INSIDE THIS ISSUE
Go Ask My Lawyer
Limits On The Long Arm Of The Law
Sub-Contractor Not A Co-Insured
In Good Hands
INSERT - - Allocation of Continuous
Damage Losses
GO ASK MY LAWYER
-Renee Plessner
In January 1999, the United States Court for the District of the Virgin Islands (Division of St. Croix) allowed Vernon Morgan's liability insurer, CIGNA, to take the deposition of Morgan's counsel in the Tutu Water Wells Contamination case. In Re Tutu Water Wells Contamination: Texaco, Inc. and Texaco Caribbean, Inc. ("Texaco"), Successor to Vernon Morgan, 184 F.R.D. 266 (D.V.I. 1999). The issue raised by this case is to what extent can a party inquire into opposing counsel's knowledge of the facts relating to a specific case, i.e., can an attorney act as advocate and witness in the same matter? The short answer, in many cases, and with some restrictions, appears to be yes.
THE FEDERAL RULES OF CIVIL PROCEDURE
Any inquiry as to whether an attorney can be deposed in an action where he represents one of the parties must begin with a discussion of the discovery parameters set forth in the Federal Rules of Civil Procedure. Fed. R. Civ. P. 30(a) provides that "any party may take the testimony of any person, including a party, by deposition upon oral examination." This language includes an attorney for a party to the action. See 8 Wright & Miller, Federal Practice and Procedure: Civil Section 2102 at 369-370 (West 1970). There is nothing in Fed. R. Civ. P. 30 that exempts a party's attorney from being subject to a deposition. Dowd v. Calabrese, 101 F.R.D. 427, 439 (D.C. Cir. 1984); In Re Arthur Treacher's Franchisee Litigation, 92 F.R.D. 429, 437 (E.D. Pa. 1981); Walker v. United Parcel Services, 87 F.R.D. 360 (E.D. Pa. 1980).
Further, Fed. R. Civ. P. 26(b)(3) provides near absolute protection of any attorney's mental impressions or opinion work product. Duplan Corp. v. Moulinage et Retorderie de Chavanoz, 509 F.2d 730 (4th Cir. 1974), cert. den. 420 U.S. 997 (1975). The principal exception to this almost complete protection arises when a party affirmatively raises an issue that involves reliance upon the attorney's advice. Duplan Corp., 509 F.2d at 735; Coleco Industries, Inc. v. Universal City Studios, 110 F.R.D. 688, 690-91 (S.D.N.Y. 1986); Pitney-Bowes, Inc. v. Mestre, 86 F.R.D. 444, 447 (S.D. Florida 1980); Kockums Industries v. Salem Equipment, 561 F. Supp. 168, 172-73 (Dist. of Oregon 1983).
Finally, under Fed. R. Civ. P. 26(c), the court, upon motion of any party, and for good cause shown, may make an order that justice requires to protect a person from annoyance, embarrassment, oppression, or undue burden or expense, and may issue a protective order denying the request for a deposition. Because the deposition of a party's attorney is usually both burdensome and disruptive, the request to depose a party's attorney constitutes good cause for obtaining a Rule 26(c) protective order unless the party seeking the deposition can show both propriety and need for the deposition. N.F.A. Corp. v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83, 85 (N.D.N.C 1987).
WHOSE BURDEN IS IT ANYWAY?
In In Re Tutu Water Wells Contamination, the Court relied on Johnston Development v. Carpenters Local Union No. 1578, 130 F.R.D. 348, 353 (D.N.J. 1990), to support the proposition that Cigna should be entitled to take the deposition of Morgan's counsel. In Johnston, the defendant served deposition subpoenas on plaintiffs' lead counsel and general counsel. Defendant sought to depose these attorneys regarding their involvement in a series of meetings that had taken place before the filing of the subject lawsuit. In determining whether or not the deposition should go forward, the Johnston court declared that in cases where an attorney's conduct itself is the basis for a claim or defense, there is little doubt that the attorney can be examined like any other witness. The Johnston court held that the question whether attorney depositions should be precluded is to be analyzed using the same standards as any other protective order motion, with the movant bearing the burden of persuasion, under Rule 26(c), of demonstrating good cause to preclude or limit the testimony.
