Bryan Brothers Inc. v. Continental Casualty Co. ( 2011 )

Filed: September 6, 2011
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 10-1439
(3:09-cv-00675-HEH)
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.
O R D E R
Upon Appellee’s motion for publication of the Court’s
opinion,
IT IS ORDERED that the motion to publish is granted.
The Court amends its opinion filed March 24, 2011, as
follows:
On the cover sheet, section 1 -- the status is changed from
“UNPUBLISHED” to “PUBLISHED.”
On the cover sheet, section 6 -- the status line is changed
to read “Affirmed by published opinion.”
On page 2 -– the reference to the use of unpublished
opinions as precedent is deleted.
For the Court – By Direction
/s/ Patricia S. Connor
Clerk
2
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
BRYAN BROTHERS INCORPORATED, a 
VIRGINIA corporation; JOSEPH
KOBER; DORIS LANSING; KARL
SCHOELLER; MILDRED SCHOELLER,
Plaintiffs-Appellants,
 No. 10-1439
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 published opinion. Judge Wynn wrote the opin-
ion, in which Judge Motz and Judge Berger concurred.
2 BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY
COUNSEL
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, Kim-
berly A. Ashmore, WILEY REIN, LLP, Washington, D.C.,
for Appellee.
OPINION
WYNN, Circuit Judge:
In this appeal, accounting firm Bryan Brothers, Incorpo-
rated, 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 cov-
erage 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 knowl-
edge, 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 Casu-
alty 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
BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY 3
sums in excess of the deductible, up to our lim-
its of liability, that you become legally obli-
gated 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 omis-
sion in the performance 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 dishon-
est, 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:
4 BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY
L. Innocent Insureds
If coverage under this Policy would be
excluded as a result of any criminal, dis-
honest, 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 becomes a partner, officer, director, associate, or employee
of the named insured, but only for professional services per-
formed 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 Whit-
worth 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
BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY 5
Company denied coverage under the prior knowledge provi-
sion 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 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 inno-
cent 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 "ille-
gal" under the bad acts exclusion; consequently, the innocent
insureds provision was not triggered to save coverage other-
wise precluded by the prior knowledge provision. Id. at 541.
The district court granted summary judgment to Continen-
tal Casualty Company based on Whitworth’s prior knowl-
edge. The bad acts exclusion and the innocent insureds
provision were therefore not applicable.1 The court also found
these provisions to be unambiguous, rejecting Bryan Broth-
ers’s argument that they were ambiguous and must be con-
strued in favor of coverage. Id. at 542. Bryan Brothers
appeals.
1
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 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.
6 BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY
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 accor-
dance 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 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 cov-
erage 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) (discuss-
ing 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
BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY 7
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 excep-
tion to the exclusion 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 mari-
time 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 main-
tains that the prior knowledge provision is a condition prece-
dent 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 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
8 BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY
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 con-
dition precedent 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 for-
tuity 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 reason-
ably expect to result in a claim.
Because Continental Casualty Company denied Bryan
Brothers’s claim for failure of a condition precedent to cover-
age, 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 indica-
tion that coverage was denied on that basis. Thus, the inno-
BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY 9
cent insureds provision, which appears to be an exception to
the bad acts exclusion, was not implicated.
Even assuming arguendo that the innocent insureds provi-
sion 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 exclu-
sions and exceptions were plainly intended "to make certain
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) (unpub-
lished) (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 in TIG Insurance Co. v. Rob-
ertson, Cecil, King & Pruitt, 116 F. App’x 423 (4th Cir.
2004) (unpublished). There, a partner at a law firm repre-
sented on a written application for professional liability insur-
ance 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 misappro-
priated 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 for addi-
tional protection in the case of a partner making misrepresen-
tations on behalf of the partnership on the application form."
Id. at 427. The same is true here because Bryan Brothers was
10 BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY
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 cov-
erage.
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
BRYAN BROTHERS INC. v. CONTINENTAL CASUALTY 11
to have more than one meaning, we construe the language in
favor of coverage and against the insurer."). But a plain read-
ing of the pertinent policy language reveals that it is not sus-
ceptible 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 agree-
ment was not triggered. Additionally, exclusions and excep-
tions in the policy cannot provide coverage that is precluded
by the prior knowledge condition. Accordingly, we affirm the
grant of summary judgment for Continental Casualty Com-
pany.
AFFIRMED