American Automobile Insurance Company v. Smith

Filing 29

MEMORANDUM OPINION AND ORDER: The Court does ORDER that Plaintiff American Automobile Insurance Company's 27 MOTION for Default Judgment Pursuant to Rule 55(b)(2), FRCivP be GRANTED. Signed by Judge Irene C. Berger on 7/1/2013. (cc: attys; any unrepresented party) (slr)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
BECKLEY DIVISION

AMERICAN AUTOMOBILE
INSURANCE COMPANY,
Plaintiff,
v.

CIVIL ACTION NO. 5:12-cv-08183

JOHN P. SMITH, et al.,
Defendants.

MEMORANDUM OPINION AND ORDER
Plaintiff, American Automobile Insurance Company (“AAIC”), brought this action against
John P. Smith and Robert Smith (“the Smith Defendants”) and Robert Rufus, Jack Tolliver, and
Greenbrier Property Group L.L.C. (collectively known herein as “the GPG Defendants”)1 seeking
a declaratory judgment that AAIC is not obligated to defend or indemnify the Smith Defendants
against claims asserted by the GPG Defendants in an underlying state court action involving an
alleged fraudulent scheme to purchase real estate at a price that exceeded the market value.
(Complaint for Declaratory Judgment (Document 1)). This Court has previously directed the
entry of default against all Defendants. (Order (Document 25)). AAIC now moves for default
judgment against all Defendants by asking this Court to declare as a matter of law that it does not
have to defend or indemnify the Smith Defendants under its errors and omissions liability
insurance policy. (Plaintiff American Automobile Insurance Company’s Motion for Default
Judgment (“Pl.’s Mot.”) (Document 27)).

1

Together with Rufus and Tolliver, John and Robert Smith are members of the Greenbrier Property Group, LLC.

After careful consideration of AAIC’s motion, the memorandum in support (Document
28), the relevant policy language and the allegations in the underlying state court action, the Court
finds that AAIC is not required to defend or indemnify John and Robert Smith.

I.
John Smith and Robert Smith seek the defense and indemnification of John Smith’s
Sponsored P&C Insurance Agents Errors and Omissions Liability Insurance Policy (“Ins.
Policy”), Policy No. 144215 09 05, for claims asserted against them in a state court civil action,
Rufus v. Greenbrier Sporting Club Dev. Co. Inc., in the Circuit Court of Greenbrier County, West
Virginia. The GPG Defendants initiated the underlying state lawsuit on May 11, 2012, against
the Greenbrier Sporting Club Development Company, Inc., United Bank, Inc., Melinda Smailes,
Stan McQuade, Thelma McQuade, James Staton and the Smith Defendants by alleging that the
defendants engaged in fraudulent conduct to sell certain real property located in the White Sulphur
District, Greenbrier County, West Virginia, to the GPG at a “grossly inflated price.”2 (Pl.’s Mot.
Ex A., Complaint, Rufus v. Greenbrier Sporting Club Dev. Co., Inc., Civil Action No. 12-C-107
(Document 27-1)).
According to the state court plaintiffs, the Smith Defendants presented the Greenbrier
Sporting Club property investment opportunity to Rufus, Tolliver and GPG, represented that the
property was a “unique ‘no risk’ investment opportunity,” asserted that the fair market value of the
property exceeded $900,000, and advised that a $110,000 membership in the Sporting Club was
mandatory with the sale of the real property. Additionally, the Smith Defendants allegedly
2
Indeed, in a previous version of the state case, John and Robert Smith were listed as party plaintiffs against the
named defendants. (See Pl.’s Mot. Ex C., Complaint ¶¶ 1-5, Smith v. Greenbrier Sporting Club Dev. Co., Inc., Civil
Action No. 11-C-516 (Document 27-3)). However, on June 14, 2012, the Cabell County Circuit Court dismissed the
first state action for improper venue. (Pl.’s Mot. Ex D. Final Order (Document 27-4)).

