Federal Hill Homeowners Ass'n v. Community Association Underwriters of America, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 09-1930
FEDERAL HILL HOMEOWNERS ASSOCIATION, INC.,
Plaintiff - Appellant,
v.
COMMUNITY ASSOCIATION UNDERWRITERS OF AMERICA, INC.; QBE
INSURANCE CORPORATION,
Defendants - Appellees.
Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Leonie M. Brinkema,
District Judge. (1:09-cv-00251-LMB-TRJ)
Argued: May 12, 2010 Decided: June 21, 2010
Before GREGORY, Circuit Judge, C. Arlen BEAM, Senior Circuit
Judge of the United States Court of Appeals for the Eighth
Circuit, sitting by designation, and Samuel G. WILSON, United
States District Judge for the Western District of Virginia,
sitting by designation.
Reversed and remanded by unpublished opinion. Judge Gregory
wrote the majority opinion, in which Judge Wilson joined.
Senior Judge Beam wrote a dissenting opinion.
ARGUED: Mark Patrick Graham, REES BROOME, PC, Vienna, Virginia,
for Appellant. Lawrence Alexis Dunn, MORRIS & MORRIS, Richmond,
Virginia, for Appellees. ON BRIEF: Maureen E. Carr, REES
BROOME, PC, Vienna, Virginia, for Appellant. Sandra S. Gregor,
MORRIS & MORRIS, Richmond, Virginia, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
2
GREGORY, Circuit Judge:
On July 24, 2009, the United States District Court for the
Eastern District of Virginia granted summary judgment to
defendants QBE Insurance Corporation (“QBE”) and Community
Association Underwriters of America, Inc. after finding they had
no duty to defend Federal Hill Homeowners Association, Inc.
(“FHHA”) from a state suit brought by a property owner. The
court found that the insurance policy at issue did not provide
coverage for the allegations of “bodily injury” in the suit
because they were not caused by a requisite “occurrence.” For
the reasons set forth below, we reverse the decision of the
district court and remand for further proceedings consistent
with this decision.
I.
QBE through its managing agent Community Association
Underwriters of America, Inc., issued an insurance policy to
FHHA for the policy period January 14, 2006, to January 14, 2007
(“the Policy”). Under the General Liability section of the
Policy, coverage is provided for claimed damages of “bodily
injury,” “property damage,” “personal injury,” or “advertising
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injury” “to which this insurance applies.” J.A. 77. 1 QBE has
the right and duty to defend any “suit” seeking those damages.
Significantly, the Policy only applies to “bodily injury” or
“property damage” which is caused by an “occurrence” taking
place during the policy period. Id. “Bodily injury” is defined
as an “injury to the body, sickness or disease, disability of
shock, mental anguish, humiliation or mental injury sustained to
any person, including death resulting from any of these at any
time.” Id. at 105. An “occurrence” is “an accident, including
continuous or repeated exposure to substantially the same
harmful conditions.” Id. at 111. Furthermore, “bodily injury”
or “property damage” expected or intended from the standpoint of
the insured is excluded from the General Liability section of
the Policy pursuant to Exclusion E. Id. at 79.
On August 13, 2007, FHHA requested that the defendants
provide coverage pursuant to the Policy based on the lawsuit of
Jayne Hornstein v. Federal Hill Homeowners Association, Inc.,
Case No. CL-2007-9459 (Fairfax Cir. Ct.) (“the Hornstein
Lawsuit”). In the Hornstein Lawsuit, the plaintiff, owner of
real property that is part of FHHA, alleged that she could not
sell the property because of information contained in a
1
Citations herein to “J.A. __” refer to the contents of the
Joint Appendix filed by the parties in this appeal.
4
disclosure packet issued by FHHA on or around February 2006
(“the Disclosure Packet”). The Disclosure Packet, provided upon
Hornstein’s request, 2 stated that the property was in violation
of FHHA’s rules and regulations. Among the violations, the
Disclosure Packet stated that the property’s fence encroached on
FHHA’s property. Based on the Disclosure Packet, Hornstein
specifically alleged four causes of action against FHHA: (1)
Declaratory Judgment; (2) Injunctive Relief; (3) Disparagement
of Property/Slander of Title; and (4) Tortious Interference.
