Commercial Underwriters Insurance v. Hunt & Calderone, P.C.

Present: All the Justices

COMMERCIAL UNDERWRITERS INSURANCE COMPANY

v. Record No. 000474 OPINION BY JUSTICE ELIZABETH B. LACY
January 12, 2001
HUNT & CALDERONE, P.C., ET AL.

FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS
Edward L. Hubbard, Judge

This appeal arises from a declaratory judgment action

regarding coverage under a professional liability, claims made

insurance policy.

On May 8, 1997, Hunt & Calderone, P.C. (H&C), an

accounting firm, filed a renewal application for professional

liability insurance with Commercial Underwriters Insurance

Company (CUIC). On May 9, Dian T. Calderone, a partner in

H&C, realized that she had missed a filing deadline for one of

the firm's clients, Michael Atalay. Calderone knew that her

error could potentially result in a loss of a $125,000 tax

credit for the client, but she did not think that a claim

would result because she was told by an administrator of the

government tax credit program that sufficient funds would

likely be available after all the timely applications had been

processed. Furthermore, when told of the error, Atalay said

he was satisfied with the assurances made by the government

administrator. H&C did not inform CUIC of the error during

the time the insurance application was pending.
 After the CUIC policy became effective, H&C learned that

sufficient funds were not available for Atalay's tax credit.

In August 1997, Atalay notified H&C that he intended to hold

H&C responsible for the lost tax credit. Because the CUIC

policy was a claims made policy, H&C requested coverage from

CUIC for Atalay's claim. CUIC denied coverage to H&C for the

claim and refused to provide a defense for H&C in an action

subsequently filed by Atalay against H&C. CUIC based its

position on three separate grounds: (1) H&C failed to meet a

condition precedent of the policy which required that, at the

inception of the policy, H&C have no knowledge of an error or

any other basis to reasonably anticipate a claim that would be

covered by the policy; (2) the claim fell under an exclusion

of the policy which disallowed coverage for a claim arising

out of any error likely to give rise to a claim of which the

insured had knowledge or a reason to anticipate prior to the

policy's inception; and (3) H&C's failure to inform CUIC of

Calderone's error during the pendency of the application

constituted a material misrepresentation, voiding the policy.

H&C filed a motion for declaratory judgment, seeking a

declaration that CUIC was required to defend the claim and

provide coverage under the policy. The trial court entered

judgment in favor of H&C, holding that H&C provided sufficient

evidence to show that it complied with the condition precedent

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to establish coverage, that coverage was not foreclosed under

the policy exclusion, and that the policy was not void based

on a misrepresentation of a material fact in the application.

We awarded CUIC an appeal.

CUIC's five assignments of error present two primary

issues. The first is whether the policy was void because H&C

failed to inform CUIC of Calderone's error prior to the

inception of the policy. The second is whether, prior to the

inception of the policy, H&C had any basis to reasonably

anticipate that Calderone's error would result in a claim

otherwise covered by the policy. We will address these issues

in order.

I.

Question number ten of the insurance policy application

asked, "After inquiry, does the Applicant . . . have knowledge

of any actual or alleged act, error, omission or circumstance

which may result in a claim being made against them or any

other basis to reasonably anticipate a claim being made

against them." H&C answered no to this question. The

application also contained a notice that the Applicant had a

continuing duty to update the insurance company, in writing,

of any change to the application that may occur between the

filing of the application and the proposed effective date.

Finally, the policy itself recited in several places that the

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representations made in the application were material to the

acceptance of the risk and the underwriting of the policy.

Based on these policy provisions, CUIC asserts that the

policy was void because H&C failed to notify CUIC of

Calderone's error in a timely fashion and that such failure

was a material misrepresentation as stated in the policy. The

trial court, relying on Harrell v. North Carolina Mutual Life

Insurance Co., 215 Va. 829, 213 S.E.2d 792 (1975), held that

even if H&C's failure to update CUIC did constitute a

misrepresentation, CUIC failed to prove that it was a material

misrepresentation.

We have construed Code § 38.2-309 1 and its predecessors to

require an insurance company contesting a claim on the basis

of an insured's alleged misrepresentation to show, by clear

proof, two facts: (1) that the statement on the application

was untrue; and (2) that the insurance company's reliance on

the false statement was material to the company's decision to

undertake the risk and issue the policy. Harrell, 215 Va. at

1
Code § 38.2-309 provides in pertinent part:

No statement in an application [for an
insurance policy] . . . made before or after
loss under the policy shall bar a recovery
upon a policy of insurance unless it is
clearly proved that such answer or statement
was material to the risk when assumed and was
untrue.

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831-32, 213 S.E.2d at 794-95. To prove the falsity is not

sufficient; the company must prove clearly that truthful

answers would have reasonably influenced the company's

decision to issue the policy. See Mut. of Omaha Ins. Co. v.

Echols' Adm'rs, 207 Va. 949, 953-54, 154 S.E.2d 169, 172

(1967)(defining "material").

