Smithson v. U.S. Fidelity & Guar. Co.

• Decision Date: 22 November 1991
• Docket Number: No. 20073,20073
• Citation: 411 S.E.2d 850,186 W.Va. 195
• Court: West Virginia Supreme Court
• Parties: Carl W. SMITHSON, Sr., dba Smithson Bros. Well Service Co., Plaintiff Below, Appellee, v. UNITED STATES FIDELITY & GUARANTY COMPANY, and Basil Thumm, Defendants Below, Appellants.

Page 850

411 S.E.2d 850

186 W.Va. 195

Carl W. SMITHSON, Sr., dba Smithson Bros. Well Service Co. Plaintiff Below, Appellee, v. UNITED STATES FIDELITY & GUARANTY COMPANY, and Basil Thumm Defendants Below, Appellants.

No. 20073.

Supreme Court of Appeals of West Virginia.

Submitted Sept. 24, 1991.

Decided Nov. 22, 1991.

Syllabus by the Court

1. Disciplinary Rule 5-102 of the Code of Professional Responsibility and current Rule 3.7 of the Rules of Professional Conduct state that it is unethical for a lawyer representing a client to appear as a witness on behalf of the client except under very limited conditions.

2. "When counsel for a party to a cause finds that he is required to be a material witness for his client he should immediately so advise his client and retire as counsel in the case." Syllabus Point 8, Edmiston v. Wilson, 146 W.Va. 511, 120 S.E.2d 491 (1961).

3. When an attorney is sought to be disqualified from representing his client because an opposing party desires to call the attorney as a witness, the motion for disqualification should not be granted unless the following factors can be met: First, it must be shown that the attorney will give evidence material to the determination of the issues being litigated; second, the evidence cannot be obtained elsewhere; and, third, the testimony is prejudicial or may be potentially prejudicial to the testifying attorney's client.

4. "Whenever a policyholder substantially prevails in a property damage suit against its insurer, the insurer is liable for: (1) the insured's reasonable attorneys' fees in vindicating its claim; (2) the insured's damages for net economic loss caused by the delay in settlement, and [(3)] damages for aggravation and inconvenience." Syllabus Point 1, Hayseeds, Inc. v. State Farm Fire & Casualty Co., 177 W.Va. 323, 352 S.E.2d 73 (1986).

5. "The question of whether an insured has substantially prevailed against his insurance company on a property damage claim is determined by the status of the negotiations between the insured and the insurer prior to the institution of the lawsuit. Where the insurance company has offered an amount materially below the damage estimates submitted by the insured, and the jury awards the insured an amount approximating the insured's damage estimates, the insured has substantially prevailed." Syllabus Point 2, Thomas v. State Farm Mutual Automobile Insurance Co., 181 W.Va. 604, 383 S.E.2d 786 (1989).

6. A first-party suit based on Hayseeds, Inc. v. State Farm Fire & Casualty Co., 177 W.Va. 323, 352 S.E.2d 73 (1986), will not be barred by the settlement of the loss in an appraisal proceeding under the fire insurance policy if the insured substantially prevailed in the appraisal proceeding over the amount of the loss.

7. "A statement is not hearsay if the statement is offered against a party and is a statement by his [or her] agent or servant concerning a matter within the scope of his [or her] agency or employment, made during the existence of the relationship. W.Va.R.Evid. 801(d)(2)(D)." Syllabus Point 3, Canterbury v. West Virginia Human Rights Commission, 181 W.Va. 285, 382 S.E.2d 338 (1989).

8. "By virtue of Section 23, Article 12, Chapter 33, Code, 1931, as amended, any person who shall solicit within this State an application for insurance shall, in any controversy between the insured or his beneficiary and the insurer issuing any policy upon such application, be regarded as the agent of the insurer and not the agent of the insured." Syllabus Point 1, Knapp v. Independence Life & Accident Insurance Co., 146 W.Va. 163, 118 S.E.2d 631 (1961). To the extent that Syllabus Point 4 of Maynard v. National Fire Insurance Co. of Hartford, 147 W.Va. 539, 129 S.E.2d 443 (1963), is to the contrary, it is overruled.

9. In contract cases, where the defendant has refused to perform and had the same opportunity to mitigate the damages as the plaintiff by taking some action, the defendant is foreclosed from asserting that the plaintiff failed to mitigate his damages.

10. "Compensatory damages recoverable by an injured party incurred through the breach of a contractual obligation must be proved with reasonable certainty." Syllabus Point 3, Kentucky Fried Chicken of Morgantown v. Sellaro, 158 W.Va. 708, 214 S.E.2d 823 (1975).

11. " 'Loss of profits can not be based on estimates which amount to mere speculation and conjecture but must be proved with reasonable certainty.' Point 5, Syllabus, State ex rel. Shatzer v. Freeport Coal Company, 144 W.Va. 178 [107 S.E.2d 503 (1959) ]." Syllabus Point 5, Addair v. Motors Ins. Corp., 157 W.Va. 1013, 207 S.E.2d 163 (1974).

