UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-1441
AMERICAN AUTOMOBILE INSURANCE COMPANY,
Plaintiff - Appellant,
versus
ARNOLD H. VALENTINE; LEWIS H. WADE; MICHAEL
REQUA,
Defendants - Appellees,
CHRISTOPHER HOLROYD; GILLIAN HOLROYD; AMERICAN
AVK COMPANY; MARY B. GUNNELLS; WILLIAM A.
GUNNELLS; MARY PARKER; STYLON OF CHARLESTON;
NANCY STANLEY, JR.; JAMES E. WISE; MARK B.
BUXTON; OAKLAND CLUB; LAZER CONSTRUCTION
COMPANY INCORPORATED,
Intervenors/Defendants - Appellees.
Appeal from the United States District Court for the District of
South Carolina, at Charleston. Patrick Michael Duffy, District
Judge. (CA-00-2952-23-2)
Argued: February 4, 2005 Decided: May 13, 2005
Before NIEMEYER and MICHAEL, Circuit Judges, and Samuel G. WILSON,
United States District Judge for the Western District of Virginia,
sitting by designation.
Reversed and remanded by unpublished per curiam opinion.
ARGUED: Sandra Denise Hauser, SONNENSCHEIN, NATH & ROSENTHAL,
L.L.P., New York, New York, for Appellant. Justin O’Toole Lucey,
Mount Pleasant, South Carolina; Justin S. Kahn, Charleston, South
Carolina, for Appellees. ON BRIEF: Martin P. Michael, Robert P.
Mulvey, SONNENSCHEIN, NATH & ROSENTHAL, L.L.P., New York, New York;
Susan Batten Lipscomb, NEXSEN, PRUET, ADAMS, KLEEMEIER, L.L.C.,
Columbia, South Carolina, for Appellant. Christian H. Hartley,
RICHARDSON, PATRICK, WESTBROOK & BRICKMAN, L.L.C., Charleston,
South Carolina; Robert Waldrep, Jr., WALDREP & STODDARD, Anderson,
South Carolina; Mary Leigh Arnold, Mt. Pleasant, South Carolina; J.
Calhoun Watson, Columbia, South Carolina, for Appellees.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
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PER CURIAM:
American Automobile Insurance Company (AAIC) sued three
insurance brokers with whom it had entered into insurance
contracts. AAIC sought a declaratory judgment that it had no
obligations under the insurance contracts to provide professional
liability coverage for suits brought against the brokers by their
former clients. After a trial before the district court and an
advisory jury, the court entered an order concluding that AAIC was
obligated under the insurance contracts to defend and indemnify the
brokers. For the following reasons, we reverse and remand.
I.
AAIC provides errors and omissions and professional liability
insurance coverage to insurance brokers. The defendants in this
case are three insurance brokers who entered into insurance
contracts with AAIC. The insuring clause in the contracts provides
that AAIC shall pay “all sums which the INSURED shall become
legally obligated to pay as DAMAGES because of . . . any act,
error, or omission of the INSURED . . . in rendering or failing to
render PROFESSIONAL SERVICES,” J.A. 46, and that AAIC shall defend
the brokers from lawsuits relating to their errors and omissions.
The contracts also contain exclusionary clauses, three of which are
relevant in this case. These clauses provide that there is no
coverage for
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[1] Any claim arising out of the insolvency,
receivership, bankruptcy, liquidation or financial
inability to pay of any organization in which the INSURED
has (directly or indirectly) placed or obtained coverage
or in which an INSURED has (directly or indirectly)
placed the funds of a client or account or in which any
person has invested as a result of consultation with
INSURED.
[2] Any claim arising from or contributed to by the
placement of coverage with Multiple Employer Welfare
Arrangements as defined in the Employee Retirement Income
Security Act of 1974 (and any amendments thereto).
[3] Any claim arising from or contributed to by the
placement of a client’s coverage or funds directly or
indirectly with any organization which is not licensed to
do business in [South Carolina].
J.A. 56.
