American Spirit Insurance Co. v. Owens

Present: 	Carrico, C.J., Lacy, Keenan, Koontz, Kinser, and
Lemons, JJ.
AMERICAN SPIRIT INSURANCE COMPANY
OPINION BY
v. 	Record No. 000767 	JUSTICE LAWRENCE L. KOONTZ, JR.
March 2, 2001
FOY OWENS, D/B/A PATRICK HENRY
INSURANCE AGENCY
FROM THE CIRCUIT COURT OF HENRY COUNTY
David V. Williams, Judge
In this appeal, we consider whether the indemnification
provisions contained in an agency agreement between an insurance
company and its agent provide for recovery of attorney’s fees
and other expenses related to litigation of claims made on an
insurance policy issued by the agent in breach of the agency
agreement.
BACKGROUND
The parties do not dispute the material facts. 	On July 4,
1994, American Spirit Insurance Company (American Spirit)
entered into an agency agreement with Foy B. Owens, doing
business as Patrick Henry Insurance Agency (Owens). 	The agency
agreement permitted Owens to bind American Spirit on insurance
policies issued by American Spirit “for risks that meet the
requirements of [the] Company’s current rates and written
underwriting guidelines.”

Relevant to the issue raised in this appeal, the agency
agreement contained the following provisions for indemnifying
American Spirit for damages arising from a breach of the
agreement by Owens:
V. INDEMNIFICATION
. . . .
4. [Owens] shall indemnify and hold harmless [American
Spirit] against any liabilities [American Spirit]
may incur as a result of any act of [Owens] in
violation of this Agreement or outside the scope of
authority granted to [Owens] pursuant to this
Agreement or any action of [Owens] which is in
violation of any law or regulation, except to the
extent [American Spirit] has caused, contributed to,
or compounded such failure.
5. [Owens] shall also reimburse [American Spirit] for
any legal or other expenses reasonably incurred by
[American Spirit] in connection with investigating
any such liabilities.
6. [Owens] shall promptly notify [American Spirit]
upon receipt of notice of the commencement of any
action relating to such liabilities, and [Owens]
shall be entitled to participate in such action, or
to assume the defense of such action with counsel of
[his] own selection. 	If [Owens] assumes defense of
any such action, [he] shall not be liable to
[American Spirit] for any legal or other expenses
subsequently incurred by [American Spirit] in
connection with such action.
On August 19, 1994, Owens accepted an application for
insurance on a house owned by Douglas D. Tyler that bound
American Spirit to coverage of $65,000 for the structure and
$45,500 for the contents. 	Owens had visited the property and
was aware that the house was in a dilapidated state. 	He relied
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upon Tyler’s representation that Tyler was in the process of
making major renovations to the house. 	Owens also based the
value of the structure and its contents solely on Tyler’s
representations. 	He subsequently admitted that on the date the
policy was written the market value of the property “wasn’t very
high,” and that the structure did not meet the requirements of
American Spirit’s underwriting guidelines.
On September 14, 1994, Tyler’s property was destroyed by
fire. 	On May 31, 1995, after an extensive investigation,
American Spirit denied Tyler’s claims for loss of the structure
and its contents under the policy obtained for him by Owens.
American Spirit based this denial on its conclusions that Tyler
had set the fire or caused it to be set and that he had made
material misstatements on the application for insurance.
Tyler and his wife filed suit against American Spirit
alleging breach of contract. 	In that case, the jury found that
Tyler had been responsible for the fire and had made false
statements on the application for insurance. 	However, the jury
further found that Tyler’s wife was a resident of the house as
defined by the policy and that she was entitled to recover
$28,500 for the losses she suffered as a result of the fire.
Subsequently, on June 5, 1997, American Spirit and the Tylers
entered into a settlement in which the Tylers received $18,000
in satisfaction of their claims.
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On April 16, 1998, American Spirit filed a motion for
judgment against Owens alleging that he had breached the agency
agreement and seeking indemnification for the expenses it
incurred in the investigation and litigation of the claims made
under Tyler’s policy. 	American Spirit specifically sought to
recover the $18,000 paid to the Tylers and “attorney’s fees,
legal expenses and expert witness expenses and costs in excess
of $45,000.” 	Owens filed grounds of defense denying that he had
breached the agency agreement.
On September 13, 1999, the parties filed cross-motions for
summary judgment with supporting briefs. 	By agreement of the
parties, the case was submitted to the trial court on the record
and discovery depositions. 	In a letter opinion to counsel dated
September 21, 1999, the trial court ruled that Owens had
“committed a material breach of the Agency Agreement” and, thus,
Owens would be required to indemnify American Spirit for the
$18,000 paid to settle the Tylers’ claims. 	The trial court
further ruled that “American Spirit would be entitled to legal
fees and expert fees incurred in the investigation of the matter
but not for expenses incurred in the trial of the Tyler
lawsuit.”
In a subsequent letter opinion dated November 12, 1999, the
trial court, in response to American Spirit’s motion for
reconsideration, adhered to its prior ruling and awarded
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American Spirit judgment in the amount of $21,887.70, including
$3,887.70 in expenses incurred in the investigation of the
claims made on Tyler’s policy. 	By order dated January 6, 2000,
the trial court entered a judgment embodying those dispositions.
We awarded American Spirit this appeal.
