Present: All the Justices
STATE FARM FIRE & CASUALTY COMPANY
v. Record No. 971075 OPINION BY JUSTICE ELIZABETH B. LACY
February 27, 1998
HERMOND MABRY, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
James B. Wilkinson, Judge
In this appeal, we consider whether the trial court
properly determined that an insurer was estopped from
litigating whether its insured's acts were negligent or
intentional based on a judgment in a prior tort action in
which the insurer provided the insured a defense under a
reservation of rights.
Helena M. Martin was injured when Hermond A. Mabry shot
her four times using two pistols while the parties were at
Mabry's residence. Martin notified State Farm Fire & Casualty
Insurance Company (State Farm), Mabry's homeowner's insurance
carrier, of the event. State Farm issued reservation of
rights letters to Mabry and Martin, asserting that insurance
coverage might not be available due to the intentional act
exclusion in the homeowner's policy.
Martin filed a motion for judgment against Mabry seeking
recovery of $125,000 for injuries resulting from the shooting.
In her pleadings, Martin alleged that the shootings were the
result of negligence on the part of Mabry. After Martin filed
her lawsuit, State Farm sent a second reservation of rights
letter to Mabry and a reservation of rights letter to counsel
for Martin. State Farm retained an attorney to provide legal
representation for Mabry.
State Farm, represented by another attorney, filed a
motion for declaratory judgment to determine whether the
intentional act exclusion in Mabry's policy applied to exclude
coverage for Mabry's acts. Prior to resolution of the
declaratory judgment proceeding, Mabry, Martin, and their
attorneys agreed to the entry of a consent judgment against
Mabry for $95,000.
Martin subsequently filed an answer in the declaratory
judgment proceeding asserting that the doctrine of collateral
estoppel precluded State Farm from litigating whether Mabry's
acts were negligent or intentional. Martin maintained that
entry of the consent order "on the pleadings," as recited in
the order, established that Mabry's acts were negligent as
alleged in the motion for judgment in the tort action.
Following an ore tenus hearing and post-trial memoranda,
the trial court issued an opinion letter in which it
determined that State Farm was estopped from litigating
whether Mabry's actions in shooting Martin were negligent or
intentional. The trial court based its opinion on "the public
policy grounds expressed by the Virginia Supreme Court in
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State Farm v. Wright, 173 Va. 261 (1939), and the estoppel
effect of a consent judgment expressed by the Virginia Supreme
Court in Culpeper Nat'l Bank v. Morris, 168 Va. 379, 385
(1937)." A final order was entered on February 26, 1997,
declaring that Mabry was entitled to coverage under the State
Farm Policy for the claims made against him by Martin, and
that State Farm was obligated to pay the judgment rendered in
the tort action in favor of Martin. We awarded State Farm an
appeal.
In its appeal, State Farm argues that the trial court's
decision improperly applied the doctrine of collateral
estoppel to preclude State Farm from arguing in the
declaratory judgment action that Mabry's actions were
intentional. Mabry and Martin reply that entry of the consent
judgment "on the pleadings" collaterally estopped State Farm
from relitigating whether Mabry negligently or intentionally
fired the shots that injured Martin.
We agree with State Farm that collateral estoppel is not
applicable in this case. One of the elements of collateral
estoppel is that the parties, or their privies, must be the
same in both the prior and subsequent actions. Angstadt v.
Atlantic Mut. Ins. Co., 249 Va. 444, 446, 457 S.E.2d 86, 87
(1995). State Farm was not a party in the tort litigation;
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therefore, this element of collateral estoppel could only be
met if the requisite privity existed between it and Mabry.
Privity requires that a party's interest be "so
identical" with another "that he represents the same legal
right." Nero v. Ferris, 222 Va. 807, 813, 284 S.E.2d 828, 831
(1981). Whether privity exists "requires a careful
examination of the circumstances of each case." Angstadt, 249
Va. at 447, 457 S.E.2d at 87. In this case, State Farm
reserved its right to challenge coverage under the policy
based on the nature of Mabry's acts. By so doing, State Farm
established that its position diverged from that of its
insured on this issue and that the interests of State Farm and
Mabry with regard to coverage were adverse, not identical.
This result was foreshadowed by our discussion in Reisen
v. Aetna Life and Casualty Co., 225 Va. 327, 302 S.E.2d 529
(1983). In Reisen, we held that a declaratory judgment
proceeding to determine coverage under an insurance policy
could be brought by an insurer while the underlying tort
litigation was pending, even if the ultimate factual issue in
determining coverage was also at issue in the tort litigation.
In the course of the opinion, we stated that "because of the
likelihood that the insurer, after judgment in the tort
action, would be entitled to litigate the very same coverage
question it sought to raise before trial," the declaratory
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judgment proceeding declaring the parties' rights in advance
was proper. Id. at 336, 302 S.E.2d at 534. This statement
would be in error if the insurer was collaterally estopped
from raising the factual issue addressed in the tort
litigation in the subsequent proceeding determining coverage.
