Present: Carrico, C.J., Hassell, Keenan, Koontz, Kinser, and
Lemons, JJ., and Poff, Senior Justice
THE PARTNERSHIP UMBRELLA, INC., ET AL.
OPINION BY
v. Record No. 991876 JUSTICE LAWRENCE L. KOONTZ, JR.
June 9, 2000
FEDERAL INSURANCE COMPANY
FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA
Thomas A. Fortkort, Judge Designate
This appeal concerns the disputed interpretation of the
insuring clauses of an executive liability and indemnification
policy. The insurance company instituted the litigation as a
declaratory judgment action. The policy-owner counterclaimed
for breach of contract. The parties stipulated that a
determination by the trial court unfavorable to the policy-owner
on two questions of law concerning the insuring clauses would
result in an agreed dismissal of the policy-owner’s counterclaim
and entry of final judgment for the insurance company.
Accordingly, under this unusual procedural posture, the trial
court’s judgment and consequently our review of that judgment,
do not involve the merits of the policy-owner’s claim or any
defenses that the insurance company might assert at trial based
upon exclusions of the policy, the relevant statutory scheme, or
such other factors. Nonetheless, a full recitation of the facts
developed in the trial court is necessary in order to place the
legal issues under review in their proper context.
BACKGROUND
On October 9, 1990, Federal Insurance Company (Federal)
issued an executive liability and indemnification policy (the
policy) with a policy limit of $1 million to The Partnership
Umbrella, Inc. (Partnership Umbrella), a Virginia corporation
affiliated with United Way of America, Inc. (United Way). The
policy provided two forms of coverage. As defined by the policy
in “Insuring Clause 1,” Federal was obligated under the
“Executive Liability Coverage” to
pay on behalf of each of the Insured Persons all Loss
for which the Insured Person is not indemnified by the
Insured Organization and which the Insured Person
becomes legally obligated to pay on account of any
claim first made against him, individually or
otherwise . . . for a Wrongful Act committed,
attempted, or allegedly committed or attempted, by the
Insured Person(s) before or during the Policy Period.
As defined by the policy in “Insuring Clause 2,” Federal was
obligated under the “Executive Indemnification Coverage” to
pay on behalf of the Insured Organization all Loss for
which the Insured Organization grants indemnification
to each Insured Person, as permitted or required by
law, which the Insured Person has become legally
obligated to pay on account of any claim first made
against him, individually or otherwise . . . for a
Wrongful Act committed, attempted, or allegedly
committed or attempted, by such Insured Person(s)
before or during the Policy Period.
Relevant to the issues in this appeal, Stephen J. Paulachak
was a director and president of Partnership Umbrella in early
1992, when a federal grand jury began an investigation into
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alleged malfeasance by William Aramony, president and chief
executive officer of United Way. In addition to his role as
president and director of Partnership Umbrella, in which
positions he had been installed by Aramony, Paulachak also
served as Aramony’s “personal assistant” and acted as a “paid
consultant” to United Way. Aramony was a director and chairman
of the board of Partnership Umbrella.
On April 9, 1992, Paulachak advised Federal through its
agent that “[t]here appear to be indications that United Way of
America intends to take legal actions against me and/or
Partnership Umbrella” and that “[t]here may also be a
governmental investigation arising due to allegations made by
United Way.” On April 10, 1992, Paulachak’s counsel requested a
formal opinion from Federal’s legal counsel on whether the
insurance policy would provide coverage to Paulachak in the
event that he was a target of a pending federal grand jury’s
investigation.
Federal requested that Paulachak provide it with a copy of
a report of an independent investigation conducted on behalf of
United Way. Although that report expressed concern about the
close relationship between Aramony and Paulachak and the
“lucrative consulting arrangements” between United Way and
Paulachak authorized by Aramony, Federal concluded that there
had not yet been a claim alleging a “Wrongful Act” as defined in
3
the policy, and declined to provide coverage for Paulachak at
that time. 1
On May 19, 1992, Paulachak was subpoenaed to appear before
the federal grand jury. Federal was advised of this
development, but again stated that it would not provide coverage
for Paulachak in the absence of an allegation that he had
committed a “Wrongful Act.”
