Robert Graham v. National Union Fire Insurance

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 13-1517

ROBERT E. GRAHAM,

Plaintiff – Appellant,

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,

Defendant – Appellee.

Appeal from the United States District Court for the Southern
District of West Virginia, at Bluefield. David A. Faber, Senior
District Judge. (1:10-cv-00453)

Argued: December 10, 2013 Decided: February 3, 2014

Before KING, GREGORY, and FLOYD, Circuit Judges.

Affirmed in part, vacated in part, and remanded by unpublished
per curiam opinion.

ARGUED: Michael W. Carey, CAREY, SCOTT, DOUGLAS & KESSLER, PLLC,
Charleston, West Virginia, for Appellant. Don C.A. Parker,
SPILMAN, THOMAS & BATTLE, PLLC, Charleston, West Virginia, for
Appellee. ON BRIEF: John A. Kessler, David R. Pogue, CAREY,
SCOTT, DOUGLAS & KESSLER, PLLC, Charleston, West Virginia, for
Appellant. Glen A. Murphy, SPILMAN THOMAS & BATTLE, PLLC,
Charleston, West Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:

This appeal presents two questions of West Virginia law

pertaining to the enforcement of insurance contracts. The first

is whether an insured may recover damages for aggravation and

inconvenience where his insurer, in breach of the policy, has

refused to defend him from potential liability arising from a

lawsuit. The resultant need of the insured to obtain

alternative representation leads to the second question:

whether prejudgment interest should accrue on the attorney fees

thereby incurred, for which the insurer is subsequently adjudged

responsible.

The district court answered both questions in the negative,

pursuant to which it entered judgment for the plaintiff, Robert

E. Graham, against the defendant, National Union Fire Insurance

Co. of Pittsburgh, Pennsylvania, for the reduced sum of

$278,273.56. Three-quarters of the judgment was awarded to

reimburse Graham for his attorney fees in connection with the

precursor liability action, with the balance intended to

compensate him for the fees earned by counsel in the litigation

below to enforce the policy. The court entered its judgment on

remand from our prior decision on the merits, see Graham v.

National Union Fire Insurance Co. of Pittsburgh, Pennsylvania,

474 F. App’x 956 (4th Cir. 2012) (unpublished), in which we

2
rejected National Union’s defenses to Graham’s allegations of

breach.

In the aftermath of our remand, National Union sought a

specific demand from Graham as a catalyst for negotiations and

possible settlement. By letter from his counsel dated September

20, 2012, Graham asserted entitlement to the aforementioned

attorney fees, plus $160,083.57 in prejudgment interest on that

portion of the fee award associated with the threshold liability

proceedings. He also demanded $368,788.74 for aggravation and

inconvenience. Though National Union acceded to the proposed

award of attorney fees, the parties could not otherwise agree on

the proper amount due Graham. The issue thereafter arose on

cross-motions for summary judgment, and, by its Memorandum

Opinion and Order of March 7, 2013, the district court ruled in

National Union’s favor on the disputed items of damages. See

Graham v. Nat’l Union Ins. Co. of Pittsburgh, Pa., No. 1:10-cv-

00453 (S.D. W. Va. Mar. 7, 2013) (the “Opinion”). 1 On March 14,

2013, the court entered the conforming judgment described above.

Graham timely noted this appeal on March 29, 2013.

We conclude that, the district court correctly denied

Graham prejudgment interest on his attorney fees. We therefore

1
The Opinion is found at J.A. 210-30. (Citations herein to
“J.A. ___” refer to the contents of the Joint Appendix filed by
the parties to this appeal.)

3
affirm that aspect of the court’s judgment. The court erred,

however, in denying Graham the opportunity to prove damages for

aggravation and inconvenience. We thus vacate that aspect of

the court’s judgment and again remand for further proceedings.