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provided the plaintiffs with promotional materials about the property, represented that it could be
relisted and sold in less than eighteen months, advised that United Bank had assured 100%
financing of the property and membership fee, limited to 90% of the property’s appraised value,
and that the purchasing contract was contingent upon that financing. According to the state court
plaintiffs, the Smith Defendants knew or should have known that the actions of the remaining
defendants, including those performing the property appraisal, were fraudulent and negligent
because the purchase price, appraisal and subsequent loan were in excess of the actual value of the
land. The state plaintiffs also allege that the Smiths had a fiduciary duty to use reasonable care in
their investigation of the purchased property, but that this duty was breached, which has resulted in
their injury and damage. The plaintiffs also allege that various fraudulent misrepresentations
were made by the remaining defendants to induce them into purchasing the real estate.
Consequently, in addition to the claim asserted against the Smiths, the plaintiffs assert claims of
fraud in the inducement, constructive fraud, breach of fiduciary duty, negligent misrepresentation,
breach of duty to use due diligence and fair dealing, and civil conspiracy against the defendants.3
Upon the Smiths’ assertion of coverage, AAIC filed this action on November 28, 2012.
On April 15, 2013, upon review of the docket in this matter, the Court directed the entry of default
against Defendants. AAIC now moves pursuant to Rule 55(b) of the Federal Rules of Civil
Procedure for a default judgment.
II.
The Declaratory Judgment Act authorizes a district court to “declare the rights and other
legal relations of any interested party seeking such declaration, whether or not further relief is or
3
The state court plaintiffs seek to recover compensatory and punitive damages, attorney fees, litigation costs, pre
and post judgment interest, an injunction to prohibit the defendants from collecting money fraudulently loaned and
from engaging in the complained of conduct, and other damages allowable by law.

3

could be sought.” 28 U.S.C. § 2201. District courts have discretion in deciding whether or not to
make such a declaration of rights “in a case of actual controversy.” Aetna Cas. & Sur. Co. v.
Ind-Com Elec. Co., 139 F.3d 419, 421 (4th Cir. 1998); 28 U.S.C. § 2201. The relief sought in a
declaratory judgment action “is appropriate ‘when the judgment will serve a useful purpose in
clarifying and settling the legal relations in issue, and . . . when it will terminate and afford relief
from the uncertainty, insecurity, and controversy giving rise to the proceeding.” Penn-America
Ins. Co. v. Coffey, 368 F.3d 409, 412 (4th Cir. 2004) (quoting Aetna Cas. & Sur. Co. v. Quarles, 92
F.2d 321, 324 (4th Cir. 1937)). “It is well established that a declaration of parties’ rights under an
insurance policy is an appropriate use of the declaratory judgment mechanism.” United Capitol
Ins. Co. v. Kapilloff, 155 F.3d 488, 494 (4th Cir. 1998); Nautilus Ins. Co. v. Winchester Homes,
Inc., 15 F.3d 371, 375 n.3 (4th Cir. 1994) (considering that an insurance company’s action seeking
a declaration that it has no duty to defend or indemnify an insured against a third party’s tort claim
generally qualifies as an actual controversy.)
The question for the Court in consideration of this declaratory judgment action is “whether
the insurer had a duty to defend [and/or indemnify] under the terms of the insurance policy.” Aetna
Cas. & Sur. Co. v. Pitrolo, 342 S.E. 2d 156, 161 (W. Va. 1986). The “[d]etermination of the
proper coverage of an insurance contract when the facts are not in dispute[, as it is in this case,] is
a question of law.” Tennant v. Smallwood, 568 S.E.2d 10, 14 (W. Va. 2002) (citations and
quotation omitted). By and large, an insurer’s duty to defend “is broader than” its duty to
indemnify, since an insurer typically must defend its insured if a claim against the insured ‘could,
without amendment, impose liability for risks the policy covers.’” Bowyer v. Hi-Lad, Inc., 609
S.E.2d 895, 912 (W. Va. 2004). Under West Virginia law, a liability insurer’s “duty to defend is

4

tested by whether the allegations in the plaintiff's complaint are reasonably susceptible of an
interpretation that the claim may be covered by the terms of the insurance policy.” (Pitrolo, 342
S.E. 2d at 160) (citations omitted). The complaint “need not ‘specifically and unequivocally
make out a claim within the coverage[]’” to invoke the duty to defend. (Id.). “However, [if] the
causes of action alleged in the plaintiff’s complaint are entirely foreign to the risks covered by the
insurance policy, then the insurance company is relieved of its duties under the policy.” Bowyer,
609 S.E.2d at 912.
It has long been recognized that “since insurance policies are prepared solely by insurers,
any ambiguities in the language of insurance policies must be construed liberally in favor of the
insured.” Pitrolo, 342 S.E.2d at 160 (citations omitted); Horace Mann Ins. v. Leeber, 376 S.E.2d
581, 584 (W. Va. 1988) (this principle applies to the insurer’s duty to defend and to pay).
Therefore, “any question concerning an insurer’s duty to defend under an insurance policy must be
construed liberally in favor of an insured where there is any question about an insurer’s
obligations.” (Id.)

