    bad     acts

exclusion; consequently, the innocent insureds provision was not

triggered      to   save    coverage       otherwise           precluded   by     the   prior

knowledge provision.            Id. at 541.

       The district court granted summary judgment to Continental

Casualty Company based on Whitworth’s prior knowledge.                              The bad

acts       exclusion      and    the     innocent         insureds        provision       were

therefore not applicable. *             The court also found these provisions

       *
        The district court also held that Whitworth’s thefts
during the policy period were “interrelated” to her pre-policy
thefts.    Therefore, the district court determined that claims
(Continued)
                                               6
to be unambiguous, rejecting Bryan Brothers’s argument that they

were ambiguous and must be construed in favor of coverage.                          Id.

at 542.       Bryan Brothers appeals.

                                           II.

       We review a grant of summary judgment de novo, viewing all

facts     and     inferences       in    favor      of    the     nonmoving      party.

Providence Square Assocs., L.L.C. v. G.D.F., Inc., 211 F.3d 846,

850 (4th Cir. 2000).            Summary judgment is appropriate if “there

is no genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.”                         Fed. R. Civ. P.

56(a).

       Virginia     law    governs      this     insurance      dispute.      Virginia

courts “‘interpret insurance policies, like other contracts, in

accordance with the intention of the parties gleaned from the

words they have used in the document.’”                    Transcon. Ins. Co. v.

RBMW,    Inc.,     262    Va.    502,   512,     551     S.E.2d   313,     318   (2001)

(quoting Floyd v. N. Neck Ins. Co., 245 Va. 153, 158, 427 S.E.2d

193,    196     (1993)).        “Because    insurance      policies      usually   are

drafted by insurers, [Virginia courts] construe ambiguous policy

based on thefts during the policy period were also precluded
because of Whitworth’s prior knowledge.    Id. at 542-43. Bryan
Brothers does not challenge that ruling on appeal.

                                           7
language purporting to exclude certain occurrences from coverage

most strongly against the insurer.”              Va. Farm Bureau Mut. Ins.

Co. v. Williams, 278 Va. 75, 81, 677 S.E.2d 299, 302 (2009).

     Virginia has long followed the rule that if the insured

fails   to   fulfill   a    condition       of   an   insurance   policy,   the

insurer’s coverage obligation is not triggered.               See State Farm

Mut. Auto. Ins. Co. v. Arghyris, 189 Va. 913, 924-25, 55 S.E.2d

16, 21 (1949); Combs v. Hunt, 140 Va. 627, 643, 125 S.E. 661,

666 (1924); Va. Fire & Marine Ins. Co. v. J.I. Case Threshing

Mach. Co., 107 Va. 588, 590-91, 59 S.E. 369, 369-70 (1907).

“[I]f the condition is broken the policy is terminated, if the

insurer so elects.”        Arghyris, 189 Va. at 927, 55 S.E.2d at 22;

accord Fidelity-Phenix Fire Ins. Co. of N.Y. v. Pilot Freight

Carriers, Inc., 193 F.2d 812, 815-16 (4th Cir. 1952) (discussing

the operation of conditions precedent to coverage under North

Carolina law).

     On the other hand, an insured may seek coverage for an

event that is within the scope of the insuring clause but falls

under a specific exclusion.       In that scenario, the policy is not

avoided and another policy provision, such as a savings clause,

may preserve coverage.        See Copp v. Nationwide Mut. Ins. Co.,

279 Va. 675, 683-84, 692 S.E.2d 220, 225 (2010) (holding that

insurer had a duty to defend insured for a claim excluded by a

homeowner’s policy but covered by an exception to the exclusion

                                        8
in an umbrella policy); see also Calmar S.S. Corp. v. Scott, 345

U.S. 427, 433-35 (1953) (discussing exclusions from coverage and

exceptions in a war-risk maritime policy).

                                     III.

