Graham v. National Union Fire Insurance Co. of Pittsburgh, PA

Filing 68

MEMORANDUM OPINION AND ORDER: The Court GRANTS defendant's 46 MOTION for Partial Summary Judgment and DENIES plaintiff's 48 MOTION for Partial Summary Judgment. The Court ORDERS plaintiff to submit a renewed demand for damages in an amount consistent with the rulings in this Memorandum Opinion and Order. Signed by Judge David A. Faber on 3/7/2013. (cc: counsel of record) (mjp)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
IN BLUEFIELD
ROBERT E. GRAHAM,
Plaintiff,
v.

Civil Action No. 1:10-00453

NATIONAL UNION INSURANCE CO.
OF PITTSBURGH, PA,
Defendant.
MEMORANDUM OPINION AND ORDER
Pending before the court are defendant’s “Motion for
Summary Judgment” and plaintiff’s “Cross-Motion for Partial
Summary Judgment.”

For the reasons below, the court GRANTS

defendant’s motion (Doc. No. 46) and DENIES plaintiff’s motion
(Doc. No. 48).

Moreover, the court ORDERS the plaintiff to

submit a renewed demand for damages in an amount consistent with
the rulings in this Memorandum Opinion and Order.
I. Factual and Procedural Background
On April 19, 2004, the State of West Virginia, et al.
(State), filed a lawsuit in the Circuit Court of Kanawha County,
West Virginia, against Robert Graham (Graham) as well as two
non-profit corporations for which Graham had served as Executive
Director.

See Doc. No. 13-1.

The State’s Complaint alleged,

among other things, that Graham had misappropriated or otherwise
inappropriately used the corporations' resources for personal

enrichment and other unauthorized purposes.
2.

Doc. No. 13-1, at

Accordingly, the State sought various forms of relief to

stop Graham's practices and restore the corporations' ability to
perform their charitable functions.

See Doc. No. 13-1, at 1-2,

19-20.1
On April 27, 2004, Graham's counsel wrote a letter to AIG
Claims Services, Inc. (AIG), which is defendant National Union’s
claims processor, enclosing a copy of the State's Complaint and
requesting "coverage to the full extent provided under any
applicable policies."

Doc. No. 18-3, at 2.

On April 29, 2004,

AIG replied to Graham's April 27, 2004 letter, denying coverage
under the Wrongful Act Liability Insurance portion of policy
number GL 6124043 (Policy).

Doc. No. 13-2, at 2.

AIG reasoned

that three exclusions to the Wrongful Act Liability coverage

1

Some of the forms of relief sought by the State included: (1)
court orders requiring Graham and the corporations to show cause
why they should not be enjoined from abusing corporate powers,
(2) a temporary injunction to preserve and maintain the assets
and records of Graham and the corporations, (3) a complete
financial accounting of Graham and the corporations to determine
whether and to what extent Graham was unjustly enriched by
corporate resources, (4) a permanent injunction requiring the
corporations to remove Graham as Executive Director, (5)
encumbrance of Graham's assets by a constructive trust to the
extent he was unjustly enriched, and (6) a judgment against
Graham requiring him to disgorge any excess compensation or
other monies unjustly obtained and "to recompensate the State
and/or the corporate defendants.”

2

applied to the State’s lawsuit against Graham.2

See id.

Accordingly, AIG explained, National Union "must respectfully
disclaim coverage for indemnification or a defense of the
aforementioned civil action."

Doc. 13-2, at 3.

On May 12,

2004, AIG wrote Graham to explain that, while the Policy insured
one corporate defendant, Council on Aging, Inc., the Policy did
not insure the other corporate defendant, All Care Home &
Community Services, Inc.

Doc. No. 13-2, at 6.

The State's lawsuit against Graham continued until
September 24, 2009, when the Circuit Court of Kanawha County,
West Virginia granted Graham's Motion for Summary Judgment on
mootness grounds.

See Doc. No. 13-4, at 11; see generally, id.