The brokers sold and marketed to various individuals a health
insurance and dental plan (the Plan). The Plan was marketed in
South Carolina from approximately August 1996 to June 1999, and
premiums under the Plan were paid to the International Worker’s
Guild Health & Welfare Trust Fund (the Fund), which was
administered by The Fidelity Group, Inc. Though the Plan was
marketed as a valid ERISA plan, it was really a Multiple Employer
Welfare Arrangement (MEWA), a much riskier type of health insurance
plan. In South Carolina an organization that wishes to sell a
self-insured MEWA like the Plan here is required to maintain
certain reserve levels, obtain stop-loss insurance to protect
against catastrophes, and have a certain number of trustees to
provide oversight and protection. It appears that the Fund
asserted that the Plan was a valid ERISA plan in order to avoid
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these requirements. Further, the Fund was never licensed to
transact insurance business in South Carolina.
The Fund eventually became insolvent, having assets of less
than $250,000 and liabilities of $30,000,000. J.A. 235. The
participants, left with no coverage for their medical claims, sued
the brokers, the ones who had sold them coverage under the Plan.
The participants brought a number of different suits (hereinafter
referred to as “the underlying suits”) against the brokers, all
seeking recovery of unpaid medical claims and related damages. The
participants allege that the brokers engaged in fraud and
negligence and in other violations of state and federal law in
their marketing and selling of the Plan.
After the underlying suits were brought, AAIC filed its own
suit against the brokers in the United States District Court for
the District of South Carolina. AAIC, relying on the exclusionary
clauses, sought a declaratory judgment that AAIC (1) “has no
obligation [under the insurance contracts] to pay any further
amounts to [the brokers] for any defense in connection with the
underlying [suits] at issue or any future related [suits] for which
the [the brokers] may claim coverage,” and (2) “has no obligation
to defend or pay any amounts to [the brokers] for any
indemnification of them in connection with the underlying claims or
any future related claims.” J.A. 43-44. AAIC also sought a
judgment “providing for a reimbursement of any and all defense
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costs already expended by [AAIC] in connection with the underlying
[suits]” as well as attorney’s fees, costs, and disbursements in
the present action. J.A. 43-44. Jurisdiction was based on the
diversity of the parties. See 28 U.S.C. § 1332(a).
The case was eventually tried before a jury, although in mid-
trial the district court designated it an advisory jury under Fed.
R. Civ. P. 39(c). The jury found that the underlying suits arose
out of (1) the insolvency of the Fund, (2) the brokers’ placement
of coverage with a MEWA, and (3) the brokers’ placement of coverage
with an organization not licensed to do business in South Carolina.
Nevertheless, the jury returned a verdict for the brokers because
it determined that none of these causes was the “dominant,
efficient cause” of the underlying suits. J.A. 2319-2322. The
district court then made its own factual findings, consistent with
the jury’s, and determined that the exclusionary clauses do not bar
coverage of the underlying suits. Because the underlying suits are
covered by the insuring provision of the contract, the district
court concluded, AAIC has a duty to defend and indemnify the
brokers. AAIC now appeals.
II.
On appeal AAIC argues that the district court misconstrued
South Carolina law regarding exclusionary clauses in insurance
contracts. For the following reasons, we agree and reverse the
district court’s order.
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A.
Under South Carolina law “[p]arties to a contract of insurance
have the right to make their own contract.” Sphere Drake Ins. Co.
v. Litchfield, 438 S.E.2d 275, 277 (S.C. Ct. App. 1993). Because
insurance policies are contracts, the “cardinal rule” in
interpreting them is “to ascertain and give effect to the intention
of the parties and, in determining that intention . . . [to] look[]
to the language of the contract.” Id. The language in an
exclusionary clause is accorded its ordinary meaning. See Long
Motor Lines, Inc. v. Home Fire & Marine Ins. Co. of Cal., 67 S.E.2d
512, 516 (S.C. 1951). “[A]n insurer has no duty to defend an
insured where the damage was caused for a reason unambiguously
excluded under the policy.” B.L.G. Enters., Inc. v. First Fin.
