Entron, Inc. v. Affiliated FM Ins. Co., 37

• Decision Date: 23 November 1984
• Docket Number: D,No. 37,37
• Citation: 749 F.2d 127
• Parties: ENTRON, INC., Plaintiff-Appellee, v. AFFILIATED FM INSURANCE CO., Defendant-Appellant. ocket 84-7170.
• Court: U.S. Court of Appeals — Second Circuit

Page 127

749 F.2d 127

ENTRON, INC., Plaintiff-Appellee, v. AFFILIATED FM INSURANCE CO., Defendant-Appellant.

No. 37, Docket 84-7170.

United States Court of Appeals Second Circuit.

Argued Aug. 27, 1984.

Decided Nov. 23, 1984.

J. Barry Cocoziello, Newark, N.J. (H. Richard Chattman, Podvey, Sachs & Catenacci, Newark, N.J., of counsel), Cecelia Kempler, New York City (James A. Greer, II, John T. Patterson, LeBoeuf, Lamb, Leiby & MacRae, New York City, of counsel), for defendant-appellant.

James C. Hansen, New York City (Michael E. Twomey, E. Sherrell Andrews, Olwine, Connelly, Chase, O'Donnell & Weyher, New York City, of counsel), for plaintiff-appellee.

Before VAN GRAAFEILAND, WINTER and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge.

On this diversity appeal we are called upon to decide two issues under New Jersey law: first, whether an insurance policy which provides for reimbursement to the insured for damaged engineering drawings up to the "cost of transcription" may be interpreted to include the cost of engineering research necessary to replace information missing from the damaged drawings; and second, whether prejudgment interest may be awarded on a breach of contract claim for unliquidated damages. The district court awarded damages for engineering research and prejudgment interest, 578 F.Supp. 334, and, for the reasons set forth below, we affirm.

Entron, Inc. is a New York corporation which manufactures and supplies electronic and electro-mechanical equipment and components to private contractors and the government. At its New Jersey plant Entron maintains an inventory of thousands of master engineering and electronic drawings created by Entron and by various companies it has acquired. Entron uses these drawings to design, manufacture, and test various components and to supply spare parts to contractors.

In December 1977 a water pipe burst on the lower level of the plant building where Entron's drawings were stored. When first discovered, the water had risen to approximately two and one-half feet and had soaked 19 to 20 filing cabinets containing drawings. After notifying Entron's insurer, Affiliated FM Insurance Co., of the flood, Entron personnel began to pump out the water and dry the drawings.

Between December 1977 and May 1978 several Affiliated representatives visited the plant and discussed the loss with Entron. In April 1978 Entron submitted a written claim for loss in the amount of $976,318, which included estimates both for restoring damaged drawings to usable form and for repairing water damage to the plant and its equipment. In response to Affiliated's request, Entron prepared and, in September 1978, submitted a detailed inventory of the damaged drawings, together with a revised claim for $1,243,712.22.

The detailed inventory classified approximately 20,000 drawings according to the degree of damage they had sustained. Some were in excellent condition and needed little or no restoration; others could be readily reproduced with a printing machine or by photographic process. A small number of drawings were so badly damaged that they required redrawing. Of those, some could simply be redrawn by hand from the originals; in other cases, however, redrawing could not proceed until information missing from the drawings because of the water damage had been replaced by engineering research. It is this latter group on which the first appeal issue focuses.

In October 1978 Affiliated contested Entron's revised claim. In addition to other objections that are not relevant to this appeal, Affiliated argued that the terms of Entron's policy did not require reimbursement for the cost of engineering research. Affiliated relied on section 10, the valuation provision of the policy, which provided that "[u]nless otherwise endorsed hereon, adjustment of loss under this Policy shall be: * * * (d) on exposed film, records, manuscripts and drawings, the value blank plus the cost of transcription * * * " (emphasis added). Affiliated contended that this section limited its obligation for any particular drawing to providing Entron with the value blank and a reasonable cost of photocopying or a similar process. Entron contended that the term "cost of transcription" included the cost of engineering research necessary to complete the damaged drawings, particularly because the protection offered by the policy was for "all risks of direct physical loss of or damage to" its personal property.

Attempts at settlement having failed, Entron filed suit in March 1979. After a trial in June and July 1983, the jury awarded Entron $310,681, allocated primarily between costs for photographic reproduction of the lightly damaged drawings and costs for engineering research and redrawing of those that were severely damaged.

