Fireman's Fund Ins. Co. v. Videfreeze Corp.

• Decision Date: 25 August 1976
• Docket Number: Nos. 75-2405,No. 75-2406,No. 75-2405,75-2406,75-2405,s. 75-2405
• Parties: FIREMAN'S FUND INSURANCE CO., Appellant in, v. VIDEFREEZE CORPORATION, and David E. Chinnery Development Corp., Appellants in
• Court: U.S. Court of Appeals — Third Circuit

Page 1171

540 F.2d 1171

FIREMAN'S FUND INSURANCE CO., Appellant in No. 75-2405, v. VIDEFREEZE CORPORATION, and David E. Chinnery Development

Corp., Appellants inNo. 75-2406.

Nos. 75-2405, 75-2406.

United States Court of Appeals, Third Circuit.

Argued April 29, 1976.

Decided Aug. 25, 1976.

Richard E. Grunert, Grunert, Stout, Hymes & Mayer, Charlotte Amalie, St. Thomas, V. I., for appellants in 75-2406 and as cross-appellees in 75-2405.

C. James Jessee, Jr., Atlanta, Ga., Thomas Alkon, Isherwood, Colianni, Alkon & Barnard, Christiansted, St. Croix, V. I., for appellee in 75-2406 and as cross-appellant in 75-2405.

Before VAN DUSEN, ADAMS and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This lawsuit has its origin in the behavior and power of nature, rather than in the conduct of the parties. A sudden rockslide occurred at Haypiece Hill on St. Thomas Virgin Islands, between midnight and 8:00 o'clock A.M. on December 8, 1974. David E. Chinnery Development Corporation ("Chinnery") owned two buildings at the foot of Haypiece Hill which it leased to Videfreeze Corporation ("Videfreeze"), one for storage of frozen foods and the other for an office. The falling rocks penetrated the building used as a warehouse and buried large quantities of food. The office building, too, was severely damaged.

Prior to the rockslide, Fireman's Fund Insurance Company ("Fireman's Fund") had issued fire insurance policies to Videfreeze covering business interruption and loss to its merchandise and to Chinnery against fire and rental loss on its buildings. The four fire insurance policies contained an "Earthquake Insurance Assumption Endorsement," providing coverage for "direct loss by earthquake."

It is undisputed that both insureds sustained losses as a result of the rockslide. Videfreeze subsequently filed Proofs of Loss, and Chinnery submitted a cost estimate of repairs to its building, both companies attributing their losses directly to an earthquake which they claimed had caused the rockslide. Fireman's Fund denied that the slide was caused by an earthquake and took the position that the losses were therefore not covered by the fire insurance policies. After more than a year had passed in which the claims remained in dispute, Fireman's Fund, as plaintiff, instituted this declaratory judgment action against the insureds under 5 V.I.C. § 1261 (1967) ¹ in the District Court of the Virgin Islands. ²

Fireman's Fund sought a determination of "the respective rights and liabilities of the Plaintiff and Defendants as a result of the rock slide of December 8, 1974." In response, the defendants asserted several counter-claims in which they alleged that their losses were caused by the earthquake and hence covered by the insurance contracts. They sought a total of at least $761,093.25 in compensatory damages plus interest and reasonable attorneys' fees. Videfreeze further claimed punitive damages of $500,000 for Fireman's Fund's failure timely to pay the claims.

All parties stipulated that the trial would be bifurcated, the "issue of insurance coverage being first decided." The first phase of the trial resulted in the jury's finding, by answer to an interrogatory, that the defendants had sustained "a direct loss by earthquake." Thereafter, the district court granted Fireman's Fund's motion for judgment notwithstanding the verdict.

I. Factual Background

As a preliminary to our analysis of the entry of judgment notwithstanding the verdict, a brief outline of the evidence is essential. The district court opinion contains a more detailed rendition of the facts. See Fireman's Fund Insurance Co. v. Videfreeze Corp., 68 F.R.D. 484 (D.V.I.1975).

Haypiece Hill consists of volcanic rock which occurs primarily in series of long columns pointed downward. The rock was quarried for many years, and the explosives used in the quarrying operations produced fractures in addition to those which occur naturally in the rock. Water flows through the cracks, and has for hundreds of years, weathering it and forming a light-colored sediment.

An extraordinary amount of rain fell in St. Thomas during October and November, 1974, totalling thirty-two inches. In the opinion of the insurance company's experts, the excessive water which penetrated the rock dislodged the side of the cliff. The insureds, however, adduced evidence that less than an inch of rain fell between November 28 and December 8, the date of the alleged earthquake.

