Midamar Corp. v. National-Ben Franklin Ins. Co. of Illinois

• Decision Date: 10 May 1990
• Docket Number: NATIONAL-BEN,Nos. 89-1014,89-1064,s. 89-1014
• Citation: 898 F.2d 1333
• Parties: MIDAMAR CORPORATION, Appellant, v.FRANKLIN INSURANCE COMPANY OF ILLINOIS and Marine Office of America Corporation, Appellees, MIDAMAR CORPORATION, Appellee, v.FRANKLIN INSURANCE COMPANY OF ILLINOIS and Marine Office of America Corporation, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1333

898 F.2d 1333

MIDAMAR CORPORATION, Appellant, v. NATIONAL-BEN FRANKLIN INSURANCE COMPANY OF ILLINOIS and Marine Office of America Corporation, Appellees, MIDAMAR CORPORATION, Appellee, v. NATIONAL-BEN FRANKLIN INSURANCE COMPANY OF ILLINOIS and Marine Office of America Corporation, Appellants.

Nos. 89-1014, 89-1064.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 12, 1989.

Decided March 14, 1990.

Rehearing Denied May 10, 1990.

Richard S. Fry, Cedar Rapids, Iowa, for appellant.

Richard D. Zito, Sibley, Iowa, for appellees.

Before ARNOLD and MAGILL, Circuit Judges, and LARSON, ^* Senior District Judge.

LARSON, Senior District Judge.

Plaintiff Midamar sued its insurers, defendants National Ben Franklin Insurance Company of Illinois and Marine Office of America Corporation, after they refused to pay a claim made by Midamar in October, 1985, when goods Midamar had shipped to Saudi Arabia were damaged during customs inspections. The trial court directed a verdict in the insurers' favor on plaintiff's bad faith claim, and a jury found in the insurers' favor on plaintiff's breach of contract claim. The jury found the insurers liable under a promissory estoppel theory, however, and awarded plaintiff damages totalling $290,810.60.

After the jury returned its verdict, the trial court granted defendant's motion for a directed verdict on a portion of the damages, and entered judgment in Midamar's favor for $35,000 plus interest. The court denied defendants' post-trial motions for judgment notwithstanding the verdict or in the alternative for a new trial. Both sides have appealed. We affirm the district court's judgment on liability, but reverse in part as to the proper measure of damages.

I.

We view the facts in the light most favorable to the jury's promissory estoppel verdict in favor of plaintiff. So viewed, the facts reveal that plaintiff Midamar was created by William Aossey in 1974. Midamar exported Iowa agricultural and related products to countries in Africa and the Middle East. Its sales had increased to over five million dollars by 1984 through contacts Aossey had developed while working in the Peace Corps and through other government-sponsored projects. In 1982, Aossey purchased an "all-risk" marine insurance policy for his food shipments from Edward Fleck, a soliciting agent of defendants. Aossey testified that Fleck had informed him the policy would cover damage that occurred in customs inspection or port clearance. ¹ At this time, sales to Saudi Arabia constituted approximately half of Midamar's overseas sales. ²

In 1985, Midamar sought to improve its distribution of meat products in Saudi Arabia by working with a Saudi company, Shehata For Trading, which had its own cold storage facilities in Jeddah and which was engaged in the distribution of foods to supermarkets and other Saudi businesses. ³ Shehata's first purchase from Midamar resulted in the shipment of $58,572.22 of meat products in July, 1985. Shehata's second purchase is the subject of this litigation. In August, 1985, Midamar shipped a forty foot refrigerated container of frozen meat and seafood products to Shehata. The invoice price of the goods was $147,705.97.

As was its custom, Midamar had borrowed funds from its bank to pay for the goods. When Midamar's customer paid for the goods, the funds would go directly to the bank to pay off the loan. In addition to Midamar's "all-risk" marine insurance, the bank carried a Foreign Credit Insurance Association (FCIA) policy to insure against certain losses in the event of non-payment by Midamar's customer.

The goods for Shehata arrived in Jeddah in September, 1985, and were subject to an unusually long series of inspections by Saudi customs officials, who were inspecting all shipments from the United States and West Germany for contraband and arms. On September 25, 1985, Midamar received a telex from Shehata stating "Just received meat container. Tremendous amount of damage. Need for you to call immediately." Aossey's brother Albert was in Riyadh installing a restaurant facility at the time the telex was received, and Albert contacted the insurers' designated settling agent in Saudi Arabia, Near East Agencies, to inform them of the damage. Midamar also gave written notice to the shipping company and the insurers that the shipment was received in a damaged condition.