The position of the Johnston court appears to be the exception, rather than the rule. Most courts that have addressed this issue have held that the taking of opposing counsel's depositions should be permitted only in limited circumstances and that, because of the potential for abuse inherent in deposing an opponent's attorney, the party seeking the deposition must demonstrate its propriety and need before the deposition may go forward. American Casualty Company of Redding, Pennsylvania v. Krieger, 160 F.R.D. 582 (S.D. Ca. 1995); Shelton, 805 F.2d at 1327. Other courts have reached this conclusion even where it is clear that the attorney is a witness to relevant, non-privileged events and/or conversations. Bogan v. Northwestern Mutual Life Insurance Company, 152 F.R.D. 9 (S.D.NY. 1993); Hay & Forage Industries, 132 F.R.D. at 689; West Peninsula Title Company, 132 F.R.D. at 302.
In addition, many courts have held that there are good reasons to require the party seeking to depose another party's attorney to bear the burden of establishing the propriety and need for the deposition.
While the Federal Rules do not prohibit the deposition of a party's attorney, experience teaches that countenancing unbridled depositions of attorneys constitutes an invitation to delay, disruption of the case, harassment, and perhaps disqualification of the attorney. In Re Arthur Treacher's Franchisee litigation, 92 F.R.D. at 437-439; Walker v. United Parcel Services, 87 F.R.D. 360. In addition to disrupting the adversarial system, such depositions have a tendency to lower the standards of the profession, unduly add to the costs and time spent in litigation, personally burden the attorney in question, and create a chilling effect between the attorney and client. Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986). For these reasons, it is appropriate to require that the party seeking to depose an attorney to establish a legitimate basis for requesting the deposition and demonstrate that the deposition will not otherwise prove overly disruptive or burdensome.
NFA Corp., supra, 117 F.R.D. at 85.
Moreover, courts have also examined the legislative intent of the Federal Rules of Civil Procedure in determining whether to allow an attorney's deposition:
It is inconceivable that had the drafters of the Federal Rules of Civil Procedure, Supreme Court or Congress intended to exempt attorneys from the provisions of Rule 30 or to otherwise limit discovery from attorneys, they would not have included a provision in Rule 30 similar to that contained in Rule 26(b)(3). Had the Court or Congress intended to engraft a preliminary showing when deposition discovery was sought from attorneys, such an exception would likely have been found in Rule 30 or otherwise within the Rules of Civil Procedure. Attorneys with discoverable facts, not protected by attorney-client privilege or work product, are not exempt from being a source for discovery by virtue of their license to practice law, or their employment by a party to represent them in litigation.
United Phosphourus, Ltd. v. Midland Fumigant, Inc., 164 F.R.D. 245, 248 (D. Kansas 1995).
DETERMINING FACTORS
In deciding whether to allow the deposition of an opposing party's attorney, courts generally weigh these factors:
1) Whether the information sought is relevant to a major issue in the case (MacKnight v. Leonard Morse Hospital, 828 F.2d 48, 51 (1st Cir. 1987);
2) Whether other means of obtaining the relevant information exist (Shelton v. American Motors Corp., 805 F.2d 1323, 1327 (8th Cir. 1986); NFA Corp v. Riverview Narrow Fabrics, Inc., 117 F.R.D. 83, 86 (M.D.N.C. 1987);
3) Whether the need for the information outweighs the inherent risks of deposing opposition counsel (Johnston Development Group v. Carpenters Local Union No. 1578, 130 F.R.D. 348, 352 (D.N.J. 1990); and
4) Whether the information sought is not privileged (West Peninsula Title Co. v. Palm Beach County, 132 F.R.D. 301, 302 (S.D. Florida 1990).