Id. at 207-09. Included in the damages Hornstein alleged in her
Slander of Title claim are “the lost economic benefits of the
sale of the Property,” “the diminution in fair market value of
the Property,” and “the mental and emotional pain and anguish
suffered by Hornstein as a result of the stress and financial
hardships caused by not being able to sell the Property.” Id.
at 208.
The defendants acknowledged receipt of FHHA’s claim under
the Policy and denied coverage on August 14, 2007. The
defendants denied coverage under both the General Liability
2
Virginia law requires a property owners’ association to
furnish an “association disclosure packet” upon the request of
an owner who is selling property within the association. Va.
Code Ann. § 55-509.5 (2009). The packet must include whether
any improvements on, alterations of, or use of the property
violate any association rules and regulations. Id.5
section of the Policy and the Directors and Officers Liability
section. While FHHA conceded no coverage under the Directors
and Officers Liability section, it brought a declaratory
judgment action against defendants on February 2, 2009,
alleging, in part, that the defendants failed to provide
coverage to FHHA related to the Hornstein Lawsuit according to
the General Liability section. On June 17, 2009, FHHA filed a
motion for summary judgment against the defendants seeking
judgment as a matter of law on its breach of duty to defend
claim. The defendants both opposed FHHA’s motion and filed
their own summary judgment motion asserting lack of coverage.
The district court granted summary judgment to the
defendants on July 24, 2009. The court found that, comparing
the Hornstein Lawsuit with the Policy as required under Virginia
law, the Policy did not provide coverage for the allegations of
“bodily injury” in the Hornstein Lawsuit, mental anguish,
because there was no requisite “occurrence.” Id. at 270-71.
FHHA timely appealed.
II.
This Court reviews the district court’s grant of summary
judgment de novo, “viewing the facts in the light most favorable
to, and drawing all reasonable inferences in favor of, the
nonmoving party.” Garofolo v. Donald B. Heslep Assocs., Inc.,
6
405 F.3d 194, 198 (4th Cir. 2005). If there is a genuine issue
of material fact or if the moving party is not entitled to
judgment as a matter of law on this record, then summary
judgment is inappropriate. Fed. R. Civ. P. 56(c); see also
Celotex v. Catrett, 477 U.S. 317, 322 (1986).
III.
FHHA contends that the district court erred in finding that
the alleged “bodily injury” in the Hornstein Lawsuit was not
caused by an “occurrence,” as defined by the Policy.
Specifically, FHHA argues that the mental and emotional pain and
anguish suffered by Hornstein was not a reasonably foreseeable
result of the issuance of the Disclosure Packet. We agree.
A.
“A federal court hearing a diversity claim must apply the
choice-of-law rules of the state in which it sits.” Res.
Bankshares Corp. v. St. Paul Mercury Ins. Co., 407 F.3d 631, 635
(4th Cir. 2005). Here, the appeal arises from a declaratory
judgment action filed in the Eastern District of Virginia, and
we apply Virginia’s choice-of-law rules. It is undisputed that
Virginia law governs.
“Under Virginia law, an insurer’s obligation to defend an
action ‘depends on comparison of the policy language with the
underlying complaint to determine whether any claims alleged [in
7
the complaint] are covered by the policy.’” America Online,
Inc. v. St. Paul Mercury Ins. Co., 347 F.3d 89, 93 (4th Cir.
2003) (quoting Superformance Int’l, Inc. v. Hartford Cas. Ins.
Co., 332 F.3d 215, 220 (4th Cir. 2003)) (alteration in the
original). This is referred to as the “eight corners rule.”
Erie Ins. Exch. v. State Farm Mut. Auto. Ins. Co., 2002 WL
32075410, at *5 (Va. Cir. Ct. Dec. 16, 2002). The insured has
the burden to prove coverage, Res. Bankshares Corp., 407 F.3d at
636, while “the insurer bears the burden of proving that an
exclusion applies,” Bohreer v. Erie Ins. Group, 475 F. Supp. 2d
578, 585 (E.D. Va. 2007).
When following the eight corners rule, we must recognize
that “[t]he duty to defend is broader than the duty to indemnify
because it ‘arises whenever the complaint alleges facts and
circumstances, some of which, if proved, would fall within the
risk covered by the policy.’” Res. Bankshares Corp., 407 F.3d
at 636 (quoting Brenner v. Lawyers Title Ins. Corp., 397 S.E.2d
100, 102 (Va. 1990)). “[I]f it is doubtful whether the case
alleged is covered by the policy, the refusal of the insurer to
defend is at its own risk.” Brenner, 397 S.E.2d at 102. “And,
if it be shown subsequently upon development of the facts that
the claim is covered by the policy, the insurer necessarily is
liable for breach of its covenant to defend.” Id.
