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Fourth Circuit Affirms in Part and Vacates in Part West Virginia District Court Judgment Denying Prejudgment Interest on Attorney Fees and Opportunity to Prove Aggravation.
Robert Graham v. National Union Fire Insurance
In Robert Graham v. National Union Fire Insurance, the United States Court of Appeals for the Fourth Circuit was asked to address two (2) questions pertaining to the enforcement of insurance contracts. The first was whether an insured may recover damages for aggravation and inconvenience where his insurer, in breach of the policy, refused to defend him from potential liability arising from a lawsuit. The second question was whether, given the need of the insured to obtain alternative representation, prejudgment interest should accrue on the attorney fees incurred, for which the insurer was adjudged responsible. After remanding the case to the district court, the Fourth Circuit (per curiam) held that the lower court correctly denied Plaintiff, Robert Graham, prejudgment interest on his attorney fees, but erred in denying Mr. Graham the opportunity to prove damages for aggravation and inconvenience. Therefore, the appellate court vacated that aspect of the court’s judgment and again remanded the case for further proceedings.
Mr. Graham was the Executive Director of two (2) West Virginia nonprofit corporations that used state and federal funds to provide services to senior citizens. In 2004, the State of West Virginia sued Mr. Graham and his employers in the Circuit Court of Kanawha County, maintaining that Mr. Graham had manipulated the members of each corporation’s Board of Directors to pay himself exorbitant salaries and benefits. That alleged malfeasance, according to the State, entitled it to a writ of quo warranto, ordering Mr. Graham’s removal and the disgorgement of his ill-gotten gains. One (1) of the corporations, Council on Aging, Inc., was designated a “municipality” and named as an additional insured on a policy issued by National Union to the State. For an annual premium just in excess of $20,000, the policy purported to afford, among other things, general comprehensive liability coverage. Under the terms of the policy, that coverage extended to “[a]ny elected or appointed official, executive officer, commissioner, director, or member of the ‘Named Insured’ while acting within the scope of his duties as such.”
Council on Aging notified National Union’s claims agent of the State litigation, but the insurer denied coverage and refused to tender a defense. Mr. Graham thus defended himself against the lawsuit at his own expense. The action persisted until 2009, when the circuit court dismissed it as moot. The dismissal came after the boards of both corporations voted to remove Mr. Graham and prohibit his future involvement in their affairs, in connection with which Mr. Graham and the corporations executed a mutual release of liability. Mr. Graham filed a complaint on March 3, 2010, in the Circuit Court of Mercer County, alleging that National Union had breached its duty under the insurance contract to provide him with a defense to the State action. National Union removed the matter to the Southern District of West Virginia. On February 17, 2011, the insurer was granted summary judgment after the district court determined that certain policy exclusions supported the denial of coverage. The Fourth Circuit reversed that judgment, which engendered proceedings on remand and, in turn, led to a second appeal before the Fourth Circuit.
Applying West Virginia law, the Fourth Circuit stated that the body of law developing the remedies afforded West Virginia insureds for an insurer’s breach of contract traces its origin to Aetna Casualty & Surety Co. v. Pitrolo, 342 S.E.2d 156 (W. Va. 1986). In that case, Aetna filed a declaratory judgment action to determine whether it was obliged to defend its insured. After a jury found coverage to exist under the policy, the circuit court ordered Aetna to take over Pitrolo’s defense in the underlying matters and reimburse him for his attorney fees. On review of the circuit court’s order, the Supreme Court of Appeals of West Virginia (the “Court”) determined that Aetna was liable not only for the attorney fees relating to the three (3) negligence proceedings, but also for the fees Pitrolo incurred in the declaratory judgment action. In so ruling, the Court deemed it irrelevant that Aetna had, perhaps, reasonably denied coverage and had otherwise acted in good faith: “After all, stated the Court, the insurer had contracted to defend the insured, and it failed to do so.
The Fourth Circuit then cited to Hayseeds, Inc. v. State Farm Fire & Casualty, 352 S.E.2d 73 (W. Va. 1986), where the Supreme Court of Appeals of West Virginia held that, “whenever a policyholder must sue his own insurance company over any property damage claims, and the policy holder substantially prevails in the action, the company is liable for the payment of the policyholder’s reasonable attorneys’ fees.” Id. at 80. The fee recovery compensates the insured for “net economic loss caused by the delays in settlement,” i.e., as a foreseeable consequence of the breach. Id. The insured is also entitled to additional consequential damages in the form of “an award for aggravation and inconvenience.” Id. Thus, the Fourth Circuit opined that whether an action on the policy is instituted by the insurer (Pitrolo) or by the insured (Hayseeds), it is settled that whenever a breach is proven of the insurer’s duty to indemnify (Hayseeds) or broader duty to defend (Pitrolo), the insured may recover direct damages for attorney fees expended in any predicate proceeding. According to the Fourth Circuit, the insured is bound to suffer the same aggravation and inconvenience regardless of how the insurer breaches the policy: either by unjustifiably refusing to provide a defense against liability or by wrongfully withholding indemnification from property loss. Further, the court determined that there is no logical reason to authorize an award for one (1) item of consequential damages—attorney fees in the enforcement litigation—while simultaneously denying recovery for aggravation and inconvenience, which are merely other items in the same category. Therefore, the appellate court concluded that, in West Virginia, insureds in Graham’s position may be compensated for aggravation and inconvenience (subject to adequate proof thereof), insofar as those items of consequential damages are permitted generally.
Finally, the Fourth Circuit stated that West Virginia law authorizes an award of prejudgment interest for “special or liquidated damages” from the date of their accrual. See W. VA. CODE § 56-6-31(a). Special damages are direct in character and “include[ ] lost wages and income, medical expenses, damages to tangible personal property and similar out-of-pocket expenditures.” Id. If an item of damages is adjudged within the statute, prejudgment interest is mandatory. See Grove v. Myers, 382 S.E.2d 536, 540 (W. Va. 1989). In State ex rel. Chafin v. Mingo County Commission, 434 S.E.2d 40 (W. Va. 1993), the West Virginia Supreme Court affirmed the denial of prejudgment interest on a county official’s legal defense expenses deemed reimbursable from the public fisc. In so ruling, the Court observed that it was “not convinced that the lower court erred in determining that the [attorney fees] did not constitute ‘similar out-of-pocket expenditures’ and therefore did not qualify as an award entitling the [official] to prejudgment interest.” Finding, however, no requirement here that the circuit court approve any aspect of Graham’s private fee arrangement with his attorneys in the State lawsuit, the Fourth Circuit concluded that Graham became liable for those hourly fees as they were incurred, up to the entry of judgment. Nevertheless, the claim remained unliquidated beyond the entry of judgment until National Union stipulated to the precise amount due, on remand following the first appeal in the enforcement action. The Fourth Circuit concluded that the absence of liquidation was enough to exclude attorney fees—even those sustained as direct damages—from the reach of the West Virginia prejudgment interest statute. Accordingly, the Fourth Circuit affirmed the lower court’s judgment insofar as that court declined to award prejudgment interest on Graham’s attorney fees, but vacated the judgment to the extent that Graham was denied the opportunity to prove consequential damages in the form of aggravation and inconvenience attributable to National Union’s breach of the insurance contract. The case was then remanded to the district court.
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