M&R Amusements Corp. v. Blair, 142 F.R.D. 304, 305-306 (N.D. Illinois 1992). In light of these determining factors, some courts have held that a request to take the deposition of a party's attorney constitutes a circumstance justifying departure from the normal rule that protective orders totally prohibiting a deposition should be rarely granted absent extraordinary circumstances. See NFA Corp., supra, 117 F.R.D. at 84-86; Shelton, supra, 805 F.2d 1323, 1327.
In Shelton, which is generally regarded as the leading case on this issue, the court recognized that circumstances may arise in which the court should order the taking of opposing counsel's deposition. The court noted, however, that those circumstances should be limited to where the party seeking to take the deposition has shown that 1) no other means exist to obtain the information than to depose opposing counsel; 2) the information sought is relevant and non-privileged; and 3) the information is crucial to the preparation of the case.
In discussing all of these factors, the NFA Corp. court set forth certain factors that a movant must demonstrate in seeking to depose a party's attorney. First, the deposition is the only practical means available of obtaining the information; if there are other persons available who have the information, they should be deposed first, and other methods, such as written interrogatories which do not involve the same dangers as an oral deposition, should be employed. Second, the movant should show that the information sought will not invade the attorney-client privilege or the attorney's work product. Finally, the information must be relevant and the need for it not outweighed by the disadvantages inherent in deposing a party's attorney. See generally, Shelton v. American Motors Corp., 805 F.2d at 1327.
ANALYSIS OF THE TUTU WATER WELLS CONTAMINATION DECISION
In In Re Tutu Water Wells Contamination, Cigna, Morgan's liability insurer, alleged that a settlement agreement negotiated by Morgan in which Morgan conceded liability to Texaco involved "a complex collusionary scheme to create the purported cause of action which is now at issue." 184 F.R.D. at 267. In challenging the validity of the consent judgment and assignment, Cigna sought to depose two of Morgan's attorneys with regard to their role in negotiating the agreement. The attorneys opposed Cigna's motion upon the ground that Cigna failed to demonstrate that there are no other means to obtain the information, that the information is not privileged, or that the information is crucial.
The court found that Cigna had demonstrated a legitimate basis for the deposition.1 Cigna claimed that the attorneys for Morgan were actors and witnesses to the subject matter of the cause of action and that the factual information sought was not privileged. Cigna claimed that the agreement giving rise to this litigation was fraudulently entered into and assigned to Texaco, and sought information regarding when the agreement was signed and the extent of the attorneys' knowledge of Morgan's financial situation at the time.
In opposition, Morgan's attorneys responded that there were other people with the same information that they had. In addition, Texaco urged the Court to follow the analysis contained in the Eighth Circuit decision, Shelton, 805 F.2d 1323. In response, Cigna argued that it had conducted depositions of Texaco personnel in order to obtain the information sought but there were gaps in the information that could only be supplied by Morgan's attorneys.
In the end, the representations made by Cigna satisfied the Court that the request for the depositions was not improper. In light of Cigna's initial showing that Morgan's attorneys were actors or witnesses to the agreement giving rise to the cause of action, and Cigna's inability to otherwise obtain the information sought, the Court found that the discovery sought was relevant and, unless privileged, discoverable.
Although Texaco also attempted to rely on the case of Advance Power Systems, Inc. v. Hi-Tech Systems, Inc., 1993 U.S. Dist. Lexus 1185, 1993 W.L. 30067 (Ed. Pa. 1987), to bolster its argument that Shelton was controlling, the court disagreed, stating that Advance Power did not specifically adopt the Shelton analysis. In addition, the court said that courts in the Third Circuit agree that an attorney can be examined like any other witness. See In Re Arthur Treacher's Franchisee Litigation, 92 F.R.D. 429.
It appears that the four factors set forth in M&R Amusements Corp., 142 F.R.D. 304, have been satisfied by Cigna. First, according to Cigna, the information sought from Morgan's counsel is relevant to a major issue in the case, i.e., whether the settlement agreement involved collusion or fraud. Second, according to Cigna, there is no other means for obtaining the relevant information. Third, the need for the information outweighs the inherent risks of deposing opposition counsel. In this case, it appears that Morgan's counsel are the only witnesses who have knowledge of the information sought. Fourth, there is no evidence that the information sought is privileged.
