Morrel v. Nationwide Mutual

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MARK MORREL; RUTH MORREL,
Plaintiffs-Appellees,
v.
No. 98-1963
NATIONWIDE MUTUAL FIRE INSURANCE
COMPANY,
Defendant-Appellant.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
Leonie M. Brinkema, District Judge.
(CA-98-116)
Argued: April 8, 1999
Decided: August 16, 1999
Before WILKINS, WILLIAMS, and KING, Circuit Judges.
_________________________________________________________________
Affirmed by published opinion. Judge King wrote the opinion, in
which Judge Wilkins and Judge Williams joined.
_________________________________________________________________
COUNSEL
ARGUED: Lowry Jock Miller, MILLER, MILLER, KEARNEY &
GESCHICKTER, L.L.P., Fairfax, Virginia, for Appellant. Bruce
Andrew Cohen, KATZ & STONE, L.L.P., Vienna, Virginia, for
Appellees. ON BRIEF: Gerald I. Katz, KATZ & STONE, L.L.P.,
Vienna, Virginia, for Appellees.
_________________________________________________________________
OPINION
KING, Circuit Judge:
Mark and Ruth Morrel obtained a money judgment against The
Miller Group Construction Company, Inc. (the "Contractor") in the
United States District Court for the District of Columbia. When they
were unable to execute the judgment, the Morrels filed this suit in the
Eastern District of Virginia, seeking to enforce the judgment directly
against the Contractor's liability insurer, Nationwide Mutual Fire
Insurance Company ("Nationwide"). The district court granted sum-
mary judgment in favor of the Morrels.
Nationwide now appeals, arguing that (1) the District of Columbia
judgment was obtained by fraud and upon defective service, and (2)
the Morrels may not recover under the insurance policy because the
Contractor breached its obligations thereunder. We reject Nation-
wide's position on both issues and affirm.
I.
On April 10, 1995, the Morrels hired the Contractor to renovate
their home in Bethesda, Maryland. The parties entered into a written
construction contract. While performing the renovations, the Contrac-
tor seriously damaged the Morrels' house.
On August 12, 1995, the Morrels submitted a claim for this damage
to Nationwide. Thereafter, Nationwide opened a file for the Morrels'
claim and had the property inspected several times. During the course
of the next year, Nationwide continued to investigate the Morrels'
claim.
As of July 1996, the Morrels still had not been compensated for the
damage to their property. Consequently, on July 22, 1996--and as
authorized by Article 10.8 of the construction contract--the Morrels
commenced an arbitration proceeding against the Contractor in accor-
dance with the rules of the American Arbitration Association. In their
filings with the arbitrator, the Morrels named as defendants "The Mil-
ler Group Construction Company, Inc." and its president, Paul D.
2
Miller. In letters dated September 22 and October 8, 1996, the Mor-
rels notified Nationwide of this arbitration proceeding. An arbitration
hearing took place on October 15, 1996. Despite receiving notice, nei-
ther Nationwide, nor Mr. Miller, nor the Contractor participated in the
arbitration. On November 11, 1996, the arbitrator awarded the Mor-
rels a total of $36,774.25 in damages. However, the award was made
against Mr. Miller personally, and not against the Contractor.1 The
award was affirmed by the American Arbitration Association on
December 20, 1996.
The Morrels were dissatisfied with the arbitration award. On Feb-
ruary 7, 1997, they filed an Application to Correct or Vacate Arbitra-
tion Award (the "Application") in the United States District Court for
the District of Columbia.2 The Application named as defendants Paul
D. Miller and "The Miller Group Construction Company." The Mor-
rels had the Application personally served on Mr. Miller, who also
accepted service on behalf of "The Miller Group Construction Com-
pany," as its president. On May 6, 1997, the Morrels sent Nationwide
a copy of the Application and all accompanying pleadings by certified
mail. Nationwide apparently received these documents the next day.3
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1 During the course of the arbitration proceeding it was discovered that
the Commonwealth of Virginia had terminated the corporate status of
The Miller Group Construction Company, Inc., on September 9, 1994.
