Bard's Apparel Mfg., Inc. v. Bituminous Fire and Marine Ins. Co., 87-5062

• Decision Date: 16 June 1988
• Docket Number: No. 87-5062,87-5062
• Citation: 849 F.2d 245
• Parties: BARD'S APPAREL MANUFACTURING, INC., Plaintiff-Appellee, v. BITUMINOUS FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 245

849 F.2d 245

BARD'S APPAREL MANUFACTURING, INC., Plaintiff-Appellee, v. BITUMINOUS FIRE AND MARINE INSURANCE COMPANY, Defendant-Appellant.

No. 87-5062.

United States Court of Appeals, Sixth Circuit.

Argued March 21, 1988.

Decided June 16, 1988.

Kenneth R. Starr (argued), Luther, Anderson, Cleary and Ruth, Nora A. McCarthy, Pamela A. McNutt, Kent L. Booher, Chattanooga, Tenn., for defendant-appellant.

Frank Van Cleave, III (argued), Tullahoma, Tenn., for plaintiff-appellee.

Before LIVELY and GUY, Circuit Judges, and COHN, District Judge. ^*

COHN, District Judge.

Defendant, Bituminous Fire and Marine Insurance Company (Bituminous), appeals from a $131,250 judgment entered against it on November 24, 1986 in favor of plaintiff, Bard's Apparel Manufacturing, Inc. (Bard's), as a consequence of a property damage and business interruption loss incurred by Bard's due to vandalism on August 10, 1985. A jury found in favor of Bard's as follows: $75,000 as compensation for contents loss; $50,000 for business interruption loss; and $6,250 (5%) as a bad faith penalty under Tenn.Code Ann. Sec. 56-7-105.

On appeal Bituminous presents five issues for review:

1. Whether the district court erred in denying its motion for summary judgment predicated on its demand for an appraisal of the loss made less than 30 days after Bard's presented a Sworn Statement in Proof of Loss along with Bard's filing of suit immediately following the demand;

2. Whether the district court erred in denying its motions for partial summary judgment and directed verdict on the bad faith penalty issue where Bard's made no formal demand for payment in a sum certain and filed suit less than 40 days after Bituminous received the Sworn Statement in Proof of Loss;

3. Whether the district court erred in its jury instruction on the measure of damages for contents loss when it defined the measure in terms of the "difference in the fair market value of the property immediately before the vandalism and immediately after", with a ceiling of the cost to repair or replace, where the insurance policy stated: "actual cash value at the time of the loss, but not exceeding the amount which it would cost to repair or replace the property with material of like kind and quality within a reasonable time after such loss";

4. Whether the district court erred in failing to direct a verdict as to the duration of time during which Bard's was entitled to receive business interruption loss payments (six weeks at a stipulated loss of $7,485 per each 30 days) and further erred in its jury instruction on the measure of damages when it told the jury to take into consideration, in determining the length of time it would have taken Bard's to reenter business, "Bard's financial condition"; and

5. Whether the district court erred in denying Bituminous's post-trial motion to amend the judgment to reflect a credit for the $250 deductible provided by the insurance policy.

For the reasons which follow, we affirm the district court's denial of summary judgment on the appraisal issue; reverse the district court's denial of directed verdict on the bad faith penalty issue; affirm the district court on its jury instruction on measure of damages for contents loss; reverse the district court on its jury instruction on business interruption loss; and reverse the district court on the $250 deductible issue. Bituminous is entitled to a new trial on the issues of business interruption loss and credit for the deductible under the insurance policy. Because the bad faith penalty issue is removed from the case, on remand the district court is entitled to give consideration to an award of prejudgment interest.

I.

On August 10, 1985 Bard's, an apparel manufacturer, suffered extensive loss to its machinery and equipment as a consequence of vandalism. Bard's machinery, for the most part, consisted of industrial sewing machines. At the time of the loss, Bard's was covered by a policy of insurance issued by Bituminous for loss by vandalism to contents of the business premises, not to exceed $208,000, and for any resulting business interruption, not to exceed $50,000. Since Bard's operated in a rented building and did not own the raw materials involved in its manufacturing operations, its contents loss was limited to machinery and equipment.

On August 11, 1985 Bard's orally notified Bituminous of its claim but did not state a sum certain. Shortly after the notice to Bituminous, Southern Sewing Supply, at Bard's request, examined the damaged sewing machines and equipment and gave Bard's a repair estimate of $34,252, sent to Bituminous, which essentially concerned work on the sewing machines. The repairs would take six weeks to complete.

