Filak v. George

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.

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 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

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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

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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

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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.

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 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

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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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