Paragraph 1 of the arbitration award states:
1. The Respondent, Paul D. Miller, is liable to Claimants in
place of the Respondent, the Miller Group Construction Co., Inc.
because the Commonwealth of Virginia terminated the corporate
existence of the Miller Group Construction Co., Inc. prior to the
formation of the Miller contract and, accordingly, Paul D. Miller
is individually liable for the obligations created by the contract.
J.A. 99.
2 Because the arbitration proceedings had taken place in Washington,
D.C., the district court for the District of Columbia had jurisdiction over
the Application. See 9 U.S.C.A. § 10 (West Supp. 1997) (arbitration
awards may be vacated by "the United States court in and for the district
wherein the award was made").
3 The claim file notes of Nationwide's claims adjuster, Jim Reilly, con-
tain the following entry dated May 7, 1997: "Rec'd document from
claimant adv. of suit filed in DC court." J.A. 410.
3
As in the arbitration proceeding, neither Mr. Miller, nor the Con-
tractor, nor Nationwide responded to the Application. Having
received no response, the Morrels moved for default judgment against
both defendants. The Motion for Default Judgment identified the
defendants as Paul D. Miller and "The Miller Group Construction
Company, Inc." On July 18, 1997, the district court for the District of
Columbia granted the Morrels' Motion for Default Judgment and
awarded the Morrels judgment in the sum of $172,762.88 against both
defendants.
On July 28, 1997, the Morrels wrote Nationwide and demanded
that it satisfy the District of Columbia judgment. Nationwide refused.
In its letter of August 22, 1997, Nationwide explained that the Con-
tractor had failed to meet its obligations under its liability insurance
policy with Nationwide (the "Policy"). More specifically, Nationwide
claimed that, in violation of the Policy, the Contractor had failed to
(1) assist Nationwide in investigating the Morrels' claim; (2) notify
Nationwide that the Morrels had sued the Contractor; and (3) send
Nationwide copies of any documents relating to the Morrels' suit or
otherwise cooperate in the defense of that suit. Given these facts,
Nationwide argued that the Contractor's breach excused Nationwide
from paying the Morrels' claim.
In December 1997, the Morrels attempted to execute the District of
Columbia judgment on the Contractor, but the United States Mar-
shal's Service was unable, after repeated attempts, to locate Paul Mil-
ler, and the judgment was returned unsatisfied.
On January 26, 1998, the Morrels initiated this diversity action
against Nationwide in the district court for the Eastern District of Vir-
ginia. The Morrels sued under Section 38.2-2200 of the Virginia
Code, which authorizes "direct action" suits against liability insurers.
Both parties moved for summary judgment, and the district court
ruled in favor of the Morrels. It concluded that the District of Colum-
bia judgment was facially valid and that, as a result, the district court
lacked authority to look behind or set aside that judgment. Addition-
ally, the district court found that Nationwide had delayed too long in
notifying the Morrels that it would invoke the Contractor's failure to
perform under the Policy as a defense to liability. Consequently, the
4
district court concluded that Nationwide had waived any defense aris-
ing out of its insured's breach of the Policy.
Nationwide now appeals to this court, contesting the validity of the
District of Columbia judgment in favor of the Morrels and the district
court's conclusion that Nationwide had waived its defenses based on
the Contractor's breach of the Policy.
II.
Section 38.2-2000 of the Virginia Code required Nationwide to
include language in the Policy providing for "direct action" against
Nationwide by certain judgment creditors of its insured:
No policy or contract insuring or indemnifying against lia-
bility for . . . injury to or destruction of property, shall be
issued and delivered in this Commonwealth unless it con-
tains in substance the following provisions or other provi-
sions that are at least equally favorable to the insured and to
judgment creditors:
...
