Court Opinion

ID: 627087
Source: CourtListenerOpinion
Date Created: 2012-04-11 18:57:53+00
Date Added: 2024-06-11T08:04:40.226134
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                             No. 11-1222

ROBERT E. GRAHAM,

                Plaintiff - Appellant,

           v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,

                Defendant - Appellee.

Appeal from the United States District Court for the Southern
District of West Virginia, at Bluefield. David A. Faber, Senior
District Judge. (1:10-cv-00453-DAF)

Argued:   January 25, 2012                 Decided:   April 11, 2012

Before KING, GREGORY, and FLOYD, Circuit Judges.

Reversed and remanded by unpublished opinion. Judge Floyd wrote
the opinion, in which Judge King and Judge Gregory joined.

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.    Lisa J. Bray, SPILMAN, THOMAS & BATTLE, PLLC,
Charleston, West Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
FLOYD, Circuit Judge:

     In    this     appeal     we   consider   whether    the     district      court

properly      granted       summary    judgment   to     National       Union    Fire

Insurance Company of Pittsburgh, Pennsylvania (National Union),

holding that the company had no duty to defend Robert Graham in

a 2004 civil action brought by the State of West Virginia.                        For

the reasons stated below, we reverse.

                                         I.

                                         A.

     Graham is the former Executive Director of two not-for-

profit West Virginia corporations, the Council on Aging, Inc.

and All Care Home and Community Services, Inc.                    The Council on

Aging   provides      social    and    other   services    to    West     Virginia’s

elderly through state and federal grants, and fees from state

and federal Medicaid funds.               All Care Home provides Medicaid

case management services to the elderly through fees from state

and federal Medicaid funds.              The same individuals compose the

Board of Directors of each corporation.

     During     all     relevant      times,   National   Union     insured       both

corporations under a general liability insurance policy.                          The

policy covers, among other things, claims for wrongful acts and

a   defense    of     the    “insured”    against      such     claims.         Graham

qualifies as an “insured” under the policy.

                                          2
      National Union’s wrongful act coverage includes a litany of

exclusions, four of which are relevant here:

  •   Exclusion   A,   providing   that    the    policy   does    not    cover

      “[a]ny claim based upon or attributable to the ‘insured’

      gaining in fact any personal profit or advantage to which

      they were not legally entitled, including remuneration paid

      in violation of law as determined by the courts”;

  •   Exclusion   C,   providing   that    the    policy   does    not    cover

      “[a]ny   claim   brought   about    or   contributed    to   by    fraud,

      dishonesty or criminal act of any ‘insured’”;

  •   Exclusion   I,   providing   that    the    policy   does    not    cover

      “[a]ny   claim[]   made    against    the   ‘insured’    for      damages

      attributable to wages, salaries and benefits”; and

  •   Endorsement #14, providing that the policy does not cover

      claims for non-pecuniary relief.

Notably, Exclusion C contains an exception indicating that the

policy will cover claims “brought about or contributed to by

fraud, dishonesty or criminal act,” unless and until “a judgment

or other final adjudication” or “admission of guilt” establishes

that the insured committed the act(s).

                                    B.

      In 2004, West Virginia (the State) filed a civil complaint

against Graham and the two corporations, alleging that they had
                                     3
breached the public trust in their use of public funds and that,

as a result, Graham had been unjustly enriched at the expense of

taxpayers.       The complaint asserted, among other things, that

Graham collected excess compensation and benefits related to his

employment,     Graham     exploited       the       Board    of    Directors,      Graham

breached his legal duty “to make full disclosure of all material

facts to the Board of Directors when asking their approval of

expenditures which [would] inure to his personal benefit, or to

the benefit of his family,” and the Board of Directors breached

its legal duty “not to make distributions of assets or income

other   than    to    serve   the    charitable            purposes     for    which    [the

organizations] were formed.”

       The    State     sought      (1)    a        preliminary         injunction,      (2)

appointment      of   a   receiver        or       court-monitor        to    oversee    the

operations of the corporations, (3) a complete and independent

accounting of the corporations and of Graham’s personal assets

and financial dealings, (4) a final injunction removing Graham

from    his    position    and   authority            to    act    on    behalf    of    the

corporations      and     requiring       implementation           of     accountability

mechanisms      and     procedures,        (5)        a    declaration         encumbering

Graham’s assets by constructive trust to the extent that he was

unjustly enriched, (6) a judgment requiring Graham “to disgorge

any excess compensation or other moneys unjustly obtained,” and

(7) an order requiring that “any moneys . . . collected from

                                               4
Graham pursuant to [a] judgment be expended on the charitable

purposes for which the defendant corporations were formed.”