Ins. Co., 514 S.E.2d 327, 330 (S.C. 1999). At the same time,
however, in order for an exclusionary clause to bar coverage, there
must exist a “causal connection” between the excluded risk and the
loss. S.C. Ins. Guar. Ass’n v. Broach, 353 S.E.2d 450, 450-51
(S.C. 1987). “The rationale of [this] rule is that ‘when the
parties made the contract of insurance, they were not inserting a
mere arbitrary provision, but it was the purpose of the insurance
company to relieve itself of liability from accidents caused by the
excluded provision.’” Id. (quoting S.C. Ins. Co. v. Collins, 237
S.E.2d 358, 361-62 (S.C. 1977)).
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After applying these basic principles of South Carolina law to
AAIC’s insurance contract, we conclude that the exclusionary clause
dealing with insolvency unambiguously bars coverage with respect to
the underlying suits. This clause excludes coverage for
Any claim arising out of the insolvency, receivership,
bankruptcy, liquidation or financial inability to pay of
any organization in which the INSURED has (directly or
indirectly) placed or obtained coverage or in which an
INSURED has (directly or indirectly) placed the funds of
a client or account or in which any person has invested
as a result of consultation with INSURED.
J.A. 56. The plain terms of this exclusionary clause make it
clear that AAIC and the brokers intended that insurance coverage
should not extend to suits against the brokers premised on their
placement of client funds with an insurance company that is unable
to pay the participants’ claims for coverage. And that is exactly
the basis for the underlying suits against the brokers. While the
participants allege a host of legal claims, they are, at bottom,
seeking damages for unpaid medical claims, claims that went unpaid
because the Fund became insolvent. Because a causal connection
exists between the excluded risk (the placement of clients funds
with an insolvent organization) and the underlying suits, we
conclude that the brokers’ claims for coverage fit squarely within
the exclusionary clause relating to insolvency. See Broach, 353
S.E.2d at 451. Therefore, the brokers are not entitled to coverage
for the underlying suits.
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The district court reached the opposite conclusion, and we
will explain why we disagree with that court’s analysis. The
district court properly found that the brokers (1) placed client
funds with an insolvent organization, (2) placed client funds with
a MEWA, and (3) placed client funds with an organization not
licensed to do business in the state of South Carolina. The
district court concluded, however, that AAIC was not protected by
any of the exclusionary clauses because AAIC failed to establish
that the excluded risks were the proximate cause of the
participant’s losses. Relying on Lesley v. American Security
Insurance Co., 199 S.E.2d 82 (S.C. 1973), the district court
interpreted South Carolina law as requiring an insurance company to
prove that the excluded risk was the proximate cause of the losses
suffered by the insured in order for an exclusionary clause to bar
coverage. To establish proximate cause, the district court
reasoned, the insurance company must establish that the excluded
risk was the dominant cause (the cause that sets in motion the
other causes). After finding that AAIC had failed to establish
that the excluded risks were the dominant cause of the brokers’
losses, the district court held that AAIC was required to provide
coverage for the underlying suits.
The district court erred because South Carolina law does not
require an insurance company to establish that a specifically
excluded risk was the proximate cause of the loss suffered by the
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insured in order for an exclusionary clause to apply. The district
court’s reliance on Lesley is misplaced because that case concerned
the interpretation of an insuring clause, not an exclusionary
clause. In Lesley a farmer’s chickens died from excessive heat
when the fans in his chicken house failed for about four hours.
199 S.E.2d at 84. The fans failed because a severe thunderstorm
(and related lightning) had interrupted the supply of electrical
power. The issue was whether the farmer’s loss fell within the
insuring clause, which provided coverage for losses “immediately
resulting from . . . lightning.” Id. The court stated that in
order to be covered, the farmer had to prove that the lightning
proximately caused the death of the chickens. An insured, the
court reasoned, could prove proximate cause by demonstrating that
the peril insured against was either the nearest efficient cause
(the cause closest in time or place) or the dominant cause of the
loss. Id. at 85. The court held that there was sufficient
evidence to conclude that the dominant cause of the farmer’s loss
was the lightning, as it caused the power failure. Id. 84-85.