That if execution on a judgment against the insured or his
personal representative is returned unsatisfied in an action
brought to recover damages for injury sustained or for loss
or damage incurred during the life of the policy or contract,
then an action may be maintained against the insurer under
the terms of the policy or contract for the amount of the
judgment . . . .
Va. Code Ann. § 38.2-2200 (Michie 1994). The Policy contains lan-
guage equivalent to that required by Section 38.2-2200.4
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4 Subsection IV.3 of the Policy, entitled "Legal Action Against Us,"
authorizes direct action suits against Nationwide under certain circum-
stances:
No person or organization has a right under this Coverage Part
. . . [t]o sue us on this Coverage Part unless all of its terms have
been fully complied with.
5
Nationwide's challenge to the district court's grant of summary
judgment arises from the language of Section 38.2-2200. First,
Nationwide argues that a "judgment against the insured"--on which
a direct action could be based--must be a valid judgment. According
to Nationwide, the judgment the Morrels obtained in the district court
for the District of Columbia was tainted by fraud and improper ser-
vice; Nationwide contends that, consequently, the Morrels may not
now enforce the judgment against them. Second, Nationwide argues
that, even if the judgment is valid, the Morrels may not collect "under
the terms of the [insurance] policy," because the Contractor has
breached the Policy.
Having reviewed the district court's grant of summary judgment de
novo, we disagree with Nationwide. See Monumental Paving & Exca-
vating, Inc. v. Pennsylvania Mfrs. Ass'n Ins. Co. , 176 F.3d 794, 797
(4th Cir. 1999).5 Viewing the record in the light most favorable to
Nationwide, we are satisfied that, as a matter of law, (1) the District
of Columbia judgment was valid, and (2) Nationwide waived its right
to rely on its claim of the insured's breach as a defense to the Mor-
rels' action. We therefore affirm.
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A person or organization may sue us to recover on an agreed set-
tlement or on a final judgment against an insured obtained after
an actual trial; but we will not be liable for damages that are not
payable under the terms of this Coverage Part or that are in
excess of the applicable limit of insurance.
J.A. 37.
5 Summary judgment is appropriate under Federal Rule of Civil Proce-
dure 56(c) "if the pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show that there is
no genuine issue as to any material fact and that the moving party is enti-
tled to judgment as a matter of law." Anderson v. Liberty Lobby, 477
U.S. 242, 247 (1986). In conducting our de novo review of the district
court's decision on summary judgment, we consider the facts in the light
most favorable to the non-moving party, here, Nationwide. Id. at 255.
6
A.
1.
Before reaching the substance of Nationwide's challenge to the
District of Columbia judgment, we address a procedural matter that
caused some confusion below. The district court concluded that,
because the District of Columbia judgment appeared to be valid on its
face, the district court lacked authority to look behind the judgment
to determine whether it had been properly issued. Instead, the district
court suggested that Nationwide could attack the District of Columbia
judgment only in the court that had issued it.
The district court underestimated its authority here. Rule 60(b) of
the Federal Rules of Civil Procedure permits a district court to "enter-
tain an independent action to relieve a party from a judgment or sus-
pend its operation." See, e.g., Cleveland Demolition Co. v. Azcon
Scrap Corp., 827 F.2d 984, 986 (4th Cir. 1987) (district court may
hear independent action alleging that judgment resulted from fraud on
the court). Unlike a motion for relief under Rule 60(b)--which may
be brought only by, or on behalf of, a party to the action that gener-
ated the contested judgment--an "independent action" under Rule
60(b) may be brought by one who was not a party to the original
action. See Aetna Cas. & Sur. Co. v. Abbott, 130 F.2d 40 (4th Cir.
1942); 7 James William Moore, Moore's Federal Practice ¶ 60.36,
at 60-369 (1996) ("[O]ne not a party to a suit . . . may, when war-
ranted by equitable principles, attack by independent action a judg-
ment obtained by the fraud of one of the parties . . . if it affects his
legal interests.").
