Robert Graham v. National Union Fire Insurance , 474 F. App'x 956 ( 2012 )

UNPUBLISHED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Reversed and remanded by unpublished opinion.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Unpublished opinions are not binding precedent in this circuit.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.
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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
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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
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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.
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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).
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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
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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
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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
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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.”
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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
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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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