First Tennessee Bank National Ass'n v. St. Paul Fire & Marine Insurance , 501 F. App'x 255 ( 2012 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1781
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
Intervenor/Plaintiff - Appellant,
and
GLOBAL TITLE, LLC,
Third Party Plaintiff,
v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
Third Party Defendant – Appellee.
No. 11-1782
GLOBAL TITLE, LLC,
Third Party Plaintiff – Appellant,
and
FIRST TENNESSEE BANK NATIONAL ASSOCIATION,
Intervenor/Plaintiff,
v.
ST. PAUL FIRE AND MARINE INSURANCE COMPANY,
Third Party Defendant - Appellee.
Appeals from the United States District Court for the Eastern
District of Virginia, at Richmond. Henry E. Hudson, District
Judge. (3:09-cv-00550-HEH-MHL)
Argued: September 18, 2012 Decided: December 21, 2012
Before TRAXLER, Chief Judge, and DIAZ and THACKER, Circuit
Judges.
Vacated and remanded by unpublished per curiam opinion.
ARGUED: Paul Peter Vangellow, Falls Church, Virginia; Clarence
A. Wilbon, BASS, BERRY & SIMS PLC, Memphis, Tennessee, for
Appellants. Christopher J. Bannon, ARONBERG GOLDGEHN DAVIS &
GARMISA, Chicago, Illinois, for Appellee. ON BRIEF: Annie T.
Christoff, BASS, BERRY & SIMS PLC, Memphis, Tennessee; Michael
P. Falzone, HIRSCHLER FLEISCHER, Richmond, Virginia, for
Appellant First Tennessee Bank National Association. Bruin S.
Richardson, LECLAIRRYAN, Richmond, Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
2
PER CURIAM:
Global Title, LLC, served as the closing agent for mortgage
loans originated by Financial Mortgage, Inc. (“FMI”), and funded
by First Tennessee National Bank. After learning that three
scheduled loans would not close, Global returned the unused
funds to FMI instead of First Tennessee. FMI’s president
absconded with the funds. Unable to recover the funds from FMI,
First Tennessee sued Global. Global sought coverage under a
liability policy issued by St. Paul Fire & Marine Insurance
Company. St. Paul determined that coverage was barred by a
policy exclusion and denied the claim, which prompted Global to
sue St. Paul for breach of contract. After a bit of procedural
shuffling and realigning, the case proceeded with Global as
plaintiff asserting claims against St. Paul; First Tennessee
intervened to assert its claim against Global.
The district court granted summary judgment in favor of St.
Paul, concluding that coverage was excluded under the policy and
that St. Paul therefore had no duty to defend or indemnify
Global. Global and First Tennessee appeal. We agree with
Appellants that there is a possibility of coverage under the
policy and that St. Paul therefore is obligated to defend Global
against First Tennessee’s claims. Accordingly, we vacate the
district court’s order and remand.
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I.
The central question in this case is whether St. Paul is
obligated under the policy to defend Global in the action
brought against Global by First Tennessee. Under Virginia law, 1
an insurer’s duty to defend its insured is broader than its duty
to indemnify. “Indeed, an insurer may be required to provide a
defense even where the ultimate resolution of the case
demonstrates that the insurer is not liable for
indemnification.” Fuisz v. Selective Ins. Co. of Am., 61 F.3d
238, 242 (4th Cir. 1995).
The duty to defend “arises whenever the complaint alleges
facts and circumstances, some of which would, if proved, fall
within the risk covered by the policy.” Virginia Elec. & Power
Co. v. Northbrook Prop. & Cas. Ins. Co., 475 S.E.2d 264, 265
(Va. 1996) (internal quotation marks omitted). Conversely, an
insurer has no duty to defend if the insurer “would not be
liable under its contract for any judgment based upon the
allegations.” Travelers Indemn. Co. v. Obenshain, 245 S.E.2d
247, 249 (Va. 1978); see Virginia Elec. & Power, 475 S.E.2d at
1
The parties agree that Virginia law governs the
disposition of this appeal. See Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496-97 (1941) (federal court sitting in
diversity must apply the choice-of-law rules of the forum
state); Buchanan v. Doe, 431 S.E.2d 289, 291 (Va. 1993)
(Virginia law governs dispute over insurance policy issued and
delivered in Virginia).