Further, and also in contrast to a motion for relief, an independent
action may be brought in a court other than the one that issued the
contested order: "A federal court can entertain an original action to
enjoin or otherwise grant relief from a judgment . . . rendered not only
by it, but also by another federal court." 7 Moore's Federal Practice
at 60-366; see also Abbott, 130 F.2d at 42 (independent action may
be brought in federal court to challenge state court judgment). Inde-
pendent actions may be brought offensively--that is, by a plaintiff--
or they may be raised by way of defense to a suit seeking to enforce
the contested judgment. 7 Moore's Federal Practice at 60-370 ("If an
7
action is brought in a federal court, the principles of the independent
action may be used defensively to defeat plaintiff's recovery."); see
Abbott, 130 F.2d at 42 (fraud raised as defense to enforcement of a
judgment to which defendant was not a party).6
The facts of Aetna Casualty & Surety Co. v. Abbott are analogous
to this case. In Abbott, a bank customer won a judgment in Maryland
state court against Takoma Park Bank, based on the disappearance of
property from the customer's safe deposit box at the bank. When the
judgment was returned unsatisfied, the customer sought to enforce the
judgment against the bank's liability insurer in the United States Dis-
trict Court for the District of Maryland. The insurer countered that the
state court judgment was void because the plaintiff and the bank had
conspired to defraud the state court. Id. at 41. The district court dis-
agreed and granted judgment on the pleadings for the bank customer.
On appeal, this court addressed the insurer's fraud defense. Id. at
43. Importantly, we did not conclude that the facial validity of the
state court judgment barred our substantive review of the insurer's
fraud defense. Instead, we rejected the fraud allegations on their mer-
its, holding that the insurer had not stated them with particularity suf-
ficient to satisfy Federal Rule of Civil Procedure 9(b). Id. at 43-44.
Here, as in Abbott, the plaintiffs obtained a judgment in another
jurisdiction against the defendant's insured, and they now seek to
enforce it in the Eastern District of Virginia against the insurer. The
insurer now, as in Abbott, raises equitable defenses to the judgment,
including contentions that the judgment is tainted by fraud. As a
result, the district court was permitted to treat Nationwide's defenses
_________________________________________________________________
6 A party wishing to assert an independent action defensively should
plead those defenses as affirmative defenses or compulsory counter-
claims. 7 Moore's Federal Practice at 60-370 n.27. We note that Nation-
wide did not plead fraud and insufficient process as either affirmative
defenses or counterclaims. Nevertheless--and especially because we
resolve these issues against Nationwide on the merits--we will not reject
Nationwide's defenses on the grounds that they were not properly
pleaded. We note, however, that proper pleading of these defenses might
well have alerted the district court to the source of its authority to look
behind the District of Columbia judgment.
8
as a Rule 60(b) independent action and address them on their merits
--as we did in Abbott--rather than simply deferring to the facial
validity of the District of Columbia judgment. We turn now to the
merits of Nationwide's defenses.
2.
Nationwide first argues that the default judgment against its
insured, The Miller Group Construction Company, Inc., is defective
because the Application to Correct or Vacate, filed in the United
States District Court for the District of Columbia, which gave rise to
this judgment, failed to name, and was not served on, its insured.
Nationwide grounds this argument on the fact that the Application
named as a defendant "The Miller Group Construction Company,"
rather than The Miller Group Construction Company, Inc. The affida-
vit of service for the Application likewise named"The Miller Group
Construction Company" as the party served.
Nationwide's argument is premised on a thin reed--a misnomer in
the spelling of the name of its insured--and is meritless. It has long
been the rule in this circuit that service of process is not legally defec-
tive simply because the complaint misnames the defendant in some
insignificant way. As we recognized many years ago:
A suit at law is not a children's game, but a serious effort
on the part of adult human beings to administer justice; and
the purpose of process is to bring parties into court. If it
names them in such terms that every intelligent person
understands who is meant . . . it has fulfilled its purpose; and
courts should not put themselves in the position of failing to
recognize what is apparent to everyone else . . . . As a gen-
eral rule the misnomer of a corporation in a notice, sum-
mons . . . or other step in a judicial proceeding is immaterial
if it appears that [the corporation] could not have been, or
was not, misled.
