American Cas. Co. of Reading, Pa. v. B. Cianciolo, Inc.

• Decision Date: 18 March 1993
• Docket Number: No. 91-3821,91-3821
• Citation: 987 F.2d 1302
• Parties: AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff-Appellant, v. B. CIANCIOLO, INC., and the Cianciolo Company, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1302

987 F.2d 1302

AMERICAN CASUALTY COMPANY OF READING, PENNSYLVANIA, Plaintiff-Appellant, v. B. CIANCIOLO, INC., and the Cianciolo Company, Inc.,

Defendants-Appellees.

No. 91-3821.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 15, 1993.

Decided March 18, 1993.

Donald C. Fellows, Kenneth M. Kenney, Fellows, Piper & Schmidt, Milwaukee, WI, James T. Crotty, Zacarias R. Chacon (argued), Julie A. Hoffman, Crotty & Chacon, Chicago, IL, for plaintiff-appellant.

Howard B. Mitz (argued), Mequon, WI, for defendants-appellees.

Before CUMMINGS, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

During the evening of December 4, 1980, a fire swept through the building housing a wholesale produce business in Wisconsin. The firms notified their insurer, American Casualty Company (which we call CNA, its trade name). Sandy Cianciolo, the general manager of the insured firms, agreed with CNA's inspector that the fire's multiple points of origin implied arson. CNA launched an investigation. Meanwhile Cianciolo (as we call the two corporations collectively) had trouble substantiating its claims of loss: most of its records had been destroyed in the fire. Although Cianciolo started filing proofs of loss in March 1981, CNA did not receive any records until May 1981, after Cianciolo changed accountants.

Cianciolo contended that the interruption of its business by the fire cost it more than $220,000 in profits plus another $103,000 in uncollectible accounts receivable. Its theory was that customers would not pay when the loss of records in the fire left Cianciolo unable to send or substantiate invoices. CNA doubted these claims, which Cianciolo could not corroborate. During a meeting with Cianciolo's lawyer on August 7, 1981, CNA offered $12,000 to compromise the business loss claims. Rather than negotiate, Cianciolo's lawyer stormed out of the meeting, vowing to meet CNA in court. CNA presently filed this diversity action, seeking a declaratory judgment that it owes nothing in light of what it characterized as fraudulently inflated claims. Cianciolo filed counterclaims demanding the full amount of its claims, plus damages for what it called CNA's bad faith refusal to pay up.

The litigation is almost 12 years old. A jury trial was held in December 1986. Immediately before the start of the trial, Cianciolo reduced its claims by more than half. Answering special interrogatories, the jury concluded (1) that Cianciolo had submitted "an inflated business earnings claim either recklessly or with the intent to deceive and defraud" CNA; (2) that Cianciolo had submitted "an inflated accounts receivable claim either recklessly or with the intent to deceive and defraud" CNA; and (3) that CNA had "exercise[d] 'bad faith' in handling the insurance claim" submitted by Cianciolo. The jury found that Cianciolo lost $53,235 because of the interruption of its business and $62,706 in uncollectible receivables. It added $5,000 in compensatory and $1 in punitive damages on the "bad faith" claim.

The jury's conclusion that Cianciolo committed fraud is not easy to reconcile with its conclusion that CNA denied the claim in bad faith, for if Cianciolo committed fraud then CNA had every right to deny the whole claim. The contract of insurance provides: "This entire policy shall be void if, whether before or after a loss, the Insured has willfully concealed or mispresented [sic] any material fact or circumstance concerning this insurance or the subject thereof". CNA asked the court to enforce the jury's fraud verdicts, which it believed led to complete victory. Cianciolo asked the court to enter judgment on the jury's monetary awards. For more than four years, the district judge did neither of these things. The parties asked the judge to act; the judge did not reply. On May 15, 1991, CNA filed a petition for a writ of mandamus, asking us to direct the judge to rule on the post-verdict motions. The very next day the district judge set aside the verdicts and ruled that a new trial would be held, on a ground neither side had raised: that the instructions failed to inform the jury that "reliance" by the insurer is an element of fraud.