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In Virginia, “an insurance policy is a contract to be
construed in accordance with the principles applicable to all
contracts.” Seabulk Offshore, Ltd. v. American Home Assur. Co.,
377 F.3d 408, 419 (4th Cir. 2004). Accordingly, “[u]nder
Virginia law, if policy language is clear and unambiguous, we do
not apply rules of construction; rather, we give the language
its plain and ordinary meaning and enforce the policy as
written.” Id. If we find ambiguity “and the intentions of the
parties cannot be ascertained, the policy must be construed
strictly against the insurer and liberally in favor of the
insured.” Id.; see also Ocean Acc. & Guarantee Corp., Ltd., of
London, England, v. Washington Brick & Terra Cotta Co., 139 S.E.
513, 513 (Va. 1927) (“It is a well recognized rule that
insurance policies, in case of doubt, should be construed most
strongly against the insurer.”).
B.
All parties agree that the Hornstein Lawsuit’s allegations
of “mental and emotional pain and anguish” fall within the
“bodily injury” requirement of the Policy. Thus, the only issue
before this Court is whether there was an “occurrence” under the
Policy. 3 The Policy defines “occurrence” as an “accident.”
3
The district court did not address the applicability of
Exclusion E. However, our analysis under the exclusion would be
identical to our determination of whether there was an
(Continued)
9
Virginia courts have expounded on this definition, holding in
the insurance context that an “occurrence” means “an incident
that was unexpected from the viewpoint of the insured,” Utica
Mut. Ins. Co. v. Travelers Indem. Co., 286 S.E.2d 225, 226 (Va.
1982), or “an event which creates an effect which is not the
natural or probable consequence of the means employed and is not
intended, designed, or reasonably anticipated,” Lynchburg
Foundry Co. v. Irvin, 16 S.E.2d 646, 648 (Va. 1941). This Court
has found that to determine whether something is an accident
under an insurance policy, Virginia courts ask “whether the
incident or injury was a reasonably foreseeable result of the
insured’s actions.” Res. Bankshares Corp., 407 F.3d at 637.
The district court in this case found no allegations of an
accident under Virginia law. The court’s justification reads:
The problem you have here is I think it is not at all
unforeseeable that if a homeowners association or any
entity sends a communication to someone indicating
that there may be a cloud on the title to their
property or an encumbrance, in this case, you know,
your fence encroaches, so you’re going to have to do
something, all right, it’s not unreasonable or
unforeseeable to anticipate that this is going to
occurrence under the Policy. Both inquiries turn on
foreseeability, as the exclusion provides that the Policy does
not apply to “bodily injury” or “property damage” expected or
intended from the standpoint of the insured. J.A. 79. Thus,
because we find that the mental anguish alleged was not
reasonably foreseeable, there was an occurrence, and Exclusion E
does not apply.
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upset the homeowner, because they’re going to have to
put out money or it holds up a sale, and apparently in
the context of this case, that’s why the letter was
even generated, so that I don’t think the mental
anguish resulting from the communication is
unforeseeable, and therefore – I’m ruling, all right?
– and therefore, that would not be covered by this
insurance policy. In other words, that claim for
mental anguish I don’t find would transform this
intentional act to an accident that would therefore be
covered.
J.A. 270-71. We hold that the district court erroneously
concluded that Hornstein’s alleged “mental and emotional pain
and anguish” was a “reasonably foreseeable result of [FHHA’s]
actions.” Res. Bankshares Corp., 407 F.3d at 637. To determine
foreseeability, we ask whether the result, “was a natural and
probable consequence” of the insured’s actions. Patch v. Metro.
Life Ins. Co., Inc., 733 F.2d 302, 304 (4th Cir. 1984). The
alleged mental anguish was not a “natural and probable
consequence” of FHHA’s issuance of the Disclosure Packet for
several reasons.