(outlining facts that established the lawsuit's mootness); cf.
Doc. No. 13-3 (Council on Aging, Inc. resolving "to eliminate
any uncertainty, concern, question or speculation concerning any
future involvement [with Graham].").
On March 3, 2010, Graham filed the instant lawsuit against
National Union Fire Insurance Co. of Pittsburgh, PA (National
Union) in the Circuit Court of Mercer County, West Virginia.
See Doc. No. 1-2, at 2.

National Union filed a timely Notice of

Removal on April 6, 2010 based on diversity jurisdiction.
2

See

AIG cited (1) the Policy’s Endorsement #14, which excludes
claims seeking “non-pecuniary relief,” (2) the “wages, salaries
and benefits” exclusion found under Exclusion I of the Wrongful
Act Liability coverage, and (3) the “personal profit” exclusion
found under Exclusion A of the Wrongful Act Liability coverage.
3

Doc. No. 1 (citing 28 U.S.C. § 1332(a) as a basis for this
court’s original jurisdiction over the matter).

National Union

then responded to Graham's Complaint on April 27, 2010.

Doc No.

4.
On July 9, 2010, National Union filed a Motion for Summary
Judgment, alleging that only legal questions remained in the
case, namely whether the State's lawsuit against Graham was the
type of lawsuit covered by the Wrongful Act Liability portion of
the Policy.

See Doc. No. 13.

National Union's Motion for

Summary Judgment argued that four specific policy exclusions
applied to Graham's lawsuit and, as a result, National Union had
no duty to defend Graham in the State's lawsuit against him.3
Id.

On July 30, 2010, Graham responded in opposition to

National Union's Motion for Summary Judgment and filed his own
Cross-Motion for Summary Judgment against National Union,
arguing that none of the policy exclusions cited by National
Union applied to the State's lawsuit against Graham and that, by
not defending Graham in the State’s lawsuit, National Union
breached its contractual obligations to Graham, namely its duty
to defend him as an “insured” under the Policy.

3

Doc. No. 18.

National Union’s Motion for Summary Judgment argued that the
same exclusions cited in AIG’s April 29, 2004 letter applied to
the State’s lawsuit against Graham. Additionally, National
Union argued that a fourth exclusion applied, namely the
exclusion found in Endorsement #17. Doc. No. 13, at 3.
4

On February 17, 2011, this court granted summary judgment
in favor of National Union, finding that the Policy's "wages,
salary and benefits exclusion" applied to the State's lawsuit
against Graham.

Doc. No. 28.

Graham appealed this court's

decision and the Fourth Circuit reversed, concluding that none
of the Policy’s exclusions should be read to eliminate National
Union's duty to defend Graham in the State's lawsuit against
him.

Doc. No. 34.

Accordingly, on August 23, 2012, this court

reopened the case for further proceedings consistent with the
Fourth Circuit’s decision.

Doc. No. 41.

On November 21, 2012, National Union filed another Motion
for Summary Judgment, arguing, among other things, that Graham's
demands for prejudgment interest and incidental and/or
consequential damages were not allowed under West Virginia law.
See Doc. No. 46.

On December 5, 2012, Graham responded in

opposition to National Union's Motion for Summary Judgment and
filed a Cross-Motion for Partial Summary Judgment against
National Union.

Doc. No. 48.
II. Applicable Law

A. Summary Judgment Standard
Rule 56(a) of the Federal Rules of Civil Procedure states,
in relevant part, that a court “shall grant summary judgment if
the movant shows that there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter

5

of law.”

Fed. R. Civ. P. 56(a); see also N. Carolina Growers'

Ass'n, Inc. v. United Farm Workers, 702 F.3d 755, 763 (4th Cir.
2012).

Moreover, Rule 56(a) authorizes summary judgment on

parts of claims or defenses as well as entire claims or
defenses.

Fed. R. Civ. P. 56(a).

Granting summary judgment, in full or in part, may still be
appropriate when only damages remain disputed.

See West v.

Costen, 558 F. Supp. 564, 575 (W.D. Va. 1983) (quoting a
previous version of Rule 56 that stated “summary judgment,
interlocutory in character, may be rendered on the issue of
liability alone although there is a genuine issue as to the
amount of damages.”).

If summary judgment is granted when only

damages are disputed, the case will proceed to trial for a
determination of damages.

Id.