CONCLUSION
The cases discussing the issue of whether opposing counsel can be called to testify as a deposition witness fall on both sides of the fence. The split in authority, however, appears to depend to a great extent on the distinct facts of each case. Because the Federal Rules of Civil Procedure do not specifically exempt attorneys from testifying at deposition, the question simply remains what prejudice, if any, will be caused to either party in the case if counsel is forced to testify. Obviously, if an attorney has first-hand knowledge of the facts of the underlying case, i.e., he was a witness or an actor, there is probably little an attorney can do to prevent himself from being called to testify as to non-privileged matters.
On the other hand, if any attorney in a case is called upon to wear two hats, there is no question that, in the long run, there could be a chilling effect on an attorney's representation of his client if the attorney knows that at some point down the road he or she may be called upon to testify as to his knowledge or conduct. As the Shelton court noted:
Taking the deposition of opposing counsel not only disrupts the adversarial system and lowers the standards of the profession, but it also adds to the already burdensome time and costs of litigation. It is not hard to imagine additional pre-trial delays to resolve work product and attorney-client objections, as well as delays to resolve collateral issues raised by the attorney's testimony. Finally, the practice of deposing counsel detracts from the quality of client representation. Counsel should be free to devote his or her time and efforts to preparing the client's case without fear of being interrogated by his or her opponent. Id. at 1327.
Other courts have expressed similar views:
Deposing an opponent's attorney is a drastic measure. It not only creates a side show and diverts attention from the merits of the case, its use also is a strong potential for abuse. Thus, a motion to depose an opponent's attorney is viewed with a jaundiced eye and is infrequently proper. M&R Amusements Corp., 142 F.R.D. 304, 305 (citations omitted).
Although the Shelton court and the M&R Amusements Corp. court have taken a harsh view of attorney depositions, the recent trend, as exhibited by the In Re Tutu Water Wells Contamination decision, appears to be more liberal in accordance with a strict reading of the Federal Rules of Civil Procedure. Thus, a word of caution -- attorneys beware!.
1 Although Cigna initially sought depositions of two of Morgan's attorneys, the court allowed the deposition of one attorney only, stating that the deposition of Morgan's co-counsel would be duplicative.
LIMITS ON THE LONG ARM OF THE LAW
-David S. Mahaffey
[Mound Cotton Wollan & Greengrass represents defendant Master Magnets, Ltd., an English manufacturer, in this products liability/personal injury action]
On the morning of September 1, 1995, Andres Banegas left his Brooklyn, New York apartment for work as a laborer at a nearby trash carting and recycling facility. Banegas, a native Honduran, had been working there for six months, earning $40 per day.
At the facility, debris collected from construction sites was placed on a long conveyor belt. As the debris traveled along the belt, workers would separate wood, stone, glass, and cardboard for eventual resale. At one point along the belt, a large commercial magnet hung overhead. It pulled metallic objects from the debris, which would be resold as well. The magnet was made by Master Magnets, Ltd., a small English manufacturer.
Debris would frequently become lodged between the two steel engine-powered cylindrical rollers located under the conveyor belt and either slow or stop the belt altogether. Banegas was instructed to stand by the belt and, using a metal pole, remove any such debris from the rollers. On this particular morning, Banegas was very busy because the rollers were constantly clogging. At one point, they stopped. Banegas was unable to remove the debris with the pole. The rollers still were not moving. As he reached for the debris with his right hand, his shirt sleeve became caught between the rollers. Suddenly, the rollers began to move, pulling his arm toward them. Banegas's right arm was crushed by the rollers. At the hospital, doctors were forced to amputate his entire arm in order to save his life.