First, FHHA being sued for mental anguish cannot be a
natural and probable consequence of the issuance of the
Disclosure Packet containing violations of the association’s
rules and regulations when the violations cited could have been
easily cured. Before bringing suit, according to the Complaint,
FHHA informed Hornstein that to bring her property into
compliance, all she had to do was “remove the existing fence and
gate” and “erect a new fence on the Property where one has not
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previously been built.” J.A. 206. The Record makes clear that
Hornstein was informed of the required action more than once.
Id. at 221, 226-27. Instead of taking this action, she decided
to sue FHHA. It is not reasonable to expect that informing a
property owner of straight-forward steps to bring her property
into compliance with association policy, essentially performing
the job a homeowners’ association is obligated to do, would
cause the property owner to experience mental anguish to the
extent compensable at law. The Hornstein Lawsuit alleges that
the mental anguish was caused by not being able to sell the
property. However, the Record shows that FHHA timely
communicated with her about the status of the violations and how
they were to be corrected. Any extended period of time when
Hornstein was not able to sell the property was a result of her
legal wrangling, not the action of FHHA.
Second, the alleged mental anguish is not a natural and
probable consequence because Hornstein was informed that the
Disclosure Packet would be issued and that it would contain the
core noncompliance in dispute — the fence encroachment — in the
event that she attempted to sell the property. In a letter
dated more than a month before the Disclosure Packet was issued,
FHHA informed Hornstein of the fence encroachment “and that the
circumstances of the encroachment of the existing fence must be
included on any disclosure.” Id. at 211. After Hornstein
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entered into a contract to sell the property without remedying
the violations, FHHA issued the Disclosure Packet, following the
course of action it had already set out. The issuance of the
Disclosure Packet and its contents therefore were not a surprise
to Hornstein. In fact, a survey Hornstein herself commissioned
put Hornstein on notice that the fence at issue was off her
property. FHHA knew that Hornstein was aware of this survey
because she submitted it to FHHA, an action which caused the
issuance of the letter mentioned above. Id. (“Your application
to make repairs to the fence as indicated on the attached house
location survey had been denied. As shown on the survey,
included with your application, your current fence encapsulates
property that belongs to Federal Hill Homeowner Association.”).
It thus was not reasonably foreseeable that Hornstein would
suffer compensable mental anguish from receiving requested
information with which she was already intimately familiar.
Moreover, Hornstein set in motion the issuance of the
Disclosure Packet, and FHHA’s course of action was required by
state law. See Va. Code Ann. § 55-509.5. The violation stated
in the required Disclosure Packet was not extraordinary, and
there is no doubt that the association is frequently confronted
with such situations when property owners wish to sell their
property; in other words, FHHA was simply doing its job. FHHA
surely could not reasonably foresee a suit alleging mental
13
anguish as a damage based on fulfilling both its legal
obligation and its role as a homeowners’ association.
Finally, a review of the Complaint reveals that Hornstein
was simply asserting mental anguish as a damage under her claim
for “slander of title,” it being necessary to demonstrate
“special damages” to prove slander of title under Virginia law.
Warren v. Bank of Marion, 618 F. Supp. 317, 320 (W.D. Va. 1985)
(“It is generally recognized that in bringing an action for
slander of title the plaintiff must prove that the defendant
maliciously published false words, which disparaged plaintiff’s
property causing plaintiff to suffer special damages.”). Courts
from other jurisdictions have held that an injured party can
only recover for pecuniary loss for slander of title. See James
O. Pearson, Jr., Annotation, What Constitutes Special Damages in
Action for Slander of Title, 4 A.L.R. 4th 532 (1981 & 1991
Supp.). General damages, such as mental anguish, are not within
the range of special damages. Id. at 536-37; see also Lawson v.
Valley Mortgage & Inv. Corp., 1987 WL 488637, at *2 (Va. Cir.
Ct. Apr. 21, 1987). Thus, we cannot say that it is reasonably
foreseeable that FHHA would be sued for a damage that is not
recoverable in the first place.
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IV.
Because we find that “mental and emotional pain and
anguish” alleged in the Hornstein Lawsuit was not a “reasonably
foreseeable result of [FHHA’s] actions,” Res. Bankshares Corp.,
407 F.3d at 637, we reverse the decision of the district court
and remand for further proceedings consistent with this
decision.
REVERSED AND REMANDED
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BEAM, Senior Circuit Judge, dissenting.
I would affirm the well-reasoned conclusions of the
district court in this matter. J.A. 264-76.
16