B. First-Party Insurance and Third-Party Insurance
Insurance policies generally fall into one of two
categories: first-party insurance and third-party insurance.
However, these labels deceive because they refer to the nature
of the policy, not the type of insured or claimant who might
later assert rights under a given policy.

Black’s Law

Dictionary defines first-party insurance as insurance that
“applies to an insured or insured’s own property, such as life
insurance, health insurance, disability insurance, and fire
insurance.”

Black's Law Dictionary (9th ed. 2009).

6

Under West

Virginia law, first-party insurance “means that the insurance
carrier has directly contracted with the insured to provide
coverage and to reimburse the insured for his or her damages up
to the policy limits.”4

Marshall v. Saseen, 192 W. Va. 94, 100,

450 S.E.2d 791, 797 (1994).

Clearly, West Virginia’s definition

of first-party insurance emphasizes the indemnification aspect
of that type of insurance.
Conversely, Black’s Law Dictionary’s entry for “third-party
insurance” refers to “liability insurance,” defining that type
of insurance as “[a]n agreement to cover a loss resulting from
the insured's liability to a third party, such as a loss
incurred by a driver who injures a pedestrian. • The insured's
claim under the policy arises once the insured's liability to a
third party has been asserted.”

Id.

Modern textbook examples

of third-party insurance include, but are not limited to,
Comprehensive General Liability insurance, Directors and
Officers (D&O) insurance, and Errors and Omissions (E&O)
insurance.

These insurance types are typically purchased by a

corporate or governmental entity to protect the entity or its
4

West Virginia law includes underinsured or uninsured motorist
insurance under the rubric of first-party insurance. Marshall
v. Saseen, 192 W. Va. 94, 99, 450 S.E.2d 791, 796 (1994).
However, underinsured or uninsured motorist insurance “is
unusual in that it is tied to the status of a third-party
tortfeasor and may also be tied to the outcome of litigation
against that tortfeasor, giving this insurance some
characteristics similar to liability insurance.” 16 Couch on
Ins. § 227:35.
7

agents against lawsuits.

D&O policies, for example, are

purchased by the corporation and generally protect corporate
officers and directors against claims alleging wrongful acts
against them in their capacity as officers and directors.

D&O

insurance is a clear example of third-party insurance, if for no
other reason than its classification as a type of liability
insurance.

Cf. Shareholder Deriv. Actions L. & Prac. § 6:35

(2012)(stating “a number of statutes now expressly authorize the
use of self-insurance or other alternative to the purchase of
D&O insurance from a third-party insurance underwriter.”)
West Virginia law does not directly define third-party
insurance, although it does define who qualifies as a thirdparty claimant under any given insurance policy type.

In Loudin

v. National Liability & Fire Insurance Company, the West
Virginia Supreme Court of Appeals addressed a unique situation
in which an individual claimant under an insurance policy could
qualify as both a first-party claimant and third-party claimant.5

5

Loudin referred to the West Virginia Insurance Commissioner’s
regulations defining “first-party claimant” and “third-party
claimaint.” See W. Va. Code R. § 114-14-2 (defining “firstparty claimant” as “an individual, corporation, association,
partnership or other legal entity asserting a right to payment
under an insurance policy or insurance contract arising out of
the occurrence of the contingency or loss covered by such policy
or contract” and defining “third-party claimant” as “any
individual, corporation, association, partnership or other legal
entity asserting a claim against any individual, corporation,
association, partnership or other legal entity insured under an
8

To resolve the ambiguity, the Loudin court held “when a named
policyholder files a claim with his/her insurer, alleging that a
nonnamed insured under the same policy caused him/her injury,
the policyholder is a first-party claimant in any subsequent bad
faith action against the insurer arising from the handling of
the policyholder's claim.”

Loudin v. Nat'l Liab. & Fire Ins.

Co., 228 W. Va. 34, 716 S.E.2d 696, 703 (2011).

