In-Towne Restaurant Corp. v. Aetna Cas. and Sur. Co.

• Decision Date: 29 May 1980
• Docket Number: IN-TOWNE
• Parties: RESTAURANT CORPORATION; Worcester County National Bank, Intervenor, v. AETNA CASUALTY AND SURETY COMPANY (and two companion cases).
• Court: Appeals Court of Massachusetts

Page 1385

402 N.E.2d 1385

9 Mass.App.Ct. 534

IN-TOWNE RESTAURANT CORPORATION; Worcester County National

Bank, Intervenor, v. AETNA CASUALTY AND SURETY COMPANY (and two companion cases).

Appeals Court of Massachusetts, Worcester.

Argued Dec. 14, 1979.

Decided April 9, 1980.

Further Appellate Review Denied May 29, 1980.

Francis J. Gallagher, Jr., Boston, for defendants.

Roger J. Brunelle, Worcester, for plaintiff.

Daniel I. Cotton, Worcester, for Worcester County Nat. Bank, intervenor.

Before ARMSTRONG, PERRETTA and DREBEN, JJ.

DREBEN, Justice.

These actions ¹ were brought to recover under policies insuring against personal property and business interruption losses after the occurrence of two fires in a night club and restaurant operated by the plaintiff (In-Towne Restaurant Corporation) in Worcester. The defendant insurance companies appeal from judgments for the plaintiff and for the intervenor, entered after a jury verdict, and from the denial of the defendants' motions for a new trial.

The cases were submitted to the jury on two questions: "1) Were either of the fires that damaged or destroyed the plaintiff's property on December 19th and December 21st, 1973, caused by either or both of the plaintiff's principal stockholders, Arnold Katz and Robert Sherman or by someone acting on their behalf? 2) At the time of the said fires, had the defendants' hazard or risk of loss been increased as a result of gambling activities upon the insured's premises?" The jury answered "no" to both questions.

The defendants claim error by the trial judge: (1) in refusing to direct verdicts in their favor on the ground that the plaintiff had violated a fraud and concealment clause contained in the policies when Katz, in a deposition, asserted a right against self-incrimination under the Fifth Amendment to the Federal Constitution; (2) in refusing to admit in evidence a statement made by the bar manager of the plaintiff that a robbery, which occurred prior to the fires, was staged for the purpose of collecting insurance proceeds; and (3) in refusing to instruct the jury that it could infer that Sherman or Katz caused the property to be burned if they made untruthful statements concerning the circumstances pertaining to the fires. The defendants also allege that the judge erred in not granting them a new trial on the ground that the plaintiff's attorney in final argument violated the Canons of Ethics to the prejudice of the defendants. There was no reversible error.

1. On May 22, 1975, after the actions had commenced, the defendants took the depositions of the plaintiff's principal stockholders, Katz and Sherman. After Katz ² had testified to the existence of card games and other gambling on the premises prior to the date of the fires, he was asked to describe the other gambling activities. On the advice of, and through counsel, Katz invoked the privilege against self-incrimination. The defendants' counsel stated he would not press the matter. The defendants did not pursue the normal remedies to force discovery, and the record shows no attempt to obtain such information or to have judicial sanctions imposed pursuant to Mass.R.Civ.P. 37, 365 Mass. 797 (1974). See Jones v. B. C. Christopher & Co., 466 F.Supp. 213, 224-227 (D.Kan.1979); Borman v. Borman, --- Mass. ---, --- ^a, 393 N.E.2d 847 (1979). There is also no indication that the defendants on any occasion, from the time of the deposition in May, 1975, until the trial in June, 1978, urged that it would be improper for the plaintiff to maintain its actions while its officers were invoking the Fifth Amendment. See Kisting v. Westchester Fire Ins. Co., 290 F.Supp. 141, 149 (W.D.Wis.1968), aff'd. 416 F.2d 967 (7th Cir. 1969); Galante v. Steele City Natl. Bank, 66 Ill.App.3d 476, 480, 23 Ill.Dec. 421, 384 N.E.2d 57 (1978). Instead, as a matter of trial strategy, the defendants presented to the jury the fact that the plaintiff's stockholders had invoked the Fifth Amendment and obtained instructions that the jury could draw inferences from that fact. See Andrews v. Frye, 104 Mass. 234, 236 (1870); Kaye v. Newhall, 356 Mass. 300, 305-306, 249 N.E.2d 583 (1969).

The defendants also filed motions for directed verdicts on the last day of trial, prior to the submission of the cases to the jury. The reasons given in the motions were that Katz and Sherman had invoked the Fifth Amendment when asked about gambling on the premises, that such claim of privilege constituted concealment under the fraud and concealment clause of the policies, ³ and that such concealment was of material facts pertaining to an increase in a hazard within the control or knowledge of the insured.