Thomas C. Cady, Morgantown, for appellee.

John E. Busch, Busch & Talbott, L.C., Elkins, for appellants.

MILLER, Chief Justice:

United States Fidelity & Guaranty Company (USF & G) appeals an adverse jury verdict in which its insured, Carl W. Smithson, Sr., doing business as Smithson Brothers Well Service Company, recovered $95,833 in a first-party bad faith settlement practices suit. USF & G argues that the trial court erred in failing to disqualify plaintiff's attorney and in not finding that the appraisal procedure under the policy barred the present suit. Several other errors relate to the damage award. We find that the plaintiff failed to present sufficient evidence of economic loss to support the verdict.

I.

USF & G insured a truck with a drilling rig attachment that was owned by the partnership of Carl Smithson and his brother, Danny Smithson. The policy limit was $60,000. On September 16, 1985, the truck was destroyed in a gas well explosion. The insured made a claim for the value of the equipment together with tools. After the insured submitted his proof of loss form, the two parties could not agree on the actual cash value of the property. Consequently, on January 15, 1986, USF & G invoked the appraisal procedure provided for in the policy. ¹

On February 11, 1986, Carl Smithson retained an attorney, who initially refused to agree to submit the claim to appraisal; however, two months later, the attorney changed his mind and selected an appraiser to represent the plaintiff on May 8, 1986. Smithson's appraiser and USF & G's appraiser could not agree on the value of the property damaged.

Under the policy appraisal procedure, the two appraisers are required to select an umpire. The parties could not agree on an umpire. Eventually, the matter was referred to the American Arbitration Association (AAA), which designated an umpire. On April 18, 1988, the umpire estimated the loss at approximately $67,000. Because the actual cash value of the insured's property exceeded the policy limit, USF & G paid the insured $60,000.

Subsequently, on June 14, 1988, Mr. Smithson sued USF & G, alleging that the insurer acted in bad faith by failing to settle his claim promptly. At trial, the circuit court directed a verdict for Mr. Smithson on the issue of liability because he had substantially prevailed in the underlying appraisal proceeding. ² See Syllabus Point 1, Hayseeds, Inc. v. State Farm Fire & Casualty Co., 177 W.Va. 323, 352 S.E.2d 73 (1986). The only issue submitted to the jury was the amount of consequential damages the plaintiff could recover, which included net economic losses, aggravation, and inconvenience. ³ The jury rendered a verdict of $95,833, and the trial court awarded the plaintiff attorney's fees equal to one-third of this amount.

II.

The first issue raised by USF & G is the trial court's failure to disqualify Mr. Smithson's attorney when USF & G informed the court that it desired to call him as a witness. USF & G contends that Mr. Smithson's attorney unduly prolonged the appraisal process, thereby increasing the plaintiff's economic losses. In support of its argument, USF & G cites DR 5-102 under Canon 5 of the Code of Professional Responsibility. ⁴ A similar prohibition is found in Rule 3.7 of the current Rules of Professional Conduct. ⁵ Both of these rules state that it is unethical for a lawyer representing a client to appear as a witness on behalf of the client except under very limited conditions. Here, USF & G proposed to call the plaintiff's attorney and question him on matters that were adverse to his client's interests. In this situation, courts have recognized the potential for abuse and and have been reluctant to disqualify the attorney without a showing of compelling circumstances.

The Arizona Supreme Court analyzed this issue in Cottonwood Estates, Inc. v. Paradise Builders, Inc., 128 Ariz. 99, 624 P.2d 296 (1981). The trial court sua sponte disqualified the plaintiff's attorney upon learning that the defendant planned to call him as a witness. The Supreme Court of Arizona began by recognizing the general rule that where counsel representing a party discerns that he will be a witness for such party, the attorney should ordinarily withdraw from representation. In analyzing this issue, the Arizona court cited our case of Edmiston v. Wilson, 146 W.Va. 511, 120 S.E.2d 491 (1961), where we stated in Syllabus Points 7 and 8:

"7. Any practice which enables an attorney, while engaged in the prosecution or the defense of litigation, to testify as a witness in the course of such litigation is disapproved.

"8. When counsel for a party to a cause finds that he is required to be a material witness for his client he should immediately so advise his client and retire as counsel in the case."

In Edmiston, we decided the case without reference to the canons of legal ethics and instead relied on cases from other jurisdictions where general dissatisfaction had been expressed concerning this practice. ⁶ The rationale for such a rule is explained in Ethical Consideration 5-9 under Canon 5 of the Code of Professional Responsibility:

"Occasionally a lawyer is called upon to decide in a particular case whether he will be a witness or an advocate. If a lawyer is both counsel and witness, he becomes more easily impeachable for...