However, “[w]here the provisions of an insurance policy contract are clear

and unambiguous they are not subject to judicial construction or interpretation, but full effect will
be given to the plain meaning intended.” Keffer v. Prudential Ins. Co. of America, 172 S.E.2d 714,
715 (W. Va. 1970). Finally, “if part of the claims against an insured fall within the coverage of a
liability insurance policy and part do not, the insurer must defend all of the claims, although it
might eventually be required to pay only some of the claims.” Leeber, 376 S.E.2d at 584.

III.
This Court’s examination of whether AAIC has a duty to defend and/or indemnify the
Smiths fundamentally requires an evaluation of both the pertinent portions of the errors and
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omissions policy and the underlying allegations against them. To date, no opposition to this
motion has been filed. However, a review of the liability coverage and the products covered by
the policy handedly establishes that the Smiths are not entitled to coverage under the policy.
Of import, the errors and omissions policy at issue provides that AAIC will:
pay on the Agent’s behalf all Loss which such Agent is legally
obligated to pay as a result of a Claim first made against such Agent
or its Agency/Agency Staff and reported to Us during the Policy
Period in accordance with Section VI. Conditions I.2., provided
that such Claim is for a Wrongful Act in the rendering of or failure
to render Professional Services in connection with a Covered
Product if that Wrongful Act occurs wholly after the Retroactive
Date.
(Ins. Policy, Section I. Coverage A.1.).4 AAIC does not dispute that the Smith Defendants are
agents or staff members of the agency covered by the policy. However, AAIC challenges

4

Relevant to this provision are the following defined terms:
C. Claim, either in the singular or plural, means:
1. Any written demand You receive for compensatory damages or
services for a Wrongful Act, including but not limited to, the institution of
arbitration proceedings against You, or
2. Any civil proceeding seeking compensatory damages against You for
a Wrongful Act, commenced by the service of a complaint or similar pleading.
All Claims against the Insured arising out of the same Wrongful Act or
Interrelated Wrongful Acts whether such Wrongful Acts involve just the
Insured or others for whose acts the Insured may be legally responsible, or the
same or different claimants, will be considered one Claim. All Claims arising
out of Interrelated Wrongful Acts will be considered first made at the time the
earliest such Claim was made against the Insured.
***
Q. Wrongful Act, either in the singular or plural, means:
1. Any actual or alleged negligent act, error or omission, or negligent
misstatement or misleading statement by any Agent or its Agency/Agency Staff
in the rendering of or failure to render Professional Services; or
2. Any actual or alleged negligent Personal Injury arising out of any
Agent's or its Agency/Agency Staff's rendering of or failure to render
Professional Services.

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whether the underlying dispute is a Covered Product under the Policy.

According to the

insurance policy, a Covered Product is
1. Property and casualty insurance coverage including workers
compensation insurance offered by a Product Provider, including
Product Providers other than the Sponsoring Company
a. Provided that the Sponsoring Company does not write
the Covered Product. For the purpose of this policy a
Covered Product that the Sponsoring Company does not
write means any Covered Product other than one for which
rates, rules, and forms are shown in the Agents Portfolio, the
Agents Technical Guides, and any other written or oral
material provided to all agents in a given state or region by
the Sponsoring Company;
b. Where the Insured has no contract or appointment for
such Covered Product with the subsidiary or affiliate of the
Sponsoring Company that provides such Covered
Product;
c. Provided that the Covered Product is offered by
Nationwide Agribusiness Insurance Company or Farmland
Mutual Insurance Company and the Covered Product is
deemed to be brokerage business by the Sponsoring
Company.
2. Life Insurance (other than Variable Life Insurance Products),
Accident and Health Insurance, Disability Income Insurance or
Fixed Annuities, including Individual Retirement Annuities;
3. Group Employee Benefit Plans or Disability Plans, provided
such Plans are fully insured at all times, but not including Group or
Ordinary Pension or Profit Sharing Plans or
4. Group or Ordinary Pension or Profit Sharing Plans, Individual
Retirement Accounts, Keogh Plans, 401a, 401k, 403b, 408k, 408p,
501b or 503b Plans, and fixed retirement annuities.
Covered Product does not include any plan or arrangement

(Ins. Policy, Section III. Definitions C & Q).

