UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 03-1259
TIG INSURANCE COMPANY,
Plaintiff - Appellee,
versus
ROBERTSON, CECIL, KING & PRUITT, a limited
partnership; ROBERTSON, CECIL, KING & PRUITT,
LLP; DAVID E. CECIL; THOMAS L. PRUITT;
INTREPID COAL COMPANY, INCORPORATED,
Defendants - Appellants,
and
F. D. ROBERTSON; PATRICIA B. ROWE; JAMES C.
BRANHAM; JANET M. MCMAHON; DONALD KEITH
MCCLANAHAN,
Defendants.
Appeal from the United States District Court for the Western
District of Virginia, at Abingdon. James P. Jones, District Judge.
(CA-01-143-1)
Argued: October 27, 2004 Decided: November 17, 2004
Before MOTZ and TRAXLER, Circuit Judges, and HAMILTON, Senior
Circuit Judge.
Affirmed by unpublished per curiam opinion.
ARGUED: Monica Taylor Monday, GENTRY LOCKE RAKES & MOORE, Roanoke,
Virginia, for Appellants. Carol L. Johnson, BOLLINGER, RUBERRY &
GARVEY, Chicago, Illinois, for Appellee. ON BRIEF: S. D. Roberts
Moore, Mary Beth Nash, GENTRY LOCKE RAKES & MOORE, Roanoke,
Virginia; T. Shea Cook, Richlands, Virginia, for Appellants. Bryan
G. Schumann, Michael G. Patrizio, BOLLINGER, RUBERRY & GARVEY,
Chicago, Illinois, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
2
PER CURIAM:
In this diversity insurance coverage dispute, the district
court granted summary judgment to the insurance company. For the
reasons set forth within, we affirm.
I.
On April 5, 1999, Ronald King, on behalf of Robertson, Cecil,
King & Pruitt (“the Firm”), signed a renewal application for
professional liability insurance through TIG Insurance Co. (“TIG”).
As part of that application, King was asked:
Is any attorney in your firm aware of any claims made
(whether reported or unreported), incidents (whether
reported or unreported), wrongful acts, errors, or
omissions that could result in a professional liability
claim against any past or present attorney of the firm or
its predecessors or is there a reasonable basis to
foresee that a claim would be made against any past or
present attorney or the firm or its predecessors?
King responded that there had been “no change,” which based on the
Firm’s past applications translated into “no.” On April 21, 1999,
TIG reissued the insurance policy.
On June 21, 1999, King died from a self-inflicted gunshot
wound. Soon thereafter, the Firm discovered that King had
misappropriated client funds. Based on this conduct, a number of
persons filed suit against the Firm, its successor, the partners
of the Firm as individuals, and King’s estate (collectively the
“Partnership”).
3
The Partnership then requested defense and indemnification
from TIG.1 In response, TIG filed the instant action, seeking (1)
rescission of the policy based on a misrepresentation in the
application, or (2) a declaration that the claims were not covered
by the policy based on that same misrepresentation, or (3) a
declaration that the “Compton claim” in particular was not covered
because King’s conduct fell within an exclusion in the policy. The
Partnership counterclaimed for breach of contract. The parties
filed cross-motions for summary judgment, and the district court
granted summary judgment to TIG, finding the insurer entitled to
rescind the policy, which left the Partnership without coverage.
II.
Under Virginia law, which applies here, an insurance company
is entitled to rescind an insurance policy if it can show “by clear
proof” that (1) a statement in the application was untrue and (2)
“the insurance company’s reliance on the false statements was
material to the company’s decision to undertake the risk and issue
the policy.” See Va. Code Ann. § 38.2-309; Comm. Underwriters Ins.
1
All of the claims against the Partnership at issue in this
case -- “Compton,” “McClanahan,” and “Intrepid Coal” -- are
premised on allegations that King misappropriated client funds. In
the “Compton” case, the district court has entered judgment against
the Partnership. In the “McClanahan” case, judgment was entered
against King’s estate, and the case against the other parties
settled. Finally, at the time of briefing the case at hand, the
“Intrepid Coal” case was pending in state court.
4
Co. v. Hunt & Calderone, 261 Va. 38, 42 (2001). The Partnership
argues that TIG was not entitled to rescission because: (1) TIG did
not prove the required elements for rescission, (2) the policy
provided for “cancellation” as the remedy for misrepresentations,
and (3) allowing rescission in this case, in which the Partnership
contracted for “innocent partner” protection, would eviscerate the
“clear intent of the policy.” None of these contentions has merit.
A.
The Partnership’s initial contention -- that TIG is not
entitled to rescission because it failed to prove the required
elements for rescission -- is belied by the record.
The Partnership makes two arguments with respect to the first
required element of “untruthfulness.” First, it argues that the
response to the application question was not “untrue” because at
the time King signed the application no clients had notified him of
their dissatisfaction.2 Client notification, however, is not
required under the plain language of the policy which requests
information on “any claims . . . wrongful acts, errors, or
omissions that could result in a professional liability claim.”
Next, the Partnership argues that the statements were not
“untrue” because King could have converted the funds during the
two-month period between signing the application and King’s death.
