First Tennessee Bank National v. St. Paul Fire and Marine Insur, No. 11-1781 (4th Cir. 2012)

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UNPUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 11-1781 FIRST TENNESSEE BANK NATIONAL ASSOCIATION, Intervenor/Plaintiff - Appellant, and GLOBAL TITLE, LLC, Third Party Plaintiff, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Third Party Defendant Appellee. No. 11-1782 GLOBAL TITLE, LLC, Third Party Plaintiff Appellant, and FIRST TENNESSEE BANK NATIONAL ASSOCIATION, Intervenor/Plaintiff, v. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, Third Party Defendant - Appellee. Appeals from the United States District Court for the Eastern District of Virginia, at Richmond. Henry E. Hudson, District Judge. (3:09-cv-00550-HEH-MHL) Argued: September 18, 2012 Before TRAXLER, Judges. Chief Judge, Decided: and DIAZ and December 21, 2012 THACKER, Circuit Vacated and remanded by unpublished per curiam opinion. ARGUED: Paul Peter Vangellow, Falls Church, Virginia; Clarence A. Wilbon, BASS, BERRY & SIMS PLC, Memphis, Tennessee, for Appellants. Christopher J. Bannon, ARONBERG GOLDGEHN DAVIS & GARMISA, Chicago, Illinois, for Appellee. ON BRIEF: Annie T. Christoff, BASS, BERRY & SIMS PLC, Memphis, Tennessee; Michael P. Falzone, HIRSCHLER FLEISCHER, Richmond, Virginia, for Appellant First Tennessee Bank National Association. Bruin S. Richardson, LECLAIRRYAN, Richmond, Virginia, for Appellee. Unpublished opinions are not binding precedent in this circuit. 2 PER CURIAM: Global Title, LLC, served as the closing agent for mortgage loans originated by Financial Mortgage, Inc. ( FMI ), and funded by First Tennessee National Bank. scheduled loans funds FMI to would not instead close, of First absconded with the funds. After learning that three Global returned Tennessee. the FMI s unused president Unable to recover the funds from FMI, First Tennessee sued Global. Global liability policy St. Company. St. Paul determined that coverage was barred by a issued by sought Paul Fire coverage & Marine under a Insurance policy exclusion and denied the claim, which prompted Global to sue St. Paul for breach of contract. shuffling and realigning, plaintiff asserting the claims After a bit of procedural case against proceeded St. Paul; with First Global as Tennessee intervened to assert its claim against Global. The district court granted summary judgment in favor of St. Paul, concluding that coverage was excluded under the policy and that St. Global. Paul therefore Global and had First no duty Tennessee to defend appeal. or We indemnify agree with Appellants that there is a possibility of coverage under the policy and that St. Paul therefore is obligated to defend Global against First Tennessee s claims. district court s order and remand. 3 Accordingly, we vacate the I. The central question in this case is whether St. Paul is obligated under the policy to defend brought against Global by First Tennessee. Global in the action Under Virginia law, 1 an insurer s duty to defend its insured is broader than its duty to indemnify. Indeed, an insurer may be required to provide a defense where the ultimate that the insurer even demonstrates indemnification. resolution is not of the case liable for Fuisz v. Selective Ins. Co. of Am., 61 F.3d 238, 242 (4th Cir. 1995). The duty to defend arises whenever the complaint alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy. Virginia Elec. & Power Co. v. Northbrook Prop. & Cas. Ins. Co., 475 S.E.2d 264, 265 (Va. 1996) (internal quotation marks omitted). Conversely, an insurer has no duty to defend if the insurer would not be liable under allegations. its contract for any judgment based upon the Travelers Indemn. Co. v. Obenshain, 245 S.E.2d 247, 249 (Va. 1978); see Virginia Elec. & Power, 475 S.E.2d at 1 The parties agree that Virginia law governs the disposition of this appeal. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941) (federal court sitting in diversity must apply the choice-of-law rules of the forum state); Buchanan v. Doe, 431 S.E.2d 289, 291 (Va. 1993) (Virginia law governs dispute over insurance policy issued and delivered in Virginia). 