Recent Developments in Virginia Regarding Insurance – Part 2

A Virginia court ruled that amounts payable to a church under its insurance policy following the complete destruction of its sanctuary in a fire would not be reduced by the amount of contributions the church received from sympathetic donors following the fire.

Church Law and Tax1999-11-01


Key point. Under the so-called “collateral source rule,” benefits payable under a church’s insurance policy as a result of a fire loss are not reduced by the amount of contributions the church receives from sympathetic donors following the loss.

A Virginia court ruled that amounts payable to a church under its insurance policy following the complete destruction of its sanctuary in a fire would not be reduced by the amount of contributions the church received from sympathetic donors following the fire. A church was destroyed by a fire. The church’s insured value was not adequate to cover the actual loss. The church sued its insurance broker, claiming that (1) the broker’s “negligent breach” of his professional duties caused the church to be grossly underinsured, and that (2) the broker breached his contract with the church to obtain adequate property insurance coverage. This case is addressed in the previous recent development in this section of the newsletter. In the course of this litigation, the insurance broker requested that the church turn over detailed information on charitable contributions made to the church following the fire, including the amount of donations and the names, addresses, and telephone numbers of individual contributors. The church contended that the broker’s motive for seeking this information was a desire to offset these charitable contributions against its responsibility to compensate the church for the uninsured loss potential resulting from the broker’s alleged negligence and breach of contract. In fact, the church received $230,237 from its donors. The Aetna insurance company paid the church $143,000 under the church’s insurance policy, plus an additional $50,000 by way of settlement. In sum, the church collected a total of $423,237 in the aftermath of the fire. The broker submitted that one contractor estimated the re-construction costs at between $440,000 and $485,000. According to the broker, if the church had selected this bid then its out-of-pocket losses would only have totaled between $16,763 and $61,763, rather than the $250,000 of uninsured losses sought. The church contended that the estimated cost to rebuild its house of worship exceeded $600,000.

The church refused to turn over the donor records the broker requested. It based this decision on the so-called “collateral source rule.” Under this rule, compensation or insurance benefits received by a claimant from a source “collateral” to the wrongdoer may not be applied as a credit against the amount of damages the wrongdoer owes. In other words, contributions received by the church following the fire cannot “offset” or reduce the amount payable under the church’s insurance policy. As a result, there was no reason to turn over the contribution records. The court explained the collateral source rule as follows: “[The rule] is designed to strike a balance between two competing principles of tort law: (1) a plaintiff is entitled to compensation to make him whole, but no more; and (2) a defendant is liable for all damages that proximately result from his wrong. A plaintiff who receives a double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer.” The court agreed with the church that the collateral source rule prevented the broker from obtaining the church’s contribution records.

The court also ruled that the broker failed to show that disclosing charitable donors would lead to the discovery of admissible evidence. Generally, a party to a lawsuit may compel the other party to turn over any documents or information “reasonably calculated to lead to the discovery of admissible evidence.” The court concluded that the broker’s request for contribution records failed this test: “The issue in this case is simple: whether the [broker’s] procurement of insufficient insurance coverage constituted negligence and/or breach of contract. The evidence on donations does not tend, even slightly, to prove a fact relevant to any issue in the case … . Testimony is properly excluded where it is irrelevant and immaterial to determination of the issues involved. The church’s fund raising capabilities and the generosity of its donors have no place in the jury’s deliberations.” The court concluded,

Should the [church] prevail, its measure of damages will, under the contract cause of action, be that amount of money which would have placed the church in the same position it would have been but for the [broker’s] breach. The evidence of contributions does not tend to place the [church] in that position. That money may well have been raised for other purposes of the church. Each dollar raised for the building reconstruction is one dollar that is unavailable for other purposes. In order for the [broker] to establish the relevance of a contribution, it would be required to show that a particular donation would have never been made to the church for any other purpose. Each contribution and each contributor would have to be examined. In other words, there would be mini-trials over each donation. Judicial economy, public policy, and sound discretion require such evidence to be precluded.

The court is also concerned with the chilling effect that such revelations could have on the flow of future donations to this or any other church. Trial courts are expressly authorized … to make any order which justice requires to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense. The court will order that the names, addresses and telephone numbers of church donors, and amounts of their donations shall remain undiscovered by the defendants. This will adequately protect the donors from any annoyance or embarrassment that may arise from disclosure of their charitable ways.

Application. It is common for churches to receive contributions from sympathetic individuals following the destruction of church property in a fire or other catastrophe. According to the collateral source doctrine, these contributions do not offset or reduce the insurer’s obligation to pay the amount specified in the church’s insurance policy. Glorious Church of God in Christ v. Aetna Casualty and Surety Co., 1998 WL 972132 (unpublished opinion, Va. Cir. Ct. 1998). [Corporations]

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