However, the

dissent in Loudin clearly defines first-party and third-party
insurance where the majority did not, quoting oft-cited
commentators on insurance law and other jurisdictions.
Justice Benjamin’s dissent quoted Couch on Insurance,
agreeing that
[f]irst-party insurance is a contract between the insurer
and the insured to protect the insured from its own actual
losses and expenses. Property insurance, fidelity
insurance, and medical/health insurance are all examples of
first-party insurance. Third-party insurance is a contract
to protect the insured from losses resulting from actual or
potential liability to a third party. This protection may
involve defending the insured from suit, paying or settling
a claim against the insured, or a combination of both.
Liability insurance is third-party insurance.
14 Couch on Ins. § 198:3 (emphasis added).

Despite Justice

Benjamin’s disagreement with the outcome in Loudin, his dissent
provides the clearest and most recent delineation between firstparty and third-party insurance in West Virginia.

insurance policy or insurance contract of an insurer.”)(emphasis
added).

9

C. Recoverable Damages under Pitrolo and Hayseeds
In West Virginia, if an insurer breaches its duty to defend
an insured, the insured is entitled to recover its litigation
expenses, including costs and reasonable attorney’s fees.

Aetna

Cas. & Sur. Co. v. Pitrolo, 176 W. Va. 190, 193, 342 S.E.2d 156,
159 (1986).

According to Pitrolo, allowing recovery of

attorney’s fees in this situation is justified “where an insurer
has violated its contractual obligation to defend its insured,
[because] the insured should be fully compensated for all
expenses incurred as a result of the insurer’s breach of
contract.”

Id.

Full compensation, according to Pitrolo,

included recovery of litigation expenses incurred during the
underlying civil lawsuit and the declaratory judgment action
brought in that case in order to determine whether the insurer
owed the insured a duty to defend.

Id.

Separately, the famous Hayseeds case has been extended to
provide for extra-contractual damages when an insured
“substantially prevails” against an insurer in a lawsuit
involving first-party insurance.

See Marshall v. Saseen, 450

S.E.2d 791, 796-97 (W.Va. 1994)(extending Hayseeds to cases
involving underinsured or uninsured motorist insurance, making
the “critical point” that both property damage insurance and
underinsured or uninsured motorist insurance are “first-party

10

insurance.”); Hayseeds, Inc. v. State Farm Fire & Cas., 352
S.E.2d 73 (W.Va. 1986).

Regarding West Virginia law, Marshall

could not be clearer—Hayseeds damages are only available to
insureds who “substantially prevail” against insurers in
lawsuits involving first-party insurance.
D. Prejudgment Interest on Attorney’s Fees and Costs incurred as
a result of an insurer’s Breach of Duty to Defend
The West Virginia Code, Section 56-6-31, provides for
prejudgment interest “if the judgment [. . .], or any part
thereof is for special damages, as defined below, or for
liquidated damages.”

W. Va. Code § 56-6-31(a).

The statute

goes on to define special damages to include “lost wages and
income, medical expenses, damages to tangible personal property
and similar out-of-pocket expenditures, as determined by the
court.”

Id. (emphasis added).

Generally, West Virginia courts

construe the prejudgment interest statute to focus on the phrase
“similar out-of-pocket expenditures.”

This focus exists, in

part, because the statute demands it by the clause “as
determined by the court.”
In accordance with the prejudgment interest statute, the
West Virginia Supreme Court has declined to extend “similar outof-pocket expenditures” to include attorney’s fees.

See State

ex rel. Chafin v. Mingo County Comm’n, 434 S.E.2d 40, 44 (W.Va.
1993)(noting that prejudgment interest was traditionally

11

“applicable only to contract actions,” but had been expanded to
apply to wrongful death actions involving loss or damage to real
and personal property.).
III. Analysis
A. Nature of the parties’ motions
As noted above, the Fourth Circuit reversed this court’s
February 17, 2011 Order granting summary judgment in favor of
National Union regarding its duty to defend Graham in the
State’s lawsuit against him.

Doc. No. 34.

Accordingly, the

duty portion of Graham’s claim against National Union has been
resolved.

The only remaining questions are (1) what type of

damages may Graham recover as a result of National Union’s
breach and (2) what amount of damages is allowed and
appropriate?
The first issue is purely one of West Virginia insurance
law.

However, contrary to the styling of Graham’s Complaint in

this case (Doc. No. 1-2, at 4), a particular demand for relief
is not an independent cause of action.

