Coverage Analysis
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 (4th Circuit)


  A federal district court seemed to adopt "subjective" test in City of Virginia Beach v. Aetna Cas. & Sur. Co., 426 F.Supp. 821, 825 (D. Va. 1976).

  Insanity does not preclude the applicability of this coverage defense if the insured was capable of realizing that harm would result from his intentional acts, even if he did not appreciate the wrongfulness of the conduct.  Johnson v. INA, 350 S.E.2d 616 (Va. 1986).

  Public policy precludes coverage for an insured who committed fraud.  Fedele v. National Liberty Ins. Co., 35 S.E.2d 766 (Va. 1945).  


  A federal district court ruled from the bench in C.E. Thurston & Sons, Inc.  v.  Chicago Ins.  Co., No.  2:97cv1034 (E.D. Va.  October 2, 1998) that allocation issues involving the underlying asbestos claims should be resolved based upon an “all sums” approach.  In contrast, a Virginia District Court stated in dicta that long-tail claims should be allocated pro rata, allocating an equal share to all affected years as well as a share to policyholders for periods of “self-insurance” or “no insurance.”  The Morrow Corporation v. Harleysville Mutual Insurance Company, 101 F.Supp.2d 422  (E.D. Va. 2000).   In Morrow, Judge Ellis declared that an insurer should provide a full defense to a suit where no reasonable means of pro ration existed, but that where defense costs can be readily apportioned, the insured must pay its fair share for the defense of the non-covered risk.  While leaving open the issue of Sentry’s defense obligation, he declared that it had no duty to reimburse the insured for indemnity for that portion of the underlying settlement that corresponded to pollution damage occurring during the years for which its policies contain absolute pollution exclusions.   On rehearing, Judge Ellis further ruled in Morrow Corporation v. Harleysville Mutual Insurance Company, 101 F.Supp.2d 441  (E.D. Va. 2000) that whether or not defense costs could reasonably be apportioned between covered and non-covered claims, “an insurer has a duty to defend the insured against the entire suit, including claims for damages attributable to the non-covered period...”


  All appeals are heard directly by the Virginia Supreme Court.


  Unfair or deceptive consumer practices are proscribed by Va. Code Ann. § 59-1-196 (1992 & Supp. 1993).  Unfair claims handling by insurers is regulated under Va. Code § 38.1-52.9 (1950).   A federal court has ruled that these statutes do not create a private right of action for policyholders. A&E Supply Co. v. Nationwide Mut. Fire Ins. Co., 798 F.2d 559 (4th Cir. 1986).

  Liability for first party bad faith in Virginia can only arise from the contract and extends only to situations connected with the policy.  A&E Supply Co. v. Nationwide Mut. Fire Ins. Co., 798 F.2d 559 (4th Cir. 1986).

  An insurer that intends to deny coverage on the basis of a policy breach by its policyholder must give notice within 20 days.  See Vermont Mut. Ins. co. v. Everette, 875 F.Supp. 1181 (E.D. Va. 1995).

  A bad faith claim may be pursued by a third party beneficiary to an insurance contract, particularly where the insurer knew that the policy was intended to benefit the claimant. Levine v. Selective Ins. Co. of America, 462 S.E.2d 81 (Va. 1995).

  In CUNA Mutual Ins. Co. v. Norman, 375 S.E.2d 724, 726 (Va. 1989), the Virginia Supreme Court set forth five factors for courts to consider in assessing whether an insurer had acted in bad faith: (1) whether reasonable minds could differ in the interpretation of the policy provisions; (2) whether the insurer had made a reasonable investigation of the facts; (3) whether the information disclosed by this investigation supported the insurer's denial; (4) whether the insurer denied coverage as a negotiating tactic; and (5) whether the insurer's defense raised issues of first impression or a reasonable debatable question of law or fact.  


  Held not to encompass claims for mental distress in American & Foreign Ins. Co. v. Church Schools in Virginia, 645 F.Supp. 628 (E.D. Va. 1986); West American Ins. Co. v. Bank of Isle of Wight, 673 F.Supp. 760 (E.D. Va. 1987).