       Bryan Brothers argues that it is entitled to coverage under

the innocent insureds provision because it did not share prior

knowledge of Whitworth’s thefts.             Bryan Brothers insists that

the prior knowledge provision is an exclusion from coverage and

that    the    innocent   insureds   provision    saves   coverage   for   the

firm.     Conversely, Continental Casualty Company maintains that

the    prior    knowledge   provision   is   a   condition   precedent     that

precludes coverage if unsatisfied.

       The plain language and structure of the policy convince us

that the prior knowledge provision is a condition precedent to

coverage.       In the first coverage agreement clause, Continental

Casualty Company agrees to cover Bryan Brothers’s liability on

claims made during the policy period “provided that . . . prior

to the effective date of this policy, none of you had a basis to

believe that any such act or omission, or interrelated act or

omission, might reasonably be expected to be the basis of a

claim” (emphasis added).        This language may be rephrased to say

that if any defined “you” knew prior to the effective date of

the policy that an act or omission might become the basis for a

                                        9
claim, any claims arising from such acts or omissions are not

covered.    Here, Bryan Brothers’s lack of prior knowledge is a

condition of Continental Casualty Company’s agreement to cover

Bryan   Brothers’s      liability      from   acts       predating    the    policy.

Because    Whitworth     had   prior    knowledge,        “[t]here    has     been   a

failure to fulfill a condition upon which [Continental Casualty

Company’s] obligation is dependent.”                Arghyris, 189 Va. at 925,

55 S.E.2d at 21.

     This interpretation melds with the concept of fortuity, a

fundamental premise of insurance law.                Insurers do not usually

contract to cover preexisting risks and liabilities known by the

insured.    Thus, it is generally the insured’s duty to provide

truthful   and    complete     information     so    the    insurer    can    fairly

evaluate the risk it is contracting to cover.                  See, e.g., Combs

v. Equitable Life Ins. Co. of Iowa, 120 F.2d 432, 437 (4th Cir.

1941) (holding that an insured’s failure to disclose a heart

condition breached a condition precedent to coverage on a life

insurance policy); Arghyris, 189 Va. at 929, 55 S.E.2d at 23

(holding   that    an    insured’s     failure      to    provide    complete    and

timely information breached the policy’s cooperation clause, a

condition precedent to coverage); Va. Fire & Marine Ins. Co. v.

J.I. Case Threshing Mach. Co., 107 Va. 588, 590-91, 59 S.E. 369,

369-70 (1907) (stating that the insured’s failure to disclose an

encumbrance   on   his    property     breached      the    condition       precedent

                                        10
that    the     insured    property      be     unencumbered).               If    the   insured

fails to comply with a clear condition required by the insurer,

it is typically not liable on the policy.

        Here,     the     prior    knowledge          provision            essentially     makes

fortuity a condition of coverage.                     The prior knowledge provision

indicates in clear and unambiguous language Continental Casualty

Company’s unwillingness to cover liability arising from prior

acts or omissions that any insured might reasonably expect to

result in a claim.

        Because         Continental       Casualty          Company           denied        Bryan

Brothers’s        claim     for    failure       of    a    condition             precedent    to

coverage, we are not persuaded by Bryan Brothers’s argument for

coverage pursuant to the innocent insureds provision.                                    Although

the facts of this case might have supported a denial of coverage

under    the     bad     acts     exclusion,       there        is    no     indication       that

coverage was denied on that basis.                     Thus, the innocent insureds

provision, which appears to be an exception to the bad acts

exclusion, was not implicated.

       Even assuming arguendo that the innocent insureds provision

could     be     considered        an    exception         to        the    prior     knowledge

provision, it is elemental that exclusions and exceptions in an

insurance policy cannot expand the scope of agreed coverage.

See     Scott,     345     U.S.     at    435      (explaining             that     overlapping

exclusions and exceptions were plainly intended “to make certain

                                              11
and doubly certain that the coverage of the policy as a whole is

in no event enlarged”); Stanley Martin Cos., Inc. v. Ohio Cas.

Grp., 313 F. App’x 609, 613 n.2 (4th Cir. 2009) (unpublished)

(explaining that exclusions, and certain exceptions, could not

expand     the    scope      of    the    insuring          clause        in     a    general

contractor’s liability policy) (citing Nationwide Mut. Ins. Co.

v.   Wenger,     222   Va.   263,    267,      278    S.E.2d       874,        876   (1981)).

