Court Dismisses Constructive Fraud Claim Against Insurer United States District Court, E.D. Virginia, October 29, 2019

VIRGINIA – Newport News Shipbuilding Division (NNS) has built ships and submarines for the United States Navy since the late 1800s. Through several transactions, the company came to be owned first by Tenneco, Inc., and later by Huntington Ingalls, Inc. Between 2001 and 2015, NNS was sued in a number of asbestos-related personal injury actions.

As part of its response to those actions, NNS sought coverage under policies issued by one of its insurers. The insurer offered coverage under several policies, but represented that no policies had been issued to NNS prior to August 1, 1973. In its own investigation, NNS discovered evidence of two policies issued prior to that date, which NNS contended provided coverage for the asbestos suits. NNS brought suit against its insurer seeking coverage under the policies and damages for the insurer’s failure to provide coverage.

The insurer moved to dismiss one of NNS’ claims—a claim for constructive fraud. The insurer contended that under applicable Virginia law, constructive fraud can arise only through a common law duty, not a contractual duty, and the insurer’s duties to NNS arose solely through the parties’ contractual relationship. NNS argued that its insurer had—and breached—a common law duty not to defraud.

The court sided with the insurer. According to the court, although an insurer may owe common law duties to an insured, the insurance relationship alone does not create a common law duty. The duty not to defraud is owed by everyone to everyone, but the duty does not apply to constructive fraud, which is characterized by innocent or negligent misrepresentations as opposed to willfully misleading another party. There is no general duty to refrain from constructive fraud. Because NNS could point to no other non-contractual duty supported by its pleadings, the court dismissed its constructive fraud claim against the insurer.

Read the case decision here.

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