On July 14, 1992, Aramony and Hamp Coley, Partnership
Umbrella’s only other director, authorized the payment of
“advances for expenses” pursuant to Code § 13.1-878 to cover
Paulachak’s legal expenses arising from the federal grand jury’s
investigation. This action was undertaken upon the advice of
Partnership Umbrella’s special counsel and with Aramony and
Coley acting as a quorum of the board members eligible to decide
such matters. See Code § 13.1-878(C)(providing that decisions
to advance legal expenses “shall be made in the manner specified
in § 13.1-880” for making indemnification decisions). It was
agreed that if it were subsequently determined that the advances
to Paulachak would violate the relevant Code provisions, the
advances would constitute a loan to Paulachak repayable at 7%
interest.
1
It is undisputed that the policy provides only
reimbursement and indemnification coverage. Federal had no duty
to provide Paulachak with a defense.
4
Paulachak signed a “statement of good faith belief pursuant
to Virginia Code Section 13.1-878” in which he stated that his
conduct as an officer and director of Partnership Umbrella was
both lawful and in the best interests of the organization. This
document is dated July 14, 1992, but a notary’s attestation form
at the foot of the document was never completed. 2 As a result of
the decision to advance expenses to Paulachak, Partnership
Umbrella alleges that it paid attorney’s fees on Paulachak’s
behalf for the period beginning in February 1992 until May 1994
exceeding $307,000 and that approximately $69,918 in fees
incurred during that time are still owed.
On May 3, 1994, Paulachak received a letter from the United
States Attorney for the Eastern District of Virginia indicating
that Paulachak was a target of the grand jury’s investigation.
Paulachak advised Federal of this development and contended that
the “target letter” was a “claim triggering coverage” under the
policy. Federal responded that this letter did not constitute a
2
Federal maintains that the required “Undertaking To Repay
Advances” obligating Paulachak to repay the advances if he was
not subsequently indemnified by Partnership Umbrella, which was
also prepared at this time, was not signed until several years
later and back-dated by Paulachak to reflect the July 14, 1992
decision date. As we have noted above, we are not here
concerned with whether Federal can successfully defend against
the claims made by Partnership Umbrella and Paulachak.
Accordingly, we will express no opinion on this issue.
5
claim of a “Wrongful Act” under the policy and declined to
provide coverage.
On September 13, 1994, Aramony, Paulachak, and another
United Way employee were named in a multi-count indictment
alleging that they were involved in a conspiracy to use
Partnership Umbrella “for illegitimate objectives . . .
including the spending of funds in the possession of
[Partnership Umbrella] for the personal use, benefit and
pleasure of the defendants and certain of their associates.”
Among the other crimes charged in the indictment were wire fraud
and filing false tax returns. Following Paulachak’s indictment,
Federal denied liability under Insuring Clause 1 of the policy
on the ground that Paulachak’s legal expenses were subject to a
“dishonesty exclusion” in the policy.
On April 3, 1995, Paulachak was convicted on eight counts
of the indictment including the conspiracy count, one count of
wire fraud, and six counts related to the filing of false tax
returns. 3 On April 7, 1995, Federal advised Partnership Umbrella
that no determination of liability under Insuring Clause 2 could
3
Paulachak was sentenced to 30 months imprisonment for these
crimes. His conviction and sentence were subsequently upheld on
appeal. See Aramony v. United States, 88 F.3d 1369, 1392 (4th
Cir. 1996).
6
be made until Partnership Umbrella decided whether it would
indemnify Paulachak.
On April 18, 1995, Coley, acting as de facto chairman of
the board of directors of Partnership Umbrella, convened a
meeting of the board. Paulachak, who was still a director,
attended the meeting with his personal attorney. Coley
“approved” the appointment of Preston Garrison as a new board
member. Coley and Garrison then approved Paulachak’s request
that “in the event of his involuntary termination due to legal
proceedings, that he be granted continued compensation and
benefits for a one year period.” Based upon the representation
of Paulachak’s counsel that Federal would require a formal
decision on indemnification, Coley and Garrison also approved a
proposal to indemnify Paulachak, which Coley was to have
reviewed by outside counsel. At the conclusion of the meeting,
Coley was formally elected as chairman of the board of
directors.
