Robert E. Graham v. National Union Fire Insurance Company of Pittsburgh, Pa

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-1517
ROBERT E. GRAHAM,
Plaintiff – Appellant,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
Defendant – Appellee.
Appeal from the United States District Court for the Southern
District of West Virginia, at Bluefield. David A. Faber, Senior
District Judge. (1:10-cv-00453)
Argued: December 10, 2013 Decided: February 3, 2014
Before KING, GREGORY, and FLOYD, Circuit Judges.
Affirmed in part, vacated in part, and remanded by unpublished
per curiam opinion.
ARGUED: Michael W. Carey, CAREY, SCOTT, DOUGLAS & KESSLER, PLLC,
Charleston, West Virginia, for Appellant. Don C.A. Parker,
SPILMAN, THOMAS & BATTLE, PLLC, Charleston, West Virginia, for
Appellee. ON BRIEF: John A. Kessler, David R. Pogue, CAREY,
SCOTT, DOUGLAS & KESSLER, PLLC, Charleston, West Virginia, for
Appellant. Glen A. Murphy, SPILMAN THOMAS & BATTLE, PLLC,
Charleston, West Virginia, for Appellee.
Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:
This appeal presents two questions of West Virginia law
pertaining to the enforcement of insurance contracts. The first
is whether an insured may recover damages for aggravation and
inconvenience where his insurer, in breach of the policy, has
refused to defend him from potential liability arising from a
lawsuit. The resultant need of the insured to obtain
alternative representation leads to the second question:
whether prejudgment interest should accrue on the attorney fees
thereby incurred, for which the insurer is subsequently adjudged
responsible.
The district court answered both questions in the negative,
pursuant to which it entered judgment for the plaintiff, Robert
E. Graham, against the defendant, National Union Fire Insurance
Co. of Pittsburgh, Pennsylvania, for the reduced sum of
$278,273.56. Three-quarters of the judgment was awarded to
reimburse Graham for his attorney fees in connection with the
precursor liability action, with the balance intended to
compensate him for the fees earned by counsel in the litigation
below to enforce the policy. The court entered its judgment on
remand from our prior decision on the merits, see Graham v.
National Union Fire Insurance Co. of Pittsburgh, Pennsylvania,
474 F. App’x 956 (4th Cir. 2012) (unpublished), in which we

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rejected National Union’s defenses to Graham’s allegations of
breach.
In the aftermath of our remand, National Union sought a
specific demand from Graham as a catalyst for negotiations and
possible settlement. By letter from his counsel dated September
20, 2012, Graham asserted entitlement to the aforementioned
attorney fees, plus $160,083.57 in prejudgment interest on that
portion of the fee award associated with the threshold liability
proceedings. He also demanded $368,788.74 for aggravation and
inconvenience. Though National Union acceded to the proposed
award of attorney fees, the parties could not otherwise agree on
the proper amount due Graham. The issue thereafter arose on
cross-motions for summary judgment, and, by its Memorandum
Opinion and Order of March 7, 2013, the district court ruled in
National Union’s favor on the disputed items of damages. See
Graham v. Nat’l Union Ins. Co. of Pittsburgh, Pa., No. 1:10-cv-
00453 (S.D. W. Va. Mar. 7, 2013) (the “Opinion”).1 On March 14,
2013, the court entered the conforming judgment described above.
Graham timely noted this appeal on March 29, 2013.
We conclude that, the district court correctly denied
Graham prejudgment interest on his attorney fees. We therefore
1 The Opinion is found at J.A. 210-30. (Citations herein to
“J.A. ___” refer to the contents of the Joint Appendix filed by
the parties to this appeal.)