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266-67 (insurer has no duty to defend the insured against claim
clearly excluded from coverage under the policy).
Resolution of the duty-to-defend question thus “requires
examination of (1) the policy language to ascertain the terms of
the coverage and (2) the underlying complaint to determine
whether any claims alleged therein are covered by the policy.”
Fuisz, 61 F.3d at 242. “This principle is commonly known as the
‘eight corners rule’ because the determination is made by
comparing the ‘four corners’ of the underlying complaint with
the ‘four corners’ of the policy . . . .” AES Corp. v.
Steadfast Ins. Co., 725 S.E.2d 532, 535 (Va. 2012). With these
principles in mind, we turn now to the specifics of this case.
A.
The policy’s general insuring clause provides coverage to
“protected persons” for loss caused by “wrongful acts” committed
during the performance of or failure to perform “real estate
professional services,” including services performed in the
capacity of title, closing, or escrow agent. Policy at SP00021.
The policy defines “wrongful act” as “any negligent act, error
or omission.” Id. at SP00022.
The policy exclusion at issue in this case is the “Handling
of funds” exclusion (the “HOF Exclusion”). The HOF Exclusion,
in relevant part, excludes from coverage claims for loss
resulting from “[a]ny unauthorized act committed by any
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protected person that deprives an owner of the use of its
funds.” Policy at SP00028 (emphasis added). The policy does
not define “unauthorized” or “unauthorized act.”
B.
The amended complaint filed by First Tennessee (as
intervening plaintiff) asserted a single count of negligence
against Global. 2 According to the allegations of the complaint,
First Tennessee entered into an agreement with FMI and
established a line of credit through which First Tennessee
provided the funds for mortgage loans originated by FMI. The
complaint alleged that Global, as closing agent, “would receive
funds from First Tennessee prior to the closing of the [FMI]-
originated loans. Global Title was to hold the funds in trust
and then distribute the funds as directed upon closing.” J.A.
33. In anticipation of funding three loans, First Tennessee
wired a total of approximately $2.5 million to Global. The
complaint alleged that when Global later learned from FMI that
the transactions had been cancelled, “[i]nstead of returning the
2
We focus on the allegations of First Tennessee’s amended
complaint-in-intervention rather than First Tennessee’s
original, multi-count complaint. The original complaint, which
was dismissed without prejudice, became a nullity upon the
filing of the amended complaint. See Young v. City of Mount
Ranier, 238 F.3d 567, 573 (4th Cir. 2001) (“[A]n amended
pleading supersedes the original pleading, rendering the
original pleading of no effect. Thus, if an amended complaint
omits claims raised in the original complaint, the plaintiff has
waived those omitted claims.”).
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funds to First Tennessee . . . , Global Title transferred the
funds . . . to [FMI.]” J.A. 34.
In support of its negligence cause of action, First
Tennessee alleged that, as closing agent, Global had a duty to
protect First Tennessee’s interest in the funds. First
Tennessee alleged that Global “breached the duty it owed to
First Tennessee when it negligently transferred $2.5 million of
First Tennessee’s money to [FMI],” and that Global’s negligence
in returning the funds entitles it to recovery. J.A. 34. The
complaint alleged no additional facts describing how or why
Global gave the money to FMI -- there are no allegations, for
example, that Global acted willfully or that Global acted in
concert with FMI. 3
3
First Tennessee attached as exhibits to its intervention
complaint certain documents evidencing the transactions at issue
here. The documents included supplemental closing instructions
executed by FMI and Global which stated that if the loan did not
close, Global was “to either (1) return the unused cashier’s
check to [FMI]; or (2) return the funds via wire transfer
directly to [First Tennessee].” J.A. 39, 42, 45. Relying on
CACI International, Inc. v. St. Paul Fire & Marine Insurance
Co., 566 F.3d 150 (4th Cir. 2009), the district court held that
Virginia’s eight-corners rule did not permit it to consider
documents attached to the complaint. See id. at 156 (declining
to consider documents attached to complaint “because Virginia
courts have not signaled a readiness to look beyond the
underlying complaint” when resolving duty-to-defend questions).