In 1997, Banegas sued Master Magnets and a Florida company, Global Equipment Marketing ("GEM"), in the United States District Court, Eastern District of New York, seeking to recover $10,000,000. Jurisdiction was based on 28 U.S.C. § 1332 (diversity). Master Magnets moved to dismiss the complaint against it under F.R.C.P. 12(b) for lack of personal jurisdiction. Setting aside the fact that the magnet did not contribute to Banegas's injury, Master Magnets argued that jurisdiction was improper under all parts of New York's long arm statute, CPLR 302, and the Constitution of the United States. The federal court stayed the motion and ordered discovery on the issue of personal jurisdiction. Before the motion could be decided by the federal court, however, the case was removed to New York State Supreme Court, Kings County a jurisdiction notorious for large personal injury verdicts and was consolidated with a related action in which plaintiff was suing various other companies involved with the purchase, design, and construction of the conveyor belt. Master Magnets filed its motion with the state court immediately and oral argument was heard.
Master Magnets argued that it was not licensed or otherwise authorized to do business in New York. It never delivered a machine directly to New York and never had any sales or marketing representatives in the state. All of its sales took place in England. Master Magnets had no offices in New York and has never directly solicited business, advertised, or circulated promotional literature in New York. It manufactures all of its products, including the one at the Brooklyn work site, only at a single location in England and employs only seven or eight people for that purpose. Occasionally, GEM would purchase Master Magnets' products and resell them in the United States. Also, GEM had circulated in the United States promotional literature containing Master Magnets' products. Master Magnets played no part in GEM's unilateral marketing decisions. Thus, argued Master Magnets, its nexus with New York (and indeed with the United States) was so attenuated and fortuitous that forcing the company to defend itself in New York would offend all notions of constitutional fairness, and therefore was not permissible.
Banegas countered by arguing that Master Magnets was "present" in New York under CPLR 302(a)(3)(i) and (ii) as a result of its "purposeful solicitation and actual penetration of U.S. and New York markets" through GEM's activities. CPLR 302 provides, in pertinent part:
(a) Acts which are the basis of jurisdiction. As to a cause of action arising from any acts enumerated in this section, a court may exercise personal jurisdiction over any non-domiciliary... who in person or through an agent:
(3) commits a tortious act without the state causing injury to person or property within the state, except as to a cause of action for defamation of character arising from the act, if he
(i) regularly does or solicits business, or engages in any other persistent course of conduct, or derives substantial revenue from goods used or consumed or service rendered, in the state, or
(ii) expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce."
Banegas went to so far as to label GEM Master Magnets' agent and "exclusive North American distributor." Plaintiff relied heavily on Kernan v. Kurz-Hastings, 997 F. Supp. 367 (W.D.N.Y. 1998). In Kernan, the district court found that a Japanese machine manufacture was subject to personal jurisdiction under New York law because it had an exclusive agreement with a Pennsylvania company to sell its products in the United States. There, the court based its decision on the notion that the Japanese manufacturer should reasonably have expected that its product would reach New York. The machine was sold by the exclusive distributor to the end user located in New York under a nationwide sales agreement. Also, the Japanese manufacturer's principal testified that he had "general knowledge" that the distributor would resell the product in either Pennsylvania or in one of the other forty-nine states. The court held that this was "sufficient to establish a prima facie case of foreseeability coupled with a purposeful act for long-arm jurisdiction under CPLR 302(1)(3)(ii)."
Master Magnets distinguished the facts in Kernan from the facts surrounding its relationship with GEM. Other than an ordinary arms-length product sale, there was no corporate connection whatsoever between the two companies at the time the lawsuit was commenced. GEM was an entirely independent corporate entity. Master Magnets never exercised any control over GEM's actions in the United States, nor did it ever direct GEM to resell its magnets anywhere in the world. Master Magnets never consulted GEM about where the magnets would be distributed. Sales of Master Magnets' products anywhere in New York were made solely by GEM. Once a magnet left Master Magnets' facility in England, it sometimes changed hands four times before reaching the end user.