Rather, Graham’s demand

for extra-contractual damages under Hayseeds is one part of
Graham’s breach of duty to defend action against National Union.
Accordingly, the court construes both Graham’s and National
Union’s motions as motions for partial summary judgment.

The

same analysis applies as with motions for summary judgment and

12

the issue of damages, if it remains in dispute following this
Order, may proceed to trial.
B. Graham is not entitled to Hayseeds damages
In reversing this court’s grant of summary judgment in
favor of National Union, the Fourth Circuit concluded that
National Union “violated its [duty to defend]” Graham in the
State’s lawsuit against him.

Doc. No. 34, at 12.

Moreover, the

Fourth Circuit found that the Policy that created National
Union’s duty to defend Graham was a “general liability insurance
policy.”

Id., at 2.

Examining the Policy, it is plain that the

entire Policy is composed of various liability insurance
coverage types.

See Doc. No. 13-5 (Coverage A is Comprehensive

General Liability Insurance, Coverage B is Personal Injury
Liability Insurance, Coverage C is Professional Liability
Insurance, Coverage D is Stop Gap Liability Insurance, and
Coverage E is Wrongful Act Liability Insurance).

Both parties

agree that National Union’s particular duty to defend Graham
arose out of Coverage E, the Policy’s Wrongful Act Liability
Insurance.

See id., at 18-22.

The Policy’s Wrongful Act Liability Insurance, like
virtually any other form of liability insurance, is third-party
insurance because it is “a contract to protect the insured from
losses resulting from actual or potential liability to a third
party.”

14 Couch on Ins. § 198:3; see Doc. No. 13-5, at 18

13

(stating that National Union “shall have the right and duty to
defend any suit against the ‘insured’ where that suit seeks
“damages for a ‘loss’ arising from any ‘Wrongful Act” of the
‘insured.’”).

More particularly, the Wrongful Act Liability

Insurance purchased by the Council on Aging is very similar to a
corporate D&O liability insurance policy—it insures the Council
on Aging and its directors and officers, among others, against
claims from third-parties.
As outlined above, Hayseeds damages are only recoverable
where an insured “substantially prevails” against an insurer in
a lawsuit to recover amounts owed under a first-party insurance
policy.

See Marshall v. Saseen, 450 S.E.2d 791, 796-97 (W.Va.

1994)(extending Hayseeds to cases involving underinsured or
uninsured motorist insurance, making the “critical point” that
both property damage insurance and underinsured or uninsured
motorist insurance are “first-party insurance.”); see also
Graham’s Cross-Motion for Partial Summary Judgment, Doc. No. 48,
at 10 (drawing the same distinction as the court and citing
Marshall for support).
However, Graham muddles the distinction between first-party
insurance and first-party policyholders; again, the two are
distinct.

The former refers to a type of insurance, the latter

refers to a type of insurance claimant, regardless of the type
of insurance.

After scouring the rulings of the West Virginia

14

Supreme Court of Appeals, this court could find no law extending
Hayseeds damages to third-party insurance cases.

The most

analogous case, which still does not yield the result Graham
seeks, is Loudin v. National Liability & Fire Insurance Company.
In Loudin, the West Virginia Supreme Court of Appeals
addressed a unique situation in which an individual claimant
under an insurance policy could qualify as both a first-party
and third-party claimant.

The Court held that “when a named

policyholder files a claim with his/her insurer, alleging that a
nonnamed insured under the same policy caused him/her injury,
the policyholder is a first-party claimant in any subsequent bad
faith action against the insurer arising from the handling of
the policyholder's claim.”

Loudin v. Nat'l Liab. & Fire Ins.

Co., 228 W. Va. 34, 716 S.E.2d 696, 703 (2011).

This narrow

holding cannot apply to Graham’s lawsuit.
Graham is not a named policyholder and has not alleged that
a nonnamed insured under the same policy has caused him injury.
Moreover, in his original Reply to National Union’s Response in
Opposition to Graham’s initial Cross-Motion for Summary
Judgment, Graham admitted that his “action against National
Union is not a common law bad faith claim.

Indeed, the words

'bad faith' do not appear anywhere in Graham's complaint.
Rather, a review of Graham's complaint reveals that [the
complaint] is plainly seeking relief under a theory of breach of

15

contract."