The theory of the insureds was that a small earthquake had triggered the slide. They produced four witnesses who testified that they had felt a tremor, and three of the four were able to place its occurrence at about 1:00 A.M. on the morning of December 8. Although it is undisputed that no earthquake was recorded on the nearest seismograph at Cayey, Puerto Rico, an earthquake of magnitude 2 to 2.5 on the Richter scale, occurring in St. Thomas, would probably escape detection in Cayey.

The insurance company's experts testified that an earthquake small enough to be unrecorded at Cayey was too small to bring down the cliff at Haypiece Hill. They based their conclusion, in part, on the descriptive ratings of the Mercalli scale. That scale, which measures intensity, is an attempt to systematize and quantify observable effects of earthquakes of different intensities. On the Mercalli scale, landslides are first mentioned at intensity VII.

A very rough correlation can be made between magnitude 2 to 2.5 on the Richter scale and intensity II on the Mercalli scale. An earthquake of intensity II in St. Thomas, therefore, might not be recorded in Cayey, but one of intensity VII would undoubtedly be detected. Although earth masses are generally not dislodged until intensity VII is reached, one of the insureds' witnesses testified that this observation pertains to stable or semi-stable masses, not highly unstable ones.

The testimony of the insureds' experts was that water saturation did not bring down the rocks on Haypiece Hill. A seismologist testified that the weakening of the cliff by quarrying and water absorption rendered it highly susceptible to toppling by a small tremor. He therefore opined that an earthquake which was undetectable at Cayey had nonetheless triggered the rockslide.

The jury returned a verdict in favor of the insureds on the sole issue of insurance coverage. The judge, "firmly convinced that a grave error has been made and a serious injustice will result", entered judgment in favor of the insurance company notwithstanding the verdict. 68 F.R.D. at 494. He also conditionally granted plaintiff's alternative motion for a new trial. Defendants appealed both actions by the trial judge. The plaintiff, Fireman's Fund, cross-appealed the district judge's decision to place the burden of proof on it and challenged the jury's instructions to that effect. We reverse the judgment notwithstanding the verdict and affirm the district court's order granting a new trial but for reasons other than those stated by it.

II. Burden of Proof

The starting point of our analysis must be an inquiry into the often elusive issue as to which party in a declaratory judgment bears the burden of proof. The judge, for policy reasons, decided to place the burden on the insurance company to prove that something other than an earthquake caused the insureds' loss. Although the question is close, we are convinced that the facts and pleadings of this particular case demand that the insureds shoulder the burden of proof of coverage.

Although Fireman's Fund sued under the federal Declaratory Judgments Act, 28 U.S.C. § 2201 (1970), as well as under its Virgin Islands counterpart, we note that there is some debate whether the federal statute applies in the District Court of the Virgin Islands. ^2A In any event, Virgin Islands law would govern the position of the burden of proof as that issue is substantive, not procedural. Palmer v. Hoffman, 318 U.S. 109, 117, 63 S.Ct. 477, 87 L.Ed. 645 (1943); Liberty Mutual Insurance Co. v. Sweeney,216 F.2d 209, 211 (3d Cir. 1954). The rule of the forum, here the Virgin Islands, would govern even if the federal statute were applicable.

1 V.I.C. § 4 (1967) provides:

The rules of the common law, as expressed in the restatements of the law approved by the American Law Institute, and to the extent not so expressed, as generally understood and applied in the United States, shall be the rules of decision in the courts of the Virgin Islands in cases to which they apply, in the absence of local laws to the contrary.

We are unable to discover any cases brought under the Virgin Islands Declaratory Judgments Act in which the position of the burden of proof is discussed. Thus, we will be guided by our distillation of the general law on this issue.

The groundbreaking case is Traveler's Insurance Company v. Greenough, 88 N.H. 391, 190 A. 129 (1937), which was decided under New Hampshire's own declaratory judgment statute. There the New Hampshire Supreme Court refused to displace the burden of proof of coverage from its normal location on the insured, despite the reversed positions of the parties in the action. The court emphasized that the hallmark of the question of the burden of proof is flexibility and quoted from IX Wigmore on Evidence § 2486 to the effect that any rules governing the burden of proof rest "for their ultimate basis upon broad reasons of experience and fairness."

Declaratory judgment actions arising after Greenough have, in the main, been characterized by such flexibility. "(T)he question depends often on the condition of the pleadings and the character of the issues when the question arises." E. Borchard, Declaratory Judgments 404-405 (2d ed. 1941). The leading case which expounded these guiding principles is Reliance Life Insurance Company v. Burgess, 112 F.2d 234 (8th Cir.), cert. denied, 311 U.S. 699, 61 S.Ct. 137, 85 L.Ed. 453 (1940).

In Burgess, the insurance company was made to...