  Virginia requires adherence to policy requirements as a condition precedent to coverage.  Liberty Mut. Ins. Co. v. Safeco Ins. Co., 223 Va. 317, 288 S.E.2d 469 (1982) (citing State Farm v. Porter, 221 Va. 592 (1980)).  In State Farm v. Scott, 236 Va. 116, 372 S.E.2d 383, 385 (1988), the Virginia Supreme Court ruled that  "when a violation of the notice requirement is substantial and material, the insurer is not required to show that it has been prejudiced by the violation.  An absence of prejudice, however, is a circumstance to be considered on the question of the materiality of the information which the insured failed to give."  
  Generally, whether notice is reasonable or not is a factual issue to be resolved based upon the circumstances of a given case.  Stonewall Ins. Co. v. Hamilton, 727 F.Supp. 271 (W.D. Va. 1989).  Prejudice (or the lack thereof) is one of the factors for the court to consider.  State Farm Fire & Cas. Co. v. Walton, 423 S.E.2d 188 (Va. 1992).  Late notice will defeat coverage as a matter of law if the insured's delay is unjustified.  Atlas Ins. Co. v. Chapman, 888 F.Supp. 742 (E.D. Va. 1995). 

  In Norfolk and Western Railway Co. v. Accident and Cas. Ins. Co. of Winterthur, 796 F.Supp. 929 (E.D. Va. 1992), affirmed in part, reversed in part, 41 F.3d 928 (4th Cir. 1994), the court ruled that a railroad had not waived its claim for coverage under excess policies by giving late notice of hearing loss claims where the policies themselves stated that notice need not be given until the insured "reasonably anticipated" that layer of excess coverage would be reached. 

  An objective standard is to be used in evaluating when it was "reasonable" to give notice under such excess policies.  Dan River, Inc. v. Continental Ins. Co., 317 S.E.2d 486 (Va. 1984). 


  Party seeking to recover under policy has the burden of showing that its claim is within the scope of coverage.  Emick v. Dairyland Ins. Co., 519 F.2d 1317 (4th Cir. 1975)("permissive use" of vehicle).


  For the most part, Virginia follows the traditional rule of lex loci contractus, looking to the place where the policy was issued or contracted for.  Frye v. Commonwealth, 231 Va. 370, 345 S.E.2d 267, 272 (1976), cited in Fuisz v. Selective Ins. Co. of America, 1995 WL 450998 (4th Cir. August 1, 1995).  See also Rossman v. State Farm Mut. Auto Ins. Co., 832 F.2d 282 (4th Cir. 1987).

  Applying Virginia's "place of the wrong" choice of laws test, the Supreme Court of Virginia has held that the availability of uninsured motorist coverage for a West Virginia accident involving a Virginia citizen should be interpreted in accordance with the law of the forum state (Virginia).  Buchanan v. Doe, 431 S.E.2d 289 (Va. 1993).

  An express choice of law provisions will be given effect if the State bears a reasonable relationship to the transaction.  Hooper v. Musolino, 364 S.E.2d 207 (Va. 1988).  With such provision, Virginia courts will generally apply the law of the place where the contract is made and to be performed.  May Partnership v. Barker, 431 S.E.2d 331 (Va. 1993).  


  Where a conflict of interests exists, the insurer must obtain independent counsel to represent its insured.  Norman v. INA, 239 S.E.2d 902, 907 (Va. 1978).  

  An attorney employed by an insurer to represent its policyholder is bound by the same standards which govern all attorneys and owes the insured the same duty as if he  were privately retained by the insured.  State Farm Fire & Casualty Co. v. Mabry, 497 S.E.2d 844, 847 (Va. 1998).  


  Held not to encompass clean up costs by two state trial courts in Argonaut Ins. Co. v. Wood Industries, Inc., No. 87-0323-R (E.D. Va., June 20, 1988) and Lumberman's Underwriting Alliance v. Atlantic Wood Ind., Inc., Henrico County Cir. Ct., Case No. 86L350 (Va. October 7, 1988). 


  The scope of claims for which declaratory relief is available is codified under §8:01-191.  However, the dispute must be real to be justiciable and cannot involve only an advisory opinion on an illusory controversy.  Reisen v. Aetna Life & Cas. Co., 225 Va. 327, 302 S.E.2d 529 (1983).  More recently, the Virginia Supreme Court has ruled that jurisdiction is only appropriate if all the parties affected by an action for declaratory relief are made a party to it.  Erie Ins. Group v. Hughes, 240 Va. 965, 393 S.E.2d 210 (1990).

  An insurer is free to obtain a declaratory judgment with respect to its claimed coverage obligations, even in advance of the resolution of the underlying suit.  Reisen v. Aetna Life & Casualty Co., 302 S.E.2d 529 (Va. 1983).  Further, findings in the underlying suit are not binding upon the insurer, even if the insurer was defending under a reservation of rights, in any subsequent declaratory judgment action.  State Farm Fire & Casualty Co. v. Habery, 1998 WL 120242 (Va. February 27, 1998).  