       Upon    receipt      of   the   State’s        complaint,    Graham’s      counsel

forwarded it to National Union’s agent, AIG Claims Services,

Inc., requesting coverage.                AIG declined, however, indicating

that Exclusion A, Exclusion I, and Endorsement #14 barred Graham

from   coverage       for    the   State’s         claims.      Accordingly,      Graham

furnished       his      own     defense           throughout    the      state    court

proceedings.

       Nearly       five-and-a-half      years        after   the   State   filed    its

complaint, the Circuit Court for Kanawha County granted summary

judgment to Graham and the corporations, holding that the issues

raised by the State were moot because of changed circumstances.

According to the circuit court, the State’s claims were moot

because       the    corporations        had       removed    Graham   as    Executive

Director, passed a resolution prohibiting Graham’s “involvement

in any aspect of the management, business operations or affairs

of the [c]orporations,” and instituted policies to prevent a

subsequent executive director from repeating Graham’s conduct.

Additionally,         the      State’s    claim        for    repayment     of    excess

compensation was moot because the State had filed the claim to

benefit the corporations, and Graham and the corporations had

agreed to relinquish any claims against each other.

                                               5
                                      C.

      On March 3, 2010, Graham filed this lawsuit, alleging that

National Union had breached its contractual duty to defend him

against the State’s 2004 claims.           Graham seeks attorneys’ fees

incurred in the underlying action and this action, and “damages

and   other   relief   available      under   West   Virginia     law   to   a

policyholder who substantially prevails against his insurer.”

      The district court, exercising jurisdiction under 28 U.S.C.

§ 1332, granted summary judgment to National Union, holding that

the insurer had no duty to defend Graham because Exclusion I of

its policy barred Graham from coverage for the State’s claims.

Graham now appeals.

                                   II.

      We review a grant of summary judgment de novo.              Brandt v.

Gooding, 636 F.3d 124, 132 (4th Cir. 2011).             We view facts in

the light most favorable to the nonmoving party when there is a

genuine   issue   regarding   those    facts.    Witt   v.   W.   Va.   State

Police, Troop 2, 633 F.3d 272, 277 (4th Cir. 2011).                 A court

must “grant summary judgment if the movant shows that 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).

                                      6
                                           A.

     In    this    diversity     action,        the    parties   agree    that   West

Virginia law applies.          In West Virginia, “an insurer’s duty to

defend is tested by whether the allegations in the plaintiff’s

complaint are reasonably susceptible of an interpretation that

the claim may be covered by the terms of the insurance policy.”

Aetna Cas. & Sur. Co. v. Pitrolo, 342 S.E.2d 156, 160 (W. Va.

1986).    “Thus, the duty to defend an insured may be broader than

the obligation to pay under a particular policy.”                         Tackett v.

Am. Motorists Ins. Co., 584 S.E.2d 158, 162-63 (W. Va. 2003)

(quoting Pitrolo, 342 S.E.2d at 160) (internal quotation marks

omitted).       “[I]f part of the claims against an insured fall

within the coverage of a liability insurance policy and part do

not, the insurer must defend all of the claims, although it

might eventually be required to pay only some of the claims.”

Id. (quoting Horace Mann Ins. Co. v. Leeber, 376 S.E.2d 581, 584

(W. Va. 1988)) (internal quotation marks omitted).

     Here, the district court held that National Union had no

duty to defend Graham because “[t]he [State’s] complaint in the

underlying      lawsuit     focused   on    Graham’s     excessive    compensation

and disproportionately generous benefits package as one of the

central     ways      in    which     Graham       abused     his    position      and

misappropriated       his    employer’s         resources.”      Graham    v.    Nat’l

Union    Ins.   Co.    of   Pittsburgh,         Pa.,   No.   1:10-00453,    2011    WL

                                           7
673945, at *3 (S.D. W. Va. Feb. 17, 2011).                         The court reasoned

that the State’s claims were “directly ‘attributable to wages,

salaries     and    benefits’”         and    thus      barred     from     coverage     by

Exclusion I.       Id.     We disagree.

      The State’s complaint alleged acts “attributable to wages,

salaries and benefits.”             But it also asserted that Graham wasted

taxpayer funds and exploited the Board of Directors.

      For    example,         the   complaint        averred       that    Graham       used

taxpayer funds to supply the basement of a senior center with

“state-of-the-art exercise equipment” that the seniors did not

use   and    to     outfit      “[t]he       upper      floors     [of     the   center],

accessible     only      by     stairs, . . . with          pool     tables,       and    a

handsomely    furnished         apartment        complete    with    a     large    screen

TV, . . . a tanning bed, and a hot tub.”                          The complaint also

alleged that Graham “remove[d] all representation on the Board

from public agencies” so that the Board “consist[ed] only of

members (patrons) age 60 and over,” and that it was his practice

to present the Board with “perfunctory written recommendations”

that were approved “without full disclosure . . . of the facts”

and “without appreciation by the Board of the consequences of

their actions.”