4 266-67 (insurer has no duty to defend the insured against claim clearly excluded from coverage under the policy). Resolution of the duty-to-defend question thus requires examination of (1) the policy language to ascertain the terms of the coverage and (2) the underlying complaint to determine whether any claims alleged therein are covered by the policy. Fuisz, 61 F.3d at 242. This principle is commonly known as the eight because corners rule the determination is made by comparing the four corners of the underlying complaint with the four corners of the policy . . . . AES Steadfast Ins. Co., 725 S.E.2d 532, 535 (Va. 2012). Corp. v. With these principles in mind, we turn now to the specifics of this case. A. The policy s general insuring clause provides coverage to protected persons for loss caused by wrongful acts committed during the performance of or failure to perform real estate professional services, including services capacity of title, closing, or escrow agent. performed in the Policy at SP00021. The policy defines wrongful act as any negligent act, error or omission. Id. at SP00022. The policy exclusion at issue in this case is the Handling of funds exclusion (the HOF Exclusion ). in relevant resulting part, from excludes [a]ny from coverage unauthorized 5 act The HOF Exclusion, claims committed for by loss any protected funds. person that deprives an owner of Policy at SP00028 (emphasis added). the use of its The policy does not define unauthorized or unauthorized act. B. The amended intervening plaintiff) against Global. 2 First Tennessee established complaint a filed asserted a by First single Tennessee count of (as negligence According to the allegations of the complaint, entered line of into credit an agreement through which with First FMI and Tennessee provided the funds for mortgage loans originated by FMI. The complaint alleged that Global, as closing agent, would receive funds from First Tennessee prior to the closing of the [FMI]originated loans. Global Title was to hold the funds in trust and then distribute the funds as directed upon closing. 33. J.A. In anticipation of funding three loans, First Tennessee wired a total of approximately $2.5 million to Global. The complaint alleged that when Global later learned from FMI that the transactions had been cancelled, [i]nstead of returning the 2 We focus on the allegations of First Tennessee s amended complaint-in-intervention rather than First Tennessee s original, multi-count complaint. The original complaint, which was dismissed without prejudice, became a nullity upon the filing of the amended complaint. See Young v. City of Mount Ranier, 238 F.3d 567, 573 (4th Cir. 2001) ( [A]n amended pleading supersedes the original pleading, rendering the original pleading of no effect. Thus, if an amended complaint omits claims raised in the original complaint, the plaintiff has waived those omitted claims. ). 6 funds to First Tennessee . . . , Global Title transferred the funds . . . to [FMI.] In support of J.A. 34. its negligence cause of action, First Tennessee alleged that, as closing agent, Global had a duty to protect Tennessee First Tennessee s alleged that interest Global in breached the the funds. duty it First owed to First Tennessee when it negligently transferred $2.5 million of First Tennessee s money to [FMI], and that Global s negligence in returning the funds entitles it to recovery. complaint alleged no additional facts J.A. 34. describing how or The why Global gave the money to FMI -- there are no allegations, for example, that Global acted willfully or that Global acted in concert with FMI. 3 3 First Tennessee attached as exhibits to its intervention complaint certain documents evidencing the transactions at issue here. The documents included supplemental closing instructions executed by FMI and Global which stated that if the loan did not close, Global was to either (1) return the unused cashier s check to [FMI]; or (2) return the funds via wire transfer directly to [First Tennessee]. J.A. 39, 42, 45. Relying on CACI International, Inc. v. St. Paul Fire & Marine Insurance Co., 566 F.3d 150 (4th Cir. 2009), the district court held that Virginia s eight-corners rule did not permit it to consider documents attached to the complaint. See id. at 156 (declining to consider documents attached to complaint because Virginia courts have not signaled a readiness to look beyond the underlying complaint when resolving duty-to-defend questions). But see Va. Sup. Ct. Rule 1:4(i) ( The mention in a pleading of an accompanying exhibit shall, of itself and without more, make such exhibit a part of the pleading. (emphasis added)). Although Appellants contend that the