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affirm that aspect of the court’s judgment. The court erred,
however, in denying Graham the opportunity to prove damages for
aggravation and inconvenience. We thus vacate that aspect of
the court’s judgment and again remand for further proceedings.
I.
Graham was the Executive Director of two West Virginia
nonprofit corporations that used state and federal funds to
provide services to senior citizens. In 2004, the State of West
Virginia sued Graham and his employers in the Circuit Court of
Kanawha County, maintaining that 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 Graham’s removal and the disgorgement of his ill-gotten
gains.2
One of the corporations, Council on Aging, Inc., was
designated a “municipality” and named as an additional insured
2 At common law, the writ of quo warranto (and the attendant
extraordinary proceeding) is “designed to test whether a person
exercising power is legally entitled to do so.” Black’s Law
Dictionary 1256 (6th ed. 1990). In West Virginia, “[a] writ of
quo warranto may be awarded and prosecuted in the name of the
State” against, inter alios, “a corporation for a misuse or
nonuse of its corporate privileges and franchises, or for the
exercise of a privilege or franchise not conferred upon it by
law.” W. Va. Code § 53-2-1.

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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.” Dist. Ct. ECF
13-5, at 6.
Council on Aging notified National Union’s claims agent of
the State litigation, but the insurer denied coverage and
refused to tender a defense. 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 Graham and prohibit his future involvement in their
affairs, in connection with which Graham and the corporations
executed a mutual release of liability.
Victory at last in hand, Graham filed the underlying
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, where, on February 17, 2011, the
insurer was granted summary judgment after the district court

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determined that certain policy exclusions supported the denial
of coverage. Our reversal of that judgment engendered the
proceedings on remand, which in turn led to the second appeal
now before us. The parties being citizens of different states
and the amount in controversy exceeding $75,000, jurisdiction
existed in the district court pursuant to 28 U.S.C.
§ 1332(a)(1). We possess appellate final order jurisdiction as
prescribed by 28 U.S.C. § 1291.
II.
The facts of record in this diversity proceeding are not in
dispute, with the result that the issues on appeal are confined
strictly to the proper interpretation of West Virginia law. As
such, our review of the final judgment below is de novo. See
Mort Ranta v. Gorman, 721 F.3d 241, 250 (4th Cir. 2013).
III.
A.
1.
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

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insured, Pitrolo, who had been sued in three separate
proceedings stemming from an automobile accident. Aetna denied
coverage, compelling Pitrolo to retain a private attorney to
represent him. 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
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, the
insurer had contracted to defend the insured, and it failed to
do so. It guessed wrong as to its duty, and should be compelled
to bear the consequences thereof.” Pitrolo, 342 S.E.2d at 161
(citation and internal quotation marks omitted).3
Aetna was not, as it happens, adjudged liable for Pitrolo’s
aggravation and inconvenience, a circumstance seized upon by
3 Notwithstanding the admonition in Pitrolo that the
insurer’s intent is typically not at issue, the category of
common-law actions alleging the wrongful denial of coverage is,
with some frequency, referred to in the legal vernacular as “bad
faith” insurance litigation.

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National Union in support of its position that the district
court here correctly denied those damages to Graham. We do not
ascribe great significance to this aspect of the result in
Pitrolo, undiscussed by the Court. Given the nascency of the
cause of action recognized in that case, we suppose it most
likely that the insured simply failed to make an appropriate
demand.
About nine months after Pitrolo, the Court confronted a
similar, but more inclusive claim in Hayseeds, Inc. v. State
Farm Fire & Casualty, 352 S.E.2d 73 (W. Va. 1986). At issue in
Hayseeds was whether the insurer of a restaurant business was
required to relinquish the policy proceeds after the
establishment was burnt down by an arsonist. The insurer, State
Farm, refused to pay, maintaining that the husband-and-wife
principals were responsible for the fire. The business sued,
and it obtained a jury verdict for the $150,000 proceeds, plus
$69,000 in attorney fees and other consequential damages,
together with a punitive damages award of $50,000.4
4 In West Virginia, two categories of compensatory damages
may be recovered by the plaintiff in a breach-of-contract
lawsuit. “Direct” damages are “those directly flowing from the
contract breach.” Desco Corp. v. Harry W. Trushel Const. Co.,
413 S.E.2d 85, 89 (W. Va. 1991). Damages categorized as direct
are distinguishable from “indirect or consequential damages that
arise from the special circumstances of the contract.” Id. In
a bad-faith action alleging an insurer’s nonperformance under a
liability policy, such as Pitrolo, the plaintiff sustains direct
(Continued)