  Federal courts will not retain diversity jurisdiction where state courts have a significant interest in establishing law and would be a more appropriate and efficient venue for resolving the coverage dispute.  Monticello Ins. Co. v. Baecher, No. 2:93 CV 642 (E.D. Va. July 19, 1994)(lead paint claims).


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information



  An insurer must defend unless the complaint against its insured "clearly demonstrates no basis upon which the insurer could be required to indemnify the insured under the policy."  Reisen v. Aetna Life & Cas. Co., 225 Va. 327, 302 S.E.2d 529, 531 (1983).  Virginia law is less clear whether this duty is limited to the actual pleadings or may also encompass facts known to the insurer.  In assessing whether a duty to defend exists under the contract, the insurer should look to the allegations in the underlying suit as compared with the scope of its policy coverage.  Fuysz v.  Selective Ins. Co.  of America, 61 F.3d 238, 242 (4th Cir.  1995).  

  Under Virginia law, an insurer’s defense obligation arises solely by reason of contract and may not be imposed based upon claimed common law or statutory duties.  Town Crier, Inc.  v.  Hume, 721 F.Supp.  99, 101 (E.D. Va.  1989).

    If any part of a complaint is within the insurer's coverage, it must defend the entire case. City of Virginia Beach v. Aetna Cas. & Sur. Co., 426 F.Supp. 821, 827 (D. Va. 1976).  However, an insured is not entitled to recover its fees for prosecuting a declaratory judgment action to compel a defense.


  Virginia Code Annotated Section 38.2-2226 requires that an insurer that plans to deny coverage must give prompt notice to the underlying tort claimant.  Before 1997, notice of denial was required within 20 days.  The statute has since been amended to require notice within 45 days after discovery by the insurer of the breach or of the claim, whichever occurs later.  Failure to give the notice within 45 days will result in a waiver of the defense based on such breach to the extent of the claim by operation of law.  Morrel v. Nationwide Mutual Fire Insurance Company, 1999 WL 617881 (4th Cir. August 16, 1999).  

  Under Virginia law, the doctrines of waiver and estoppel may not be used to enlarge coverage.  Blue Cross and Blue Shield of Virginia v. Wingfield, 391 S.E.2d 73, 74 (Va. 1990) and The Morrow Corporation v. Harleysville Mutual Insurance Company, 101 F.Supp.2d 422  (E.D. Va. 2000).


  Virginia Supreme Court has ruled that an excess insurer is not obligated to contribute to the cost of defending a suit merely because the ad damnum exceeds the underlying limits.  U.S. Fire Ins. Co. v. Aspen Building Corp., 367 S.E.2d 478 (Va. 1988).

  Similarly, the Fourth Circuit ruled in National Electrical Manufacturers Association v.  Gulf Underwriters Ins.  Co., 162 F.3d 821 (4th Cir. 1998) that an insured could not compel a defense from its umbrella carrier where it had not proved the exhaustion of all of the underlying insurance.  The court took particular note of the fact that the insured had settled with the primary carriers but had refused to disclose the details of the settlements.

  An umbrella insurer was not required to "drop down" over an insolvent primary insurer in Atkinson Dredging Co. v. St. Paul Fire & Marine Ins. Co., 836 F.Supp. 341 (E.D. Va. 1993).


  Virginia Code Section 38.2-309 provides that “no statement in an application for an insurance policy made before or after loss under the policy shall bar a recovery under a policy of insurance unless it is clearly proved that such answer or statement was material to the risk when assumed and was untrue.”   The Virginia Supreme Court has interpreted Section 309 as requiring an insurer who seeks avoid coverage on the basis of its policyholder’s misrepresentation in the policy application to show that (1) the statement on the application was untrue and (2) the insurer’s reliance on the false statement was material to its decision to underwrite the risk and issue the policy.  Commercial Underwriters Insurance Company v. Hunt and Calderone, P.C., No. 00474 (Va. January 12, 2001)(E&O policy).  More than mere falsity is required; the insurer must prove that truthful answers would have reasonably influenced its decision to issue the policy.  Harrell v. North Carolina Mutual Life Insurance Company, 213 S.E.2d 792, 794 (Va. 1975)(life insurance policy).

  In S.F. v. West American Ins. Co., 463 S.E.2d 450 (Va. 1995), a case involving a suit against an apartment building owner by seven plaintiffs who had been sexually assaulted by the insured's property manager, the Virginia Supreme Court ruled that the meaning of "occurrence" was ambiguous in that it could extend to the insured' hiring of the molester, its supervision or its negligent retention of him.  Under the circumstances, the court ruled that the various claims could not be restricted to a single policy limit and were each a separate "occurrence."   However, the court refused to find that each separate molestation incident was a new "occurrence." 

