PRESENT: All the Justices
CANDICE L. FILAK, ET AL.
v. Record No. 031407 OPINION BY JUSTICE BARBARA MILANO KEENAN
April 23, 2004
PAMELA S. GEORGE
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY
Herbert C. Gill, Jr., Judge
This appeal is from a judgment for a defendant in an action
alleging breach of contract and constructive fraud based on an
insurance agent's alleged failure to procure a fire insurance
policy with certain provisions. We consider whether the circuit
court erred in sustaining the defendant's demurrer to the
constructive fraud claim and in granting the defendant's motion
to strike the plaintiff's evidence on the breach of contract
claim.
The following facts are relevant to this appeal. Christian
B. Massey and Candice L. Filak, husband and wife, (collectively,
the plaintiffs) owned a 36-acre horse farm in Chesterfield
County. The plaintiffs lived in an apartment located in a barn
on the farm.
In 1990, the plaintiffs began building their "dream home"
on the property. The plaintiffs, who both had been employed in
the construction industry, purchased all the building materials
and equipment required for the construction project and
performed their own labor in building the house.
The plaintiffs held a "rural fire" insurance policy on
their property issued by Virginia Farm Bureau Mutual Insurance
Company (Farm Bureau). That policy provided a $150,000 limit of
liability for the loss of a dwelling on the farm.
In September 1996, while the house was still under
construction, Filak contacted Farm Bureau, which assigned one of
its agents, Pamela S. George, to meet with the plaintiffs.
George informed the plaintiffs that they could obtain an "elite"
insurance policy that would provide at least $481,000 in "total
replacement" costs for their new house and its contents in the
event that the house was destroyed by fire. The plaintiffs
agreed to purchase the "elite" policy and paid a premium to Farm
Bureau to secure the policy.
According to the plaintiffs, George told them that in the
event of a "full, total, devastating loss" of the house, they
would receive under the "elite" policy the total replacement
costs "within a few days or the next day" after sustaining such
a loss. However, the "elite" policy issued by Farm Bureau
provided that in the event of a complete loss, the plaintiffs
were entitled to receive total replacement costs only if they
repaired and replaced the house within six months after
receiving payment for the "actual cash value of the damage." 1
1
This policy provision is in accord with the requirements
of Code § 38.2-2119.
2
In July 1997, before construction was completed, lightning
struck the house causing a fire that completely destroyed the
structure. The plaintiffs filed a claim with Farm Bureau for
the total replacement costs of the house. Farm Bureau paid the
plaintiffs about $190,000 for the "actual cash value" of the
house and informed them that under the terms of their policy
they had "180 days . . . to present a claim for any amount over
the actual cash value" that they had been paid. The plaintiffs
did not rebuild the house.
The plaintiffs filed a motion for judgment against Farm
Bureau seeking recovery of the total replacement costs of their
house. George was not named as a defendant in this action. The
plaintiffs eventually settled their lawsuit with Farm Bureau for
$100,000, which they received in addition to the earlier
$190,000 payment representing the "actual cash value" of the
destroyed structure.
After reaching this settlement with Farm Bureau, the
plaintiffs filed an amended motion for judgment against George
alleging, among other things, breach of contract and
constructive fraud. 2 The plaintiffs alleged, in relevant part:
[George] told [p]laintiffs that the insurance coverage
would cover the full replacement cost of at least
$481,000 for the house and building materials while
2
The plaintiffs also asserted against George claims of
actual fraud and "malpractice." The circuit court ultimately
dismissed these claims, which are not before us in this appeal.
3
the house was under construction. [George] stated
that should [p]laintiffs' house burn to the ground,
under the insurance she would procure on their behalf,
[Farm Bureau] would promptly write them a check for
the full replacement cost.
The plaintiffs also asserted that the settlement with Farm
Bureau resulted in a total payment that was "at least $200,000
less than the replacement costs of the house."
The plaintiffs further alleged that they "placed their
trust and confidence in [George] to advise them properly" and to
procure for them "the appropriate insurance coverage," and that
they agreed to purchase insurance from her based on her
"representations to them and undertakings on their behalf." The
plaintiffs asserted that George "misrepresented the procurement
. . . of appropriate and adequate coverage, and the terms of the
coverage procured," and that they reasonably relied on those
misrepresentations to their detriment. The plaintiffs further
alleged that George's "misrepresentations" constituted a "breach
of [her] duty" to the plaintiffs.
George filed a demurrer to the amended motion for judgment.
The circuit court sustained the demurrer to the constructive
fraud claim based on the plaintiffs' "inability to clearly
allege the existence of a common law duty." Citing the
"economic loss rule," the circuit court further held that a
claim for constructive fraud is not actionable when such a claim
essentially alleges negligent performance of contractual duties.
