C-Suzanne Beauty Salon, Ltd. v. General Ins. Co. of America

Decision Date17 March 1978
Docket NumberC-SUZANNE,D,No. 386,386
Citation574 F.2d 106
PartiesBEAUTY SALON, LTD., by Salvatore Ferro and Patricia Ferro, his wife, Plaintiff-Appellee, v. GENERAL INSURANCE COMPANY OF AMERICA, Defendant-Appellant, and Lawley Service, Inc., Robert Beatty Agency, Defendants. ocket 77-7346.
CourtU.S. Court of Appeals — Second Circuit

James E. Crotty, Buffalo, N. Y., for plaintiff-appellee.

Max J. Gwertzman, New York City, Richard H. Huber, Gwertzman & Pfeffer, New York City of counsel, for defendant-appellant.

Before FRIENDLY, SMITH and MESKILL, Circuit Judges.

MESKILL, Circuit Judge:

I. INTRODUCTION

In November of 1973, Salvatore and Patricia Ferro purchased the C-Suzanne Beauty Salon from Dorothy Smith, its sole stockholder. C-Suzanne's business was located in leased premises in Kenmore, New York. At the time of the sale, C-Suzanne's personal property was insured against loss by fire by the General Insurance Company of America in the amount of $15,000. The Ferros decided that this amount was inadequate and in January, 1974, increased its limit to $35,000. On April 19, 1974, Salvatore Ferro telephoned his insurance agent and inquired whether the policy was in effect. It was. The next day, an incendiary fire occurred. The business closed on a permanent basis.

C-Suzanne filed a proof of loss with General Insurance on November 18, 1974. New York counsel for General Insurance responded by requesting that Mr. and Mrs. Ferro appear for an examination under oath at a specified time and place. 1 The Ferros' lawyer sent the following reply on December 23, 1974:

Mr. and Mrs. Ferro have consulted with the undersigned regarding this claim, and after due deliberation, they have advised our office that they do not intend to proceed.

Accordingly, they will not be present on the above date and time for the Examination under Oath.

We suggest that you mark your file ahead, and if lawsuit is not instituted within 12 months from the date of loss, then you will have a "free one".

The object of my letter is to save you the time and trouble of coming to Buffalo needlessly.

General Insurance did not insist on conducting an examination, although the policy gave it the right to do so. 2 The Ferros apparently changed their minds about pursuing their claim, however, for they retained a new lawyer, and on April 18, 1975, two days before the one-year limitation of action period imposed by the policy was to expire, 3 C-Suzanne brought suit in New York State Supreme Court in Erie County. The action was removed to the United States District Court for the Western District of New York. The basis for federal jurisdiction is diversity of citizenship.

General Insurance interposed a number of defenses to the action. Three of them are relevant here. First, it asserted that the Ferros' refusal to appear for an examination under oath constituted a breach of the "cooperation clause" of the policy, see note 2 supra, which precluded recovery. Second, it asserted that the Ferros had committed arson and, concomitantly, that they were guilty of fraud in filing a proof of loss which stated the contrary. Third, it asserted that the amount of damage alleged to have been sustained in the proof of loss was grossly and fraudulently exaggerated.

Prior to trial, General Insurance moved for summary judgment on the basis of the alleged breach of the cooperation clause. The district court denied the motion but ordered the Ferros to submit to an examination under oath. The court's order, which had been drafted by General Insurance, provided that the denial of the motion to dismiss was without prejudice to General Insurance's right to renew the motion at a later date if the delay of the examination proved to have prejudiced General Insurance's investigation of the facts. The motion was later renewed, but it was denied on the ground that there had been no showing of prejudice.

At trial, C-Suzanne sought to recover the full value of improvements that it had made at the beginning of the lease when the building was remodeled to make it suitable for a beauty salon. Before the court charged the jury, General Insurance requested the following charge regarding improvements and betterments:

if the jury finds that the assured did not replace the improvements and betterments which were in the premises at the time of loss, in that event they are limited to the unexpired term of the lease, which in this case was approximately one year (C-Suzanne had a three-year lease and an option to renew that it had exercised for an additional two years; the renewal period would have expired on April 1, 1975), and must apportion the amount to be one fifth of whatever they find the value of these improvements and betterments to have been. . . .