United States v. A.H. Fischer Lumber Co., 162 F.2d 872, 873 (4th Cir.
1947) (citations omitted).
9
Here, there is simply no possibility that Paul Miller, the president
of the insured corporation who accepted service on its behalf, did not
understand that the Application filed by the Morrels naming "The
Miller Group Construction Company" sought to bring The Miller
Group Construction Company, Inc. into court. The lack of the abbre-
viation "Inc." misled no one. Indeed, we have held that the inclusion
of an unnecessary "Inc." in a defendant's name does not make the
complaint defective. A.H. Fischer Lumber Co., 162 F.2d at 873. The
absence of an appropriate "Inc." is likewise irrelevant here.
Moreover, the body of the Application refers to both the construc-
tion project performed by the Contractor and the ensuing arbitration,
to which the Contractor was indisputably a party. 7 Perhaps most sig-
nificantly, a copy of the construction contract giving rise to this entire
controversy was attached to the Application; the contract is between
the Morrels and "The Miller Group Construction Co. Inc." If there
was any confusion as to what business entity the Application sought
to name, the allegations in the Application and its attachments dis-
pelled that confusion. See Barsten v. Department of Interior, 896 F.2d
422, 423 (9th Cir. 1990) (technical misnaming of defendant insignifi-
cant where complaint and accompanying documents make defen-
dant's identity clear); Rice v. Hamilton Air Force Base Commissary,
720 F.2d 1082 (9th Cir. 1983) (same).
Finally, Nationwide's own correspondence with the Morrels points
out the unlikelihood that the Application could have caused any con-
fusion. In its letter of August 22, 1997, Nationwide refers to its
insured alternately as "The Miller Group Construction Company,
Inc." and "The Miller Group Construction Company."8 Having used
_________________________________________________________________
7 Nationwide attempts to create an argument out of the Application's
description of the corporate defendant as "a sole proprietorship whose
corporate existence was terminated by the Commonwealth of Virginia on
September 9, 1994." Rather than confusing the issue, this description
appears to be aimed at carefully naming the company in a legally accu-
rate manner. Whether the company had, or had not, technically converted
into a sole proprietorship when it lost its corporate charter, all parties
agree that its charter was revoked on September 9, 1994. Consequently,
this description does not invalidate the Application.
8 In pertinent part, Nationwide's letter read as follows:
10
these terms interchangeably itself, it is somewhat disingenuous of
Nationwide to argue that the one term accurately identifies its insured,
while the other refers to "another company" altogether. We therefore
conclude that the Contractor was properly brought into the Morrels'
suit. A.H. Fischer Lumber Co., 162 F.2d at 873.
3.
In a related argument, Nationwide claims that the District of
Columbia judgment is the product of fraud, because the final judg-
ment itself names "The Miller Group Construction Company, Inc.,"
while the Application had named "The Miller Group Construction
Company." Nationwide argues that this change in names was tanta-
mount to the Morrels suing one company and then having judgment
entered against another. This argument also is entirely meritless.
As explained above, the Morrels' Application was sufficient to
bring the Contractor before the district court for the District of
Columbia, even though the Application did not get the company's
name precisely right. See id. As a result, we conclude that neither the
court nor the Contractor could have been defrauded when, after the
Contractor was properly made a party to the suit, a final judgment
was entered that did get the Contractor's name precisely right. Chang-
ing of the defendant's name in the judgment form did not have the
_________________________________________________________________
Following the initial inspection of the Morrel's[sic] house, Mr.
Paul Miller nor anyone else associated with The Miller Group
Construction Company did not provide Nationwide with any fur-
ther assistance in resolving this claim . . . . The insured has an
obligation to send us copies of any legal papers received in con-
nection with the suit and cooperate with the investigation and
defense of the suit. Again, the Miller Group Construction
Company failed to meet any of these policy requirements.