Therefore,       the   innocent      insureds         provision         cannot        provide

coverage that is precluded by the plain language of the prior

knowledge provision.

      We   reached      a    similar     decision          TIG     Insurance         Co.    v.

Robertson, Cecil, King & Pruitt, 116 F. App’x 423 (4th Cir.

2004) (unpublished).          There, a partner at a law firm represented

on a written application for professional liability insurance

that the firm was unaware of any act or omission that might

reasonably be expected to become the basis for a claim.                                 Prior

to   the   application,      the    applicant-partner             had   misappropriated

client funds without the firm’s knowledge.                        Id. at 424-25.           The

affected     clients      sued     the   firm,       which       sought    coverage        for

liability on the clients’ claims.                    Id.     Applying Virginia law,

we held that the insurer could rescind the policy based on the

applicant-partner’s          misrepresentations.                 Id.      at     426.      We

rejected    the    argument       that   coverage          was    saved        for   partners

innocent of the misrepresentation because they did not “contract

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for   additional       protection       in     the      case    of   a   partner     making

misrepresentations           on   behalf           of   the     partnership        on    the

application form.”           Id. at 427.            The same is true here because

Bryan   Brothers       was    free     to    bargain      for    additional      coverage

against acts of its employees.

      Likewise, other courts have made the same interpretation of

identical policy language.              In Professional Asset Strategies v.

Continental Casualty Co., No. 2:09-cv-1238-AKK, 2010 WL 4284991,

at *1 (E.D. Ark. Aug. 27, 2010), an investment firm’s employee

stole money from client accounts without the firm’s knowledge.

The   firm    acquired       professional          liability     insurance    after       the

thefts.       When the firm discovered the employee’s misconduct and

its clients sued, the firm sought coverage, which was denied

because the employee had prior knowledge of his thefts.                              Id. at

*2.     The    court    observed       that    “coverage        exists    only     if    this

[prior knowledge] precondition is met, and is denied if anyone

meeting   the    definition       of    ‘you’       has   knowledge      of   what      might

reasonably be a potential claim.”                       Id. at *5 (first underline

added).

      In other words, no coverage exists if any ‘you’ had
      prior knowledge of the existence of a claim.     Where
      there is no prior knowledge and coverage exists, the
      policy provides various exclusions, including [the bad
      acts exclusion].      However, in cases where the
      exclusion is because of ‘criminal, dishonest, illegal,
      fraudulent or malicious’ acts of a ‘you,’ then the
      ‘innocent insured’ provision kicks in to restore
      coverage.

                                              13
Id. at *7; accord Cont’l Cas. Co. v. Walker, No. 4:07cv00298

SWW, 2008 WL 8101840, at *4 (E.D. Ark. July 7, 2008) (rejecting

contention that an innocent insured clause provided coverage for

a claim not first made and reported during the policy period).

       Finally, we decline Bryan Brothers’s request to find the

pertinent language ambiguous and construe the policy in favor of

coverage.       Williams, 278 Va. at 81, 677 S.E.2d at 302 (“[I]f

disputed policy language is ambiguous and can be understood to

have more than one meaning, we construe the language in favor of

coverage and against the insurer.”).           But a plain reading of the

pertinent policy language reveals that it is not susceptible to

more    than    one   meaning.     Because    the   language   of   the    prior

knowledge provision is unambiguous and structured as a condition

precedent to the coverage agreement, we will not contort the

language to find an ambiguity.

                                      IV.

       In sum, we hold that the prior knowledge provision is a

clear and unambiguous condition precedent to recovery on the

policy.     Because Whitworth had prior knowledge of her thefts, a

condition precedent was unfulfilled, and the coverage agreement

was not triggered.         Additionally, exclusions and exceptions in

the    policy   cannot   provide   coverage    that   is   precluded      by   the

                                      14
prior knowledge condition.   Accordingly, we affirm the grant of

summary judgment for Continental Casualty Company.

                                                        AFFIRMED

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