The requested charge was based on a policy provision set out in the margin. 4 The district judge declined to give this charge. He explained that C-Suzanne's interest in the improvements and betterments extended beyond the term of the lease because there was a prospect that it would have negotiated a new lease and continued to occupy the premises even after the old lease expired. The judge was of the view that the jury was entitled to consider that prospect and award damages on that basis.

The jury returned a verdict in favor of C-Suzanne in the amount of $20,000. General Insurance made a post-trial motion for a judgment notwithstanding the verdict, again raising certain issues relevant to this appeal. It renewed its arguments based on the cooperation clause. In addition, it argued that fraud had been established as a matter of law. Finally, it argued that the court had erred in denying the request to charge based on the provision dealing with improvements and betterments. In a brief written decision, the district court rejected each of these arguments and denied the motion. As noted above, the first argument was rejected on the ground that no prejudice had been shown. The second argument or collection of arguments was rejected on the ground that reasonable minds could differ over the Ferros' responsibility for the fire. The court's reason for rejecting the third argument was somewhat different than the reason it had given at trial. The court's reasoning is explained in detail later in this opinion. See Part IV, infra.

On this appeal, General Insurance again raises its arguments based on the cooperation clause, the alleged fraud and the improvements and betterments provision. We reject the first two, but on the basis of the third we reverse and remand for a new trial on the issue of damages. 5

II. THE COOPERATION CLAUSE

The insurance policy provides that "(n)o suit or action on this policy for the recovery of any claim shall be sustainable in any court of law or equity unless all the requirements of this policy shall have been complied with . . . ." 6 One of the "requirements" of the policy is the so-called " cooperation clause," which states that the insured, "as often as may be reasonably required, shall . . . submit to examinations under oath . . . ." 7 In Hudson Tire Mart, Inc. v. Aetna Cas. & Sur. Co., 518 F.2d 671, 674 (2d Cir. 1975), this Court observed that the purpose of the cooperation clause "is to enable the insurer to obtain all knowledge and facts concerning the cause of the fire and the loss involved while the information is fresh in order to protect itself from fraudulent and false claims." See also Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 94-95, 3 S.Ct. 507, 28 L.Ed. 76 (1884). Although it is true, as we noted in Hudson Tire, that a refusal to appear for an examination under oath constitutes a material breach of the contract of insurance, it is also true, as a general principle of New York law, that "equity will not enforce forfeitures." Hal Roach Studios, Inc. v. Film Classics, Inc., 156 F.2d 596, 599 (2d Cir. 1946). Thus, in construing the cooperation clause, the New York Court of Appeals has held that "a breach which will defeat a recovery cannot be based upon technical or unimportant omissions or defects in the performance by either party." Porter v. Traders' Ins. Co., 164 N.Y. 504, 509, 58 N.E. 641, 642-43 (1900). Rather, a "willful and fraudulent withholding of information" must be shown. Happy Hank Auction Co. v. American Eagle Fire Ins. Co., 1 N.Y.2d 534, 539, 154 N.Y.S.2d 870, 873, 136 N.E.2d 842, 844 (1956). In Happy Hank, the Appellate Division unanimously agreed that "it is clear that plaintiff has willfully and designedly refused to answer questions and produce documents that are indisputably material to its claim," 286 A.D. 505, 510, 145 N.Y.S.2d 206, 211-12 (1st Dep't 1955), and it granted summary judgment and ordered dismissal of the complaint. The Court of Appeals modified this order so as to reinstate the complaint, explaining that willfulness and fraud present "the kind of question of fact that cannot, except in the most extreme of cases, be resolved through the study of affidavits." 1 N.Y.2d at 539, 154 N.Y.S.2d at 873, 136 N.E.2d at 844. The reluctance of the New York courts to enforce a forfeiture is illustrated well in the case of Mortgage Affiliates Corp. v. Commercial Union Ins. Co., 27 A.D.2d 119, 276 N.Y.S.2d 404 (2d Dep't 1967). In that case, there was a refusal to comply with the cooperation clause. The court ordered dismissal of the action, but it made its order conditional so that the sanction of dismissal would not be applied if the plaintiff complied with the provisions of the policy within 20 days.

Here, the district judge's handling of the cooperation clause issue was consistent with the principles discussed above. By denying General Insurance's pre-trial motion to dismiss, while at the same time requiring the Ferros to submit to an examination, the district judge reached a result much like that reached in Mortgage Affiliates. By conditioning the renewal of the motion to dismiss upon a showing of prejudice, the district judge was acting in...

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