      We    think     it      plain,     therefore,         that     the     complaint’s

allegations were not entirely “attributable to wages, salaries

and   benefits,”      and     consequently,        we    cannot     conclude,      as    the

                                             8
district court did, that Exclusion I absolved National Union of

its   duty   to        defend   Graham.             Rather,       we   hold     that     because

Exclusion I applied to some but not all of the State’s claims,

National     Union       had    a   duty       to    defend       Graham      unless     another

exclusion precluded coverage.                  See Tackett, 584 S.E.2d at 163.

      And our review of the policy reveals no other applicable

exclusions        or    endorsements.               Endorsement        #14     fails   to    bar

coverage because the State did not confine its requested relief

to non-pecuniary measures; rather, it requested a judgment that

required Graham “to disgorge any excess compensation or other

moneys unjustly obtained.”                 Exclusion A also fails because it

requires     a    determination        “by          [a]   court[]”       that    the   insured

“gain[ed] . . . personal profit or advantage to which [he was]

not legally entitled.”              Here, where the trial court ultimately

dismissed        the    State’s     claims          as    moot,    the       necessary      court

determination is lacking.

                                                B.

      Not only do the exclusions and endorsements in National

Union’s policy fail to absolve it of a duty to defend Graham,

the exception to Exclusion C effectively reaffirms the duty.

      Recall      that    Exclusion        C    bars      coverage       for    “[a]ny      claim

brought about or contributed to by fraud, dishonesty or criminal

act of any ‘insured,’” but not until “a judgment or other final

                                                9
adjudication . . . establish[es]               that    acts      of        active   or

deliberate fraud, dishonesty or criminal act [were] committed by

such ‘insured(s)’ or . . . there [is] an admission of guilt by

the   ‘insured.’”       Without   such        an   adjudication       or    admission,

coverage remains intact.

      Graham contends, and National Union does not dispute, * that

the State’s complaint included allegations that Graham unjustly

enriched himself through fraud and dishonesty.                      Thus, National

Union had a duty to defend Graham until either he admitted guilt

or the court determined he committed the acts.                             Because the

trial court dismissed the State’s claims as moot, however, no

“judgment or other final adjudication” or “admission of guilt”

occurred.        Thus, we are compelled to hold that the exception to

Exclusion C required National Union to defend Graham and that

National Union breached its contractual duty by not doing so.

      In    so    holding,   we   recognize         that   the    district       court

concluded    otherwise,      reasoning    instead      that   the      exception    to

Exclusion C mandated coverage only to the extent that no other

policy exclusion applied to the claims.                    See Graham, 2011 WL

      *
       The parties failed to include National Union’s Answer as
part of the record on appeal.       Nevertheless, National Union
confirmed at oral argument that its Answer did not dispute
Graham’s charge that the State alleged he committed “fraud,
dishonesty and/or criminal acts in the misappropriation of the
assets of the [c]orporations to unjustly enrich himself.”

                                         10
673945, at *3 (“[The exception in Exclusion C] modifies only the

scope of the exclusion in which [it] is contained . . . [and]

does not . . . render all other exclusions obsolete.”).                                     But

this view is contrary to West Virginia law.

       In West Virginia, “[a]n insurer wishing to avoid liability

on a policy purporting to give general or comprehensive coverage

must make exclusionary clauses conspicuous, plain, and clear,

placing     them    in   such     a       fashion       as    to    make    obvious     their

relationship to other policy terms.”                          Marcum Trucking Co. v.

U.S. Fid. & Guar. Co., 438 S.E.2d 59, 63 (W. Va. 1993) (quoting

Nat’l Mut. Ins. Co. v. McMahon & Sons, Inc., 356 S.E.2d 488, 491

(W. Va. 1987), overruled on other grounds by Potesta v. U.S.

Fid.    &   Guar.    Co.,   504     S.E.2d        135       (W.    Va.   1998))     (internal

quotation     marks      omitted).           Furthermore,            because      “insurance

policies are prepared solely by insurers, any ambiguities in

the[ir] language . . . must be construed liberally in favor of

the insured.”         Pitrolo, 342 S.E.2d at 160.                        Such is the case

here.        National       Union         drafted       a     policy       that     fails    to

“conspicuous[ly],        plain[ly],         and     clear[ly]”           indicate    how    the

exception     to     Exclusion        C     operates         relative       to    the   other

exclusions.        At best, then, National Union drafted a policy that

is ambiguous, and we thus construe the language “liberally in

favor of the insured,” holding that the policy entitled Graham

                                             11
to a defense against the State’s claims and that National Union

violated its duty to provide one.

                              III.

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

grant of summary judgment and remand for further proceedings not

inconsistent with this opinion.

                                           REVERSED AND REMANDED

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