In summary, the insured did not meet the requirements of their
policy and therefore Nationwide has no obligation to pay any
portion of the judgment against Paul Miller and The Miller
Group Construction Company, Inc.
J.A. 477 (emphasis added).
11
effect of entering judgment against "another company"; it simply cor-
rected the name of a company that already was a defendant.
It is unclear in the record why the misnomer occurred and why the
Contractor is named differently in the Application and the final judg-
ment. Assuming that the Morrels discovered the error in the Applica-
tion after it had been filed, the better practice would have been to
move for permission to amend the corporate defendant's name under
Rule 15(a) of the Federal Rules of Civil Procedure. Nevertheless, the
final judgment remains proper and binding on the Contractor even
without such an amendment. We addressed exactly this issue in A.H.
Fischer Lumber Co. There, although the defendant had not been
named with absolute accuracy--the abbreviation"Inc." was incor-
rectly added to the end of its name--the complaint had nevertheless
made the defendant subject to the district court's jurisdiction: "The
defendant had unquestionably been brought into the case, and . . .
would have been bound without amendment[of the complaint] by any
judgment that might have been rendered therein." Id. at 874 (empha-
sis added).
Because the Contractor had been served as effectively as if its cor-
rect corporate name had appeared on the Application, the inclusion of
its correct name on the final judgment changed no legal aspect of the
case and did not prejudice Nationwide. Consequently, this misnomer
did not serve in any way to defraud the court or any party to the pro-
ceeding.
B.
Finally, Nationwide contends that the Morrels cannot recover
against it "under the terms of the policy," within the meaning of Sec-
tion 38-2.200(2) of the Virginia Code, because the Contractor
breached its obligations to Nationwide under the Policy. Although
breach of a policy by its insured can protect an insurer from a direct
action suit, Nationwide has waived its right to rely on the Contractor's
asserted breach here.
A claimant seeking to bring a direct action against an insurer in
Virginia stands in the shoes of the insured against whom his claim
arose. Consequently, if the insured has breached the insurance policy,
12
the insurer may assert this breach as a bar to the third-party claimant's
recovery. E.g., Liberty Mut. Ins. Co. v. Safeco Ins. Co. of America,
288 S.E.2d 469 (Va. 1982). But the Virginia Code requires an insurer
to promptly notify a claimant of its intention to defend based on an
insured's breach of the underlying policy:
Whenever any insurer on a policy of liability insurance dis-
covers a breach of the terms or conditions of the insurance
contract by the insured and the insurer intends to rely on the
breach in defense of liability for any claim within the terms
of the policy, the insurer shall notify the claimant. . . of its
intention to rely on the breach as a defense. Notification
shall be given within twenty days after discovery by the
insurer or any of its agents of the breach or of the claim,
whichever is later.
Va. Code Ann. § 38.2-2226 (Michie 1994) (amended 1997) (emphasis
added).9
The ultimate purpose of the statute, as explained by the Supreme
Court of Virginia, is to protect claimants such as the Morrels:
The obvious purpose of the statute is to require a liability
insurer that intends to rely on a breach of the terms and con-
ditions of the policy contract, in defense of any claim under
the policy, to furnish prompt notice of such intention to the
_________________________________________________________________
9 The parties agree that the pre-1997 version of the statute applies to the
dispute at issue. Section 38-2.2226 was amended in 1997 and currently
reads as follows:
Whenever any insurer on a policy of liability insurance discovers
a breach of the terms or conditions of the insurance contract by
the insured, the insurer shall notify the claimant or the claimant's
counsel of the breach. Notification shall be given within forty-
five days after discovery by the insurer of the breach or of the
claim, whichever is later . . . . Failure to give the notice within
forty-five days will result in a waiver of the defense based on
such breach to the extent of the claim by operation of law.
Va. Code Ann. § 38.2-2226 (Michie Supp. 1998).