In claiming that the denial of their motions was error, the defendants correctly recognize that the fraud and concealment clause requires that there be concealment of a "material fact or circumstance" to render the policy void. Daniels v. Hudson River Fire Ins. Co., 12 Cush. 416, 425 (1853); Employers' Liab. Assur. Corp. v. Vella, 366 Mass. 651, 655, 321 N.E.2d 910 (1975). Firemen's Ins. Co. v. Smith, 180 F.2d 371 (8th Cir.), cert. denied, 339 U.S. 980, 70 S.Ct. 1028, 94 L.Ed. 1384 (1950). See G.L. c. 175, § 186. A material fact is one "the knowledge or ignorance of which would naturally influence the judgment of the underwriter in making the contract at all, or in estimating the degree and character of the risk, or in fixing the rate of the premium. If the fact so untruly stated or purposely suppressed is not of this character, it is not a 'misrepresentation' or 'concealment' within this clause . . . ." Daniels, 12 Cush. at 425.

In order to support their claim that a material fact was concealed, the defendants make two arguments. The first, which does not strictly rest on the fact that the stockholders invoked the Fifth Amendment to the Federal Constitution, is based on the claim that gambling increased the hazard. They argue that had they known that gambling occurred on the premises, they would not have written the risk, or, if they had issued the policies, they would have cancelled them once they had discovered the gambling.

The defendants were not entitled to directed verdicts on this argument. It is a question for the jury or other trier of fact to determine whether a material fact has been concealed. Campbell v. New England Mutual Life Ins. Co., 98 Mass. 381, 395-396 (1867). See Employers' Liab. Assur. Corp. v. Vella, 366 Mass. at 655-656, 321 N.E.2d 910 (1975). There was evidence at trial from which the jury could find that the defendants' risk of loss had not increased by reason of the gambling activities. The defendants' own witness, the person in charge of the underwriting department at Aetna, testified on cross-examination that infrequent, friendly card games among persons playing for small stakes who could afford to lose, "would not be a factor" in cancelling or procuring insurance. ^{4 4} Taking the evidence most favorable to the plaintiff, Boyle v. Wenk, --- Mass. ---, --- ^b, 393 N.E.2d 1053 (1979), it cannot be said that directed verdict should have been granted. Moreover, a court cannot take judicial notice, or hold, as a matter of law, that gambling increases the risk. Firemen's Ins. Co. v. Smith, 180 F.2d at 376. See Security Ins. Co. v. Dazey, 78 F.2d 537, 538 (1935). See also St. Paul Fire & Marine Ins. Co. v. Bachmann, 285 U.S. 112, 118, 52 S.Ct. 270, 272, 76 L.Ed. 648 (1932).

The second argument of the defendants does rest on the invocation of the Fifth Amendment by the stockholders of the plaintiff. The defendants argue that the fraud and concealment clause, see note 3, supra, places a duty on the insured to disclose information material to any defense and that Katz's assertion of the Fifth Amendment violated the clause by precluding the defendants from developing such defenses, particularly the extent of gambling. This contention is based on a concealment which occurred in May, 1975, at the time of the depositions, more than five months after the plaintiff had filed its first action. There is a split of authority as to whether concealment or fraud after denial of liability and initiation of suit can vitiate the policy, the majority rule appearing to be that the clause, despite language referring to time periods before and after a loss, cannot give the insurer additional rights after suit is filed. ⁵

We need not, however, decide whether the majority or minority rule should apply. Even if it be assumed that the assertion of the Fifth Amendment constituted willful concealment and that such concealment at the time of the deposition was within the statutory policy provisions, the defendants have not met the requirement, discussed earlier in this opinion, that there be a finding by a trier of fact that a material fact was misrepresented or concealed. Campbell v. New England Mut. Life Ins. Co., 98 Mass. at 396. Employers' Liab. Assur. Corp. v. Vella, 366 Mass. at 655-656, 321 N.E.2d 910. Under the defendants' construction of the clause, the insurer could show concealment as a matter of law by merely establishing that a material fact or defense might exist and that the insured refused to answer questions relating thereto. We do not think the fraud and concealment clause casts such a wide net.

We are buttressed in our conclusion by the provisions of G.L. c. 175, § 99, which prescribe a statutory form for fire insurance policies. By St.1951, c. 478, Massachusetts adopted a statutory policy based upon what is known in the insurance field as the "standard policy", a form originally adopted in New York in 1943. 1943 N.Y.Laws, c. 671, § 6. Many provisions of the Massachusetts statutory policy, including the fraud and concealment clause, are identical ⁶ to the "standard policy," but although the latter contains a provision requiring the insured to submit to examinations under oath, the Massachusetts policy does not. In the circumstances of the adoption of the Massachusetts statutory...