Persian Galleries, Inc. v. Transcontinental Ins. Co., s. 93-5129

• Decision Date: 07 October 1994
• Docket Number: 93-5130,Nos. 93-5129,s. 93-5129
• Citation: 38 F.3d 253
• Parties: PERSIAN GALLERIES, INC., Plaintiff-Appellee, Cross-Appellant, v. TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 253

38 F.3d 253

PERSIAN GALLERIES, INC., Plaintiff-Appellee, Cross-Appellant, v. TRANSCONTINENTAL INSURANCE COMPANY, Defendant-Appellant Cross-Appellee.

Nos. 93-5129, 93-5130.

United States Court of Appeals Sixth Circuit.

Argued May 10, 1994.

Decided Oct. 7, 1994.

James C. Wright, William D. Vines (argued and briefed), Ronald C. Koksal, Butler, Vines, Babb & Threadgill, Knoxville, TN, for plaintiff-appellee, cross-appellant.

Charles F. Sterchi, III (argued), Archie R. Carpenter (briefed), Carpenter & O'Connor, Knoxville, TN, for defendant-appellant, cross-appellee.

Before: KRUPANSKY, BOGGS, and SUHRHEINRICH, Circuit Judges.

KRUPANSKY, Circuit Judge.

Defendant-Appellant, Transcontinental Insurance Company (Transcontinental), has appealed the jury verdict in favor of plaintiff-appellee, Persian Galleries, Inc., on plaintiff's breach of insurance contract claim. Persian Galleries has cross-appealed the dismissal of its cause of action under the Tennessee Consumer Protection Act of 1977 (TCPA), TENN.CODE ANN. Sec. 47-18-104.

Persian Galleries filed its initial action on March 13, 1991, charging that defendant had breached its insurance contract by refusing to pay for the loss of 27 oriental rugs covered under plaintiff's "all risks" insurance policy. In an answer dated March 24, 1992, Transcontinental denied any breach of contract and raised a number of affirmative defenses, including material misrepresentation by the plaintiffs, fraud and failure to cooperate with the company in investigating the claim. On May 19, 1992, plaintiff moved to amend the pretrial order and sought recovery under the Tennessee Consumer Protection Act. The motion was initially granted but after the defendant challenged the amendment, the court dismissed the TCPA claim, concluding that plaintiff, as a corporation, was not a consumer within the meaning of the Act. A trial in August 1992 on plaintiff's breach of insurance contract claim resulted in a hung jury and a mistrial.

As a tactical maneuver upon retrial, Transcontinental withdrew all of its affirmative defenses to emphasize that plaintiff bore the burden of proving a loss covered by the insurance policy at issue. After Persian Galleries sought reconsideration of the district court's previous order dismissing its cause of action under the TCPA, the court concluded that Tennessee would permit a corporate entity to sue as a consumer under the Act, but refused to reinstate the claim on the basis that TENN.CODE ANN. Sec. 56-7-105 was the sole and exclusive remedy for a policy holder to recover damages in excess of the policy as a result of the insurer's bad faith refusal to pay a claim. The retrial in December 1992 resulted in a jury verdict in favor of Persian Galleries for $468,400 plus prejudgment interest.

Persian Galleries is in the business of selling oriental rugs. On March 24, 1990, the plaintiff's Knoxville, Tennessee store was allegedly burglarized and 27 rugs were stolen. Plaintiff filed a claim under its "all risks" insurance policy with Transcontinental, seeking coverage for the stolen property. Transcontinental denied that any loss had occurred and refused coverage. Persian Galleries then filed the instant action, charging defendant with breach of its insurance contract.

At trial, Masoud "Max" Kashani, Vice President of Persian Galleries, testified that on the evening of March 24, 1990, he was notified by his security service that the alarm at his Knoxville store had been activated, whereupon he proceeded to the store to investigate. Upon arrival, Kashani inspected the store and observed that several rugs were missing and that the glass from a broken front door window, which had apparently afforded entry into the premises, had been shattered over the floor of the storeroom.

Monte Boone, a patrol officer with the Knoxville Police Department, also responded to the break-in at Persian Galleries. When he arrived at the crime scene, the audible alarm was sounding and he observed that the glass in the front door had been partially broken out. He noticed glass on the sidewalk outside the door; in contrast to Kashani, however, Boone testified that there was no glass inside the store but, rather, the shattered glass from the door remained undisturbed on the sidewalk. Boone and another officer removed the remainder of the glass from the door frame in order to keep it from falling as they passed through the opening.