Near East Agencies hired Thomas Howell Kiewit, an international loss adjusting company, to assess the damage. The survey report, dated October 31, 1985, notes "crushed, torn and opened cartons" and "serious defrosting damage" in some products upon initial survey on September 28. The report states that "segregation was required to assess the loss," but Shehata had not performed the segregation because "[a]s the consignment had arrived in a damaged condition, they considered the shipment as not being received until the claim was settled."

Aossey arranged to fly from Egypt, where he was attending a meeting, to Saudi Arabia to assess the situation. Aossey testified that when he arrived he found over half of all the packages of meat had been opened and/or opened and damaged. After Aossey worked to sort the inedible goods from the rest, Kiewit's representative surveyed the damage and concluded 809 cartons with a value of $56,129.46 were damaged. Kiewit's report states the agent was able to convince Aossey that some salvage of loose pieces was possible, and so they agreed a depreciation of 60% was "fair and reasonable," for a total loss of $35,000. In a section labeled "Cause of the Damage," the report states "The entire consignment was unloaded, cartons opened etc., checked and re-loaded in a very poor manner." The report concludes: "Based on our findings, we came to the conclusion that the damage to this consignment is entirely due to customs inspection."

Before he left Saudi Arabia, Aossey was told by Near East Agencies' general manager that the $35,000 in damage was covered. In reliance on this promise, Aossey agreed that Shehata could pay the balance of the invoice to the bank after the insurance proceeds had been applied to reduce the amount due from Shehata. ⁴ The insurers never paid the $35,000, and Shehata never paid the balance due.

Instead, almost immediately after receiving Midamar's claim for damage, the insurers cancelled Midamar's policy effective November 1, 1985. In December, Aossey accepted an offer of $7,000 in settlement of two other outstanding claims which he valued at $15,000, believing that prompt receipt of the $35,000 would follow and he could then collect the remaining balance from Shehata. Defendants never indicated at the December meeting that they had any problem with Midamar's $35,000 claim. Three months later, however, the insurers denied the claim on the ground that the "all-risk" policy excluded coverage for damage due to variation in temperature. ⁵ At the same time, the insurers sent a telex to Near East Agencies indicating their "final position" was "negative" on Midamar's claim and requesting that, in the future, "[w]ould appreciate it if surveyor/you would refrain from giving comments to claimants about insurance coverage of individual claims."

Because Midamar was unable to obtain payment from Shehata to repay its loan, the bank sought to collect on the FCIA policy. The Foreign Credit Insurance Association eventually paid $56,895 towards the loss. At trial, Midamar presented testimony, through Aossey, that the insurers knew that Shehata would not pay for the goods until the insurance claim was settled; that Near East Agencies represented the loss was covered; that Midamar agreed in reliance that Shehata could wait for the insurance payment of $35,000; and that Midamar's losses from the insurers' refusal to pay included (1) the $35,000 agreed damage, (2) the remaining $55,810 due from Shehata on the invoice, ⁶ (3) a $100,000 reduction in Midamar's line of credit at the bank; (4) a reduction in Midamar's working capital; and (5) lost profits in 1986, 1987, and the first part of 1988.

II.

On appeal, the parties raise issues relating only to plaintiff's bad faith and estoppel claims. Plaintiff contends the court erred in refusing to submit its bad faith conduct claim to the jury. Defendant argues it is entitled to judgment notwithstanding the verdict or a new trial on plaintiff's estoppel claim, and plaintiff contends it is entitled to the full amount of damages awarded by the jury under plaintiff's estoppel theory.

A. Bad Faith

To establish a cause of action against an insurance carrier for bad faith conduct relating to a claim made by its insured, plaintiff must show (1) the absence of a reasonable basis for denying benefits of the policy and (2) defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Dolan v. Aid Insurance Co., 431 N.W.2d 790, 794 (Iowa 1988) (citing Anderson v. Continental Insurance Co., 85 Wis.2d 675, 691, 271 N.W.2d 368, 376 (1978)). Because plaintiff has not appealed from the jury's finding that no coverage existed under the insurance contract, any error by the district court in refusing to submit plaintiff's bad faith conduct claim to the jury is harmless. The jury's finding of no coverage compels the conclusion that defendants had a "reasonable basis for denying benefits of the policy," and hence defendants could not be held liable for bad faith conduct under Iowa law.

B. Estoppel Liability

The Restatement (Second) of Contracts provides a remedy for a party who, in the absence of an express contract, has relied to his or her detriment on the promise of another:

A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

Restatement (Se...