4
At a jury trial on the contract claim, Massey testified
that George stated that the "elite" policy would provide
coverage to Filak and Massey in the event of a "full, total,
devastating loss." According to Massey, George explained that
if, for example, the house "burned to the ground and there's
nothing left," then "the next day, if everything was totally
gone, she would pay us the $481,000." Massey also stated that
George told him that the policy would provide payment
"immediately [for] replacement [costs] for my home the moment it
was lost."
Massey testified that when he received the written "elite"
policy from Farm Bureau, he did not review the policy "that
closely" because he relied on George's representations
concerning the policy contents. Massey stated that he did not
have any concerns about the policy because George had explained
the policy "very thoroughly." With regard to the plaintiffs'
alleged damages, Massey conceded that the damages claimed
against George were "exactly the same damages that [the
plaintiffs] claimed in the Farm Bureau case."
Filak testified that George stated that she would procure
an insurance policy for the plaintiffs that would provide
$481,000 in total replacement costs for the house and that "in
the event of a total loss, we would be paid immediately. As a
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matter of fact, she said within a few days or the next day they
would come out and pay us."
At the end of the plaintiffs' case, George moved to strike
the evidence on the contract claim on various grounds relating
to the sufficiency of the evidence. The circuit court sustained
the motion to strike and dismissed the plaintiffs' case with
prejudice. The plaintiffs appeal.
The plaintiffs argue that the circuit court erred in
sustaining George's demurrer to their constructive fraud claim.
The plaintiffs note that they alleged George made material
misrepresentations, which caused them to enter into both the
alleged oral contract with George and the insurance contract with
Farm Bureau, and that the plaintiffs reasonably relied on George's
misrepresentations to their detriment. The plaintiffs contend
that the "economic loss rule" does not bar their constructive
fraud claim because George had a "common law duty" to be truthful
to them. We disagree with the plaintiffs' arguments.
A demurrer admits the truth of all facts alleged in a motion
for judgment but does not admit the correctness of the pleader's
conclusions of law. Blake Constr. Co. v. Upper Occoquan Sewage
Auth., 266 Va. 564, 570-71, 587 S.E.2d 711, 714-15 (2003);
Yuzefovsky v. St. John's Wood Apartments, 261 Va. 97, 102, 540
S.E.2d 134, 136-37 (2001). The function of a demurrer is to test
the legal sufficiency of the facts alleged. Glazebrook v. Bd. of
6
Supervisors, 266 Va. 550, 554, 587 S.E.2d 589, 591 (2003); W.S.
Carnes, Inc. v. Bd. of Supervisors, 252 Va. 377, 384, 478 S.E.2d
295, 300 (1996). Because our review of a circuit court's decision
sustaining a demurrer addresses that same legal question, we
review the circuit court's judgment de novo. Glazebrook, 266 Va.
at 554, 587 S.E.2d at 591.
Applying these principles, we conclude that the circuit court
properly sustained George's demurrer to the constructive fraud
claim under the "economic loss rule." As we explained in
Sensenbrenner v. Rust, Orling & Neale, Architects, Inc., 236 Va.
419, 425, 374 S.E.2d 55, 58 (1988), losses suffered as a result of
the breach of a duty assumed only by agreement, rather than a duty
imposed by law, remain the sole province of the law of contracts.
The rationale for this rule lies in the distinctly different
policy considerations distinguishing the law of torts from the law
of contracts.
The primary consideration underlying tort law is the
protection of persons and property from injury, while the major
consideration underlying contract law is the protection of
bargained for expectations. Id. Thus, when a plaintiff alleges
and proves nothing more than disappointed economic expectations
assumed only by agreement, the law of contracts, not the law of
torts, provides the remedy for such economic losses. Willard v.
Moneta Bldg. Supply, Inc., 262 Va. 473, 480, 551 S.E.2d 596, 599
7
(2001); Ward v. Ernst & Young, 246 Va. 317, 325, 435 S.E.2d 628,
632 (1993); Rotonda Condo. Unit Owners Ass'n v. Rotonda Assocs.,
238 Va. 85, 90, 380 S.E.2d 876, 879 (1989); Sensenbrenner, 236 Va.
at 425, 374 S.E.2d at 58.
Here, the plaintiffs' claim against George merely sought
recovery for losses allegedly suffered as a result of George's
failure to fulfill her oral contract to procure a policy that
would pay the total replacement costs of the plaintiffs' home
within a few days after sustaining a total loss. The purely
economic nature of this alleged loss is illustrated by Massey's
testimony in which he conceded that the plaintiffs sought to
recover the very same damages in their separate lawsuits against
George and Farm Bureau.