Contending that $110,045 of the award had been improperly allocated for engineering research, Affiliated moved to reduce the judgment by that amount. Entron moved to amend the judgment to include $186,408.60 in prejudgment interest. From Judge Glasser's denial of the former motion and grant of the latter, Affiliated appeals.

Cost of Transcription

Affiliated argues that its obligation under Sec. 10(d) of the policy to cover "the value blank plus the cost of transcription" is limited to providing Entron with the value of the blank media (e.g., light sensitive paper, vellum, or mylar) plus the reasonable cost of copying onto that blank media from a pre-existing copy or original of the drawing. Entron contends that the trial court correctly held that the term "cost of transcription" includes any research necessary to make usable copies of drawings that were missing information because of the water damage.

Construction of this clause presents a question of state law. While New Jersey courts have insisted that "clear basic terms and particular provisions of an insurance contract may not be disregarded at will and a new contract judicially made for the parties", Linden Motor Freight Co. v. Travelers Insurance Company, 40 N.J. 511, 193 A.2d 217, 225 (1963), they have, nevertheless, extended considerable protection to the insured in interpreting the provisions of insurance policies. "Courts are bound to protect the insured to the full extent that any fair interpretation will allow." Mazzilli v. Accident & Casualty Insurance Company, 35 N.J. 1, 170 A.2d 800, 803 (1961). "When members of the public purchase policies of insurance they are entitled to the broad measure of protection necessary to fulfill their reasonable expectations. They should not be subjected to technical encumbrances or to hidden pitfalls * * *." Kievit v. Loyal Protective Life Insurance Company, 34 N.J. 475, 170 A.2d 22, 26 (1961). Thus, "[w]herever possible the phraseology must be liberally construed in favor of the insured; if doubtful, uncertain, or ambiguous, or reasonably susceptible of two interpretations, the construction conferring coverage is to be adopted." Hunt v. Hospital Service Plan of New Jersey, 33 N.J. 98, 162 A.2d 561, 563 (1960).

Citing numerous dictionaries in opposition, Affiliated argues that the phrase "cost of transcription" in Sec. 10(d) clearly and unambiguously means the cost of copying and that the court cannot interpret it to include the cost of engineering research necessary to replace missing information. However, we should not "dwell at any length upon the semantical approach." Linden Motor Freight Co., 193 A.2d at 224. Instead, we are instructed by the New Jersey courts to interpret the policy in view of "what we conceive to be the reasonable expectations of the average purchaser in the light of the contract language." Id.

While Sec. 10(d) does limit Affiliated's responsibility to the "cost of transcription", the policy does not clearly spell out the meaning of this phrase and thus leaves the boundaries of coverage open for interpretation. Section 8 of the policy provides that "[e]xcept as hereinafter excluded this Policy insures against all risks of direct physical loss of or damage to the property insured." This broad language reasonably supports Entron's expectation that the policy would cover the full cost of replacing the engineering drawings, including research necessary to fill in missing information.

If Affiliated's interpretation of Sec. 10(d) were to control, the policy would provide no meaningful coverage for engineering drawings that were severely damaged. For example, with respect to a drawing that was intact but illegible, Entron would recover only the cost of making an equally illegible copy--an obviously meaningless objective. Moreover, with a drawing that was completely destroyed, Entron would recover nothing but the cost of a blank sheet of vellum or mylar. Such an interpretation would create exactly the type of "hidden pitfall" that an insured should be protected against. As the New Jersey Supreme Court has pointed out, "Where particular provisions, if read literally, would largely nullify the insurance, they will be severely restricted so as to enable fair fulfillment of the stated policy objective." Kievit, 170 A.2d at 26. Although Affiliated's interpretation of Sec. 10(d) would not nullify every aspect of this comprehensive insurance policy, it would largely nullify any meaningful protection for one of Entron's valuable assets--its engineering drawings.

Affiliated further argues that it offers customers more comprehensive insurance coverages, such as its Valuable Papers and Records endorsement, that are designed to provide the kinds of protection Entron claims here, and it contends that the availability of such coverages under other policies precludes coverage of engineering research under the policy at issue. This argument is both illogical and unfair. First, it does not follow that simply because one type of insurance policy reimburses for certain losses, another type of insurance policy necessarily excludes such losses. Second, Entron's expectations under the policy it...