Graham was the Executive Director of two West Virginia

nonprofit corporations that used state and federal funds to

provide services to senior citizens. In 2004, the State of West

Virginia sued Graham and his employers in the Circuit Court of

Kanawha County, maintaining that Graham had manipulated the

members of each corporation’s Board of Directors to pay himself

exorbitant salaries and benefits. That alleged malfeasance,

according to the State, entitled it to a writ of quo warranto

ordering Graham’s removal and the disgorgement of his ill-gotten

gains. 2

One of the corporations, Council on Aging, Inc., was

designated a “municipality” and named as an additional insured

2
At common law, the writ of quo warranto (and the attendant
extraordinary proceeding) is “designed to test whether a person
exercising power is legally entitled to do so.” Black’s Law
Dictionary 1256 (6th ed. 1990). In West Virginia, “[a] writ of
quo warranto may be awarded and prosecuted in the name of the
State” against, inter alios, “a corporation for a misuse or
nonuse of its corporate privileges and franchises, or for the
exercise of a privilege or franchise not conferred upon it by
law.” W. Va. Code § 53-2-1.

4
on a policy issued by National Union to the State. For an

annual premium just in excess of $20,000, the policy purported

to afford, among other things, general comprehensive liability

coverage. Under the terms of the policy, that coverage extended

to “[a]ny elected or appointed official, executive officer,

commissioner, director, or member of the ‘Named Insured’ while

acting within the scope of his duties as such.” Dist. Ct. ECF

13-5, at 6.

Council on Aging notified National Union’s claims agent of

the State litigation, but the insurer denied coverage and

refused to tender a defense. Graham thus defended himself

against the lawsuit at his own expense. The action persisted

until 2009, when the circuit court dismissed it as moot. The

dismissal came after the boards of both corporations voted to

remove Graham and prohibit his future involvement in their

affairs, in connection with which Graham and the corporations

executed a mutual release of liability.

Victory at last in hand, Graham filed the underlying

Complaint on March 3, 2010, in the Circuit Court of Mercer

County, alleging that National Union had breached its duty under

the insurance contract to provide him with a defense to the

State action. National Union removed the matter to the Southern

District of West Virginia, where, on February 17, 2011, the

insurer was granted summary judgment after the district court

5
determined that certain policy exclusions supported the denial

of coverage. Our reversal of that judgment engendered the

proceedings on remand, which in turn led to the second appeal

now before us. The parties being citizens of different states

and the amount in controversy exceeding $75,000, jurisdiction

existed in the district court pursuant to 28 U.S.C.

§ 1332(a)(1). We possess appellate final order jurisdiction as

prescribed by 28 U.S.C. § 1291.

II.

The facts of record in this diversity proceeding are not in

dispute, with the result that the issues on appeal are confined

strictly to the proper interpretation of West Virginia law. As

such, our review of the final judgment below is de novo. See

Mort Ranta v. Gorman, 721 F.3d 241, 250 (4th Cir. 2013).

III.

The body of law developing the remedies afforded West

Virginia insureds for an insurer’s breach of contract traces its

origin to Aetna Casualty & Surety Co. v. Pitrolo, 342 S.E.2d 156

(W. Va. 1986). In that case, Aetna filed a declaratory judgment

action to determine whether it was obliged to defend its

6
insured, Pitrolo, who had been sued in three separate

proceedings stemming from an automobile accident. Aetna denied

coverage, compelling Pitrolo to retain a private attorney to

represent him. After a jury found coverage to exist under the

policy, the circuit court ordered Aetna to take over Pitrolo’s

defense in the underlying matters and reimburse him for his

attorney fees.

On review of the circuit court’s order, the Supreme Court

of Appeals of West Virginia (the “Court”) determined that Aetna

was liable not only for the attorney fees relating to the three

negligence proceedings, but also for the fees Pitrolo incurred

in the declaratory judgment action. In so ruling, the Court

deemed it irrelevant that Aetna had, perhaps, reasonably denied

coverage and had otherwise acted in good faith: “After all, the

insurer had contracted to defend the insured, and it failed to

do so. It guessed wrong as to its duty, and should be compelled

to bear the consequences thereof.” Pitrolo, 342 S.E.2d at 161

(citation and internal quotation marks omitted). 3

Aetna was not, as it happens, adjudged liable for Pitrolo’s

aggravation and inconvenience, a circumstance seized upon by

3
Notwithstanding the admonition in Pitrolo that the
insurer’s intent is typically not at issue, the category of
common-law actions alleging the wrongful denial of coverage is,
with some frequency, referred to in the legal vernacular as “bad
faith” insurance litigation.

