First Alabama Bank of Montgomery, N.A. v. First State Ins. Co., Inc.

• Decision Date: 27 April 1990
• Docket Number: No. 88-7387,88-7387
• Parties: FIRST ALABAMA BANK OF MONTGOMERY, N.A., Plaintiff-Appellee-Cross-Appellant, v. FIRST STATE INSURANCE COMPANY, INC., a corporation and Cameron and Colby Company, Incorporated, a/k/a Cameron and Colby Co., Incorporated, a Massachusetts corporation, Defendants-Appellants, Johnson & Higgins of Georgia, Inc., a corporation, 1st St. Ins. & Cameron & Colby, Defendants-Appellants-Cross-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1045

899 F.2d 1045

FIRST ALABAMA BANK OF MONTGOMERY, N.A. Plaintiff-Appellee-Cross-Appellant, v. FIRST STATE INSURANCE COMPANY, INC., a corporation and Cameron and Colby Company, Incorporated, a/k/a Cameron and Colby Co., Incorporated, a Massachusetts corporation Defendants-Appellants Johnson & Higgins of Georgia, Inc., a corporation, 1st St Ins. & Cameron & Colby, Defendants-Appellants-Cross-Appellees.

No. 88-7387.

United States Court of Appeals, Eleventh Circuit.

April 27, 1990.

Clyde C. Owen, Jr., Ball, Ball, Matthews & Novak, P.A., John R. Matthews, Jr., Montgomery, Ala., for defendants-appellants-cross-appellees.

M. Roland Nachman, Jr., Balch & Bingham, Montgomery, Ala., Lange, Simpson, Robinson & Somerville, Robert McD. Smith, Birmingham, Ala., for plaintiff-appellee-cross-appellant.

Kevin R. Jespersen, Manger, Kalison, Murphy & McBride, Morristown, N.J., Robert A. Huffaker, Rushton, Stakely, Johnston & Garrett, P.A., Montgomery, Ala., amicus curiae.

Richard H. Gill, Copeland, Franco, Screws & Gill, P.A., Montgomery, Ala., Daniel M. Blanca, Mendes & Mount, New York City, for First State Ins. Co. & Cameron & Colby.

Fournier J. Gale, III, Maynard, Cooper, Frierson & Gale, P.C., Walker Percy Badham, III, Birmingham, Ala., Joe C. Freeman, Jr., Howell Hollis, III, Jack N. Sibley, Freeman & Hawkins, Atlanta, Ga., for Johnson & Higgens of Ga., Inc.

Appeals from the United States District Court for the Northern District of Alabama.

Before TJOFLAT, Chief Judge, HATCHETT, Circuit Judge, and ESCHBACH ^*, Senior Circuit Judge.

ESCHBACH, Senior Circuit Judge:

Defendants-Appellants First State Insurance Company ("First State"), Cameron and Colby Company, Inc. ("Cameron & Colby"), and Johnson & Higgins appeal from the trial court's award of compensatory and punitive damages in favor of plaintiff-appellee First Alabama Bank ("First Alabama") in a diversity action for fraud and breach of contract. ¹ Plaintiff filed this diversity action in federal district court against First State ² seeking both to recover on a bank trust department errors and omissions ("E & O") insurance policy and to recover damages for fraud. First Alabama also sued Johnson & Higgins in both tort and contract for failure to provide expertise and skill as plaintiff's exclusive insurance broker in the procurement of E & O insurance and for fraud.

Following a bench trial, the court entered judgment in favor of First Alabama on its fraud and contract claims against First State and awarded First Alabama compensatory and punitive damages, together with costs. The court also found in favor of First Alabama on its contract claim against Johnson & Higgins and awarded the plaintiff compensatory damages. The court specifically stated that the liability of Johnson & Higgins is secondary to that of the other defendants. The court, however, entered judgment against plaintiff on its fraud and negligence claims against Johnson & Higgins.

From these various rulings, defendants now appeal, raising a total of seven issues. First State first argues that the court erred in concluding that First Alabama's fraud claims are not barred by the applicable statute of limitations. Second, it contends that the court's finding that it committed fraud against First Alabama is clearly erroneous. Third, the company argues that the court erred in granting First Alabama's motion for partial summary judgment and in striking its affirmative defense of failure to give timely notice of a claim. Fourth, it asserts that the court erred in concluding that the claims made policy without prior acts coverage, which it sold to First Alabama, violates public policy. Fifth, First State claims that the court erred in entering allegedly inconsistent judgments against it on both the fraud and contract claims. Finally, it argues that the court erred in awarding First Alabama prejudgment interest on the compensatory damage award. Johnson & Higgins also appeals, claiming that the court erred in construing First Alabama's tort claims as contract ones and in holding that the merger doctrine does not apply to bar First Alabama's contract action. Finally, First Alabama cross-appeals arguing that the court erred in denying it attorneys' fees from Johnson & Higgins for its litigation expenses against First State. Without deciding the public policy issue we affirm the district court's award of compensatory and punitive damages. However, because we believe that the contract was an indemnity policy, and not a liability one, we remand this case for the court to determine the proper amount of prejudgment interest.