On May 25, 1995, Coley and Garrison approved a formal
resolution of indemnification “for attorney’s fees and expenses
which [Paulachak] incurred from May 3, 1994, the date of the
target letter, through the conclusion of any proceeding with
respect to the indictment, including any appeal.” The
resolution states that the indemnification was based upon a
determination that Paulachak “was not adjudged guilty on the
7
basis that any personal benefit was improperly received by him
from [Partnership Umbrella],” but, rather, that “the monies and
other benefits received by Mr. Paulachak which were the subject
of the indictment were intended to be fringe benefits.”
On March 18, 1996, following an extensive investigation by
Federal into the circumstances surrounding the decision to
indemnify Paulachak, Federal formally denied coverage under
Insuring Clause 2. Federal maintained that the indemnification
determination did not comport with the requirements for making
such determinations under Virginia law and that in any case the
determination was “unfounded and invalid.” Federal further
asserted that it was not liable under either of the insuring
clauses for any of Paulachak’s legal expenses, whether
indemnified or not, because those expenses arose from a risk not
insurable under Virginia law and were subject to exclusions
within the policy.
Thereafter, on March 18, 1996, Federal filed a declaratory
judgment action seeking a determination that it was not liable
under the policy to Partnership Umbrella or Paulachak.
Partnership Umbrella filed a counterclaim alleging breach of
contract. Partnership Umbrella sought to recover both the
monies it had advanced to Paulachak for legal expenses incurred
prior to May 3, 1994 under Insuring Clause 1 and for legal
expenses subject to the indemnification resolution under
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Insuring Clause 2 up to the maximum limit of the policy. 4
Partnership Umbrella further contended that if it could not
recover the monies paid as indemnification under Insuring Clause
2 because its indemnification decision was unlawful, it should
nonetheless be able to recover these monies under Insuring
Clause 1.
It is not disputed that Paulachak is an “insured person” as
defined by the policy. Nor is it disputed that the policy was
in force at all times relevant to the claims made by Paulachak
and Partnership Umbrella for reimbursement and indemnification
under the insuring clauses of the policy. Rather, as stipulated
by the parties, the disputed issue of law in the trial court was
whether, under the language of the policy, Federal would remain
liable under Insuring Clause 1 after Partnership Umbrella made a
decision to indemnify Paulachak if that decision were
subsequently determined to have been unlawful. The parties
further disputed the standard of law to be applied in
determining whether the indemnification decision was lawful.
The parties agreed that if these issues were resolved “in a
manner unfavorable to Partnership Umbrella,” it would withdraw
4
There is some disagreement in the record over the amounts
of the legal expenses actually incurred by Paulachak and
advanced or indemnified by Partnership Umbrella; however, it is
not disputed that in total these expenses exceed Federal’s
maximum possible liability under the policy.
9
its counterclaim. Accordingly, on January 10, 1997, the two
following questions of law were submitted to the trial court.
1. If [Partnership Umbrella] cannot recover under
Insuring Clause 2 because of a determination that its
indemnification of Paulachak was not “as permitted
. . . by law,” may [Partnership Umbrella] recover
under Insuring Clause 1 either the amounts it has paid
for Paulachak’s defense, or the amounts Paulachak was
“legally obligated to pay?”
2. Can Federal argue to the jury in this case, based
on the substantive merits of [Partnership Umbrella’s]
decision to indemnify Paulachak, that the
indemnification did not meet the statutory standards
governing indemnification (including those attorney’s
fees for counts on which Paulachak was not convicted)?
The parties filed briefs addressing these two questions.
With respect to the first question, Federal maintained that once
a decision to indemnify an insured person is made by the insured
organization, coverage under Insuring Clause 1 ceases with
respect to all legal expenses incurred by an insured person,
even if the decision to indemnify was unlawful. Because Federal
further maintained that the indemnification decision had been
taken contrary to what was “permitted or required by law,” it
asserted it also had no liability under Insuring Clause 2.