7
National Union in support of its position that the district

court here correctly denied those damages to Graham. We do not

ascribe great significance to this aspect of the result in

Pitrolo, undiscussed by the Court. Given the nascency of the

cause of action recognized in that case, we suppose it most

likely that the insured simply failed to make an appropriate

demand.

About nine months after Pitrolo, the Court confronted a

similar, but more inclusive claim in Hayseeds, Inc. v. State

Farm Fire & Casualty, 352 S.E.2d 73 (W. Va. 1986). At issue in

Hayseeds was whether the insurer of a restaurant business was

required to relinquish the policy proceeds after the

establishment was burnt down by an arsonist. The insurer, State

Farm, refused to pay, maintaining that the husband-and-wife

principals were responsible for the fire. The business sued,

and it obtained a jury verdict for the $150,000 proceeds, plus

$69,000 in attorney fees and other consequential damages,

together with a punitive damages award of $50,000. 4

4
In West Virginia, two categories of compensatory damages
may be recovered by the plaintiff in a breach-of-contract
lawsuit. “Direct” damages are “those directly flowing from the
contract breach.” Desco Corp. v. Harry W. Trushel Const. Co.,
413 S.E.2d 85, 89 (W. Va. 1991). Damages categorized as direct
are distinguishable from “indirect or consequential damages that
arise from the special circumstances of the contract.” Id. In
a bad-faith action alleging an insurer’s nonperformance under a
liability policy, such as Pitrolo, the plaintiff sustains direct
(Continued)
8
Adhering to its analysis in Pitrolo, the Court held that

“whenever a policyholder must sue his own insurance company over

any property damage claims, and the policy holder substantially

prevails in the action, the company is liable for the payment of

the policyholder’s reasonable attorneys’ fees.” Hayseeds, 352

S.E.2d at 80. The fee recovery compensates the insured for “net

economic loss caused by the delays in settlement,” that is, as a

foreseeable consequence of the breach. Id. The insured is also

entitled to additional consequential damages in the form of “an

award for aggravation and inconvenience.” Id. The Court thus

affirmed the trial court’s judgment, except that it reversed the

damages as the result of being compelled to retain substitute
counsel to represent him in the proceedings with respect to
which the insurer has abrogated its duty to defend. By
contrast, the attorney fees incurred by the plaintiff in
litigation with the insurer to enforce the policy are properly
classified as consequential damages, insofar as “at the time of
the contract the parties could reasonably have anticipated that
[such fees] would be a probable result of the breach.” Desco
Corp., 413 S.E.2d at 89; see United States v. Arvanitis, 902
F.2d 489, 497 (7th Cir. 1990) (payments to counsel by insurer
investigating defendant’s fraudulent scheme not recoverable
under statute disallowing restitution for consequential damages
such as “legal fees generated in prosecuting a claim”). The
attorney fee award in Pitrolo comprised both categories of
damages. Hayseeds, however, did not involve a liability policy
and its attendant predicate litigation, with the result that the
attorney fees awarded by the jury in that case were incurred
exclusively in enforcement of the policy, and thus wholly within
the category of consequential damages.

9
punitive damages award as unsupported by a sufficient showing of

actual malice. See id. at 80-81.