district court erred by refusing to consider the exhibits, we need not decide that (Continued) 7 C. Adopting the report and recommendation of the magistrate judge, see 28 U.S.C. § 636(b)(1)(B), the district court granted summary judgment in favor of St. Paul on the coverage question. Because the policy did not define unauthorized, the district court, looking to Black s Law Dictionary, defined unauthorized as [d]one without authority implied, or apparent authority. Dictionary (9th ed. 2009)). as [t]he right behalf; . . . relations by or or made without actual, J.A. 153 (quoting Black s Law The court then defined authority permission to act legally on another s the power of one person to affect another s legal acts done in accordance with the other s manifestations of assent; the power delegated by a principal to an agent. . . . J.A. 153. The district court concluded that, given the allegations in the complaint that the funds belonged to First Tennessee and that Global was to hold the funds in trust and distribute them at closing as directed by First Tennessee, Global s actions were unauthorized as a matter of law. The magistrate judge question. As we will explain, the allegations of First Tennessee s complaint, even without consideration of the attached exhibits, are sufficient to trigger St. Paul s duty to defend. 8 explained this conclusion in the report and recommendation adopted by the district court: It is undisputed that these three [FMI]-originated loans never closed, and it is undisputed that First Tennessee never directed Global Title to transfer the funds to [FMI] despite the failure to close. Thus, Global Title's transfer of First Tennessee s funds to [FMI] constituted an unauthorized act that deprived the owner of the use of its funds. Accordingly, the Handling of funds provision excludes coverage for this unauthorized act. J.A. 133. Thus, in this case, because First Tennessee did not authorize Global to return the funds to FMI, the court held Global s action was unauthorized within the meaning of the HOF Exclusion. II. On appeal, district erroneous. agent is court s Global and First interpretation Tennessee of the contend HOF that the Exclusion was They argue that under Virginia law, an act that an authorized to perform does not become unauthorized simply because the agent performed the act negligently. And because negligent acts are not necessarily unauthorized acts, Appellants argue that the HOF Exclusion does not foreclose the possibility of coverage under the policy. We agree. A. Because the policy did not define unauthorized act, the district court properly defined unauthorized act as an act 9 taken without authority. See, e.g., Scottsdale Ins. Co. v. Glick, 397 S.E.2d 105, 108 (Va. 1990) ( In the absence of a definition, words used in an insurance policy their ordinary and accepted meaning. ). must be given Nonetheless, when the HOF Exclusion is considered as part of the policy as a whole, we think it clear that the district court took too narrow a view of the precise authority necessary for an agent s action to be authorized. An insurance policy, of course, is a contract subject to the same rules of construction as any other contract. See Virginia Farm Bureau Mut. Ins. Co. v. Williams, 677 S.E.2d 299, 302 (Va. S.E.2d 2009); 405, 409 Harleysville (Va. Mut. 1959). Ins. The Co. v. primary Dollins, goal in 109 the construction of written contracts is to determine the intent of the contracting parties . . . . Flippo v. CSC Assocs. III, L.L.C., 547 S.E.2d 216, 226 (Va. 2001) (internal quotation marks omitted); see Bender-Miller Co. v. Thomwood Farms, Inc., 179 S.E.2d 636, 639 (Va. 1971) ( [T]he intent of the parties as expressed in their contract controls. ). When determining the intent of the contracting parties, the whole instrument is to be considered; not any one provision only, but all its provisions; not the words merely in which they were expressed, but their object and purpose, as disclosed by the language, by the subject matter, 10 and the condition and relation of the parties. Worrie v. Boze, 62 S.E.2d 876, 880 (Va. 1951) (emphasis added; internal quotation marks omitted); see Flippo, 547 S.E.2d at 226 ( [I]ntent is to be determined from the language employed, surrounding circumstances, the occasion, and apparent object of the parties. (emphasis added; internal quotation marks omitted)). In our view, the district court failed to properly consider the