Partnership Umbrella contended that the coverage of Insuring
Clause 1 applied to any loss sustained by an insured person that
was not actually indemnified by the insured organization. Thus,
it further contended that if its indemnification was not lawful,
there was no indemnification and it was entitled to coverage for
10
any funds disbursed by it as advances or under the
indemnification resolution.
In a letter opinion dated March 24, 1997 and subsequently
adopted by reference in the May 13, 1999 final order, the trial
court concluded that Partnership Umbrella, as a party to the
contract, could enforce Paulachak’s rights under Insuring Clause
1 and, citing Atlantic Permanent Fed. Savings & Loan Ass’n v.
American Casualty Company of Reading, Pennsylvania, 839 F.2d 212
(4th Cir. 1988), could also claim a right of equitable
subrogation. Thus, under either theory, and even if Partnership
Umbrella were barred from recovering under Insuring Clause 2,
the trial court concluded that Partnership Umbrella might still
recover under Insuring Clause 1. However, the trial court
further determined that Partnership Umbrella’s rights under
Insuring Clause 1 were limited to any rights Paulachak would
have had under that clause and, thus, “are limited to the
amounts of money for attorney fees which are due and owing but
not yet paid,” and for which Paulachak had not been indemnified.
Thus, the trial court ruled in its final order that Partnership
Umbrella could not “recover under Insuring Clause 1 for any of
the amounts it has paid on Paulachak’s behalf.” In effect, the
trial court determined that any monies advanced to Paulachak
constituted “indemnification” regardless of whether these
payments were made under the July 14, 1992 decision to advance
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legal expenses or under the May 25, 1995 indemnification
resolution, which applied only to those expenses incurred
following Paulachak’s receipt of the target letter.
With respect to the second question presented to the trial
court, Partnership Umbrella contended that the action of the
individual directors to indemnify Paulachak was subject to the
“business judgment rule” as codified in Code § 13.1-870 and,
thus, was not subject to review by a trial court or a jury for
compliance with requirements of Code § 13.1-876 which
authorizes indemnification under certain circumstances. Federal
contended that it should be entitled to argue that the decision
of Partnership Umbrella to indemnify Paulachak did not comport
with the provisions of Code § 13.1–876, even if the actions of
the individual directors were not violative of that statute.
The trial court agreed with Federal. The trial court noted
that the position taken by Partnership Umbrella would render
meaningless the provisions of Code § 13.1–876(D), which
prohibits indemnification in certain cases, if a decision in
violation of that prohibition were not subject to judicial
review. Accordingly, the trial court ruled that Federal could
“argue to the jury in this case, based on the substantive merits
of [Partnership Umbrella’s] decision to indemnify Paulachak,
that the statutory standards governing indemnification were not
met.”
12
Following receipt of the trial court’s letter opinion,
Partnership Umbrella, by motion, requested a clarification of
that opinion. In that motion, Partnership Umbrella inquired
whether the trial court’s opinion prohibited it from recovering
the monies paid as advances for legal expenses incurred by
Paulachak prior to his receiving the May 3, 1994 target letter.
In its final order, the trial court denied the motion for
clarification without comment. Determining that its resolution
of the two questions of law was “in a manner unfavorable to”
Partnership Umbrella, the trial court dismissed Partnership
Umbrella’s counterclaim with prejudice and entered judgment for
Federal. We awarded Partnership Umbrella this appeal.
DISCUSSION
Partnership Umbrella contends that the trial court erred in
ruling that Partnership Umbrella could not seek to recover under
Insuring Clause 1 of the policy all of the legal expenses which
it paid on behalf of Paulachak. 5 We will first consider whether
5
Partnership Umbrella notes on brief that Federal failed to
assign cross-error to the trial court’s determination that
Partnership Umbrella could seek to recover those amounts which
had not been indemnified and which are still “due and owing.”