  A U.S. District Court ruled in Norfolk and Western Railway Co. v. Accident and Cas. Ins. Co. of Winterthur, 796 F.Supp. 929 (W.D. Va. 1992), aff'd on other grounds, 41 F.3d 928 (4th Cir. 1994) that hearing loss claims that had been filed against the insured arose out of multiple "occurrences," although it did not define exactly how many.  Applying the "cause" test, the court notes that "many different sounds could damage the hearing of many employees in many places over the course of many years, making this case one in which multiple occurrence created multiple injuries."  the court notes that a more accurate determinant of the number of occurrences might be based upon "the generation of noise by a particular machine or by a number of machines in a particular physical plant."   On appeal, the Fourth Circuit did not disagree with this analysis but found that the District Court had acted prematurely in reaching this issue.

  By contrast, while also adopting the "cause" test, a federal district court in Maryland, interpreting Virginia law, ruled in a products liability case that various separate problems suffered by a customer who purchased a security system from the insured all arose out of "one proximate, uninterrupted and continuing cause" (the sale of the defective security system) and were therefore one "occurrence."  Sting Security, Inc. v. First Mercury Syndicate, Inc., 791 F.Supp. 555 (D. Md. 1992). 


  Applying the law of Missouri and New York, a federal court in Virginia ruled that claims against a Virginia corporation because of pollution at a site in West Virginia were held not to be "sudden and accidental" where the pollution occurred over a six year period in the course of a third party's normal disposal operations. Asbestos Removal Corp. v. Guaranty National Ins. Co., 846 F.Supp. 33 (E.D. Va. 1994), aff'd, 48 F.3d 1215 (4th Cir. 1995).  The court found that the insured had the burden of proof in establishing the exception to the exclusion.

  In The Morrow Corporation v. Harleysville Mutual Insurance Company, 101 F.Supp.2d 422  (E.D. Va. 2000), Judge Ellis ruled that “sudden” has a temporal meaning that precluded coverage for gradually-occurring contamination but nonetheless ruled that Sentry owed a defense to a law suit by a landlord against a dry cleaner that alleged discharges and spills of perc owing to the fact that the vague description of how pollutoin occurred “describe a broad continuum of pollution events that include abrupt or quick, unintentional spills or discharges as well as those that are otherwise.”  The court refused to find that the underlying complaint could be characterized as alleging a continuous pattern of discharges.   On the other hand, the court declared that such claims were unambiguously excluded under a later policy containing an “absolute” pollution exclusion, rejecting the insured’s claims of ambiguity and surprise.

  Absolute exclusion upheld by trial court in Douglas Call.  However, a trial court refused to apply it to lead poisoning claims in Unisun Ins. Co. v. Schulwolf, 2000 Va. Cir. LEXIS 107 (Va. Cir. Ct. August 23, 2000) and  Monticello Ins. Co. v. Baecher, Norfolk Circuit Court CL94-3451 (Va. September 29, 1995).  While recognizing that lead itself may be considered a pollutant under some circumstances, the Baecher court adopted as more convincing those cases which have ruled that an objectively reasonable person would not construe the presence of lead paint in a house as involving "pollution."  On appeal, however, the Virginia Supreme Court ruled that the claims were subject to an exclusion for claims arising out of "any substance where the Insured is or may be liable as a result of the manufacture, production, extraction, sale, handling, utilization, distribution, disposal or creation by or on behalf of the Insured of such substance." Monticello Ins. Co. v. Baecher, 252 Va. 347, 477 S.E.2d 490 (1996). the court ruled that the underlying plaintiff's exposure to lead-based paint arose out of the insured landlord's "utilization" of lead on the premises, notwithstanding the insured's argument that merely allowing lead-based paint to remain on the walls of the premises did not constitute "utilization."  
  The Fourth Circuit has ruled that a Virginia District Court erred in finding that an excess insurer had a duty to defend a class action by welders who alleged that the insured had been negligent in developing standards for the use of manganese in welding rods.  In National Electrical Manufacturers Association v.  Gulf Underwriters Ins.  Co., 162 F.3d 481 (4th Cir.  1998), the court held that the underlying claims plainly involved injuries resulting from the discharge of a “pollutant” whatever the theory of liability.  The court refused to limit the scope of the exclusion to “environmental pollution”, holding that the insured’s reasonable expectations of coverage are irrelevant where the terms of the policy are plain and unambiguous.