Hence, whether an action on the policy is instituted by the

insurer (Pitrolo) or by the insured (Hayseeds), it is settled

that whenever a breach is proved of the insurer’s duty to

indemnify (Hayseeds) or broader duty to defend (Pitrolo), the

insured may recover direct damages for attorney fees expended in

any predicate proceeding (usually an adjudication of the

insured’s liability to a third party), and also consequential

damages for fees incurred to enforce the policy against the

insurer. The first question in this appeal is whether Graham

may pursue additional consequential damages for aggravation and

inconvenience, like the insured in Hayseeds, notwithstanding

that the facts of his case are — at least superficially — more

analogous to those in Pitrolo. 5

From the insured’s perspective, he is bound to suffer the

same aggravation and inconvenience regardless of how the insurer

breaches the policy: either by unjustifiably refusing to

provide a defense against liability or by wrongfully withholding

5
As in Pitrolo, the litigation before the district court
sought to resolve an insurer’s duty to defend its insured from
liability. The only notable difference — albeit a legally
immaterial one — is that the case at bar was filed by the
insured, while Pitrolo was a declaratory judgment action
initiated by the insurer.

10
indemnification from property loss. And there is no logical

reason to authorize an award for one item of consequential

damages — attorney fees in the enforcement litigation — while

simultaneously denying recovery for aggravation and

inconvenience, which are merely other items in the same

category. We therefore conclude that, in West Virginia,

insureds in Graham’s position may be compensated for aggravation

and inconvenience (subject to adequate proof thereof), insofar

as those items of consequential damages are permitted generally.

The district court reached the contrary result by

distinguishing between liability policies — implicating both the

duty to defend and the duty to indemnify — and those simply

providing indemnification from loss. The court denominated the

former type (at issue here and in Pitrolo) “third-party

insurance,” Opinion 13, and the latter type (discussed in

Hayseeds) “first-party insurance,” id. at 13. Justice Benjamin

made the same distinction, espousing the minority viewpoint in

Loudin v. National Liability & Fire Insurance Co.: “First-party

insurance is a contract between the insurer and the insured to

protect the insured from its own actual losses and expenses

. . . . Third-party insurance is a contract to protect the

insured from losses resulting from actual or potential liability

to a third party.” 716 S.E.2d 696, 707 (W. Va. 2011) (Benjamin,

11
J., dissenting) (quoting Couch on Insurance 3d § 198:3 (2005)

(internal quotation marks omitted)). 6

Loudin is not particularly useful to our analysis, however,

because the issue in that case was a broad one, namely, whether

the plaintiffs had a sufficient contractual (first-party)

relationship with the insurer such that a bad-faith action could

be maintained to begin with. See Elmore v. State Farm Mut.

Auto. Ins. Co., 504 S.E.2d 893, 897 (W. Va. 1998) (“[T]he common

law duty of good faith and fair dealing . . . runs between

insurers and insureds and is based on the existence of a

contractual relationship. [T]here is simply nothing to support

a common law duty of good faith and fair dealing on the part of

insurance carriers toward third-party claimants.”).

Here, by contrast, Graham is an acknowledged insured in

privity with National Union under the latter’s liability policy;

he is no stranger to the contract. Moreover, the question

presented is considerably more narrow than in Loudin, i.e.,

whether Graham is entitled to the full array of consequential

damages ordinarily available to the insured in a breach-of-

contract proceeding. The answer is “yes,” and it depends naught

6
See also Marshall v. Saseen, 450 S.E.2d 791, 797 (W. Va.
1994) (“First party insurance means that the insurance carrier
has directly contracted with the insured to provide coverage and
to reimburse the insured for his or her damages up to the policy
limits.”).

12
on the characterization of the insurance as first-party or

third-party. Rather, consequential damages are part and parcel

of the remedies obtainable in a bad-faith action against an

insurer, which, as set forth in the above-cited passage from

Elmore, can only be initiated and maintained by an insured, that

is, a first-party claimant.

Indeed, the Loudin majority framed the primary issue before

it as “whether the circuit court properly categorized the

[plaintiffs] as third-party claimants.” 716 S.E.2d at 700. The

Court in Loudin was asked to determine the insurer’s duties

under a liability policy on a pickup truck. The truck had been

backed over the insured by his brother, who was operating it

with permission. Although the insured was, in a manner akin to

the typical third-party claimant, seeking recompense for the

negligent operation of the covered vehicle, the Court ruled that

he was nonetheless a first-party claimant with standing to sue

his insurer for withholding coverage. See id. at 703 (“[W]e now

hold that, when a named policyholder files a claim with his/her

insurer, alleging that a nonnamed insured under the same policy

caused him/her injury, the policyholder is a first-party

claimant in any subsequent bad faith action against the insurer

arising from the handling of the policyholder’s claim.”).