Accordingly, because State Farm was not a party to the
tort litigation nor was it in privity with Mabry regarding the
nature of Mabry's acts, we conclude collateral estoppel does
not apply to preclude State Farm from litigating that issue. 1
Accord, Alabama Farm Bureau Mut. Cas. Ins. Co. v. Moore, 349
So.2d 1113, 1115-17 (Ala. 1977); Farmers Ins. Co. of Arizona
v. Vagnozzi, 675 P.2d 703, 708 (Ariz. 1983); Spears v. State
Farm Fire and Cas. Ins., 725 S.W.2d 835, 837-38 (Ark. 1987);
Kelly v. Cherokee Ins. Co., 574 S.W.2d 735, 737-39 (Tenn.
1978). But see Miller v. United States Fidelity & Cas. Co.,
197 N.E. 75, 77 (Mass. 1935). See generally, Comment, The
Effect of Collateral Estoppel on the Assertion of Coverage
Defenses, 69 Colum. L. Rev. 1459 (1969).
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In Norman v. Insurance Co. of North America, 218 Va. 718,
725, 239 S.E.2d 902, 906 (1978), we stated that the judgment
entered in the tort litigation holding the insured's actions
to be intentional "constitutes a collateral estoppel" of the
insured's action against the insurer in which the insured
asserted his actions were "accidental." However, we did not
examine the elements of collateral estoppel and specifically
did not discuss privity. Accordingly, Norman does not provide
binding precedent for the principle that collateral estoppel
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We also conclude that none of the other forms of estoppel
noted by the trial court operate here to preclude State Farm
from pursuing its declaratory judgment proceeding. Under
principles of estoppel and waiver, providing the insured a
legal defense generally makes the insurer liable for amounts
recovered against the insured because the insurer's actions
indicate that the policy coverage applies, and, therefore, the
insurer is estopped from subsequently seeking to avoid
liability under the policy. Cooper v. Employers Mut.
Liability Ins. Co. of Wisconsin, 199 Va. 908, 916, 103 S.E.2d
210, 216 (1958); 14 George J. Couch, Cyclopedia of Insurance
Law § 51:239 (Mark S. Rhodes ed., 2d ed. 1982).
If an insurer provides a reservation of rights, however,
the insurer "is not deemed to have waived, nor be estopped to
set up, the defense of lack of coverage" because of its
participation in the tort litigation. Norman v. Ins. Co. of
N. America, 218 Va. 718, 726, 239 S.E.2d 902, 907 (1978). As
the trial court acknowledged, State Farm provided Mabry a
defense under a reservation of its right to later assert its
defenses to coverage under the policy, and, thus, these
principles of estoppel and waiver are inapplicable.
would apply to insurers in the circumstances of the instant
case.
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Finally, the trial court referred to an "estoppel" based
on its view that actions taken by State Farm in the conduct of
the tort litigation provided the insurer with "its day in
court," and, therefore, State Farm was not entitled to another
opportunity to try its case on the merits, citing State Farm
Mutual Automobile Insurance Co. v. Wright, 173 Va. 261, 3
S.E.2d 187 (1939).
However, here State Farm did not have "its day in court"
in the tort proceeding. See Farm Bureau Mut. Auto. Ins. Co.
v. Hammer, 177 F.2d 793, 799-800 (4th Cir. 1949). State Farm
was not a party to the tort litigation and, therefore, could
not independently assert its position on the nature of Mabry's
acts in that proceeding. Nor could it assert its position in
conjunction with providing a defense to its insured. The
attorney employed by the insurer to defend the insured "is
bound by the same high standards which govern all attorneys,
and owes the insured the same duty as if he were privately
retained by the insured." Norman, 218 Va. at 727, 239 S.E.2d
at 907. To comply with this duty in the tort litigation,
Mabry's attorney could not argue that Mabry's acts were
intentional because such an argument could expose Mabry to
punitive damages and would not be in his best interest. Thus,
the declaratory judgment proceeding to determine the issue of
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policy coverage was State Farm's first opportunity to assert
its coverage defense and to try its case on the merits.
In the instant case, State Farm sent reservation of
rights letters to its insured, Mabry, and to Martin when it
was initially informed of Martin's claim. Reservation of
rights letters were again sent to Mabry and to Martin's
counsel when the tort litigation was initiated. Under these
circumstances, neither waiver, estoppel, nor collateral
estoppel precluded State Farm from raising its coverage
defense, specifically the question whether Mabry shot Martin
intentionally or negligently.
Accordingly, we will reverse the judgment of the trial
court and remand the case for further proceedings.
Reversed and remanded.
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