Present: All the Justices
AUGUSTA MUTUAL INSURANCE COMPANY
v. Record No. 061339 OPINION BY JUSTICE CYNTHIA D. KINSER
June 8, 2007
CARVIE M. MASON, JR., ET AL.
FROM THE CIRCUIT COURT OF LOUISA COUNTY
Timothy K. Sanner, Judge
The dispositive issue in this appeal concerns the
legal sufficiency of an insurance company’s pleading in a
third-party action for damages arising out of an insurance
agent’s allegedly fraudulent misrepresentations regarding
the condition of a dwelling that the insurance company
agreed to insure. Because the only duties allegedly
violated by the agent emanate exclusively from the parties’
preexisting contractual relationship, we conclude that the
insurance company failed to properly state claims for
either fraud in the inducement or breach of fiduciary duty.
Accordingly, we will affirm the circuit court’s judgment
sustaining demurrers and dismissing the insurance company’s
amended third-party motion for judgment with prejudice.
I. FACTS AND PROCEEDINGS
Carvie M. Mason, Jr. and Joseph W. Mason filed a
motion for judgment against Augusta Mutual Insurance
Company (Augusta Mutual) on February 24, 2005, seeking
damages for Augusta Mutual’s allegedly wrongful denial of
coverage for a loss sustained by the Masons on December 25,
2004, when a fire destroyed a dwelling they owned.
According to the Masons, Augusta Mutual denied coverage for
their fire loss because of a misrepresentation on a
“Woodburning Stove Inspection Report” (the Report) that
supposedly bore Carvie’s signature and was part of the
Masons’ initial application for a homeowner’s insurance
policy. The Masons alleged that, on December 7, 1998,
Herbert L. Jones, Jr., acting as an agent for Augusta
Mutual, completed and signed the Report, which erroneously
indicated that a flue in the Masons’ dwelling was
constructed of masonry lined with tile. The Masons
asserted that they never told Jones how the flue was
constructed and that Carvie did not sign the Report. In
their motion for judgment, the Masons asserted claims
against Augusta Mutual for breach of the insurance
contract, defamation of Carvie, and bad faith.
Augusta Mutual filed an amended third-party motion for
judgment against Jones and Lee-Curtis Insurance Services,
Inc. (Lee-Curtis), Jones’ employer at the time he allegedly
completed the Report.1 Augusta Mutual alleged that, if the
1
The circuit court previously sustained a demurrer to
Augusta Mutual’s original third-party motion for judgment,
in which Augusta Mutual alleged that Jones and Lee-Curtis
were liable to it under theories of breach of contract,
2
Masons’ allegations were true, then Jones, by submitting
the Report with actual or constructive knowledge of its
inaccuracy and by signing Carvie’s name to it, breached
contractual duties he owed to Augusta Mutual under an
Agency Agreement between Augusta Mutual and Lee-Curtis,2 as
well as contractual duties set forth in the Report, Augusta
Mutual’s policy manual, and its underwriting guidelines.
Augusta Mutual asserted claims against Jones for fraud in
the inducement and breach of fiduciary duties. Augusta
Mutual also alleged that Lee-Curtis was vicariously liable
for Jones’ wrongful acts.
negligence, and respondeat superior for any damages that
Augusta Mutual might be required to pay to the Masons.
Augusta Mutual did not incorporate or refer to those
allegations in its amended pleading. Thus, those original
allegations are not before us in this appeal. See
Yuzefovsky v. St. John’s Wood Apartments, 261 Va. 97, 102,
540 S.E.2d 134, 136 (2001) (“[W]hen a circuit court
sustains a demurrer to an amended motion for judgment which
does not incorporate or refer to any of the allegations
that were set forth in a prior motion for judgment, we will
consider only the allegations contained in the amended
pleading to which the demurrer was sustained.”).
2
Augusta Mutual and Lee-Curtis entered into an
“Agency Agreement” that, among other things, authorized
Lee-Curtis “to receive and accept proposals of insurance,”
to bind Augusta Mutual up to a certain risk limit, and to
appoint “licensed solicitors or sub-agents.” In the
agreement, Lee-Curtis acknowledged that all information
requested in an application for insurance “is material to
[Augusta Mutual’s] underwriting decisions.” The Agency
Agreement required Lee-Curtis to “use due diligence in
obtaining accurate information and making all necessary
inspections required by [Augusta Mutual].”