We agree that this portion of the trial court’s ruling is not
subject to review because it is not the subject of an assignment
of cross-error. Rule 5:18(b). Similarly, although Federal
asserts on brief that “the doctrine of subrogation does not
support [Partnership Umbrella’s] argument,” it did not assign
cross-error to the trial court’s determination that Partnership
Umbrella could enforce the policy on behalf of Paulachak and
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Partnership Umbrella is entitled to seek repayment from Federal
for the payments it made to Paulachak and his attorneys as
advances pursuant to Code § 13.1-878 which were not
subsequently confirmed under the indemnification resolution. We
will then consider whether Partnership Umbrella can seek to
recover from Federal those monies paid after May 3, 1994 and
ultimately confirmed under the indemnification resolution if
that resolution is determined to be unlawful. In this context,
we are not concerned with the viability of a claim under
Insuring Clause 2 of the policy.
In considering these issues, we apply the well established
rule that when the language in an insurance policy is clear and
unambiguous, courts do not employ rules of construction; rather,
they give the language its plain and ordinary meaning and
enforce the policy as written. Osborne v. National Union Fire
Ins. Co., 251 Va. 53, 56, 465 S.E.2d 835, 837 (1996); see also
Virginia Farm Bureau Mut. Ins. Co. v. Hodges, 238 Va. 692, 696,
recover directly those monies to which it was entitled under the
equitable doctrine of subrogation. Accordingly, we will affirm
the trial court’s ruling with respect to these issues. In doing
so, however, we express no opinion on the validity of the
arguments directed to these issues by the parties in the trial
court or on appeal. Rather, we simply recognize that Federal’s
failure to assign cross-error prevents relitigation of these
issues on remand as they are now “the law of the case.”
Lockheed Info. Mgmt. Systems v. Maximus, Inc., 259 Va. 92, 108,
524 S.E.2d 420, 429 (2000).
14
385 S.E.2d 612, 614 (1989); United Services Auto. Assoc. v.
Webb, 235 Va. 655, 657, 369 S.E.2d 196, 198 (1988); Atlas
Underwriters, Ltd. v. Meredith-Burda, Inc., 231 Va. 255, 259,
343 S.E.2d 65, 68 (1986). We are of opinion that the language
in Insuring Clause 1 of the policy is clear and unambiguous.
Under Insuring Clause 1, unless an exclusion in the policy
is found to apply, Federal would be obligated “to pay on behalf
of each of the Insured Persons all Loss for which the Insured
Person is not indemnified by the Insured Organization.” The
July 14, 1992 action by Partnership Umbrella’s board of
directors only authorized the payment of advances pursuant to
Code § 13.1-878 for Paulachak’s legal expenses incurred to that
date and in the future. It is self-evident that such advances
were not made as indemnification, since the decision to
indemnify requires a separate determination under Code § 13.1-
880. Moreover, unlike indemnification, advances must be subject
to a written undertaking by the director that they will be
repaid if it is ultimately determined that the director did not
meet the standard of conduct required under Code § 13.1-876 for
an indemnification decision.
By contrast, the May 25, 1995 indemnification resolution
was made pursuant to Code § 13.1-880. By its express terms,
that resolution applied only to “attorney’s fees and expenses
which [Paulachak] incurred from May 3, 1994.” Thus, while some
15
of the monies advanced to Paulachak or paid on his behalf to his
attorneys after May 3, 1994 subsequently were approved as
“indemnification,” the payments for expenses incurred prior to
May 3, 1994 were never so approved and indemnified and Paulachak
remained “legally obligated to pay” those expenses.
Accordingly, Paulachak, as an “Insured Person” is entitled
to seek recovery under Insuring Clause 1 for all of the expenses
he incurred that were not subject to indemnification by
Partnership Umbrella. Similarly, under the law of this case,
see note 5, supra, Partnership Umbrella may seek to recover
under that clause those funds which it paid on Paulachak’s
behalf as advances pursuant to Code § 13.1-878 and may seek to
enforce the policy on his behalf with respect to monies still
“due and owing.”