object and purpose of the insurance policy when determining the meaning of unauthorized act in the HOF Exclusion. The object and purpose of the contract in this case is clear. The contract is a professional liability insurance policy that protects Global from liability for certain losses caused by Global while performing real-estate-related services in its capacity as an agent. Authority, the focus of the district court s analysis, is of course a critical concept in the law another, of agency there relationship, is -no however, absent agency authority to act relationship. questions about on Within liability simple authority, but on scope of authority. behalf an turn of agency not on The principal is liable for the actions of the agent committed within the scope of authority, but agent s authority. not for actions outside the scope of the See, e.g., Allen Realty Corp. v. Holbert, 318 S.E.2d 592, 596 (Va. 1984) ( [A] principal is liable to third persons for wrongful acts 11 an agent commits within the scope of his employment, even if the principal does not approve or know of the misconduct . . . . ); Kern v. Freed Co., 299 S.E.2d 363, 364 (Va. 1983) ( If the agent exceeds his authority, the principal is not bound by the agent s acts. ). Because liability in the agency context -- the very risk addressed by the policy -- turns on the scope of the agent s authority, we believe that when the HOF Exclusion is considered in light of the purpose and subject-matter of the policy, the exclusion for losses caused by an unauthorized act must be understood as referring insured s authority. to an act outside the scope of the See London Guar. & Accident Co. v. C.B. White & Bros., 49 S.E.2d 254, 259 (Va. 1948) (explaining that insurance policy must be construed in the light of the subject matter with which the parties are dealing and the words or phrases of the policy should be given their natural and ordinary meaning as understood in the business world. (emphasis added)); accord State Farm Mut. Auto. Ins. Co. v. Powell, 318 S.E.2d 393, 397 (Va. 1984). We believe this to be the most natural reading of the policy -- so construed, the policy imposes obligations on the insurer that track those of an agent s principal. Just as the principal would be liable for the wrongful act of his agent committed within the scope of the agent s authority but not for acts outside the scope of authority, the policy provides coverage for wrongful acts committed within the scope of the 12 insured s authority but not for acts committed outside the scope of the insured s authority. Accordingly, the HOF Exclusion, as we conclude it must be interpreted, precludes coverage for claims of loss caused by any act outside the scope of the insured s authority that deprives an owner of the use of its funds. The question, then, is whether the allegations in First Tennessee s complaint clearly and unambiguously establish that Global s actions exceeded the scope of its authority as closing agent such that coverage for the claim is barred by the HOF Exclusion. Neck Ins. Co., effective, the 427 S.E.2d 193, exclusionary 196 See Floyd v. Northern (Va. language 1993) must ( [T]o clearly be and unambiguously bring the particular act or omission within its scope. ). Under Virginia law, an act need not be expressly or impliedly directed by the employer in order for the act to occur within the scope of the employment. Similarly, an act committed in violation of an employer s direction is not always beyond the scope of the employment. Gina Chin & Assocs. v. First Union Bank, 537 S.E.2d 573, 579 (Va. 2000). Whether an agent acted within the scope of his authority turns not on whether the particular act at issue -- often a tort committed by the agent - is within the scope of the agent s authority, but [on] whether the 13 service itself in which the tortious act authority. was done was . . . within the scope of such Broaddus v. Standard Drug Co., 179 S.E.2d 497, 503 (Va. 1971) (emphasis added; internal quotation marks omitted). Under this standard, negligent and even willful and malicious acts of an agent are not necessarily outside the scope of the agent s authority. See Allen Realty Corp., 318 S.E.2d at 597 ( [A] liable principal is for negligent acts that its agent commits within the scope of his employment. ); Commercial Bus. Sys., Inc. v. Bellsouth Servs., Inc., 453 S.E.2d 261, 266 (Va. 1995) (employee s willful and malicious acts