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Adhering to its analysis in Pitrolo, the Court 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.” Hayseeds, 352
S.E.2d at 80. The fee recovery compensates the insured for “net
economic loss caused by the delays in settlement,” that is, 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. The Court thus
affirmed the trial court’s judgment, except that it reversed the
damages as the result of being compelled to retain substitute
counsel to represent him in the proceedings with respect to
which the insurer has abrogated its duty to defend. By
contrast, the attorney fees incurred by the plaintiff in
litigation with the insurer to enforce the policy are properly
classified as consequential damages, insofar as “at the time of
the contract the parties could reasonably have anticipated that
[such fees] would be a probable result of the breach.” Desco
Corp., 413 S.E.2d at 89; see United States v. Arvanitis, 902
F.2d 489, 497 (7th Cir. 1990) (payments to counsel by insurer
investigating defendant’s fraudulent scheme not recoverable
under statute disallowing restitution for consequential damages
such as “legal fees generated in prosecuting a claim”). The
attorney fee award in Pitrolo comprised both categories of
damages. Hayseeds, however, did not involve a liability policy
and its attendant predicate litigation, with the result that the
attorney fees awarded by the jury in that case were incurred
exclusively in enforcement of the policy, and thus wholly within
the category of consequential damages.

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punitive damages award as unsupported by a sufficient showing of
actual malice. See id. at 80-81.
Hence, 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 proved 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 (usually an adjudication of the
insured’s liability to a third party), and also consequential
damages for fees incurred to enforce the policy against the
insurer. The first question in this appeal is whether Graham
may pursue additional consequential damages for aggravation and
inconvenience, like the insured in Hayseeds, notwithstanding
that the facts of his case are — at least superficially — more
analogous to those in Pitrolo.5
From the insured’s perspective, he 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
5 As in Pitrolo, the litigation before the district court
sought to resolve an insurer’s duty to defend its insured from
liability. The only notable difference — albeit a legally
immaterial one — is that the case at bar was filed by the
insured, while Pitrolo was a declaratory judgment action
initiated by the insurer.

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indemnification from property loss. And there is no logical
reason to authorize an award for one 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. We therefore conclude 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.
2.
The district court reached the contrary result by
distinguishing between liability policies — implicating both the
duty to defend and the duty to indemnify — and those simply
providing indemnification from loss. The court denominated the
former type (at issue here and in Pitrolo) “third-party
insurance,” Opinion 13, and the latter type (discussed in
Hayseeds) “first-party insurance,” id. at 13. Justice Benjamin
made the same distinction, espousing the minority viewpoint in
Loudin v. National Liability & Fire Insurance Co.: “First-party
insurance is a contract between the insurer and the insured to
protect the insured from its own actual losses and expenses
. . . . Third-party insurance is a contract to protect the
insured from losses resulting from actual or potential liability
to a third party.” 716 S.E.2d 696, 707 (W. Va. 2011) (Benjamin,

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J., dissenting) (quoting Couch on Insurance 3d § 198:3 (2005)
(internal quotation marks omitted)).6
Loudin is not particularly useful to our analysis, however,
because the issue in that case was a broad one, namely, whether
the plaintiffs had a sufficient contractual (first-party)
relationship with the insurer such that a bad-faith action could
be maintained to begin with. See Elmore v. State Farm Mut.
Auto. Ins. Co., 504 S.E.2d 893, 897 (W. Va. 1998) (“[T]he common
law duty of good faith and fair dealing . . . runs between
insurers and insureds and is based on the existence of a
contractual relationship. [T]here is simply nothing to support
a common law duty of good faith and fair dealing on the part of
insurance carriers toward third-party claimants.”).
Here, by contrast, Graham is an acknowledged insured in
privity with National Union under the latter’s liability policy;
he is no stranger to the contract. Moreover, the question
presented is considerably more narrow than in Loudin, i.e.,
whether Graham is entitled to the full array of consequential
damages ordinarily available to the insured in a breach-of-
contract proceeding. The answer is “yes,” and it depends naught
6 See also Marshall v. Saseen, 450 S.E.2d 791, 797 (W. Va.
1994) (“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.”).