I. Statement of Facts

Although the record and the briefs in this case are voluminous, the basic facts are not unusually complex. We will attempt to describe the events that transpired as simply as possible. In the fall of 1975, First Alabama decided to consolidate the insurance coverage of its affiliate banks into a centralized program. In order to accomplish this goal, it appointed an insurance committee to study the banks' insurance needs. The committee was composed of four members: the bank's president, Lynn Mosley, its corporate auditor, James Bohannon, and two stockholder-directors, who were local insurance agents in Alabama. The committee decided to appoint an exclusive insurance broker and invited several major national brokerage firms, including Johnson & Higgins, to submit written proposals and to make oral presentations on the services they offered.

On November 5, 1975, Johnson & Higgins made its oral presentation to members of First Alabama's insurance committee. In its presentation, Johnson & Higgins stressed that it had "specialists" to meet the bank's needs and that it would "function as an arm of management." Tr. at 37-38. Bohannon testified at trial that Johnson & Higgins also emphasized that "they would shop the market to make sure that [the bank] got the best insurance coverage for the premium [the bank] paid." Id. at 38. Along with its oral presentation, Johnson and Higgins distributed copies of a written proposal entitled "A Proposal of Risk Management Services for First Alabama Bancshares, Inc." to members of the committee. In its proposal, Johnson & Higgins states that one of its strengths is "its knowledge of insurance markets." Plaintiff's Exhibit No. 13 at 15. Besides stressing that Johnson & Higgins serves as a broker for "large financial institutions," id. at 30, the proposal states that "we review the competitive positions of insurance carriers in the marketplace ..." and "once the quotes are in, we prepare a comparison sheet of premiums, coverage and service, and present alternative insurance plans to you," id. at 16-17. In addition to this proposal, Johnson & Higgins had also sent a letter to Jim Bohannon, which mentions that the company has a number of banks as clients and that this allows the company to "have personnel particularly skilled in the handling of insurance problems for banks." Plaintiff's Exhibit No. 7 at 1. Based on the presentation and proposal that Johnson & Higgins submitted, the committee in November 1975 selected it as First Alabama's exclusive insurance broker.

After being appointed as First Alabama's exclusive insurance broker, Johnson & Higgins recommended to the bank that it obtain trust department E & O insurance because none of its affiliates had this type of coverage. Trust E & O insurance is a specialized form of coverage which insures against losses and related expenses incurred from claims arising from negligent acts, errors, or omissions in the administration of trusts or estates. Trust E & O coverage is usually written by insurers on a "claims made" basis. That is, subject to the coverage limit and other restrictions of the policy, the insured is protected against risks to the extent that a claim is made upon the insured within the period of the policy as defined, regardless of when the acts giving rise to the claim occurred. In contrast, occurrence policies provide coverage only for losses, acts, or omissions occurring during the current policy period. On May 25, 1976, at a meeting between representatives of First Alabama and Johnson & Higgins, Bohannan testified that First Alabama voiced its desire to obtain E & O insurance. On June 22, 1976, Johnson & Higgins wrote Cameron & Colby for a quotation on E & O coverage. Shortly thereafter, Johnson & Higgins presented a proposed "claims made" policy to First Alabama. The policy, which would be issued by First State, contained a provision entitled exclusion (b) which specifically excludes "prior acts coverage," or losses "arising out of events committed prior to the Retroactive Date" of the policy. Affidavit of Bette E. Mahoney, Rec. 55 (Exhibit B).

After reviewing the policy, Mosley testified that representatives of First Alabama met with Pat Green of Johnson & Higgins and told him that they wanted the insurance with prior acts coverage. Mosley also testified that he asked Johnson & Higgins to see whether First State would be willing to issue the policy with prior acts coverage for a higher premium. Subsequently, Johnson & Higgins arranged a meeting in October 1976 in Boston between representatives of First Alabama, Johnson & Higgins, and First State. At the meeting, Bohannon testified that he reiterated First Alabama's desire to obtain the E & O insurance with prior acts coverage. First State responded by saying it would bring the matter up with its London reinsurers and that it was "up to London where [sic] [the bank] could get prior acts or not." Tr. at 102.

Shortly after this meeting, Francis Vincent, First State's underwriter in charge of trust E & O insurance, wrote to Pat Green of Johnson & Higgins about the availability of the coverage. In his letter, Vincent states that his firm had obtained the necessary reinsurance, but it was "unable to offer any prior acts coverage." Affidavit of Francis J. Vincent, Rec. 53 (Exhibit A). Johnson & Higgins then...