Neither Loudin, nor Pitrolo, nor any other West Virginia

authority poses an impediment to the consequential damages

13
Graham seeks. Such damages are dependent only on proof thereof

by a preponderance of the evidence. Remand shall afford Graham

the opportunity to develop and present his evidence of

aggravation and inconvenience in connection with the breach

already established.

West Virginia law authorizes an award of prejudgment

interest for “special or liquidated damages” from the date of

their accrual. See W. Va. Code § 56-6-31(a). Special damages

are direct in character and “include[] lost wages and income,

medical expenses, damages to tangible personal property and

similar out-of-pocket expenditures.” Id. If an item of damages

is adjudged within the statute, prejudgment interest is

mandatory. See Grove v. Myers, 382 S.E.2d 536, 540 (W. Va.

1989). Graham maintains that the attorney fees he incurred in

defending against the State lawsuit are similar enough to

medical expenses to be subject to prejudgment interest.

In State ex rel. Chafin v. Mingo County Commission, 434

S.E.2d 40 (W. Va. 1993), the Court affirmed the denial of

prejudgment interest on a county official’s legal defense

expenses deemed reimbursable from the public fisc. In so

ruling, the Court observed that “[w]e are not convinced that the

lower court erred in determining that the [attorney fees] did

not constitute ‘similar out-of-pocket expenditures’ and

14
therefore did not qualify as an award entitling the [official]

to prejudgment interest.” Id. at 44.

Thereafter, in Miller v. Fluharty, 500 S.E.2d 310 (W. Va.

1997), a bad-faith action to enforce an indemnification policy,

the Court reversed an award of prejudgment interest on

litigation fees and expenses. The most compelling basis for the

Court’s holding was its observation that attorney fees,

particularly those earned on a contingency basis, are

“unliquidated and unsettled until the circuit court issues its

ruling. Only after the circuit court approves the

policyholder’s attorney’s fee does the amount become liquidated

and established.” Id. at 325. At that point, of course, post-

judgment interest will begin to accrue. The Miller Court also

noted that, because the insured is not typically liable for the

contingent fees until after the verdict or settlement is paid by

the insurer, such expenses are not “out-of-pocket” as set forth

in the statute. See id. at 325-26.

Graham correctly notes that both of the pertinent West

Virginia authorities are factually distinguishable from his

case, in that Chafin was not an insurance case and Miller

involved only attorney fees incurred in litigation with the

insurer. Graham has excluded that portion of his attorney fees,

properly classified as consequential — not direct — damages,

from his prejudgment interest claim. Further, as Graham

15
emphasizes, he agreed to pay counsel in the State lawsuit by the

hour, and not on a contingency basis, a circumstance not present

in Miller and one that arguably undercuts much of the rationale

supporting that decision.

There being no requirement that the circuit court approve

any aspect of Graham’s private fee arrangement with his

attorneys in the State lawsuit, it is apparent that Graham

became liable for those hourly fees as they were incurred, up to

the entry of judgment. Nevertheless, the claim remained

unliquidated beyond the entry of judgment until, on remand

following the first appeal in this enforcement action, National

Union stipulated to the precise amount due. We conclude that,

in accordance with Miller, the absence of liquidation is enough

to exclude attorney fees — even those sustained as direct

damages — from the reach of the West Virginia prejudgment

interest statute.

IV.

Pursuant to the foregoing, the judgment on appeal is

affirmed insofar as the court below declined to award

prejudgment interest on Graham’s attorney fees. The judgment is

vacated, however, to the extent that Graham was denied the

opportunity to prove consequential damages in the form of

aggravation and inconvenience attributable to National Union’s

16
breach of the insurance contract. We remand the matter to the

district court for further proceedings consistent with this

opinion.

AFFIRMED IN PART, VACATED IN PART,
AND REMANDED