Southern Ins. Co. of Virginia v. Williams

Present: All the Justices

SOUTHERN INSURANCE COMPANY OF VIRGINIA
OPINION BY
v. Record No. 011583 JUSTICE LAWRENCE L. KOONTZ, JR.
April 19, 2002
JOHN A. WILLIAMS, ET AL.

FROM THE CIRCUIT COURT OF CAMPBELL COUNTY
J. Samuel Johnston, Jr., Judge

In this appeal, we consider whether the trial court in a

declaratory judgment action correctly determined that an

insurance company had a duty to defend and provide liability

coverage under a “BUSINESSOWNERS” policy.

BACKGROUND

The parties do not dispute the material facts. On January

6, 1989, John A. Williams applied for a businessowners insurance

policy with an insurance agency representing Southern Insurance

Company of Virginia. In that application, Williams gave the

name of the “APPLICANT” as “WILLIAMS HOUSE OF FINE FURNITURE”

and gave a street address and post office box number as the

mailing address. 1 Williams indicated that the “LOCATION OF

PREMISES #1” was the same as the mailing address. The space on

the application for listing “LOCATION OF PREMISES #2” was left

1
At various places in the record, “Furniture” is
abbreviated “Ftr.” For clarity, wherever this abbreviation
occurs, we will substitute the intended word.
blank. Williams also provided the name of the mortgage holder

for the store.

In the appropriate space on the application, Williams

indicated that he was applying for the policy as an individual,

rather than as a corporation, partnership, or “OTHER” type of

business entity. Under the space for “BUSINESS OF APPLICANT,”

Williams provided “[Furniture] Store – Mostly Appliances,” and

under “DESCRIBE OCCUPANCY OF PREMISES,” Williams provided

“Appliance & [Furniture] Store.” The application listed the

applicant’s business as “MERCANTILE” under the space for “RISK

TYPE(S).” Williams further indicated on the application that

his interest in the premises was as an owner occupying more than

75% of the building. During the application process he did not

tell the agent that he owned any other properties. In response

to the question on the application “DOES APPLICANT OWN ANY OTHER

PREMISES, PERFORM OPERATIONS, MANUFACTURE OR SELL PRODUCTS OR

HAVE COMPLETED OPERATIONS EXPOSURE?,” the box marked “NO” was

checked.

The amount of coverage requested in the application was

$75,000 for the actual value of the premises, $30,000 for

business personal property, and $500,000 of comprehensive

business liability coverage. The annual policy premium for

these coverages was $999.

2
 Southern Insurance issued a declaration effective January

6, 1989 to “WILLIAMS HOUSE OF FINE FURNITURE” along with the

requested policy. SECTION I of the policy contained provisions

related to property coverages and SECTION II contained those

related to comprehensive business liability.

Relevant to this appeal, the policy language in SECTION II

included the following definition of the term “insured”:

[I]f the named insured is designated in the
Declarations as an individual, the person so
designated but only with respect to the conduct of a
business of which he is the sole proprietor, and the
spouse of the named insured with respect to the
conduct of such business;

. . . .

[I]f the named insured is designated in the
Declarations as other than an individual, partnership
or joint venture, the organization so designated and
any executive officer, member of the board of
trustees, directors or governors or stockholders
thereof while acting within the scope of his duties as
such[.]

In February 1989, National Technical Services, Inc.,

conducted a risk assessment survey of WILLIAMS HOUSE OF FINE

FURNITURE on behalf of Southern Insurance. As a result of that

survey, recommendations were made to Southern Insurance

concerning the need to have proper inspection of the fire

extinguishers located on the premises and a need to increase the

estimate of the building’s actual value. Nothing in the survey

indicated that National Technical Services was made aware that

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Williams owned additional properties or that he had other

business interests.

In accord with Southern Insurance’s practice, annual

declarations were issued with renewal invoices in 1990 and 1991.