13
claimant . . . so that steps may be taken by the claimant, a
stranger to the insurance contract, to protect his rights.
Liberty Mut. Ins. Co., 288 S.E.2d at 474. Toward this end, federal and
state courts interpreting Section 38.2-2226 and its predecessor statute
have concluded that an insurer which fails to notify a claimant within
the twenty-day statutory period waives its right to rely on the
insured's breach. Vermont Mut. Ins. Co. v. Everette, 875 F. Supp.
1181, 1189 (E.D. Va. 1995); Federal Ins. Co. v. Nationwide Mut. Ins.
Co., 448 F. Supp. 723 (W.D. Va. 1978) (interpreting Va. Code Ann.
§ 38.1-389.1, the predecessor statute to § 38.2-2226, as providing for
waiver of defenses where the rights of a claimant may be prejudiced);
Berry v. State Farm Mut. Auto. Ins. Co., 340 F. Supp. 228, 231 (E.D.
Va. 1972) (same); Maxey v. Doe, 225 S.E.2d 359, 361 (Va. 1976)
(same).
Here, Nationwide argues that the Contractor breached the provi-
sions of the Policy requiring the Contractor to assist Nationwide in
the event of a lawsuit. For example, subsection IV.2(c) of the Policy
requires the Contractor to "[c]ooperate with[Nationwide] in the
investigation, settlement or defense of the claim or suit." J.A. 37.
Nationwide contends that the Contractor provided no assistance what-
soever, and thus breached this provision of the Policy.
Assuming Nationwide is correct on this point, the question
becomes whether--and if so, when--Nationwide notified the Morrels
of its intention to rely on the Contractor's breach in defense of the
Morrels' claim. The only effective notification in the record is
Nationwide's August 22, 1997 letter to the Morrels' counsel.10 In that
_________________________________________________________________
10 Nationwide suggests that it gave the Morrels appropriate notice in
late 1996, when its claims adjuster, Jim Reilly, told the Morrels that "be-
cause he was unable to contact The Miller Group Construction Com-
pany, Inc. or Mr. Paul Miller, he was unable to respond to the Morrels'
claims and that he would be unable to respond to the Morrels' claims
until he had the cooperation of the policyholder . . . ." J.A. 442. Assum-
ing such a conversation took place, its content, as described by Nation-
wide itself, does not satisfy the notification requirements of § 38.2-2226.
Such notice, at a minimum, must alert the claimant to the possibility that
the insurer will completely deny coverage because of its insured's non-
14
letter, Nationwide does clearly satisfy the notification requirements of
Section 38.2-2226: "Unfortunately, Nationwide will not be making
any payment on behalf of our insured for this claim. The policy
holder failed to meet his policy conditions throughout the entire
claim." J.A. 477.
Because Nationwide notified the Morrels on August 22, 1997, that
it would rely on its insured's breach to defend against the Morrels'
claim, this notice was timely only if Nationwide"discovered" both
the Morrels' claim and the Contractor's breach no earlier than August
2, 1997. § 38.2-2226 (amended 1997). Nationwide's own pleadings in
the district court disclose that it had notice of the claim and the breach
long before August 2, 1997. First, in its answers to the Morrels' inter-
rogatories, Nationwide explains that it sent an investigative engineer
to the Morrels' house to investigate their claim on September 6, 1995.
J.A. 438. Unquestionably, then, Nationwide knew of the Morrels'
claim no later than this date, approximately twenty-three months
before the notice deadline of Section 38.2-2226.