DISCUSSION
In Southern Railway Co. v. Arlen Realty, 220 Va. 291, 296,
257 S.E.2d 841, 844 (1979), where the right of the indemnitee
was based upon an express contract, we adopted “the rule
followed in the great majority of other jurisdictions . . . that
the indemnitee may recover reasonable attorney’s fees and
expenses of litigation spent in defense of the claim indemnified
against.” 	The indemnitee’s right to recover is based upon the
express terms of the contract, and where “no provision of the
contract provides otherwise,” that right extends to any expense
reasonably incurred as a result of the breach, including the
proper legal costs and expenses incurred in defending an
indemnified claim made by a third party against the indemnitee.
Id.; see also Appalachian Power Co. v. Sanders, 232 Va. 189,
196, 349 S.E.2d 101, 106 (1986).
In order to determine whether the agency agreement between
American Spirit and Owens in this case provides for recovery of
attorney’s fees and expenses of litigation of an indemnified
claim, we look to the parties’ intentions as expressed in the
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terms of that agreement. 	Familiar principles govern our
resolution of this issue. 	First, where the terms of the
contract are clear and unambiguous, we will construe those terms
according to their plain meaning. 	Bridgestone/Firestone v.
Prince William Square, 250 Va. 402, 407, 463 S.E.2d 661, 664
(1995). 	“Additionally, we will not insert by construction, for
the benefit of a party, a term not express in the contract.”
Lansdowne Development Co. v. Xerox Realty, 257 Va. 392, 400, 514
S.E.2d 157, 161 (1999). 	Finally, we construe the contract as a
whole, without giving emphasis to isolated terms. 	Id. at 401,
514 S.E.2d at 161; see also Vega v. Chattan Associates, 246 Va.
196, 199, 435 S.E.2d 142, 143 (1993).
Owens contends that paragraphs 4, 5, and 6 of the
indemnification section of the agency agreement are in conflict
and ambiguous, and must be construed against American Spirit.
We disagree. 	We find nothing ambiguous in the terms of the
agreement. 	Rather, these three paragraphs, and the three
paragraphs that precede them, which provide indemnification for
the agent in reciprocal circumstances of liabilities arising
from a breach by the company, constitute a comprehensive scheme
for indemnifying each party for any loss occasioned by the
breach of the other.
Specifically with respect to the claim for indemnity made
by American Spirit, paragraph 4 expressly provides
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indemnification for “any liabilities” American Spirit incurred
as a result of Owens’ breach of the agency agreement. 	Paragraph
5 provides indemnification for “any legal or other expenses
. . . incurred . . . in connection with investigating any such
liabilities.”
Owens contends that because paragraph 5 makes specific
reference to legal expenses, those expenses are by implication
necessarily excluded from the term “any liabilities” in
paragraph 4. 	We disagree. 	By its express terms, paragraph 5
relates only to additional expenses incurred in the
investigation of claims arising from the liabilities incurred by
the company as a result of the agent’s breach. 	Nothing in the
paragraph, expressly or by implication, manifests an intent to
limit the meaning of the term “any liabilities” in paragraph 4,
and we will not by construction supply such limitations.
Owens further contends that paragraph 6 expressly
stipulates the conditions under which indemnification of
litigation expenses will be available to American Spirit and,
thus, is the “provision of the contract provid[ing] otherwise”
which was absent in Southern Railway Co. 	He further contends
that because the record does not demonstrate that he was given
the opportunity to join in the defense of the Tylers’ lawsuit
against American Spirit, American Spirit is barred from seeking
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indemnification of the litigation expenses it incurred in that
lawsuit.
Paragraph 6 provides a mechanism for the agent to avoid
indemnification of the company’s litigation expenses if he
elects to participate in the defense “of any action relating to
such liabilities.” 	That mechanism requires the agent to notify
the company upon his receipt of notice of any action relating to
the liabilities indemnified by the agent and permits him to
elect to join in or assume the defense of such action. 	However,
nothing in paragraph 6, or elsewhere in the agreement, imposes a
reciprocal duty on the company to notify the agent of such
actions. 	Nor do the terms of paragraph 6 expressly or by
implication limit the company’s right to recover litigation
expenses to those instances where the agent has been afforded
the opportunity to participate in the defense of an action and
has declined to do so. 	The circumstances were much the same in
Southern Railway Co., where we said that “[u]nless the contract
of indemnity provides otherwise, the indemnitee’s failure to
give the indemnitor timely notice of and an opportunity to
defend against the third party’s claim does not bar recovery by
the indemnitee against the indemnitor.” 	Southern Railway Co.,
220 Va. at 296, 257 S.E.2d at 844. 	In the absence of such
terms, paragraph 6 has no application to the facts of this case.
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In summary, we hold that under paragraph 4 of the indemnity
provisions of the agency agreement, American Spirit was
indemnified for “any liabilities” it incurred as the result of
Owens’ breach. 	No express term of the agreement excludes from
that indemnity the “reasonable attorney’s fees and expenses of
litigation spent in defense of the claim indemnified against.”
Accordingly, the trial court erred in failing to include such
expenses in the judgment awarded to American Spirit.
CONCLUSION
Because the reasonableness of the attorney’s fees and
expenses of litigation sought by American Spirit was not
contested below, we will reverse the judgment of the trial court
with respect to the denial of the claim for those expenses and
enter final judgment for American Spirit for $65,637.89
reflecting the $18,000 paid in settlement of the Tylers’ claims,
$43,750.19 in attorney’s fees related to the investigation and
defense of those claims, and $3,887.70 in other expenses related
to the investigation and defense of those claims.
Reversed and final judgment.
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