We now consider Partnership Umbrella’s further contention
that it should also be able to seek recovery of those funds it
paid as indemnification if it is determined that the May 25,
1995 indemnification resolution was unlawful. Partnership
Umbrella argues that the modifying language of Insuring Clause
2, “as permitted or required by law,” creates a condition
precedent that the decision to indemnify must be valid before
the coverage under Insuring Clause 1 will be terminated.
Federal responds that once the insured organization makes a
decision to indemnify an officer or director, coverage for the
16
expenses incurred by that officer or director under Insuring
Clause 1 terminates and any coverage that is available under the
policy must come under Insuring Clause 2.
Applying the same standard for interpreting an insurance
policy cited above, we are of opinion that when read together
the insuring clauses are clear and unambiguous as to the effect
of a decision by “the Insured Organization . . . [to] grant[]
indemnification to [an] Insured Person.” Once that decision has
been made, the coverage of Insuring Clause 2 becomes effective
and the “Insured Person,” by the express terms of Insuring
Clause 1, is no longer entitled to recover his indemnified
expenses.
The modifying language in Insuring Clause 2, “as permitted
or required by law,” does create a condition precedent; however,
it would be counterintuitive to hold that this condition applies
to coverage under Insuring Clause 1 where no such language is
found. Rather, when read in the context of both insuring
clauses, the validity of the indemnification decision is a
condition precedent only to recovery under Insuring Clause 2
where the limiting language occurs. It should be self-evident
that if a decision to indemnify is not “permitted . . . by law”
and, thus, payments made pursuant to it would not be subject to
reimbursement under Insuring Clause 2, neither would the loss
incurred by the insured person be subject to direct
17
reimbursement under Insuring Clause 1. Therefore, Partnership
Umbrella’s contention that what it may not be able to recover as
a result of an invalid or unlawful decision to indemnify
Paulachak, it should nonetheless be able to recover by
subrogation under Insuring Clause 1 is without merit.
Partnership Umbrella’s remaining assignment of error states
that “[t]he Trial Court erred by ruling, as a matter of law,
that Partnership Umbrella was prohibited from recovering
anything from [Federal] under either Clause 1 or Clause 2 of the
insurance policy if its indemnification decision is not valid.”
Partnership Umbrella does not relate this assignment of error to
either of its questions presented and offers no substantive
argument on the issue it presents. Moreover, the error assigned
does not correctly state the substance of the trial court’s
ruling. Rather, as expressly stated in the final order, the
trial court merely held, with regard to the second question
submitted to the court by the parties, that Federal “can argue
to the jury in this case, based on the substantive merits of
[Partnership Umbrella’s] decision to indemnify Paulachak, that
the statutory standards governing indemnification were not met.”
(Emphasis added.) In short, while it may be that the trial
court would ultimately rule as Partnership Umbrella implies in
its assignment of error, the trial court did not rule on the
effect of the failure to meet the statutory standard, but only
18
on whether that issue could be raised. Assuming that
Partnership Umbrella intended to challenge that ruling, we hold
that the trial court did not err in its ruling.
The question whether Partnership Umbrella met the required
statutory standard governing indemnification has yet to be
decided. The effect of the failure to meet that standard is one
of law, upon which the trial court has not yet ruled. As we
have stressed throughout this opinion, neither the
determinations of law made by the trial court nor our review of
that judgment in this opinion deals with the merits of
Partnership Umbrella’s claims, the potential defenses available
to Federal under the exclusions of the policy, or the
application of the indemnification statutes to any determination
of fact made as to Partnership Umbrella’s compliance with the
standard therein. Rather, those claims and defenses are yet to
be resolved in the trial court proceedings.
CONCLUSION
For these reasons, we will reverse that portion of the
trial court’s judgment that prohibits Partnership Umbrella from
seeking recovery under Insuring Clause 1 for those payments made
on behalf of Paulachak for legal expenses incurred by him prior
to May 3, 1994. We will affirm the trial court’s judgment in
all other respects, and the case will be remanded to the trial
19
court for further proceedings consistent with the views
expressed in this opinion.
Affirmed in part,
reversed in part,
and remanded.
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