Present: All the Justices
COMMERCIAL UNDERWRITERS INSURANCE COMPANY
v. Record No. 000474 OPINION BY JUSTICE ELIZABETH B. LACY
January 12, 2001
HUNT & CALDERONE, P.C., ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS
Edward L. Hubbard, Judge
This appeal arises from a declaratory judgment action
regarding coverage under a professional liability, claims made
insurance policy.
On May 8, 1997, Hunt & Calderone, P.C. (H&C), an
accounting firm, filed a renewal application for professional
liability insurance with Commercial Underwriters Insurance
Company (CUIC). On May 9, Dian T. Calderone, a partner in
H&C, realized that she had missed a filing deadline for one of
the firm's clients, Michael Atalay. Calderone knew that her
error could potentially result in a loss of a $125,000 tax
credit for the client, but she did not think that a claim
would result because she was told by an administrator of the
government tax credit program that sufficient funds would
likely be available after all the timely applications had been
processed. Furthermore, when told of the error, Atalay said
he was satisfied with the assurances made by the government
administrator. H&C did not inform CUIC of the error during
the time the insurance application was pending.
After the CUIC policy became effective, H&C learned that
sufficient funds were not available for Atalay's tax credit.
In August 1997, Atalay notified H&C that he intended to hold
H&C responsible for the lost tax credit. Because the CUIC
policy was a claims made policy, H&C requested coverage from
CUIC for Atalay's claim. CUIC denied coverage to H&C for the
claim and refused to provide a defense for H&C in an action
subsequently filed by Atalay against H&C. CUIC based its
position on three separate grounds: (1) H&C failed to meet a
condition precedent of the policy which required that, at the
inception of the policy, H&C have no knowledge of an error or
any other basis to reasonably anticipate a claim that would be
covered by the policy; (2) the claim fell under an exclusion
of the policy which disallowed coverage for a claim arising
out of any error likely to give rise to a claim of which the
insured had knowledge or a reason to anticipate prior to the
policy's inception; and (3) H&C's failure to inform CUIC of
Calderone's error during the pendency of the application
constituted a material misrepresentation, voiding the policy.
H&C filed a motion for declaratory judgment, seeking a
declaration that CUIC was required to defend the claim and
provide coverage under the policy. The trial court entered
judgment in favor of H&C, holding that H&C provided sufficient
evidence to show that it complied with the condition precedent
2
to establish coverage, that coverage was not foreclosed under
the policy exclusion, and that the policy was not void based
on a misrepresentation of a material fact in the application.
We awarded CUIC an appeal.
CUIC's five assignments of error present two primary
issues. The first is whether the policy was void because H&C
failed to inform CUIC of Calderone's error prior to the
inception of the policy. The second is whether, prior to the
inception of the policy, H&C had any basis to reasonably
anticipate that Calderone's error would result in a claim
otherwise covered by the policy. We will address these issues
in order.
I.
Question number ten of the insurance policy application
asked, "After inquiry, does the Applicant . . . have knowledge
of any actual or alleged act, error, omission or circumstance
which may result in a claim being made against them or any
other basis to reasonably anticipate a claim being made
against them." H&C answered no to this question. The
application also contained a notice that the Applicant had a
continuing duty to update the insurance company, in writing,
of any change to the application that may occur between the
filing of the application and the proposed effective date.
Finally, the policy itself recited in several places that the
3
representations made in the application were material to the
acceptance of the risk and the underwriting of the policy.
Based on these policy provisions, CUIC asserts that the
policy was void because H&C failed to notify CUIC of
Calderone's error in a timely fashion and that such failure
was a material misrepresentation as stated in the policy. The
trial court, relying on Harrell v. North Carolina Mutual Life
Insurance Co., 215 Va. 829, 213 S.E.2d 792 (1975), held that
even if H&C's failure to update CUIC did constitute a
misrepresentation, CUIC failed to prove that it was a material
misrepresentation.
We have construed Code § 38.2-309 1 and its predecessors to
require an insurance company contesting a claim on the basis
of an insured's alleged misrepresentation to show, by clear
proof, two facts: (1) that the statement on the application
was untrue; and (2) that the insurance company's reliance on
the false statement was material to the company's decision to
undertake the risk and issue the policy. Harrell, 215 Va. at
1
Code § 38.2-309 provides in pertinent part:
No statement in an application [for an
insurance policy] . . . made before or after
loss under the policy shall bar a recovery
upon a policy of insurance unless it is
clearly proved that such answer or statement
was material to the risk when assumed and was
untrue.
4
831-32, 213 S.E.2d at 794-95. To prove the falsity is not
sufficient; the company must prove clearly that truthful
answers would have reasonably influenced the company's
decision to issue the policy. See Mut. of Omaha Ins. Co. v.
Echols' Adm'rs, 207 Va. 949, 953-54, 154 S.E.2d 169, 172
(1967)(defining "material").
