J. Yanan & Associates, Inc. v. Integrity Ins. Co.

• Decision Date: 27 September 1985
• Docket Number: No. 84-2442,84-2442
• Parties: 18 Fed. R. Evid. Serv. 1182 J. YANAN & ASSOCIATES, INC., Plaintiff-Appellee, v. INTEGRITY INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1025

771 F.2d 1025

18 Fed. R. Evid. Serv. 1182

J. YANAN & ASSOCIATES, INC., Plaintiff-Appellee, v. INTEGRITY INSURANCE COMPANY, Defendant-Appellant.

No. 84-2442.

United States Court of Appeals, Seventh Circuit.

Argued April 18, 1985.

Decided Aug. 26, 1985.

As Amended Sept. 27, 1985.

Joseph P. Murdock, Smith & Murdock, Indianapolis, Ind., for plaintiff-appellee.

Lewis A. Kaplan, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant-appellant.

Before CUDAHY and POSNER, Circuit Judges, and PELL, Senior Circuit Judge.

CUDAHY, Circuit Judge.

The plaintiff, Yanan & Associates, brought this action in the Southern District of Indiana charging the defendant, Integrity Insurance, with breach of an oral agreement and with additional tortious misconduct, and seeking compensatory and punitive damages. Integrity appeals from a jury award of $48,000 in compensatory damages and a modified award of $150,000 in punitive damages. We affirm in part and reverse in part.

I

James Yanan is the owner of J. Yanan & Associates, an independent insurance agency headquartered in Indiana. Integrity Insurance Company is a property and casualty insurer headquartered in New Jersey. In April of 1978 Yanan and Integrity entered into a written agreement under which Yanan & Associates became a managing general agent for Integrity.

Before the agreement was signed, Yanan had provided Integrity with financial statements for the fiscal year ending January 31, 1977, nearly fifteen months before. The balance sheet showed that, as of that date, Yanan & Associates had a net worth of roughly $47,000. Integrity evidently did not insist upon more recent statements before signing. Three months later, in July of 1978, Yanan provided Integrity with financial statements for the year ending January 31, 1978. The balance sheet for that year showed that Yanan & Associates' liabilities exceeded its assets by $175,347. Integrity, concerned about the sudden change in Yanan's financial condition, asked for an explanation. A letter from the secretary-treasurer of Yanan & Associates to the Vice President of Integrity, dated July 28, 1979, explained that in the interim James Yanan had repurchased stock held by other shareholders, and was now the sole shareholder. ¹ Apparently Yanan had written off loans from Yanan & Associates to the other two shareholders and had distributed the corporation's reserves as part of the transaction.

Testimony from witnesses for each side indicates that Integrity was concerned that Yanan was, in effect, "bankrupt;" there evidently was some discussion about cancelling Yanan's contract. On August 14, 1978, Yanan and an associate went to Integrity's home office to try to reach an agreement satisfactory to both parties. Yanan agreed to furnish Integrity with a letter of credit for $150,000, and on the same day signed ² an agreement under which premiums collected by Yanan for Integrity would be deposited to a "lock box" account in an Indiana bank, from which only Integrity could make withdrawals, and only sixty days after the end of the month in which the premiums became due. The interest that accrued would go to Yanan. The earlier arrangement had simply required Yanan to maintain the premiums "in a manner satisfactory to [Integrity]."

There is some dispute about the significance of the letter of credit. When Yanan and his associate went to Integrity's office on August 14, Yanan first met alone with Lawrence Stern, Integrity's president. According to Yanan, he wanted some assurance that, if he continued to convert business to Integrity, he would not be arbitrarily cancelled at some point. Accordingly, he agreed to provide the letter of credit in answer to Integrity's concern about the financial condition of Yanan & Associates, and he received in return an oral agreement from Stern not to cancel Yanan's contract for 18 months, in answer to Yanan's concern about being cancelled. The original agreement, dated April 1, 1978, provided that either party could terminate on 60 days notice.

Stern, on the other hand, denied that he had agreed orally not to cancel Yanan's contract for 18 months. According to him, the letter of credit was required as security for the premiums Yanan was writing, because of Yanan's poor financial condition. When Stern and Yanan rejoined the others, there was apparently no reference to the oral agreement that Yanan claims was made.