Both declarations included a description of the nature of the

business as an “APPLIANCE STORE.” The 1991 declaration further

contained a designation of business types which had not appeared

on either of the prior declarations: “INDIVIDUAL,”

“PARTNERSHIP,” “JOINT VENTURE,” “CORPORATION,” and “OTHER.” An

“X” was inserted in the space next to the “OTHER” on this

declaration.

At the time Williams applied for Southern Insurance’s

businessowners policy, he and his wife, Ferna P. Williams, owned

and rented at least seven houses to tenants. Between 1982 and

1994, one of these houses was rented to Rebecca Wright.

Williams maintained a separate policy of insurance on this house

with another insurance company. This policy insured against

damage to or the loss of the structure, but provided no personal

injury liability coverage to Williams or his wife. The billing

address for this policy was not the address of the furniture

store.

In 1988, Wright gave birth to a daughter, Lacy A. Wright.

On August 30, 1993, Lacy was diagnosed as suffering from lead

poisoning. In a motion for judgment filed in the trial court

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against Williams and his wife, Wright alleged that her

daughter’s lead poisoning resulted from lead-based paint in the

home she rented from them. Wright, individually and as next

friend of her daughter, sought $2,350,000 in compensatory and

punitive damages.

Subsequently, on December 17, 1999, Williams and his wife

filed a motion for declaratory judgment in the trial court

alleging that Southern Insurance was required to provide them

with a defense and liability coverage for Wright’s claims under

its businessowners policy. Southern Insurance denied that its

policy provided coverage for the claims asserted by Wright.

Wright and her daughter were added as party plaintiffs to the

declaratory judgment suit by order dated June 20, 2000.

On March 28, 2001, the trial court held a hearing at which

Williams and the agent who had accepted the application for the

businessowners policy were the only witnesses. The evidence

received was in accord with the above-recited facts. During the

course of the hearing, Williams objected to the introduction of

the application for insurance and testimony concerning the

application process on the ground that it was parol evidence

outside the contract of insurance. The trial court indicated

that it would allow Southern Insurance to “make [its] record”

and that it would rule on the admissibility of the application

and related testimony at the conclusion of the evidence.

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Although the trial court never made an express ruling on the

admissibility of the application evidence, it did direct

specific questions to the agent concerning the contents of the

application and initialed the application as an admitted

exhibit.

In closing arguments, both parties asserted that the

contract of insurance was unambiguous, but disputed which

definition of “insured” under SECTION II of the policy should

apply. Williams contended that because WILLIAMS HOUSE OF FINE

FURNITURE was a fictitious entity and the application had

indicated that the policy was for an individual, the

comprehensive business liability coverage of the policy extended

to any business conducted by Williams as a sole proprietor.

Southern Insurance contended that the policy coverage was

limited to the business conducted on the premises of WILLIAMS

HOUSE OF FINE FURNITURE. Southern Insurance further contended

that, even if the policy’s coverage extended to any other

business conducted by Williams as a sole proprietor, the rental

house business was not a sole proprietorship because Williams

and his wife jointly owned those houses.

In a final order dated April 16, 2001, the trial court

ruled that Southern Insurance had a duty to defend and provide

liability coverage to Williams for the damages claimed by Wright

and her daughter. The trial court did not state an express

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rationale for its judgment. By order dated October 22, 2001, we

awarded Southern Insurance this appeal.

DISCUSSION

It is well established that insurance contracts, like other

contracts, generally are to be construed according to their

terms and without reference to parol evidence. However, resort

to parol evidence is proper where a latent ambiguity exists in a

particular insurance contract. See, e.g., Connecticut Fire Ins.

Co. v. W. H. Roberts Lumber Co., 119 Va. 479, 495, 89 S.E. 945,

948 (1916); Home Ins. Co. v. Gwathmey, 82 Va. 923, 926, 1 S.E.

209, 211 (1887).

The specific definitions of the “insured” in Southern

Insurance’s policy are not, when read in isolation, ambiguous.