Nevertheless, Banegas argued that it was outrageous for Master Magnets to challenge the Court's exercise of personal jurisdiction when it had sold magnets to GEM for distribution world-wide, including New York. GEM's President testified that he expected his advertisements of Master Magnets' products "might generate sales in New York." In addition, Banegas put before the Court a 1998 written agreement between GEM and Master Magnets whereby Master Magnets will indemnify and hold harmless GEM for any injuries arising from the use of a Master Magnets product sold by GEM. Still, the agreement was irrelevant because it was not in effect until long after the lawsuit was started. The reality was that the presence of any Master Magnets products in New York State was the result of GEM's independent actions. There was no evidence that Master Magnets had targeted the New York market.
On June 17, 1999 the Court, by the Hon. Edward Rappaport, granted Master Magnets' motion to dismiss. The Court ruled that "while GEM and Master Magnets have cooperated in an effort to expand Master Magnets' presence in the United States, their 'interrelationships' do not exhibit a degree of control of GEM by Master Magnets so as to establish a principal-agent relationship between the two."
As of the date of publication, Banegas has filed a Notice of Appeal but has not perfected the appeal.
SUB-CONTRACTOR NOT A CO-INSURED
-David W. Kenna
A general contractor's all-risk property insurer can subrogate against a plumbing sub-contractor for damages caused by the plumbing sub-contractor because a sub-contractor is not automatically a co-insured under a general contractor's property policy of insurance.
In Lumbermen's Underwriting Alliance v. RCR Plumbing, Inc., 969 P.2d 301 (1998), the Supreme Court of Nevada recently overruled its earlier decision in J.F. Shea Company v. Hyndes Plumbing, 96 Nev. 862, 619 P.2d 1207 (1980), and held that where a subcontract between RCR Plumbing, Inc. and Lumbermen's insured, Durable Homes, required RCR to hold harmless and indemnify Durable for all losses arising from RCR's performance of the subcontract and required RCR to obtain liability and property damage insurance for losses naming Durable as an additional insured, Lumbermen's was not prohibited from bringing a subrogation against RCR to recover proceeds paid by Lumbermen's to Durable as a result of a loss caused by RCR.
Durable was the general contractor on a project to build a residential subdivision in Las Vegas. Durable subcontracted with RCR for the installation of plumbing and gas piping in the homes under construction. The subcontract provided:
To the full extent permitted by law, RCR agrees to hold harmless and indemnify Durable against any and all claims, damages, losses, liabilities and expenses ... arising from or in connection with RCR's performance or non-performance under this subcontract. RCR further agrees to obtain prior, [sic] to commencing work and maintain, at its sole cost, during the progress of its performance hereunder such insurance policies as may be required by Durable including, without limitation ... property damage insurance ... naming Durable as an additional insured.
RCR obtained an insurance policy from Federated Mutual Insurance Company naming Durable as an additional insured.
Lumbermen's issued a policy to J.M. Peters Company, Inc., a company related to Durable and involved in the construction of the residential subdivision. The Lumbermen's policy insured against property damage to the residential subdivision occurring during the course of construction. The policy named, by endorsement, Capital Pacific Holdings, Inc. the parent company of both Durable and Peters. Although Capital was the only named insured, Lumbermen's paid Taos Estates, L.L.P. and so Taos is referred to as the named insured throughout the Court's opinion.
The Lumbermen's policy provided coverage for:
Dwellings, apartment houses, garden apartments, condominiums and other structures pertinent thereto, while in the course of construction and after completion - - but not sold or occupied with insured's knowledge, together with all building materials and supplies at the construction site intended to enter into construction of same, owned by the insured or for which the insured is legally liable.
During construction, on September 11, 1995 an RCR employee allegedly negligently started a fire that caused over $1.2 million dollars in damage to the residential subdivision. Lumbermen's paid $1,079,248.00 to Taos.
On November 26, 1996, Lumbermen's filed a complaint against RCR for damages resulting from the fire. The District Court dismissed the complaint on the ground that RCR was a co-insured under the policy. Lumbermen's appealed, arguing that the District Court erred in precluding Lumbermen's from bringing a subrogation action against RCR. Specifically, Lumbermen's argued that RCR had not established that it was a co-insured of Taos under the Lumbermen's policy.