On March 5, 1979, Integrity notified Yanan & Associates that it was terminating the agency contract on May 5, 1979, roughly nine months after the August 14, 1978 meeting, and roughly thirteen months after the agency agreement was originally entered into. In the notice of termination Integrity referred to the sixty days termination provision of the agency contract.

In response to the termination Yanan at first expressed surprise ³ but did not mention any oral 18 month termination agreement. Later, in a letter dated April 27, 1979, Yanan thanked Stern for extending the agreement to June 5, 1979. In that same letter, Yanan asked Stern to cash the letter of credit against current accounts due. ⁴ Integrity at first refused, taking the position that the letter was to serve as security for premiums that Yanan would continue to collect for over a year after termination of the contract. Yanan objected that that had not been part of the contract, and would jeopardize Yanan's ability to find another insurer to do business with; he notified Integrity that he would stop making payments into the "lock box" account until Integrity accepted tender of the letter of credit as payment on account due. On May 24, 1979, Integrity wrote to Yanan saying that it had cashed the letter of credit, and demanding that Yanan resume payments to the lock box account.

On June 14, 1979, Integrity brought suit in the Indiana courts to enforce the lock box agreement. On June 20, 1979, the probate court entered an "agreed judgment" under which Yanan agreed to make future payments into the "lock box" account; it had become apparent that Yanan had actually resumed payment on June 5. Whether Integrity knew of the June 5 and subsequent payments at the time of filing suit is disputed.

Yanan subsequently brought suit in the Indiana courts for breach of the alleged oral contract not to terminate for 18 months, and for punitive damages for that breach. Integrity removed the action to the United States District Court for the Southern District of Indiana. The jury returned verdicts for Yanan, awarding $48,000 for breach of the contract and $250,000 in punitive damages. In response to Integrity's post-trial motions the court reduced punitive damages to $150,000. Integrity complains on appeal of evidence improperly admitted, and of insufficient evidence to support the award of punitive damages.

II.

A. Admissibility of evidence.

In support of his claim to have reached an oral agreement with Integrity's president, Yanan testified concerning an agreement that he had entered into with the Allied Fidelity Insurance Company; under that agreement he gave a letter of credit as consideration for a one-year no-cancellation period. This deal was struck some time after Yanan began this action. When Integrity objected to the admission of evidence of that agreement, Yanan's counsel explained the point of the offer:

[I]t is introduced as a relevant exhibit ... to show the intent, ... the manner in which the business has been conducted and the fact it is a common situation to enter into extended periods of cancellation agreement in consideration for a letter of credit.

The trial judge admitted the evidence.

Integrity argues that the evidence would not have justified a jury in concluding, from this single transaction, that there was such a practice. ⁵ According to Integrity, evidence of custom is not probative unless it is clear that the custom or practice would govern most similar transactions. We believe that that argument misconceives how the evidence was to be used. Although evidence of consistent practice would be necessary to establish that such and such is the custom, a single example (the so-called "counterexample") has probative value when the point is to show that something is not the practice. In this case, Integrity's strategy was to argue that it would never have given an 18 month no-cancellation guarantee; that it would have been irresponsible to do so; and that no insurer in the business would have done it. In closing argument, for example, Integrity's counsel made this argument:

[Integrity has] no long-term agreements with any managing general agent, including the one that they own.... [T]hey have managing general agents who have been with them for ten years or more[,] producing millions of dollars' worth of business, and do not have any noncancellable contracts or any contracts for a fixed term. And that was explained to you on the basis of the fact that it would be irresponsible for an insurance company to guarantee to write this man's business for a period beyond the normal 60-day cancellation because they don't know what kind of business he is going to write. And he picked some terrible business, as is demonstrated here. And that is the very reason that you would not give an 18-month absolute contract to anybody.

Appellant's Appendix at 715. Faced with that sort of argument about the nature of the practice of insurers and agents, it is appropriate and probative to show instances in which such "absolute" agreements have in fact been made.

Of course, the example chosen by the plaintiff is more or less self-serving. Ideally evidence of this sort would consist of examples involving circumstances which would rule out the possibility of having been contrived specifically for use as evidence. Here the single example adduced was an agreement entered into by the plaintiff after this action had been filed. Those circumstances certainly lessen the probative value of the evidence, and a jury might have been...