But see Va. Sup. Ct. Rule 1:4(i) (“The mention in a pleading of
an accompanying exhibit shall, of itself and without more, make
such exhibit a part of the pleading.” (emphasis added)).
Although Appellants contend that the district court erred by
refusing to consider the exhibits, we need not decide that
(Continued)
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C.
Adopting the report and recommendation of the magistrate
judge, see 28 U.S.C. § 636(b)(1)(B), the district court granted
summary judgment in favor of St. Paul on the coverage question.
Because the policy did not define “unauthorized,” the district
court, looking to Black’s Law Dictionary, defined “unauthorized”
as “‘[d]one without authority’” or “‘made without actual,
implied, or apparent authority.’” J.A. 153 (quoting Black’s Law
Dictionary (9th ed. 2009)). The court then defined “authority”
as “‘[t]he right or permission to act legally on another’s
behalf; . . . the power of one person to affect another’s legal
relations by acts done in accordance with the other’s
manifestations of assent; the power delegated by a principal to
an agent. . . .’” J.A. 153.
The district court concluded that, given the allegations in
the complaint that the funds belonged to First Tennessee and
that Global was to hold the funds in trust and distribute them
at closing as directed by First Tennessee, Global’s actions were
“unauthorized” as a matter of law. The magistrate judge
question. As we will explain, the allegations of First
Tennessee’s complaint, even without consideration of the
attached exhibits, are sufficient to trigger St. Paul’s duty to
defend.
8
explained this conclusion in the report and recommendation
adopted by the district court:
It is undisputed that these three [FMI]-originated
loans never closed, and it is undisputed that First
Tennessee never directed Global Title to transfer the
funds to [FMI] despite the failure to close. Thus,
Global Title's transfer of First Tennessee’s funds to
[FMI] constituted an unauthorized act that deprived
the owner of the use of its funds. Accordingly, the
“Handling of funds” provision excludes coverage for
this unauthorized act.
J.A. 133. Thus, in this case, because First Tennessee did not
authorize Global to return the funds to FMI, the court held
Global’s action was unauthorized within the meaning of the HOF
Exclusion.
II.
On appeal, Global and First Tennessee contend that the
district court’s interpretation of the HOF Exclusion was
erroneous. They argue that under Virginia law, an act that an
agent is authorized to perform does not become unauthorized
simply because the agent performed the act negligently. And
because negligent acts are not necessarily unauthorized acts,
Appellants argue that the HOF Exclusion does not foreclose the
possibility of coverage under the policy. We agree.
A.
Because the policy did not define “unauthorized act,” the
district court properly defined “unauthorized act” as an act
9
taken without authority. See, e.g., Scottsdale Ins. Co. v.
Glick, 397 S.E.2d 105, 108 (Va. 1990) (“In the absence of a
definition, words used in an insurance policy must be given
their ordinary and accepted meaning.”). Nonetheless, when the
HOF Exclusion is considered as part of the policy as a whole, we
think it clear that the district court took too narrow a view of
the precise “authority” necessary for an agent’s action to be
“authorized.”
An insurance policy, of course, is a contract subject to
the same rules of construction as any other contract. See
Virginia Farm Bureau Mut. Ins. Co. v. Williams, 677 S.E.2d 299,
302 (Va. 2009); Harleysville Mut. Ins. Co. v. Dollins, 109
S.E.2d 405, 409 (Va. 1959). “The primary goal in the
construction of written contracts is to determine the intent of
the contracting parties . . . .” Flippo v. CSC Assocs. III,
L.L.C., 547 S.E.2d 216, 226 (Va. 2001) (internal quotation marks
omitted); see Bender-Miller Co. v. Thomwood Farms, Inc., 179
S.E.2d 636, 639 (Va. 1971) (“[T]he intent of the parties as
expressed in their contract controls.”).
