Continental Cas. Co. v. Howard

• Decision Date: 03 December 1985
• Docket Number: No. 82-3047,82-3047
• Citation: 775 F.2d 876
• Parties: 19 Fed. R. Evid. Serv. 40 CONTINENTAL CASUALTY COMPANY, Plaintiff-Appellee, v. Ervin HOWARD, d/b/a LaFayette Components, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 876

775 F.2d 876

19 Fed. R. Evid. Serv. 40

CONTINENTAL CASUALTY COMPANY, Plaintiff-Appellee, v. Ervin HOWARD, d/b/a LaFayette Components, Defendant-Appellant.

No. 82-3047.

United States Court of Appeals Seventh Circuit.

Argued April 10, 1985.

Decided Oct. 29, 1985.

As Amended Nov. 7 and Nov. 13, 1985.

Rehearing Denied Dec. 3, 1985.

William K. Bennett and Robert W. Bennett, Bennett, Boehning, Poynter & Clary, Lafayette, Ind., for defendant-appellant.

Lisa Marco Kouba, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., for plaintiff-appellee.

Before WOOD and COFFEY, Circuit Judges, and PECK, Senior Circuit Judge. ^*

COFFEY, Circuit Judge.

The defendant, Ervin Howard appeals a jury verdict on a counterclaim in his favor in the amount of $9,500 rather than the $379,000 Howard claimed. We affirm.

I

This litigation, in federal court under our diversity jurisdiction, arose out of the destruction by fire of the defendant's roof-truss factory in LaFayette, Indiana in January of 1981. After investigating the cause of the fire, the insurer, Continental Casualty Company ("Continental") concluded that the fire had been set by an arsonist, and that the circumstances surrounding the fire indicated that the owner, Howard, was the arsonist, and that the business' financial condition had deteriorated during the past three to four years. Continental initiated a declaratory judgment action in the United States District Court for the Northern District of Indiana to determine its liability under the policy. Howard counterclaimed for the proceeds of the insurance policy covering the factory ("factory policy") and for the value of a truck destroyed in the fire, also insured by Continental under a separate automobile business policy ("automobile policy"). Additionally, Howard sought punitive damages under both policies contending that Continental, "willfully, wantonly, maliciously, oppressively, and in bad faith, refused, without legal cause, to meet its contractual obligations" under the insurance policies.

The district court judge directed a jury verdict in the favor of Continental and on the issue of punitive damages. As to the truck, the jury returned a verdict against Continental on its claim of nonliability and for Howard on his counterclaims in the amount of $9,500, the value of the truck. The court entered judgment on the verdict, denied Howard's post-trial motions under Fed.R.Civ.P. 50 and 59 for entry of corrected judgment, judgment notwithstanding the verdict, and a new trial on the issue of damages.

After the reading of the verdict, Judge Sharp expressly forbid the parties and their attorneys to have any contact with the jurors, but Howard, in direct defiance of the order, telephoned the jury foreman that same night. The foreman allegedly told Howard that the $9,500 verdict referred to the truck alone and that the jury returned, "another form written in red ink for the building contents of $269,000." After searching the jury room for this alleged missing second verdict form and finding nothing, the judge rejected Howard's request to question the jury regarding the verdict and, after being advised of Howard's actions the previous day, again admonished counsel and the parties, "that any attempt to contact any members of this Jury will, from this point forward, be treated as direct contempt of an Order of this Court." One week later, the foreman of the jury filed an affidavit stating in relevant part:

"It was not the intent of any of the jurors, including myself, to limit Mr. Howard's recovery from Continental Casualty Insurance Company to only $9,500 on the truck policy by the form of the verdict the jury returned on Thursday, October 21, 1982. We believed that Mr. Howard would receive a grand total of $379,000 from Continental on both insurance policies."

Continental objected, noting that the affidavit attempted to impeach the jury's verdict and appeared to have been prepared by someone other than the foreman. Howard renewed his post-trial motions citing the affidavit as bolstering his argument for relief. Judge Sharp ordered the affidavit stricken and once again denied Howard's post-trial motions.