2
Of course, his clients did not “notify” King of their
dissatisfaction only because he had deftly kept them in the dark
with respect to his fraudulent behavior.
5
The Partnership offers no affirmative support for this statement,
and ignores the strong record evidence to the contrary.3 Indeed,
during oral argument, the district court expressly asked whether
King engaged in “wrongful activities” prior to signing the 1999
renewal application, and the Partnership agreed that it did not
dispute that he had. Because it is evident from the record that
King had already converted client funds prior to signing the 1999
application, his assertions in that application were patently
untrue, satisfying the first rescission requirement.
Nor do we find any more persuasive the Partnership’s argument
with respect to the other rescission requirement -- that TIG
assertedly failed to demonstrate that the misrepresentations were
material. To prove that a fact is material to the risk, an insurer
must demonstrate that it would influence its decision to issue the
policy. Mutual of Omaha Ins. Co. v. Echols, 207 Va. 949, 953-54
(1967). A court will not take “judicial notice” of this fact, see
Harrell v. North Carolina Mutual Life Ins. Co., 215 Va. 829, 833
(1975) (discussing predecessor statute), nor will boilerplate
language in the policy asserting the materiality of all
representations suffice. Comm. Underwriters, 261 Va. at 43. But
an underwriter’s sworn statements, particularly when
3
In particular, the record reveals that King converted funds
from Compton when he took possession of a check in 1996; that he
pilfered funds from the McClanahan estate from 1993 to 1997; and
that he assertedly misappropriated funds from Intrepid Coal Corp.
in 1998.
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uncontradicted, are sufficient to demonstrate the materiality of
the misrepresentation. Echols, 207 Va. at 954-55; Hawkeye-Security
Ins. Co. v. Gov’t Employee Ins. Co., 207 Va. 944, 948 (1967).
In this case, TIG submitted an affidavit from a TIG
underwriter, which specifically averred that a policy would not
have been issued if King had disclosed his misconduct. The
Partnership offered no evidence to the contrary, and conceded
during the motions hearing that the information might indeed “be
material.” As the district court noted, it would be “unimaginable
that the facts of King’s misconduct would not be material to the
risk of insuring against future malpractice claims.”
Thus, TIG proved the required elements of recission.
B.
The Partnership next contends that even if TIG technically
satisfied the rescission elements, TIG waived its right to
rescission by mentioning “cancellation” as a remedy for
misrepresentations in the policy. This argument too fails.
Cancellation and rescission are different and alternative
remedies. By “rescinding” the policy, the contract is voided ab
initio, alleviating TIG’s responsibility for any claims arising
during the policy and requiring it to return the premiums paid. If
TIG instead chose to “cancel” the contract as provided for in the
policy, TIG would still be responsible for defending against prior
claims, because relief would be prospective only.
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The Partnership has failed to cite any authority for the novel
proposition that providing for “cancellation” in an insurance
policy necessarily precludes the alternative remedy of rescission,
and there is no reason why it should. Although an insured could
contract for “greater protection,” including a limitation of
remedies, the Partnership did not do so here. See Atlantic
Permanent Fed. Savings & Loan Assoc. v. Amer. Casualty Co., 839
F.2d 212, 215 (4th Cir. 1988) (enforcing policy language, under
Virginia law, which stated that the policy “shall not be voided or
rescinded”); see also Sterling Ins. Co. v. Willie Roy Dansey, 195
Va. 933, 943 (1954) (enforcing language in application requiring
answers to be “knowingly” false). In this case, the policy allowed
either party to cancel, and specifically stated that the insurer
“may” cancel the policy for several reasons, only one of which was
because of a “misrepresentation in the Application.” Thus, although
under the policy TIG “may” choose cancellation over rescission, it
is by no means required to do so.
C.
Finally, the Partnership contends that allowing rescission
would violate the “clear intent of the policy” because it would
allow TIG to eviscerate the “innocent partner” protection provided
in the policy. This argument rests on a misunderstanding of the
scope of the policy’s “innocent partner” protection.
8
Even if, as Cecil and Pruitt vigorously contend, they did not
know of King’s misrepresentation on the application, they were not
“innocent partners” for the purpose of the insurance policy. The
only protection for “innocent parties” provided in the policy is
Exclusion 1, and is limited to protection from judgments “arising
out of any dishonest, fraudulent, criminal, malicious or knowingly
wrongful act, error, omission, or Personal Injury.” The
Partnership could have, but did not, contract for additional
protection in the case of a partner making misrepresentations on
behalf of the partnership on the application form. Cf. Atlantic,
839 F.2d at 215 (noting policy language stating that the policy
“shall not be voided or rescinded and coverage shall not be
excluded as a result of any untrue statement in the [application]
form, except as to those persons making such statement or having
knowledge of its untruth”). Thus, although Cecil and Pruitt may,
in fact, be “innocent,” they did not contract to be protected in
this circumstance, and as a result, rescission of the policy does
not violate the “clear intent of the policy.”
III.
For all of these reasons, the judgment of the district court
is
AFFIRMED.
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