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on the characterization of the insurance as first-party or
third-party. Rather, consequential damages are part and parcel
of the remedies obtainable in a bad-faith action against an
insurer, which, as set forth in the above-cited passage from
Elmore, can only be initiated and maintained by an insured, that
is, a first-party claimant.
Indeed, the Loudin majority framed the primary issue before
it as “whether the circuit court properly categorized the
[plaintiffs] as third-party claimants.” 716 S.E.2d at 700. The
Court in Loudin was asked to determine the insurer’s duties
under a liability policy on a pickup truck. The truck had been
backed over the insured by his brother, who was operating it
with permission. Although the insured was, in a manner akin to
the typical third-party claimant, seeking recompense for the
negligent operation of the covered vehicle, the Court ruled that
he was nonetheless a first-party claimant with standing to sue
his insurer for withholding coverage. See id. at 703 (“[W]e now
hold 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.”).
Neither Loudin, nor Pitrolo, nor any other West Virginia
authority poses an impediment to the consequential damages

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Graham seeks. Such damages are dependent only on proof thereof
by a preponderance of the evidence. Remand shall afford Graham
the opportunity to develop and present his evidence of
aggravation and inconvenience in connection with the breach
already established.
B.
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). Graham maintains that the attorney fees he incurred in
defending against the State lawsuit are similar enough to
medical expenses to be subject to prejudgment interest.
In State ex rel. Chafin v. Mingo County Commission, 434
S.E.2d 40 (W. Va. 1993), the 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 “[w]e are not convinced that the
lower court erred in determining that the [attorney fees] did
not constitute ‘similar out-of-pocket expenditures’ and

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therefore did not qualify as an award entitling the [official]
to prejudgment interest.” Id. at 44.
Thereafter, in Miller v. Fluharty, 500 S.E.2d 310 (W. Va.
1997), a bad-faith action to enforce an indemnification policy,
the Court reversed an award of prejudgment interest on
litigation fees and expenses. The most compelling basis for the
Court’s holding was its observation that attorney fees,
particularly those earned on a contingency basis, are
“unliquidated and unsettled until the circuit court issues its
ruling. Only after the circuit court approves the
policyholder’s attorney’s fee does the amount become liquidated
and established.” Id. at 325. At that point, of course, post-
judgment interest will begin to accrue. The Miller Court also
noted that, because the insured is not typically liable for the
contingent fees until after the verdict or settlement is paid by
the insurer, such expenses are not “out-of-pocket” as set forth
in the statute. See id. at 325-26.
Graham correctly notes that both of the pertinent West
Virginia authorities are factually distinguishable from his
case, in that Chafin was not an insurance case and Miller
involved only attorney fees incurred in litigation with the
insurer. Graham has excluded that portion of his attorney fees,
properly classified as consequential — not direct — damages,
from his prejudgment interest claim. Further, as Graham

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emphasizes, he agreed to pay counsel in the State lawsuit by the
hour, and not on a contingency basis, a circumstance not present
in Miller and one that arguably undercuts much of the rationale
supporting that decision.
There being no requirement that the circuit court approve
any aspect of Graham’s private fee arrangement with his
attorneys in the State lawsuit, it is apparent 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, on remand
following the first appeal in this enforcement action, National
Union stipulated to the precise amount due. We conclude that,
in accordance with Miller, the absence of liquidation is enough
to exclude attorney fees — even those sustained as direct
damages — from the reach of the West Virginia prejudgment
interest statute.
IV.
Pursuant to the foregoing, the judgment on appeal is
affirmed insofar as the court below declined to award
prejudgment interest on Graham’s attorney fees. The judgment is
vacated, however, 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

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breach of the insurance contract. We remand the matter to the
district court for further proceedings consistent with this
opinion.
AFFIRMED IN PART, VACATED IN PART,
AND REMANDED

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