3
Jones and Lee-Curtis each filed a demurrer to Augusta
Mutual’s amended third-party motion for judgment. They
asserted that any recovery by Augusta Mutual based on the
facts alleged would be based in contract, not tort, and,
therefore, the claims for fraud in the inducement, breach
of fiduciary duty, and respondeat superior must be
dismissed. Both third-party defendants also filed separate
pleas asserting that the applicable statute of limitations
barred Augusta Mutual’s claims. The circuit court
sustained the third-party defendants’ demurrers and pleas
of the statute of limitations, and dismissed Augusta
Mutual’s amended third-party motion for judgment with
prejudice. This appeal ensued.
II. ANALYSIS
Augusta Mutual assigns two errors to the circuit
court’s judgment. First, it argues that the circuit court
erred by sustaining the third-party defendants’ pleas of
the statute of limitations. Second, Augusta Mutual
challenges the circuit court’s judgment sustaining the
demurrers filed by Jones and Lee-Curtis. The second
assignment of error is dispositive. In that regard, the
parties’ dispute centers on the question whether Augusta
Mutual’s amended third-party motion for judgment stated
actionable claims for fraud in the inducement and/or breach
4
of fiduciary duty,3 or whether, as Jones and Lee-Curtis
contend, Augusta Mutual attempted to turn what was actually
a breach of contract claim into actionable tort claims.
The principles guiding our review of a trial court’s
judgment sustaining a demurrer are well-established. “The
purpose of a demurrer is to determine whether a motion for
judgment states a cause of action upon which the requested
relief may be granted.” Tronfeld v. Nationwide Mut. Ins.
Co., 272 Va. 709, 712, 636 S.E.2d 447, 449 (2006) (citing
Welding, Inc. v. Bland County Serv. Auth., 261 Va. 218,
226, 541 S.E.2d 909, 913 (2001)). “A demurrer tests the
legal sufficiency of facts alleged in pleadings, not the
strength of proof.” Glazebrook v. Board of Supervisors,
266 Va. 550, 554, 587 S.E.2d 589, 591 (2003). Accordingly,
we accept as true all properly pled facts and all
inferences fairly drawn from those facts. Id. “Because
the decision whether to grant a demurrer involves issues of
law, we review the circuit court’s judgment de novo.”
Dreher v. Budget Rent-A-Car Sys., 272 Va. 390, 395, 634
3
On brief, Augusta Mutual also argues that its
amended third-party motion for judgment alleged sufficient
facts to state a cause of action for negligence per se
based on Jones’ alleged violation of Code § 38.2-512. Our
review of the record discloses that Augusta Mutual did not
plead negligence per se in its amended third-party motion
for judgment and that such a claim was not before the
circuit court when it sustained the demurrers.
5
S.E.2d 324, 326–27 (2006) (citing Glazebrook, 266 Va. at
554, 587 S.E.2d at 591).
We turn first to Augusta Mutual’s asserted cause of
action for fraud in the inducement. That claim, embodied
in Count I of Augusta Mutual’s amended third-party motion
for judgment, alleged that, if Jones actually stated that
the flue was lined with tile and signed Carvie’s name on
the Report, Jones did so intentionally in order to receive
a commission for himself and Lee-Curtis and that, in doing
so, Jones misrepresented material facts upon which Augusta
Mutual relied to its detriment by issuing a homeowner’s
insurance policy to the Masons. It is true that a “false
representation of a material fact, constituting an
inducement to the contract, on which [a party] had a right
to rely, is always ground for rescission of the contract by
a court of equity” or “ground for an action for damages in
a court of law.” George Robberecht Seafood, Inc. v.
Maitland Bros. Co., 220 Va. 109, 111–12, 255 S.E.2d 682,
683 (1979) (citations omitted). Jones and Lee-Curtis
contend, however, that the allegations were insufficient to
state an actionable claim for fraud in the inducement
because Augusta Mutual failed to assert that Jones’ alleged
actions violated any duties apart from those contract
6
duties arising by virtue of the Agency Agreement. We agree
with Jones and Lee-Curtis.