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operating as a Multiple Employer Welfare Arrangement (as defined
in the Employer Retirement Income Security Act of 1974 including
any amendments thereto).
(Ins. Policy, Amended Covered Product Definition 144618 04 12 Endorsement (Document 27-2)
at 23). The Financial Products: Mutual Funds, Variable Products and Securities Extension
144630 04 09 amended the Policy’s definition for a Covered Product as follows:
Covered Product, either in the singular or plural, also means the
following products, provided, however, that the products have
already been approved in writing for sale or offered for sale by the
broker dealer(s) listed below:
a.
Variable products, including but not limited to Variable
Annuities and Variable Life Insurance, sold or serviced by the
Insured as a Registered Representative;
b.
Mutual Funds registered with the Securities and Exchange
Commission and sold or serviced by the Insured as a Registered
Representative; or
c.
Any Securities sold or serviced by the Insured as a
Registered Representative.
(Ins. Policy, Financial Products: Mutual Funds, Variable Products and Securities Extension
144630 04 09 (Document 27-2) at 40). For the purpose of this endorsement, the term Securities
has the same meaning as that term in the Securities Act of 1933, the
Securities Exchange Act of 1934, the Investment Company Act of
1940, and the Investment Advisers Act of 1940, and any
amendments thereto; provided, however, Securities shall not
include:
1.
Any Mutual Funds registered with the Securities and
Exchange Commission;
2.
Any promissory notes;
3.
Any unregistered Securities; or
4.
Any telephone leasing

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(Id. at 41.) Because the allegations in the underlying state litigation concern a real estate
transaction involving an inflated purchase price, rather than property and casualty insurance, life
accident or health insurance, an employee benefit plan or pension, profit sharing plans, IRAs or an
annuity, the disputed transaction cannot be found to be a Covered Product under the policy.
Moreover, although the GPG Defendants alleged in their state case that they purchased the real
estate based, in part, on their ability to re-sale the property in less than eighteen months, the
transaction cannot be found to fall within the definition of Covered Products under the Financial
Product Endorsement.

The disputed property purchase, while loosely described as “an

investment” in the state court complaint, does not involve securities, as that term is defined by the
policy5, mutual funds or variable insurance products. The nature of the state court action is
grounded in fraudulent tort claims related to the purchase of real property. Such claims are
“entirely foreign to the risks covered by the insurance policy,[consequently] then the insurance
company is relieved of its duties under the policy.” Bowyer, 609 S.E.2d at 912. Accordingly,
assuming that the Smiths’ conduct constituted a Wrongful Act under the policy, the Court finds

5
The Financial Products Endorsement defines the term “securities” in part based on the definition of that term in
the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the
Investment Advisors Act of 1940. Accordingly, that term means
any note, stock, treasury stock, security future, security-based swap, bond,
debenture, evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil, gas, or
other mineral rights, any put, call, straddle, option, or privilege on any security,
certificate of deposit, or group or index of securities (including any interest
therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign
currency, or, in general, any interest or instrument commonly known as a
“security”, or any certificate of interest or participation in, temporary or interim
certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing.
15 U.S.C. § 77b(a)(1); see also 15 U.S.C. §§ 78c(a)(10), 80a-2(a)(36), 80b-2(a)(18).

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that the Smiths are not entitled to the defense and indemnity because their conduct did not involve
a Covered Product. 6 Therefore, AAIC is entitled to a declaratory judgment that it has no
obligation to defend or indemnify the Smiths.
IV.
Consequently, upon consideration of the foregoing, the Court does hereby ORDER that
Plaintiff American Automobile Insurance Company’s Motion for Default Judgment (Document
27)) be GRANTED.
The Court DIRECTS the Clerk to send a copy of this Order to counsel of record and to any
unrepresented party.
ENTER:

July 1, 2013

6
Because of the disposition herein, the Court need not consider AAIC’s further argument that the Smiths did not
provide Professional Services to a Client (as those terms are used in the policy) inasmuch as any Professional Service
performed must have been in connection with a Covered Product.

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