Lesley would be relevant if this case was about whether the
brokers’ losses arose out of the insuring clause of the insurance
contract, that is, whether the losses arose out of “[a]ny act,
error, or omission . . . in rendering or failing to render
[professional services].” J.A. 46. However, the issue is not
whether the brokers are entitled to coverage under the insuring
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clause; it is whether they are barred from coverage by the
exclusionary clauses. Nothing is said in Lesley that implies that
its rule of causation applies to exclusionary clauses, nor have we
found any South Carolina case applying Lesley’s rule of causation
to exclusionary clauses. As insuring and exclusionary clauses
serve diametric purposes (one provides coverage while the other
limits it), we see no reason why the rule of causation for insuring
clauses should be applied to exclusionary clauses. Further, an
application of Lesley’s proximate cause rule to exclusionary
clauses would be inconsistent with much more recent South Carolina
precedent, which requires only that there be a “causal connection”
between the excluded risk and the loss. See Broach, 353 S.E.2d at
450-51. While the South Carolina courts have not precisely
articulated the meaning of the term “causal connection,” it appears
that the term refers to a causal relationship that may be less
direct or immediate than Lesley-type proximate cause. See, e.g.,
McPherson v. Mich. Mut. Ins. Co., 426 S.E.2d 770, 772 (S.C. 1993)
(concluding that exclusionary clause bars coverage of otherwise
covered conduct because “without the [excluded risk], there is no
link by which the [covered conduct] can be independently connected
to [the losses]”). In sum, we conclude that the exclusionary
clause relating to insolvency unambiguously bars coverage of the
broker’s claims stemming from the underlying suits and that the
district court erred in ruling to the contrary.
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B.
The brokers argue that AAIC is barred from arguing against a
requirement of proximate cause on appeal because it had earlier
agreed to jury instructions supporting such a requirement. The
proposed jury instructions were filed two weeks before trial with
the district court. AAIC correctly counters that it (1) raised
objections to the proximate cause requirement throughout trial, (2)
sought to have the instructions modified at the charge conference
before the jury was instructed, (3) raised its objections again
after the jury rendered its verdict and before it was excused, and
(4) raised its objections a final time when it moved for the
district court to reconsider its decision. We agree with AAIC that
it has not waived this argument.
Finally, the brokers offer two alternative grounds for
affirming the district court’s order. They first argue that
rulings made by the South Carolina state courts and admissions by
AAIC in those proceedings bar relitigation of the issue of
causation under the Rooker-Feldman doctrine and the doctrine of
collateral estoppel. See D.C. Ct. App. v. Feldman, 460 U.S. 462
(1983); Rooker v. Fid. Trust Co., 263 U.S. 413 (1923). They also
argue that the doctrine of reasonable expectations, which places
the burden on the insurer to clearly communicate the terms of
coverage, bars application of the exclusionary clauses. The
district court considered these arguments and committed no error in
rejecting them.
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III.
For the foregoing reasons, we reverse the district court’s
order determining that AAIC is obligated under the insurance
contract to defend the brokers against the underlying suits and to
indemnify them for any losses. Because the exclusionary clause
relating to insolvency bars coverage, AAIC is entitled to a
declaratory judgment that it (1) has no obligation under the
insurance contract to pay any further amounts to the brokers for
any defense in connection with the underlying suits or any future
related suits for which the brokers may claim coverage, and (2) has
no obligation to defend or pay any amounts to the brokers for any
indemnification in connection with the underlying suits or any
future related suits. On remand the district court should consider
AAIC’s request for (1) the reimbursement of defense costs already
expended by it in connection with the underlying suits, and (2)
attorney’s fees, costs, and disbursements in the present case.
REVERSED AND REMANDED
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