  InCarova Corporation v. USF&G, 2000 U.S. Dist. LEXIS 18964 (E.D. Va. May 15, 2000), a federal district court ruled that allegations by a neighboring property owner that the insured’s disposal of trash and waste had caused damage to adjoining properties plainly involved the disposal of “waste” within the scope of an absolute pollution exclusion contained in the USF&G policy.  “While a lay person may not necessarily consider the trash or recyclable materials on the Carova land as ‘pollution,’ due to the fact that they are not necessarily hazardous, the policy speaks for itself and it requires no interpretation by clearly defining pollution as ‘any solid, liquid, gaseous or thermal irritant or contaminant including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.’“


  Allegations of visual impairment, blowing trash and emissions of fumes onto the plaintiff’s property have been held not to constitute “property damage.”  Carova Corporation v. USF&G, 2000 U.S. Dist. LEXIS 18964 (E.D. Va. May 15, 2000).


  The public policy of Virginia prohibits individuals from obtaining insurance for actions taken with specific intent to cause harm.  Atlantic Permanent Savings and Loan Assoc. v. American Cas. Co. of Reading, 839 F.2d 212, 217 (4th Cir. 1988). See also Fedele v. National Liberty Ins. Co., 35 S.E.2d 766 (Va. 1945)(no coverage for fraud claims).  However, the Fourth Circuit has affirmed a lower court's ruling that requiring malpractice coverage for a fertility specialist who artificially inseminated patients with his own sperm was held not to be against the public policy of Virginia in St. Paul Fire & Marine Ins. Co. v. Jacobson, 48 F.3d 778, 783 (4th Cir. 1995).


  Code §38.2-227 and §38.1-42.2 (1983) forbids coverage for punitive damages based on intentional conduct but allows insurers to provide coverage for punitive damages where damages are awarded on the basis of negligent or wanton and willful conduct.  However, this statute has been interpreted by the Virginia Supreme Court as only extending to bodily injury claims.  U.S. Fire Ins. Co. v. Aspen Building Corp., 367 S.E.2d 478 (Va. 1988).

  Applying Illinois law, the 4th Circuit has ruled that public policy forbids insuring punitive damages based on the insured's own misconduct.  Rossman v. State Farm Mut. Auto Ins. Co., 832 F.2d 282 (4th Cir. 1987).


  Ambiguous language in an insurance policy will be interpreted in favor of the policyholder.  Smith v. Allstate Ins. Co., 241 Va. 477, 403 S.E.2d 696, 697 (1991).  Exclusions will only be applied to defeat coverage if they unambiguously encompass the acts or omissions in question.  Floyd v. Northern Ins. Co., 232 Va. 340, 350 S.E.2d 616 (1986).


  No cases.


  The Virginia Supreme Court has yet to issue a ruling intepreting the application of liability insurance policies to long-tail claims.  In the absence of a clear statement of controlling law, lower courts have reached conflicting results.

  In The Morrow Corporation v. Harleysville Mutual Insurance Company, 101 F.Supp.2d 422  (E.D. Va. 2000), a federal district court declared that claims arising out of a dry cleaner’s discharge of perc triggered coverage through the period of polluting activity.  Furthermore, even though the sources of contamination ended in 1992, the court found that the underlying suit alleged that the contamination persisted until 1996, when it was finally discovered.  The District Court concluded that Virginia would likely follow an “injury in fact” approach of the sort recently adopted by the Fourth Circuit in Spartan Petroleum under South Carolina law.  

  In contrast to Morrow, a federal district court ruled from the bench in C.E. Thurston & Sons, Inc.  v.  Chicago Ins.  Co., No.  2:97cv1034 (E.D. Va.  October 2, 1998) that a “continuous trigger” should be used for asbestos suits.

  Finally, a federal district court in Maryland, interpreting Virginia law, ruled that a "manifestation" trigger should be applied to a products liability case involving a defective security system. Sting Security, Inc. v. First Mercury Syndicate, Inc., 791 F.Supp. 555 (D. Md. 1992).

   While acknowledging that no Virginia court had addressed this issue, Judge Gibb ruled in Hoechst Celanese Corp. v. Aetna Casualty & Surety Company,  No. 7466 (Va. Cir. Ct.January 7, 2000) that HCC could not claim coverage for pollution liabilities involving a subsidiary in view of the fact that the policies had expired before HCC acquired this entity.  The court declared that after-acquired liabilities are not covered under a policy even if pollution occurred during the policy period.  “Coverage may exist on acquisitions made during the policy period but coverage is not provided as to liabilities acquired after the policy period had expired.  To interpret the contract language otherwise would not be logical and could lead to unjust and bizarre results.”

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