At the outset, we acknowledge that a single act or
occurrence can, in certain circumstances, support causes of
action both for breach of contract and for breach of a duty
arising in tort. Foreign Mission Bd. v. Wade, 242 Va. 234,
241, 409 S.E.2d 144, 148 (1991) (citing Kamlar Corp. v.
Haley, 224 Va. 699, 705, 299 S.E.2d 514, 517 (1983)). To
avoid turning every breach of contract into a tort,
however, we have enunciated the rule that, in order to
recover in tort, “the duty tortiously or negligently
breached must be a common law duty, not one existing
between the parties solely by virtue of the contract.” Id.
(citing Spence v. Norfolk & W. R.R. Co., 92 Va. 102, 116,
22 S.E. 815, 818 (1895)).
Our decision in Richmond Metropolitan Authority v.
McDevitt Street Bovis, Inc., 256 Va. 553, 507 S.E.2d 344
(1998), exemplifies the application of that rule. There, a
municipal corporation entered into an agreement with a
private contractor for the construction of a baseball
stadium. Id. at 555, 507 S.E.2d at 345. In order to
obtain payment for its work, the contractor submitted
several documents to the municipal corporation stating
under oath that it had completed the construction work
7
according to the design specifications set forth in the
contract. Id. at 555–56, 507 S.E.2d at 345. Many years
later, the municipal corporation learned that the
contractor failed, despite its prior representations, to
comply with the design specifications. Id. at 556, 507
S.E.2d at 345. Consequently, the municipal corporation
filed an action against the contractor, alleging, inter
alia, claims for actual and constructive fraud. Id. at
556, 507 S.E.2d at 345–46. The trial court entered summary
judgment for the contractor, finding that the contractor’s
alleged misrepresentations only breached duties assumed by
contract and that nothing demonstrated the breach of any
duty that was separate and independent from the contract.
Id. at 557, 507 S.E.2d at 346.
On appeal, the municipal corporation contended that
the contractor’s misrepresentations about its compliance
with the contract and its “false applications under oath to
induce payments” were “separate and independent wrongs that
[went] beyond [the] contractual duties” and supported
causes of action for actual and constructive fraud. Id.
We rejected this argument and affirmed the judgment of the
trial court. Id. at 557, 560, 507 S.E.2d at 346, 348. We
explained that the determination whether a cause of action
sounds in contract or tort depends on the source of the
8
duty violated. Id. at 558, 507 S.E.2d at 347. Because
“each particular misrepresentation by [the contractor]
related to a duty or an obligation that was specifically
required by the . . . [c]ontract,” we concluded that the
contractor’s misrepresentations did not give rise to a
cause of action for actual fraud. Id. at 559, 507 S.E.2d
at 347. Likewise, because the record failed to show that
the contractor did not intend to fulfill its contractual
duties when it entered into the agreement with the
municipal corporation, we held there was no claim for fraud
in the inducement. Id. at 560, 507 S.E.2d at 348.
Augusta Mutual argues that the instant case is
distinguishable from McDevitt because the latter did not
involve either allegations that the contractor made
intentionally false statements to induce the municipal
corporation to enter into the contract or evidence that the
contractor never intended to fulfill its contractual
obligations. Augusta Mutual contends that in this case,
however, its allegations asserting that Jones’ intentional
misrepresentations on the Report induced it to issue the
insurance policy to the Masons state a claim for fraud in
the inducement. We disagree.
The duties that Jones allegedly violated by making
fraudulent representations about the condition of the
9
Masons’ flue and by signing Carvie’s name on the Report
arose solely by virtue of the Agency Agreement between
Augusta Mutual and Lee-Curtis. The agreement specifically
required “due diligence in obtaining accurate information
and making all necessary inspections required by [Augusta
Mutual].” In addition, a sentence appearing at the top of
the Report stated, “This form is to be completed by an
Augusta Mutual [a]gent after a personal inspection of the
installed stove and this report is to be signed by the
agent and the policyholder.” In fact, Augusta Mutual
alleged in its amended third-party motion for judgment that
Jones breached his contractual duties to Augusta Mutual as
set forth not only in the Agency Agreement, but also in the
Report, Augusta Mutual’s policy manual, and its
underwriting guidelines. Augusta Mutual failed to identify
the breach of any duty arising from a source other than its
contractual relationship with Lee-Curtis. Like the
municipal corporation in McDevitt, Augusta Mutual alleged
only a breach of contractual obligations. Thus, it did not
assert a valid claim for fraud in the inducement.4
4
In light of our decision, it is not necessary to
decide whether a claim for fraud in the inducement exists
when the party engaging in the alleged fraudulent conduct
is not a party to the contract fraudulently induced.