Further, contrary to the plaintiffs' assertion, George did
not have a common law duty to the plaintiffs arising out of the
parties' dealings. 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. See Ward, 246 Va. at 324, 435 S.E.2d
at 631; Sensenbrenner, 236 Va. at 425, 374 S.E.2d at 58; Blake
Constr. Co. v. Alley, 233 Va. 31, 34-35, 353 S.E.2d 724, 726
(1987); Kamlar Corp. v. Haley, 224 Va. 699, 706, 299 S.E.2d 514,
517 (1983). Therefore, we hold that the plaintiffs did not assert
a valid claim of constructive fraud against George because
8
whatever duties George may have assumed arose solely from the
parties' alleged oral contract. 3
The plaintiffs also argue that the circuit court erred in
sustaining George's motion to strike their claim for breach of
contract. Among other arguments, the plaintiffs address the
element of damages and assert that as a result of George's breach
of her oral agreement, their Farm Bureau policy effectively was
worth only $290,000, the amount they actually recovered from Farm
Bureau. The plaintiffs contend that, therefore, they sustained
damages measured by the difference between the full replacement
costs of their home and the amount they actually were paid by Farm
Bureau. We disagree with the plaintiffs' arguments and conclude
that they failed as a matter of law to establish any damages
resulting from George's alleged breach of contract.
The elements of a breach of contract action are (1) a legally
enforceable obligation of a defendant to a plaintiff; (2) the
defendant's violation or breach of that obligation; and (3) injury
or damage to the plaintiff caused by the breach of obligation.
Brown v. Harms, 251 Va. 301, 306, 467 S.E.2d 805, 807 (1996);
Fried v. Smith, 244 Va. 355, 358, 421 S.E.2d 437, 439 (1992);
Westminster Investing Corp. v. Lamps Unlimited, Inc., 237 Va. 543,
546, 379 S.E.2d 316, 317 (1989). In considering the circuit
3
Our conclusion in this regard is applicable both to the
plaintiffs' original motion for judgment and to their amended
9
court's decision striking the evidence on the contract claim, we
view the facts in the light most favorable to the plaintiffs and
draw all fair inferences from those facts. See Howerton v. Mary
Immaculate Hosp., Inc., 264 Va. 272, 273, 563 S.E.2d 671, 671
(2002); Baysden v. Roche, 264 Va. 23, 25-26, 563 S.E.2d 725, 726
(2002); Gina Chin & Assocs. v. First Union Bank, 260 Va. 533, 536,
537 S.E.2d 573, 574 (2000).
The evidence showed that George procured for the plaintiffs a
policy providing full replacement costs of their home in the event
that it was totally destroyed by fire. However, contrary to their
alleged agreement with George, the policy required the plaintiffs
to rebuild their home within six months of receiving payment for
the actual cash value of the damage before they were entitled to
receive full replacement costs. Therefore, the proper measure of
damages in this case is the difference between the policy that the
plaintiffs allegedly bargained for, one that would pay full
replacement costs within a few days of a total loss, and the
policy that the plaintiffs actually received, one that required
them to rebuild their house within the time period specified in
the policy before being entitled to payment of full replacement
costs. See Estate of Taylor v. Flair Prop. Assocs., 248 Va. 410,
414, 448 S.E.2d 413, 416 (1994); Bryant v. Peckinpaugh, 241 Va.
172, 178, 400 S.E.2d 201, 205 (1991).
motion for judgment.
10
The plaintiffs, however, failed to establish any damages
resulting from their inability to obtain full replacement costs
within a few days after the fire. Although the plaintiffs
testified that they were unable to rebuild their home without
receiving the full replacement costs within the shorter time
period promised by George, the plaintiffs did not present any
evidence to support this claim. Notably, the plaintiffs failed to
show that they attempted, but were unable, to obtain alternative
financing to rebuild the home within the six months required by
the policy terms. They also failed to prove the additional cost
of any alternative financing for which they could have qualified,
or other "delay" damages attributable to the policy provision
requiring them to rebuild their house before receiving full
replacement costs.
Based on this record, the only testimony relating to damages
was the plaintiffs' unsupported assertion that they could not
rebuild the house without receiving immediate payment of full
replacement costs from Farm Bureau. This mere assertion failed as
a matter of law to establish damages resulting from the difference
in the policy George allegedly agreed to procure for the
plaintiffs and the policy that she actually obtained for them.
Therefore, we hold that the circuit court properly struck the
11
evidence on the contract claim at the conclusion of the
plaintiffs' case. 4
For these reasons, we will affirm the circuit court's
judgment.
Affirmed.
4
Given this resolution of the plaintiffs' contract claim,
we need not address George's additional arguments that the
alleged oral contract failed for lack of consideration and was
barred under the doctrine of accord and satisfaction. We also
express no opinion on whether an action for breach of an alleged
contract, such as the one asserted here, will lie against an
employee insurance agent based solely on that employee's actions
assisting a policyholder in the procurement of an insurance
policy issued by her employer.
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