Citing Northwestern National Insurance Co. v. Nemetz, 135 Wis.2d 245, 262, 400 N.W.2d 33, 40 (Ct.App.1986), the judge explained: "Because the jury was not instructed that it must find reliance on the part of the insurance company for any misrepresentation in a proof of claim to be material and, therefore, void the policy, the verdict is infected by an error of law." A brief dictum in Nemetz supports this position, but the dictum is contrary to a line of precedent in Wisconsin that reliance is unnecessary. E.g., F. Dohmen Co. v. Niagara Fire Insurance Co., 96 Wis. 38, 71 N.W. 69 (1897); Worachek v. New Denmark Mutual Home Fire Insurance Co., 102 Wis. 88, 91-92, 78 N.W. 411, 412 (1899); Myer v. Home Insurance Co., 127 Wis. 293, 299, 106 N.W. 1087, 1088-89 (1906); Stebane Nash Co. v. Campbellsport Mutual Insurance Co., 27 Wis.2d 112, 124, 133 N.W.2d 737, 748 (1965). See also American Home Fire Assurance Co. v. Juneau Store Co., 78 F.2d 1001 (7th Cir.1935). It is easy to see why. An insurer that relied on a fraudulent proof of loss would pay the claim, and unless the insurer later learned the truth there would be no litigation. If reliance were essential, then any insurer that actually paid (because it had been taken in) would be relieved of the legal obligation to pay, while an insurer that did not pay (because it discovered the fraud) would be legally required to pay. A clause vitiating the policy in the event of fraud is designed to give the insured a compelling reason to tell the truth. A reliance requirement, however, would eliminate that incentive--for if the fraud succeeded, the insured would keep the money, and if the fraud failed, the insured would be no worse off. See Tempelis v. Aetna Casualty & Surety Co., 164 Wis.2d 17, 473 N.W.2d 549 (Ct.App.1991) (repudiating the dictum in Nemetz ), affirmed, 169 Wis.2d 1, 485 N.W.2d 217 (1992).

The district judge's brief opinion did not mention either the many decisions of the Supreme Court of Wisconsin holding that reliance is not an element of the insurer's burden or the powerful reasons why this must be so. CNA asked the district judge to reconsider. The judge declined, giving no reasons. But he must have had second thoughts, because at the end of the second trial (in August 1991) the instructions once again omitted any reference to reliance. The judge told the jury that only "material" misrepresentations counted as fraud and did not define that term. The second jury saw things in a new light. It answered each of the three questions differently from the first: no fraud in the business earnings claim, no fraud in the accounts receivable claim, and no bad faith by CNA. This jury awarded Cianciolo $300,000 for losses caused by the interruption of its business and nothing for its uncollectible receivables. By the time of the second trial, Cianciolo had been claiming only $94,190 for business interruption losses, so the judge reduced the award to this sum. Cianciolo is willing to accept the curtailed award, even though the first jury gave it more; CNA wants the first verdict reinstated, contending that the jury's findings of fraud are free from error and dispose of the remainder of the case.

As we have explained, the district judge's reason for setting aside the first jury's verdict is wrong. Reliance is not essential. A policy of insurance providing that misrepresentations by the insured render the contract void will be enforced, provided the misrepresentations are material. Tempelis, 169 Wis.2d at 11, 485 N.W.2d at 221. No one doubts that Cianciolo's representations were material, and that they were false. Cianciolo conceded as much when it abandoned more than half of its claims immediately before the first trial. The first jury awarded Cianciolo only part of the reduced claim, and the second jury fixed the lost accounts receivable at zero. So the principal dispute at the trials was whether the errors were attributable to the destruction of Cianciolo's records or were instead deliberate (or reckless) efforts to mislead its insurer.

A decision either way is justifiable. CNA points to numerous claims that do not pass the straight face test. For example, Cianciolo demanded $7,800 as the cost of repairing trucks supposedly damaged by the fire. In fact, the trucks had been parked four blocks from the building at the time of the blaze and were unscathed. Cianciolo sought $41,214 that it could not collect from Dale's Fresh Approach, telling CNA that Dale's would not pay its bills because Cianciolo could not produce copies of its invoices. In fact, Cianciolo and Dale's had been in litigation over these bills since August 1980, four months before...