10
This conclusion applies with equal force to Augusta
Mutual’s claim for damages based on Jones’ alleged breach
of fiduciary duties. In Count II of its amended third-
party motion for judgment, Augusta Mutual claimed that, if
the Masons’ allegations were true, then Jones, as an agent
and fiduciary of Augusta Mutual, violated his duties
to exercise the utmost good faith and loyalty
towards Augusta Mutual, to avoid acting adversely
to the interests of Augusta Mutual by taking any
position that is inconsistent with the interests
of Augusta Mutual, to disclose any and all
knowledge that might affect Augusta Mutual’s
decision on whether to insure [the Masons], and
to avoid withholding any material information
relating to [the Masons’] application for
insurance.
Although Augusta Mutual alleged that these duties exist
“[a]part from any duties Jones may have had to Augusta
Mutual pursuant to contract,” the duties that Jones
allegedly violated are nothing more than the fiduciary
duties an agent owes to his or her principal. See Horne v.
Holley, 167 Va. 234, 241, 188 S.E. 169, 172 (1936) (“[A]n
agent is a fiduciary with respect to the matters within the
scope of his agency.”). “A fiduciary relationship exists
in all cases when special confidence has been reposed in
one who in equity and good conscience is bound to act in
good faith and with due regard for the interests of the one
reposing the confidence.” H-B Ltd. P’ship v. Wimmer, 220
11
Va. 176, 179, 257 S.E.2d 770, 773 (1979); see also Ferguson
v. Gooch, 94 Va. 1, 6, 26 S.E. 397, 399 (1896).
“[I]ncorporated in every contract between a fiduciary and
his principal is an obligation, imposed by law upon the
fiduciary, to disclose anything known to him which might
affect the principal’s decision whether or how to act.”
Owen v. Shelton, 221 Va. 1051, 1054, 277 S.E.2d 189, 191
(1981).
But for the existence of the Agency Agreement, neither
Jones nor Lee-Curtis would have owed any fiduciary duty to
Augusta Mutual. That certain of those fiduciary duties
arose by implication does not alter the result. See
O’Connell v. Bean, 263 Va. 176, 181, 556 S.E.2d 741, 743
(2002). As we previously explained:
“If the cause of complaint be for an act of
omission or non-feasance which, without proof of
a contract to do what was left undone, would not
give rise to any cause of action (because no duty
apart from contract to do what is complained of
exits) then the action is founded upon contract,
and not upon tort.”
Oleyar v. Kerr, 217 Va. 88, 90, 225 S.E.2d 398, 399 (1976)
(quoting Burks Pleading and Practice § 234 at 406 (4th ed.
1952)). “The law of torts provides redress only for the
violation of certain common law and statutory duties
involving the safety of persons and property, which are
imposed to protect the broad interests of society.” Filak
12
v. George, 267 Va. 612, 618, 594 S.E.2d 610, 613 (2004).
Any fiduciary duty allegedly breached in this case existed
solely because of the contractual relationship between
Augusta Mutual and Lee-Curtis, and in turn, its employee,
Jones. Therefore, we hold that Augusta Mutual failed to
assert a valid claim for breach of fiduciary duties.
III. CONCLUSION
For the reasons stated and because we continue in our
commitment to “safeguard against turning every breach of
contract into an actionable claim for fraud,” McDevitt, 256
Va. at 560, 507 S.E.2d at 348, we conclude that the circuit
court did not err in sustaining the third-party defendants’
demurrers and dismissing Augusta Mutual’s amended third-
party motion for judgment with prejudice. Thus, we will
affirm the circuit court’s judgment.5
Affirmed.
5
In light of our decision, it is not necessary to
address Augusta Mutual’s remaining assignment of error
challenging the circuit court’s decision sustaining the
pleas of the statute of limitations filed by Jones and Lee-
Curtis.
13