Doc. No. 23, at 9.

There is simply no way to

stretch Loudin such that it fairly extends Hayseeds damages to a
lawsuit like Graham’s.
Moreover, despite his confusion between the two insurance
law concepts of first-party insurance and first-party claimant,
Graham would nevertheless have this court extend Hayseeds to
lawsuits where an insured sues an insurer for breach of duty to
defend under a third-party insurance policy.

Id. at 11.

Graham

suggests this extension based on the “policy” of Hayseeds.

Id.

This court declines—indeed, is unable—to make West Virginia law
based on a party’s policy arguments.
Accordingly, Graham is not entitled to recover any
Hayseeds-type damages on his breach of duty to defend claim
against National Union.
C. Graham is entitled to damages under Pitrolo
National Union believes it is liable to Graham for (1)
reasonable attorney’s fees and costs associated with his defense
against the State’s lawsuit against him and (2) attorney’s fees
and costs incurred in pursuing the instant lawsuit.6
47, at 2.

Doc. No.

Graham does not dispute National Union’s concession.

The court finds, after reviewing Aetna Casualty & Surety Company

6

National Union imprecisely refers to the instant lawsuit as a
declaratory judgment action. Graham seeks only affirmative,
legal damages as relief in this case, not a declaratory
judgment, which is usually equitable in nature.
16

v. Pitrolo, that National Union’s belief is well-founded in West
Virginia law.
Under Pitrolo, if an insurer breaches its duty to defend an
insured, the insured is entitled to recover its litigation
expenses, including costs and reasonable attorney’s fees.

Aetna

Cas. & Sur. Co. v. Pitrolo, 176 W. Va. 190, 193, 342 S.E.2d 156,
159 (1986).

Although Pitrolo awarded litigation expenses for

the underlying lawsuit as well as the declaratory judgment
action involved in that case, the Pitrolo principle is that an
insured “should be fully compensated for all expenses incurred
as a result of the insurer’s breach of contract,” both for the
litigation expenses of the case below and at bar.

Id.

Accordingly, under Pitrolo, Graham is entitled to recover
reasonable attorney’s fees and costs associated with his defense
against the State’s lawsuit against him and reasonable
attorney’s fees and costs incurred in pursuing the instant
lawsuit.

Furthermore, because Graham submitted proper

documentation showing he signed a contingent fee agreement for
the instant lawsuit (Doc. No. 49), that agreement controls the
proper award of attorney’s fees and costs concerning the instant
lawsuit.
D. Graham is not entitled to prejudgment interest
Graham argues that he only seeks prejudgment interest on
special damages, particularly those arising from the State’s

17

lawsuit against him.

See Doc. No. 48, at 7.

However, the

“special damages” Graham seeks are comprised entirely of
attorney’s fees and associated litigation expenses.

Graham

cites no West Virginia law that would essentially roll Pitrolotype attorney’s fee awards into a “special damages” bundle for
purposes of awarding prejudgment interest on that amount.
Indeed, State ex rel. Chafin v. Mingo County Commission suggests
the West Virginia Supreme Court of Appeals would not apply
prejudgment interest to attorney’s fees awarded under Pitrolo.
State ex rel. Chafin v. Mingo County Comm’n, 434 S.E.2d 40, 44
(W.Va. 1993).

The court will not construe West Virginia’s

prejudgment interest statute to cover Pitrolo damages in this
case, particularly when it appears the West Virginia Supreme
Court of Appeals would not.
Accordingly, Graham is not entitled to recover prejudgment
interest on any recoverable damages.
IV. Conclusion
For the foregoing reasons, the court GRANTS defendant’s
motion for partial summary judgment (Doc. No. 46) and DENIES
plaintiff’s cross-motion for partial summary judgment (Doc. No.
48).

Moreover, the court ORDERS the plaintiff to submit a

renewed demand for damages in an amount consistent with the
rulings in this Memorandum Opinion and Order.

18

The Clerk is directed to send copies of this Memorandum
Opinion and Order to counsel of record.
IT IS SO ORDERED this 7th day of March, 2013.
ENTER:
David A. Faber
Senior United States District Judge

19