On appeal Howard argues that the district court erred: (1) in directing a verdict in favor of Continental on the punitive damages issue; (2) in denying his post-trial motions; and, (3) in striking the foreman's affidavit. ¹

II

A. Punitive Damages

The general rule in Indiana is that punitive damages are not recoverable in contract actions. Hoosier Ins. Co., Inc. v. Mangino, 419 N.E.2d 978, 981 (Ind.App.1981). As an exception however, Indiana courts will allow the imposition of punitive damages, "where the breach also includes conduct (1) which independently establishes the elements of a common law tort such as fraud or (2) where elements of fraud, malice, gross negligence or oppression mingle in the controversy ... [and] the public interest is served by the deterrent effect of the punitive damages award." Id. The insured may recover punitive damages if he is able to demonstrate that the insurer was acting in bad faith in denying the claims; specifically, "bad faith means knowledge by [the insurer] that it had no legitimate reason for denying [the insured]'s claim, but nevertheless refused it...." Id. See, e.g., Rex Ins. Co. v. Baldwin, 163 Ind.App. 308, 323 N.E.2d 270 (1975) (insurer asserted a defense after a limitations period had expired knowing, as a matter of law, that the defense was no longer available); Vernon Fire & Casualty Ins. Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173 (1976) (insurer refused to pay or negotiate the insurance policy proceeds until the insured procured a release from an associate on an unrelated claim, a service to which the insurer was not entitled). Additionally, Indiana courts have allowed punitive damages when an insurer investigating a claim that it reasonably believes was fabricated by the insured prejudices the insured's ability to prove his innocence by delaying and misrepresenting the true nature of the investigation. Riverside Ins. Co. v. Pedigo, 430 N.E.2d 796 (Ind.App.1982). To avoid the chilling effect of punitive damage suits and to allow insurers to dispute their liability in good faith, the insured must present clear and convincing evidence of the insurer's bad acts. Travelers Indem. Co. v. Armstrong, 442 N.E.2d 349 (Ind.1982).

"[P]unitive damages should not be allowable upon evidence that is merely consistent with the hypothesis of malice, fraud, gross negligence or oppressiveness. Rather, some evidence should be required that is inconsistent with the hypothesis that the tortious conduct was the result of the mistake of law or fact, or his error of judgment, over-zealousness, mere negligence or other such noninequitous human failing."

Id. at 362.

Howard bases his claim for punitive damages on two grounds. First, he contends that the, "insurer so completely lacked evidence on its sole defense of owner incendiarism as to manifest its bad faith denial of the claim, warranting an award of punitive damages under Indiana law." In the alternative, he asserts that Continental's, "conduct during the pendency of Howard's claim also warranted punitive damages." Our standard of review of a directed verdict is whether there was sufficient evidence upon which a jury could have entered a verdict for Howard on his counterclaim. Schultz v. Owens-Illinois, Inc., 696 F.2d 505, 511 (7th Cir.1982). We may not weigh the evidence or determine credibility; rather in determining whether Howard was entitled to have his punitive damages claim presented to the jury, we must assess the evidence in the light most favorable to Howard. Id. When evaluating Howard's first claim--that Continental denied his claim in bad faith--we must determine whether the record demonstrates that Continental's suspicion of owner incendiarism was reasonable. Pedigo, 430 N.E.2d at 806-07.

Howard testified that he was in the factory from noon until 11:00 p.m. on Sunday, January 4, 1981, the night of the fire, taking inventory, sorting damaged wood and moving equipment to create more working space. Howard further testified that he left the plant at 11:00 p.m., locked all doors behind him, returned to his house trailer located sixty to ninety feet south of the building, and shortly thereafter departed on a trip to Louisville at approximately midnight. The fire was reported to the fire department at 3:15 a.m. Based on the warping of steel "I" beams (indicating exposure to abnormally high intensity heat for an extended period of time), the presence of "spalling" (explosion-like indentations in a concrete floor), and, further, the fact that highly combustible materials (work stations, wood and tires) had been strategically placed in a pile, both the Deputy Indiana State Fire Marshal and a fire investigator retained by Continental, Gary Mang, concluded that the fire was caused by arson. Both Mang and John Shaw, the LaFayette Fire Department Assistant Chief testified that, in their opinions, the fire had been burning for some three hours before the fire department arrived. Specifically, Shaw informed the court that when he arrived at the scene, at approximately 3:18 a.m., he observed 30-foot flames coming through the roof. Shaw stated that he learned during his twenty-six years with the fire department and in training courses on the spread of a fire that flames will break through a window or roof of a building only after exhausting the oxygen supply within the structure. Based upon his knowledge, training, experience and observations of both the size of Howard's building and the intensity of the fire, Shaw concluded that the fire had been burning for approximately three hours when the fire department arrived at the scene shortly after 3:00 a.m. Furthermore, Mang stated that the arsonist had moved thirteen two-ton work stations to the center portion of the building and had stacked tires and wood around...