When determining the intent of the contracting parties,
“the whole instrument is to be considered; not any one provision
only, but all its provisions; not the words merely in which they
were expressed, but their object and purpose, as disclosed by
the language, by the subject matter, and the condition and
10
relation of the parties.” Worrie v. Boze, 62 S.E.2d 876, 880
(Va. 1951) (emphasis added; internal quotation marks omitted);
see Flippo, 547 S.E.2d at 226 (“[I]ntent is to be determined
from the language employed, surrounding circumstances, the
occasion, and apparent object of the parties.” (emphasis added;
internal quotation marks omitted)). In our view, the district
court failed to properly consider the “object and purpose” of
the insurance policy when determining the meaning of
“unauthorized act” in the HOF Exclusion.
The object and purpose of the contract in this case is
clear. The contract is a professional liability insurance
policy that protects Global from liability for certain losses
caused by Global while performing real-estate-related services
in its capacity as an agent. “Authority,” the focus of the
district court’s analysis, is of course a critical concept in
the law of agency -- absent authority to act on behalf of
another, there is no agency relationship. Within an agency
relationship, however, questions about liability turn not on
simple “authority,” but on scope of authority. The principal is
liable for the actions of the agent committed within the scope
of authority, but not for actions outside the scope of the
agent’s authority. See, e.g., Allen Realty Corp. v. Holbert,
318 S.E.2d 592, 596 (Va. 1984) (“[A] principal is liable to
third persons for wrongful acts an agent commits within the
11
scope of his employment, even if the principal does not approve
or know of the misconduct . . . .”); Kern v. Freed Co., 299
S.E.2d 363, 364 (Va. 1983) (“If the agent exceeds his authority,
the principal is not bound by the agent’s acts.”).
Because liability in the agency context -- the very risk
addressed by the policy -- turns on the scope of the agent’s
authority, we believe that when the HOF Exclusion is considered
in light of the purpose and subject-matter of the policy, the
exclusion for losses caused by an “unauthorized act” must be
understood as referring to an act outside the scope of the
insured’s authority. See London Guar. & Accident Co. v. C.B.
White & Bros., 49 S.E.2d 254, 259 (Va. 1948) (explaining that
insurance policy must be “construed in the light of the subject
matter with which the parties are dealing and the words or
phrases of the policy should be given their natural and ordinary
meaning as understood in the business world.” (emphasis added));
accord State Farm Mut. Auto. Ins. Co. v. Powell, 318 S.E.2d 393,
397 (Va. 1984). We believe this to be the most natural reading
of the policy -- so construed, the policy imposes obligations on
the insurer that track those of an agent’s principal. Just as
the principal would be liable for the wrongful act of his agent
committed within the scope of the agent’s authority but not for
acts outside the scope of authority, the policy provides
coverage for wrongful acts committed within the scope of the
12
insured’s authority but not for acts committed outside the scope
of the insured’s authority.
Accordingly, the HOF Exclusion, as we conclude it must be
interpreted, precludes coverage for claims of loss caused by any
act outside the scope of the insured’s authority that deprives
an owner of the use of its funds. The question, then, is
whether the allegations in First Tennessee’s complaint clearly
and unambiguously establish that Global’s actions exceeded the
scope of its authority as closing agent such that coverage for
the claim is barred by the HOF Exclusion. See Floyd v. Northern
Neck Ins. Co., 427 S.E.2d 193, 196 (Va. 1993) (“[T]o be
effective, the exclusionary language must clearly and
unambiguously bring the particular act or omission within its
scope.”).
Under Virginia law, an “act need not be expressly or
impliedly directed by the employer in order for the act to occur
within the scope of the employment. Similarly, an act committed
in violation of an employer’s direction is not always beyond the
scope of the employment.” Gina Chin & Assocs. v. First Union
Bank, 537 S.E.2d 573, 579 (Va. 2000).
Whether an agent acted within the scope of his authority
turns not on whether the particular act at issue -- often a tort
committed by the agent -– is “within the scope of the agent’s
authority, but [on] whether the service itself in which the
13
tortious act was done was . . . within the scope of such
authority.” Broaddus v. Standard Drug Co., 179 S.E.2d 497, 503
(Va. 1971) (emphasis added; internal quotation marks omitted).