The Court began its discussion by stating the established rule that "an insurer may not subrogate against a co-insured of its insured" citing J.F. Shea Co. v. Hines Plumbing, 96 Nev. 862, 866, 619 P.2d 1207, 1209 (1980). The Court also noted that while ambiguous terms in an insurance policy are usually construed against the insurer, that principle does not apply in determining who is an insured. The Court then discussed Shea, a case that RCR cited as factually on all fours with this case.
In Shea, an employee of a sub-contractor of the insured developer negligently caused a fire that damaged a building under construction. Under the terms of the subcontract, the sub-contractor indemnified the developer from "any loss resulting from the sub-contractor's performance." The subcontract also required the developer to obtain fire insurance covering the property subject to the subcontract. The district court dismissed the insurer's action on the ground that the subcontractor was a co-insured of the general contractor and so a subrogation action could not be brought against the sub-contractor. The Nevada Supreme Court affirmed the District Court, holding that although the sub-contractor was not identified as an insured on the developer's policy, the loss at issue was covered and so the sub-contractor was a co-insured. The court relied on the language of the policy providing that losses to materials, equipment, and supplies of temporary structures of all kinds incidental to the construction of buildings and structures, and similar properties belonging to others for which the insured is liable, were covered.
In Shea, the Court concluded that the term "liable" was not restricted to the legal liability of the developer but extended coverage to the owner of any property for which the developer was generally responsible. Thus, the general contractor was the insured, and responsible for the premises where the work was in progress and for equipment and supplies on the premises. Thus, the sub-contractor's material and supplies located on the damaged premises were covered under the policy in Shea. As a result, the sub-contractor was an insured party under the policy.
The Lumbermen's Court noted that subsequent to Shea, and in an apparent response to that decision, property insurers writing builder's risk policies began to limit coverage to property "owned by the insured or for which the insured is legally liable." Thus, property insurers, including Lumbermens, attempted to rely on what the court labeled a fictitious distinction between "liability" and "legal liability."
In Lumbermen's, however, the court distinguished Shea from Lumbermen's. Whereas the Shea subcontract required that the developer provide fire insurance, covering property subject to the subcontract, the contract between RCR and Durable contained no such provision. Thus, the Court held that Shea would not be applicable to the facts of the later case.
Instead, the Court found unambiguous the subcontract between RCR and Durable requiring RCR to hold harmless and indemnify Durable for all losses arising from performance of the agreement and requiring RCR to obtain liability and property damage insurance for losses, naming Durable as an additional insured.
The Court recognized that RCR's liability insurance at least arguably provided duplicate coverage similar to that obtained by the developer in Shea. The Court also recognized, however, that this duplication of coverage did not create an inference that RCR was an insured under the Lumbermen's policy, so that Lumbermen's was, as a matter of law, entitled to bring a subrogation action. Accordingly, the Court reversed the district court's dismissal of the action and remanded the case for further proceedings.
The Court reserved comment as to apportionment between RCR's and Durable's policies.
IN GOOD HANDS
-David W. Kenna
The Supreme Court of Connecticut recently held that an insured who incurred debt for repairs to his fire-damaged home was entitled to recover the full replacement cost of the house, including the amount of depreciation between the actual cash value of the damaged portion and the cost necessary to repair or replace the damaged portion.
In Northrop v. Allstate Insurance Company, 247 Conn. 242, 720 A.2d 819 (1998), the court rejected Allstate's arguments that the insured was not entitled to recover the replacement cost of his house because he had not "spent" the entire amount necessary to replace the property, and because the contract between the insured and his builder did not comply with the Connecticut Hone Improvement Act. Allstate also claimed that the trial court had incorrectly calculated the prejudgment interest award.
