On February 3, 2014, the United States Court of Appeals for the Fourth Circuit added an additional tool for West Virginia policyholders who are injured by an insurer’s wrongful denial of coverage and refusal to defend. In Graham v. National Union Fire Insurance Company of Pittsburgh, PA, No. 13-1517, the court held that West Virginia law permits an insured to recover damages for aggravation and inconvenience resulting from an insurer’s improper denial.
In this diversity action, Robert E. Graham was the executive director of two West Virginia nonprofits that utilized state and federal funds to provide services to senior citizens. The State of West Virginia sued Graham, seeking his removal and the disgorgement of allegedly ill-gotten gains from the nonprofit corporations. Graham sought coverage under a National Union general liability policy, but National Union denied the claim and refused to provide Graham with a defense. Graham brought suit, alleging that National Union breached its duty under the insurance contract to provide him with a defense, and sought, among other things, damages associated with the aggravation and inconvenience that resulted from National Union’s denial of coverage.
Initially, the United States District Court for the Southern District of West Virginia ruled that certain policy exclusions supported National Union’s denial of coverage, but the Fourth Circuit reversed; as a result, on remand, the district court found that National Union breached the insurance contract when it refused to defend Graham in the underlying action. As damages, Graham sought not only the cost of defending the claim, prejudgment interest, and attorneys’ fees incurred in obtaining coverage, but also additional damages for aggravation and inconvenience. The parties filed cross-motions for summary judgment on whether the insured could recover prejudgment interest and damages for aggregation and inconvenience. The district court granted insurer’s motion for summary judgment and held that West Virginia law did not permit the insured to recover these damages.
On appeal, the Fourth Circuit affirmed the district court’s denial of prejudgment interest, but vacated the summary judgment regarding aggravation and inconvenience damages, and remanded for further proceedings to permit Graham to prove that he incurred aggravation and inconvenience attributable to insurer’s breach of the insurance contract. In so ruling, the appellate court extended West Virginia Supreme Court precedent that permits an insured to recover “consequential damages in the form of ‘an award for aggravation and inconvenience’” when insurers breach first-party insurance policies (providing indemnification for loss) to third-party insurance policies (implicating both the duty to defend and the duty to indemnify). The Fourth Circuit reasoned that 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.” The appellate court explained that an insured is entitled to the “full array of consequential damages ordinarily available to the insured in a breach-of-contract proceeding” because “it depends naught on the characterization of the insurance as first-party or third-party.”
The Fourth Circuit emphasized that an insured was entitled to recover consequential damages under West Virginia law resulting from a breach of an insurance policy. For instance, whenever an insurer breaches its duty to indemnify or duty to defend, the insured may recover direct damages for attorney fees expended in any underlying proceeding and also consequential damages for fees incurred to enforce the policy against the insurer. From the court’s perspective, damages for aggravation and inconvenience were simply an additional consequential damage that the insured incurred as a result of the insurer’s breach, and could be recovered.
Somewhat limiting the utility of the Graham decision is the fact that the court designated the opinion as “not for publication,” meaning that it is not binding precedent. However, the Fourth Circuit’s logic appears unimpeachable, and its ruling is a natural extension of existing West Virginia law. Accordingly, it is reasonable to expect that subsequent decisions will permit policyholders to recover for the “aggravation” and “inconvenience” they incur as a result of a liability insurer’s refusal to defend or indemnify, in addition to any other remedies that they may have under applicable law (including breach of the implied covenant of good faith and fair dealing or statutory remedies for unfair trade practices).