Under this standard, negligent and even willful and malicious
acts of an agent are not necessarily outside the scope of the
agent’s authority. See Allen Realty Corp., 318 S.E.2d at 597
(“[A] principal is liable for negligent acts that its agent
commits within the scope of his employment.”); Commercial Bus.
Sys., Inc. v. Bellsouth Servs., Inc., 453 S.E.2d 261, 266 (Va.
1995) (employee’s “willful and malicious acts” done to advance
his self-interest were not “conclusively” outside scope of
employment because the acts were committed while the employee
was performing his duties and “in the execution of the services
for which he was employed”).
In this case, First Tennessee asserted only a negligence
claim against Global. First Tennessee did not allege that
Global’s actions were unauthorized or that Global acted outside
the scope of its authority as closing agent, nor are there any
other factual allegations in the complaint that would permit
this court to conclude, as a matter of law, that the transfer
was outside the scope of Global’s authority. See Gina Chin &
Assocs., 537 S.E.2d at 577 (listing factors relevant to
determination of whether given action was within the scope of
employment). Because a negligent act by an agent may still be
14
an act within the scope of the agent’s authority, see Allen
Realty Corp., 318 S.E.2d at 597, we agree with Appellants that
the HOF Exclusion thus does not clearly and unambiguously
encompass the conduct alleged in First Tennessee’s complaint.
See Floyd, 427 S.E.2d at 196.
St. Paul, however, argues that while the duty to defend is
broad, the insured cannot create coverage by inventing scenarios
not alleged in the complaint that theoretically could be covered
by the policy. And in St. Paul’s view, because the complaint
does not allege that Global was attempting to return the funds
to First Tennessee when it transferred them to FMI, Global’s
claim that it negligently performed an authorized act is
inconsistent with the allegations of the complaint and does not
trigger St. Paul’s duty to defend. We disagree.
Although the complaint does not include details about how
or why the transfer occurred, First Tennessee had no obligation
to include any such additional details in its complaint. The
allegations in the amended complaint were sufficient to support
First Tennessee’s negligence claim: that Global had a duty to
protect First Tennessee’s interest in the funds and to return
the unused funds to First Tennessee; that Global breached that
duty by returning the funds to FMI instead; and that First
Tennessee suffered damages from Global’s breach of its duties.
See McGuire v. Hodges, 639 S.E.2d 284, 288 (Va. 2007) (listing
15
elements of negligence claim). The allegations of the amended
complaint could “without amendment” support a judgment for
negligence, and the allegations are therefore sufficient to
trigger St. Paul’s duty to defend. Parker v. Hartford Fire Ins.
Co., 278 S.E.2d 803, 804 (Va. 1981) (per curiam).
B.
Upon concluding that coverage was barred by the HOF
Exclusion, the district court held that St. Paul had no duty to
defend Global or indemnify Global for any judgment that might be
entered against it. Because the allegations of the complaint
do not establish the applicability of the HOF Exclusion as a
matter of law, the district court’s ruling on the
indemnification issue was premature. If the evidence in First
Tennessee’s action shows that Global’s actions were outside the
scope of Global’s authority as closing agent, St. Paul will have
no obligation to indemnify Global for the judgment. The
possibility that St. Paul might not ultimately be responsible
for the judgment, however, has no effect on St. Paul’s
obligation to defend Global against First Tennessee’s claims.
See Virginia Elec. & Power, 475 S.E.2d at 266 (“[T]he obligation
to defend is not negated merely by the unsuccessful assertion of
a claim otherwise facially falling within the risks covered by
the policy. . . . The insurer has the obligation to defend the
16
insured in such circumstances even though the obligation to pay
is not ultimately invoked.”).
III.
For the reasons discussed above, we hold that the
allegations of First Tennessee’s complaint create a possibility
of coverage under the policy’s insuring clause and do not
unambiguously fall within the scope of the HOF Exclusion. The
district court therefore erred in concluding that St. Paul had
no duty to defend or indemnify Global against First Tennessee’s
claims. Accordingly, we vacate the district court’s judgment
relieving St. Paul of its duty to defend and indemnify Global,
and we remand the case to the district court. Upon resolution
of First Tennessee’s action against Global, the indemnification
issue will be ripe for reconsideration by the district court.
VACATED AND REMANDED
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