We agree with the trial court that Harrell controls the
case at hand. In Harrell, the applicant for a life insurance
policy did not disclose that she had been hospitalized and had
undergone operations for cancer numerous times during the five
years prior to submitting her application. The application
recited that her answers " 'are each material to the risk and
that the Company believing them to be true will rely and act
upon them.' " 215 Va. at 830, 213 S.E.2d at 794 (emphasis
added). When cancer was found to be a cause of death and an
investigation revealed her misrepresentations on the
application, the insurance company denied the claim, relying
upon the predecessor to Code § 38.2-309. 2
At trial, the insurance company offered into evidence the
application language quoted above and the testimony of several
agents of the company, but not one agent was in a position to
2
In Harrell, this Court engaged in an analysis of Code
§ 38.1-366, the predecessor to Code § 38.2-309. For the
purposes of this appeal, the two statutes contain virtually
identical language.
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testify to the materiality of the misrepresentations. This
Court stated:
While it is incredible that any responsible insurance
company would have issued a policy of life insurance to
Mrs. Foxx with knowledge that she had recently been
released from a hospital after a major operation for
carcinoma of the breast, and with knowledge that she had
a history of other hospitalizations for cancer, we will
not take judicial notice of this fact. The burden of
clearly proving the affirmative defense of materiality of
a misrepresentation is not carried when the court, to
find the fact, must resort to assumption and conjecture.
Harrell, 215 Va. at 833, 213 S.E.2d at 795-96 (first emphasis
added).
Similarly, in this case, the only evidence of materiality
CUIC offered was the policy itself, which recited in
boilerplate language that the representations in the
application were material and which language we assume is
included in every policy issued by CUIC. Such evidence is far
from the clear proof required to show that truthful answers
would have reasonably influenced CUIC's decision to issue the
policy to H&C. Accordingly, we conclude that the trial court
did not err in holding that CUIC failed to meet its burden of
proof on the question of materiality.
II.
The second issue is also one of proof. The policy
provisions regarding a condition precedent and an exclusion
involved a determination of whether it was reasonable for H&C
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to anticipate or have any reason to anticipate that
Calderone's error, made before the inception of the policy,
would result in a claim under the policy. 3 H&C had the burden
to produce evidence that it met the terms of the condition
precedent, whereas CUIC bore the ultimate burden of persuasion
on this issue. Erie Ins. Exch. v. Meeks, 223 Va. 287, 290-91,
288 S.E.2d 454, 456-57 (1982). In addition, CUIC carried the
burden to prove that the exclusion applied. Va. Elec. & Power
Co. v. Northbrook Prop. & Cas. Ins., 252 Va. 265, 270, 475
S.E.2d 264, 266 (1996). The trial court found that H&C
satisfied its evidentiary burden and CUIC did not.
David E. Hunt, a partner in H&C, and Calderone, both of
whom are certified public accountants and testified in that
capacity, stated that Calderone's error was not one which
3
Section I.A.2. of the policy provided:
All of the following conditions must be satisfied
before coverage will apply:
. . . .
2. the Insured had no knowledge of such actual or
alleged act, error, omission, circumstance or Personal
Injury or otherwise had no basis to reasonable [sic]
anticipate a claim that would be insured by this Coverage
Part at policy inception;
Section II.A., relating to policy exclusions, stated in
pertinent part that coverage would not be provided for:
any claim arising out of any actual or alleged act,
error, omission, Personal Injury or circumstance likely
7
could reasonably be anticipated to result in a claim because
the assurances by one of the tax credit program's
administrators, Dan Girouard, justified a conclusion that
funds would be available for Atalay despite the untimely
filing of the application. Atalay also testified at trial
that, although he was aware of Calderone's error, after
talking with Calderone and Girouard, he believed the matter
"would be okay." Atalay stated that he had no intention of
filing a claim against H&C until July, when he learned that
tax credits would not be available to him.
CUIC's only witness was Martha Shea Hollifield, Dan
Girouard's supervisor. Hollifield testified that she recalled
talking with Calderone about Atalay's application, but she did
not recall telling Calderone funds would be available. The
trial court found this evidence insufficient to rebut H&C's
evidence that two certified public accountants had no
reasonable basis to anticipate a claim from the facts in this
case.
Although the trial court noted that H&C's testimony was
self-serving, the court did not reject the testimony as
incredible. Faced with H&C's testimony, CUIC had to provide
evidence that would challenge the reasonableness of H&C's
to give rise to a claim of which an Insured had
knowledge, or otherwise had reason to anticipate might
8
belief that no claim would arise. The trial court did not
require that such evidence be in the form of "expert
testimony" as CUIC suggests. Rather, the trial court
suggested that evidence from "professionals in the field"
would be needed to refute the evidence produced by H&C. As
stated by the trial court, CUIC simply failed to satisfy that
burden.
Principles of appellate review require that we affirm
determinations of fact made by the trial court unless there is
no support for such determinations in the record. Quantum
Dev. Co. v. Luckett, 242 Va. 159, 161, 409 S.E.2d 121, 122
(1991). Based on our review, we cannot conclude that this
factual conclusion of the trial court is without support in
the record.
For the above reasons, we will affirm the judgment of the
trial court.
Affirmed.
result in a claim, prior to the inception of this policy.
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