Second, Nationwide had discovered the Contractor's breach of the
Policy before August 2, 1997. The Supreme Court of Virginia has
described "discovery" of an insured's breach as a two-step process:
"``[D]iscovery' of a breach entails, first, awareness by the insurer of
facts tending to show there has been a violation of the policy provi-
sions and, second, evaluation of those known facts culminating in a
decision that a breach apparently has occurred." Liberty Mut. Ins. Co.,
288 S.E.2d at 474.
_________________________________________________________________
cooperation. See, e.g., Liberty Mut. Ins. Co., 288 S.E.2d at 472, 475
(although conditional, insurer's notice satisfied§ 38.2-226 when it told
claimant that insured's failure to cooperate "could result in a full denial
of coverage to our insured"). By contrast, Nationwide does not claim
that, before August 1997, it ever told the Morrels that it might deny cov-
erage to the Contractor altogether. Its agent simply says he told the Mor-
rels that Nationwide "would be unable to respond to the Morrels' claims
until [Reilly] had the cooperation of the policyholder." Such a statement,
while alerting the Morrels that processing of their claim might be
delayed, does not notify them that Nationwide is considering denying
coverage altogether.
15
In its opposition to the Morrels' summary judgment motion,
Nationwide demonstrates that it had effectively discovered the Con-
tractor's breach by the time it received the arbitration award. At this
point, Nationwide admits that it was aware of the Contractor's "previ-
ous breach of the terms and conditions of the policy." J.A. 421. Such
a statement indicates that, when it received the award, Nationwide
was aware not only of the underlying facts, but had determined that
they constituted a breach of the Policy.
Indeed, Nationwide cannot have concluded otherwise. In its letter
of August 22, 1997, Nationwide acknowledges that the Contractor
had not met "any" of its policy requirements since the Morrels' home
was first inspected; this inspection took place no later than September
1995. Consequently, in May 1997, Nationwide had known for at least
nineteen months that the Contractor was not upholding its responsibil-
ities under the Policy. Also at this time, Nationwide received the arbi-
tration award--not from its insured, but from the Morrels--which
states on its face that Paul Miller did not participate in the arbitration,
either for himself or on behalf of the Contractor. The award thus noti-
fied Nationwide that its insured had defaulted in the arbitration, all
apparently without ever discussing the arbitration with Nationwide.
Knowing these facts, Nationwide can only have concluded that the
Contractor had breached the Policy.
At the latest, then, Nationwide had discovered the Contractor's
breach by May 7, 1997, when it received from the Morrels a copy of
the District of Columbia pleadings, to which the arbitration award
was attached as an exhibit. Because it was aware of the Morrels'
claim by that time as well, Nationwide had discovered both this claim
and the Contractor's breach more than three months before it notified
the Morrels of its intent to rely on the breach as a defense to the Mor-
rels' claim. Nationwide therefore did not satisfy the statutory notifica-
tion requirement of Section 38.2-2226, and has waived its right to
raise the Contractor's breach as a shield to the Morrels' claim.
Everette, 875 F. Supp. at 1189.
Nationwide nevertheless contends that receipt of the arbitration
award did not trigger its notice obligations under Section 38.2-2226,
because the award found the Contractor not liable to the Morrels.
Given this finding, Nationwide contends that it had no reason to then
16
notify the Morrels of its intent to rely on its insured's breach. While
Nationwide convincingly explains why it decided not to send a Sec-
tion 38.2-2226 notice to the Morrels after receiving the arbitration
award, it does not explain why it should be relieved of the conse-
quences of that decision.
The twenty-day clock of Section 38.2-2226 is not triggered by an
insurer's determination that, for strategic or tactical reasons, it will
definitely rely on its insured's breach. Instead, the statute starts the
twenty-day period when the insurer has discovered both the claim and
the breach of the policy. Thus an insurer may not simply withhold the
required notice until it makes a final determination to deny coverage
under the policy. Everette, 875 F. Supp. at 1190. Consequently, the
substance of the arbitration award had no effect on Nationwide's obli-
gations under Section 38.2-2226, and we agree with the district court
that Nationwide has forfeited its defenses that arise from the Contrac-
tor's breach of the Policy.
III.
Having rejected Nationwide's equitable challenge to the District of
Columbia order, and having determined that Nationwide waived its
defenses based on the Contractor's apparent breach of the Policy, we
affirm the district court's grant of summary judgment in favor of the
Morrels.
AFFIRMED
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