However, a latent ambiguity exists in this policy because the

named insured is not a legal entity and the individual insured

is not named. This ambiguity becomes apparent when the

definitions of the “insured” are read in context with the

complete contract of insurance, including the declarations which

are specifically referred to in the definitions. Indeed, the

dispute between the parties is rooted in that latent ambiguity,

which has existed in Southern Insurance’s policy from its

inception.

According to the initial declaration, the named insured is

“WILLIAMS HOUSE OF FINE FURNITURE.” The parties concede that

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there is no legal entity by that name. By the same token,

Williams is not named in this declaration or the policy. The

original declaration and first renewal declaration provide the

additional information that the business of the insured is an

“APPLIANCE STORE,” but fail to designate a business type as

contemplated in the policy definition of the “insured.” Only in

the second renewal declaration is there a specific designation

of the business type as “OTHER.” However, that definition of

the insured clearly contemplates a legal organization with

executive officers, a board of trustees, directors or governors,

and stockholders, none of which WILLIAMS HOUSE OF FINE FURNITURE

or Williams individually could have.

Thus, when the policy was first issued, a latent ambiguity

existed because the applicable definition of “insured” under

SECTION II was unclear. In the face of this latent ambiguity,

we will resort to an examination of the parol evidence in order

to determine the original intention of the parties to that

policy.

The parol evidence clearly establishes that Williams sought

and obtained insurance coverage for a furniture and appliance

business operating out of a single premises. Williams never

disclosed that he owned any other properties or conducted any

other business. He never stated that he was applying for

liability coverage for the operation of his rental housing

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business. Indeed, nothing in the record even suggests that such

was his intention at the time he made the application. Southern

Insurance was entitled to issue its policy and assess the policy

premiums in reliance upon Williams’ representations. See

Niagara Fire Insurance Co. v. Elliott, 85 Va. 962, 963, 9 S.E.

694, 695 (1889) (“the insurer, in estimating the price at which

he is willing to indemnify the insured, must have under his

consideration the nature of the business, and the usual course

and manner of conducting it”).

Accordingly, we hold that Southern Insurance’s duty to

defend and afford coverage to Williams under its policy of

insurance did not extend to any personal liability Williams

might incur in his business of renting houses. To hold

otherwise would extend the benefits granted and broaden the

risks imposed to a degree obviously never contemplated by the

parties to the insurance contract. 2

2
Relying on Mollenauer v. Nationwide Mutual Insurance Co.,
214 Va. 131, 198 S.E.2d 591 (1973)(per curiam), Williams
contends that an individual is entitled to coverage under a
businessowners policy for losses unrelated to and occurring off
the premises of the main place of business for which the policy
was issued. Williams’ reliance on Mollenauer is misplaced, as
that case may be distinguished on multiple grounds.

In Mollenauer, the policy of insurance was issued to an
individual trading under a fictitious name. Id. at 131, 198
S.E.2d at 591. Here, the declarations never identified Williams
individually, but listed the name of the insured as “WILLIAMS
HOUSE OF FINE FURNITURE” only. Thus, unlike the facts of
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 CONCLUSION

For these reasons, we will reverse the judgment of the

trial court that Southern Insurance had a duty to defend and

provide liability coverage to Williams for the claims arising

from his rental housing business and enter final judgment in

favor of Southern Insurance.

Reversed and final judgment.

Mollenauer, here there was no express indication to the
insurance company that it was Williams, rather than the business
he was conducting at a specific location, who was being insured.
Moreover, in Mollenauer the policy contained a specific
provision applying to monetary losses “within the living
quarters in the home of any messenger” while off the premises of
the insured. It was in interpreting this provision of the
contract of insurance that we determined that it must be
construed against the insurer and in favor of finding liability.
Id. at 133, 198 S.E.2d at 592. By contrast, the declarations of
the policy at issue here clearly indicate that off-premises
liability coverage was not included in the policy.

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