We agree with the trial court that Harrell controls the

case at hand. In Harrell, the applicant for a life insurance

policy did not disclose that she had been hospitalized and had

undergone operations for cancer numerous times during the five

years prior to submitting her application. The application

recited that her answers " 'are each material to the risk and

that the Company believing them to be true will rely and act

upon them.' " 215 Va. at 830, 213 S.E.2d at 794 (emphasis

added). When cancer was found to be a cause of death and an

investigation revealed her misrepresentations on the

application, the insurance company denied the claim, relying

upon the predecessor to Code § 38.2-309. 2

At trial, the insurance company offered into evidence the

application language quoted above and the testimony of several

agents of the company, but not one agent was in a position to

2
In Harrell, this Court engaged in an analysis of Code
§ 38.1-366, the predecessor to Code § 38.2-309. For the
purposes of this appeal, the two statutes contain virtually
identical language.

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testify to the materiality of the misrepresentations. This

Court stated:

While it is incredible that any responsible insurance
company would have issued a policy of life insurance to
Mrs. Foxx with knowledge that she had recently been
released from a hospital after a major operation for
carcinoma of the breast, and with knowledge that she had
a history of other hospitalizations for cancer, we will
not take judicial notice of this fact. The burden of
clearly proving the affirmative defense of materiality of
a misrepresentation is not carried when the court, to
find the fact, must resort to assumption and conjecture.

Harrell, 215 Va. at 833, 213 S.E.2d at 795-96 (first emphasis

added).

Similarly, in this case, the only evidence of materiality

CUIC offered was the policy itself, which recited in

boilerplate language that the representations in the

application were material and which language we assume is

included in every policy issued by CUIC. Such evidence is far

from the clear proof required to show that truthful answers

would have reasonably influenced CUIC's decision to issue the

policy to H&C. Accordingly, we conclude that the trial court

did not err in holding that CUIC failed to meet its burden of

proof on the question of materiality.

II.

The second issue is also one of proof. The policy

provisions regarding a condition precedent and an exclusion

involved a determination of whether it was reasonable for H&C

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to anticipate or have any reason to anticipate that

Calderone's error, made before the inception of the policy,

would result in a claim under the policy. 3 H&C had the burden

to produce evidence that it met the terms of the condition

precedent, whereas CUIC bore the ultimate burden of persuasion

on this issue. Erie Ins. Exch. v. Meeks, 223 Va. 287, 290-91,

288 S.E.2d 454, 456-57 (1982). In addition, CUIC carried the

burden to prove that the exclusion applied. Va. Elec. & Power

Co. v. Northbrook Prop. & Cas. Ins., 252 Va. 265, 270, 475

S.E.2d 264, 266 (1996). The trial court found that H&C

satisfied its evidentiary burden and CUIC did not.

David E. Hunt, a partner in H&C, and Calderone, both of

whom are certified public accountants and testified in that

capacity, stated that Calderone's error was not one which

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Section I.A.2. of the policy provided:

All of the following conditions must be satisfied
before coverage will apply:
. . . .
2. the Insured had no knowledge of such actual or
alleged act, error, omission, circumstance or Personal
Injury or otherwise had no basis to reasonable [sic]
anticipate a claim that would be insured by this Coverage
Part at policy inception;

Section II.A., relating to policy exclusions, stated in
pertinent part that coverage would not be provided for:

any claim arising out of any actual or alleged act,
error, omission, Personal Injury or circumstance likely

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could reasonably be anticipated to result in a claim because

the assurances by one of the tax credit program's

administrators, Dan Girouard, justified a conclusion that

funds would be available for Atalay despite the untimely

filing of the application. Atalay also testified at trial

that, although he was aware of Calderone's error, after

talking with Calderone and Girouard, he believed the matter

"would be okay." Atalay stated that he had no intention of

filing a claim against H&C until July, when he learned that

tax credits would not be available to him.

CUIC's only witness was Martha Shea Hollifield, Dan

Girouard's supervisor. Hollifield testified that she recalled

talking with Calderone about Atalay's application, but she did

not recall telling Calderone funds would be available. The

trial court found this evidence insufficient to rebut H&C's

evidence that two certified public accountants had no

reasonable basis to anticipate a claim from the facts in this

case.

Although the trial court noted that H&C's testimony was

self-serving, the court did not reject the testimony as

incredible. Faced with H&C's testimony, CUIC had to provide

evidence that would challenge the reasonableness of H&C's

to give rise to a claim of which an Insured had
knowledge, or otherwise had reason to anticipate might

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belief that no claim would arise. The trial court did not

require that such evidence be in the form of "expert

testimony" as CUIC suggests. Rather, the trial court

suggested that evidence from "professionals in the field"

would be needed to refute the evidence produced by H&C. As

stated by the trial court, CUIC simply failed to satisfy that

burden.

Principles of appellate review require that we affirm

determinations of fact made by the trial court unless there is

no support for such determinations in the record. Quantum

Dev. Co. v. Luckett, 242 Va. 159, 161, 409 S.E.2d 121, 122

(1991). Based on our review, we cannot conclude that this

factual conclusion of the trial court is without support in

the record.

For the above reasons, we will affirm the judgment of the

trial court.

Affirmed.

result in a claim, prior to the inception of this policy.

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