On January 3, 1992, plaintiff Northrop's East Haven home was damaged by a fire. Northrop and Allstate agreed that the replacement cost for the fire loss was $74,724.00 with an actual cash value of $64,408.10. The replacement cost included depreciation of $10,065,90 and a $250.00 deductible. Under the terms of Northrop's Homeowners' policy, Allstate was not required to pay the depreciation amount until Northrop actually completed repair or replacement of the house. Specifically, the coverage provision of the policy entitled the insured to recover the "amount actually and necessarily spent to repair or replace the damaged building structure." The policy required that until repair or replacement was completed, only the actual cash value of the damaged building structure would be paid. The policy also permitted recovery of the actual cash value of the building structure in the event the house was not repaired or replaced.
There was no dispute that Northrop was entitled to recover the actual cash value ($64,408.10) of his house and that sum was paid to him in two installments in May 1993. Northrop executed a release to Allstate of all claims other than the depreciation amount. Northrop hired a builder and paid the builder a total of $63,143.66 between May 1993 and March 1994. After Allstate refused to pay the depreciation amount, Northrop commenced this action.
The trial court had rejected Allstate's claim that the contract between Northrop and his builder was invalid because of noncompliance with the Connecticut Home Improvement Act. The court held that the statute is intended to benefit consumers and is not intended to be a defense against insurance claims.
Allstate also alleged that the imprecision and vagueness of the contract drafted by Northrop and his builder indicated that they were intended to defraud Allstate. The trial court held that the contract, while lacking in some detail, sufficiently described the work to be done and the price to be paid. Thus, the trial court dismissed Allstate's claim of a conspiracy between Northrop and his builder.
The trial court also dismissed Allstate's defense that Northrop had not "spent" the entire replacement cost because he had not actually laid out the full amount of the repairs and replacement. Relying on the coverage provision of the policy, Allstate argued that Northrop had not "actually and necessarily spent" the money. The trial court, however, recognized Northrop's incurring of the debt as sufficient to satisfy the policy requirement.
Finally, the trial court rejected, as unproven, Allstate's claim that only $54,000.00 worth of work was done on the house.
The Supreme Court affirmed the lower court on all points other than Allstate's claim that the prejudgment interest was incorrectly calculated from the date of Northrop's release instead of the date of completion of the work.
The Court held that Allstate's attempt to define the term "spent" improperly narrowed the language of the policy beyond the ordinary sense of the word. Relying upon Webster's Third New International Dictionary, the Court noted that in addition to meaning to "pay out" or "disburse," "spend" can mean "incurring obligations calling for" the payment of money. Thus, the Court held, a reasonable interpretation by an insured of the term "spent" includes not only money already paid, but also money owed for repairs or replacement already completed, lifting from the insured the undue burden of having to finance the withheld depreciation amount in order to secure the entire replacement cost. The Court noted that an insured pays an additional premium for replacement cost coverage, and so if Allstate's position were upheld, the existence of replacement cost coverage, where the depreciation amount was extensive, would be purely illusory to any but very wealthy insureds who could afford to finance their own repairs or replacement. The Court concluded that the insurer was properly protected from fraud by the requirement that repairs or replacement be completed by the time depreciation is paid. Thus, Allstate's "moral hazard" argument was rejected.
The Court also affirmed the findings of the trial court with regard to the validity of the contact and debt between Northrop and Allstate.
Allstate did not have the right to challenge the Northrop/builder contact on the ground that it failed to comply with the Home Improvement Act because the Act is intended to protect homeowners and if, as here, the homeowner does not seek the protection of the Act and instead agrees that the contractor should be paid, the Act is inapplicable. An insurer cannot interpose non-compliance as a defense to an otherwise legitimate claim.
Lastly, the Court considered Allstate's argument that the date upon which the prejudgment interest award was calculated was incorrect. The Court agreed that the date used by the trial court to calculate prejudgment interest was incorrect because on May 12, 1993, the date selected by the trial court, the repairs and replacement had not yet been completed so the depreciation amount was not yet due. The Court disagreed, however, with Allstate's contention that an alternate date could not be considered on remand. The Court noted that Allstate's adjuster visited the house in December 1993 and the repairs were complete. Thus, prejudgment interest could be determined by targeting December 1993 as the milestone date.
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