done to advance his self-interest were not conclusively outside scope of employment because the acts were committed while the employee was performing his duties and in the execution of the services for which he was employed ). In this case, First Tennessee asserted only a negligence claim against Global. First Tennessee did not allege that Global s actions were unauthorized or that Global acted outside the scope of its authority as closing agent, nor are there any other factual allegations in the complaint that would permit this court to conclude, as a matter of law, that the transfer was outside the scope of Global s authority. Assocs., 537 S.E.2d at 577 (listing See Gina Chin & factors relevant to determination of whether given action was within the scope of employment). Because a negligent act by an agent may still be 14 an act within the scope of the agent s authority, see Allen Realty Corp., 318 S.E.2d at 597, we agree with Appellants that the HOF Exclusion thus does not clearly and unambiguously encompass the conduct alleged in First Tennessee s complaint. See Floyd, 427 S.E.2d at 196. St. Paul, however, argues that while the duty to defend is broad, the insured cannot create coverage by inventing scenarios not alleged in the complaint that theoretically could be covered by the policy. And in St. Paul s view, because the complaint does not allege that Global was attempting to return the funds to First Tennessee when it transferred them to FMI, Global s claim that it negligently performed an authorized act is inconsistent with the allegations of the complaint and does not trigger St. Paul s duty to defend. We disagree. Although the complaint does not include details about how or why the transfer occurred, First Tennessee had no obligation to include any such additional details in its complaint. The allegations in the amended complaint were sufficient to support First Tennessee s negligence claim: that Global had a duty to protect First Tennessee s interest in the funds and to return the unused funds to First Tennessee; that Global breached that duty by returning the funds to FMI instead; and that First Tennessee suffered damages from Global s breach of its duties. See McGuire v. Hodges, 639 S.E.2d 284, 288 (Va. 2007) (listing 15 elements of negligence claim). complaint could negligence, and without the The allegations of the amended amendment allegations trigger St. Paul s duty to defend. support are a for sufficient therefore judgment to Parker v. Hartford Fire Ins. Co., 278 S.E.2d 803, 804 (Va. 1981) (per curiam). B. Upon concluding that coverage was barred by the HOF Exclusion, the district court held that St. Paul had no duty to defend Global or indemnify Global for any judgment that might be entered against it. Because the allegations of the complaint do not establish the applicability of the HOF Exclusion as a matter of law, the district court s indemnification issue was premature. ruling on the If the evidence in First Tennessee s action shows that Global s actions were outside the scope of Global s authority as closing agent, St. Paul will have no obligation to indemnify Global for the judgment. The possibility that St. Paul might not ultimately be responsible for the judgment, however, has no effect on St. Paul s obligation to defend Global against First Tennessee s claims. See Virginia Elec. & Power, 475 S.E.2d at 266 ( [T]he obligation to defend is not negated merely by the unsuccessful assertion of a claim otherwise facially falling within the risks covered by the policy. . . . The insurer has the obligation to defend the 16 insured in such circumstances even though the obligation to pay is not ultimately invoked. ). III. For the reasons discussed above, we hold that the allegations of First Tennessee s complaint create a possibility of coverage under the policy s insuring clause and do unambiguously fall within the scope of the HOF Exclusion. not The district court therefore erred in concluding that St. Paul had no duty to defend or indemnify Global against First Tennessee s claims. Accordingly, we vacate the district court s judgment relieving St. Paul of its duty to defend and indemnify Global, and we remand the case to the district court. Upon resolution of First Tennessee s action against Global, the indemnification issue will be ripe for reconsideration by the district court. VACATED AND REMANDED 17

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