Because Bard's, prior to the vandalism, had filed for reorganization under Chapter 11 of the Bankruptcy Act, Bituminous was uncertain as to who to pay. Also, there was no agreement between the parties in the Fall of 1985 as to the amount of the business interruption loss.

On November 25, 1985 Bituminous filed a complaint of interpleader in the Bankruptcy Court for the Eastern District of Tennessee that named Bard's and two of its creditors as defendants and stated in part:

Complainant has agreed with its insured that the amount payable under the contents loss portion of the policy is $32,251.03 and said sum is now due and payable.

The complaint requested that the defendants settle between themselves their respective rights to the $32,251.03 and that Bituminous be discharged from all liability under the contents loss portion of its policy.

The bankruptcy proceeding was subsequently dismissed without objection on December 26, 1985, apparently mooting the interpleader action. In January of 1986 Bituminous issued two checks to Bard's, one for $32,251.03 to cover the contents loss and another for $18,000 to cover the business interruption loss. Because the checks included Bard's attorney and a creditor as named payees in addition to Bard's, the checks were returned to Bituminous.

On February 18, 1986 Bituminous received from Bard's a Sworn Statement in Proof of Loss in the amount of $75,000 as the actual cash value of its contents loss and $50,000 as its business interruption loss. On March 11, 1986, after Bard's had advised Bituminous of its intention to file suit, Bituminous made a demand for appraisal.

Bard's filed suit on March 20, 1986. Pretrial, the parties stipulated that the monthly loss for business interruption was $7,485. The district court denied Bituminous's motion for summary judgment on Bard's failure to participate in an appraisal, stating in the order denying reconsideration of the issue:

it is evident that the demand for an appraisal was made very late in the game; that an appraisal at this time would be meaningless because plaintiff no longer owns the damaged equipment; and that equity requires a finding that an appraisal, as a condition precedent to recovery, has been waived by the defendant's conduct.

Also pretrial, the district court granted Bituminous's motion to eliminate the claims for punitive damages from the case, leaving to the jury the issue of a bad faith penalty under Tenn.Code Ann. Sec. 56-7-105.

The testimony at trial, at best, was confusing. In addition to the matters described above, it essentially went as follows:

Aaron Bailey, the principal of Bard's, testified as to the vandalism, the damage to the sewing machines and the interruption in Bard's business. Bailey also expressed the opinion that the before and after value of the sewing machines was $100,000 and $18,000, respectively, and that it would have taken eight to nine months for Bard's to reenter the business and that Bard's sold the sewing machines, or what was left of them, in the interim. Bailey further described his rejection of the two checks received from Bituminous in January of 1986. Finally, Bailey described his repeated efforts to get Bituminous to make proper payment on the contents loss.

Bard's also offered the opinion testimony from persons familiar with the sale and repair of sewing machines to the effect that the sewing machines had a fair market value of between $100,000 and $200,000 before the vandalism and that to replace them would cost $142,000.

An adjustor for Bituminous testified that the estimate given by Southern Sewing Supply was intended to establish the cost of repairing the sewing machines to put them into good working order and that the work would take six weeks. A representative of Southern Sewing Supply testified as to the completeness of its estimate and that it covered all the sewing machines owned by Bard's. A representative of Bituminous testified as to the company's concern about who to pay because of Bard's unstable financial condition.

Post-trial, the district court denied Bituminous's motion for a judgment notwithstanding the verdict or for a new trial, and denied Bard's motion to allow for prejudgment interest on the ground that the bad faith penalty awarded subsumed it.

II.

A.

We review the denial of summary judgment on the appraisal issue by the same test used by the district court, Hand v. Dayton-Hudson, 775 F.2d 757, 759 (6th Cir.1985), and find no error in its decision. Under Tennessee law, an appraisal provision in an insurance policy is valid. Hickerson v. German-American Ins. Co., 96 Tenn. 193, 33 S.W. 1041 (1896). However, as explained in Hickerson: "Any attempt on the part of either party to misuse or pervert the provisions of the policy as to an appraisal, so as to unreasonably delay an adjustment ... is a breach of good faith, and should be treated as a waiver of the condition...." Id. 33 S.W. at 1044. Here, the parties spent approximately six months discussing an adjustment of the loss without Bituminous requiring Bard's to submit a Sworn Statement in Proof of Loss, and Bituminous twice attempted to pay the loss without agreement by Bard's. In the interim, the insured property was disposed of so that any...