At trial, the defendant insurance company introduced evidence purporting to prove that no burglary had occurred at Persian Galleries. Richard Mark King, the branch manager for plaintiff's alarm company, described the alarm system in place at the time of the burglary. He explained that the store had two movement detectors as well as two additional detectors that would be activated by the sound of shattering glass. He testified further that all alarm activations were transmitted to the central office where they were memorialized in a computer database. Referring to these company records, King testified that when the alarm at Persian Galleries had been activated on the night of the burglary, it had reset itself within a few seconds. He also testified that the alarm would have continued to sound so long as there had been movement within the store.

Defendant presented the expert testimony of Billy Joe Jernigan who opined that, from his inspection of the alarm system in question and the relevant records, the intruder could have been in the store for approximately twenty seconds. On cross-examination, however, Jernigan admitted that he had only examined the system after it had been upgraded following the break-in and had not conducted any tests of its operations before that time. Jernigan also conceded on cross-examination that continuous movement within the storeroom could have resulted in an alarm reset time lag of approximately one and a half minutes thereby permitting the burglary to have been completed.

Plaintiff countered defendant's evidence with the testimony of its own expert witness, James Geiger. Geiger was the only engineer who had tested the system as it had existed on the date of the burglary. At trial, he testified that the system records were entirely consistent with the time frame of the theft. First, he explained that the burglars could have entered through the door in question and then have removed the rugs quickly without trying to avoid the motion detectors--i.e., a "smash and grab." Second, he testified that the theft could have occurred by avoiding the motion detectors' sensory beams. He finally explained that the alarm could have been avoided by covering a device on the wall, preventing the system from activating until the burglars left.

Over defendant's objection, the plaintiff also introduced the expert testimony of Lieutenant Larry Johnson, a detective in charge of the major crime division of the Knox County Sheriff's Department. Johnson testified that he had conducted an experiment by reenacting the burglary under ostensibly the same conditions that existed within and without the premises on the evening of the incident. During this experiment, which had been videotaped and introduced as evidence at trial, the window glass in the entry door had been broken out and four individuals removed 24 rugs in one minute and thirty-five seconds. The video was also used to contend that an individual walking over the shattered tempered glass would not overly disturb the scattered shards on the store's cement floor or mar the floor's surface. In an effort to discredit the video presentation, defendant recalled Officer Boone who testified that the physical evidence in and about the store as reconstructed by the plaintiff did not accurately reflect the conditions as he had observed them upon his arrival at the site.

The jury returned a verdict for the plaintiff in the amount of $468,400 and awarded prejudgment interest at a rate of ten percent. The district court entered final judgment and this timely appeal and cross-appeal followed.

As its first assignment of error, defendant charged that the trial court improperly instructed the jury as to the plaintiff's burden of proof to recover under the "all risks" insurance policy. ¹ The district court instructed

This is an action for breach of an insurance contract. You have heard the theories of the parties, both at the beginning of this trial and here again at final argument. I won't go into those theories except to say that the legal effect of the conflict between the theories of the parties is to place the burden of proof on plaintiff to prove by a preponderance of the evidence that it suffered a loss covered by the policy. The plaintiff alleges loss by risk of direct physical loss. It is the defendant's contention that there was not such a loss. In order to show that it suffered a loss under the policy, it is not necessary for plaintiff to show how the property came to be lost. It is not necessary for the plaintiff to show the method or means by which the property came to be lost. It is sufficient if plaintiff shows the property is lost and covered by the direct physical loss provision of the contract of insurance. The defendant has not asserted any exclusions under the policy.

Defendant argued that this instruction was improper because it did not require the plaintiff to prove that the loss was fortuitous, erroneously contending that under the facts of this case the term fortuitous was synonymous with theft by persons unknown to the parties to the insurance contract. See Harbor House Condominium Ass'n v. Massachusetts Bay Ins. Co., 915 F.2d 316, 318 (7th Cir.1990) ("To recover under an 'all risk' insurance policy, the plaintiffs must demonstrate that a loss has occurred and that loss was caused by a fortuitous event"). Defendant further urged that the above instruction could have permitted the jury to return a verdict for Persian Galleries even if it had concluded that plaintiff had...