T.D.S. Inc. v. Shelby Mut. Ins. Co., No. 83-3622

• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)
• Writing for the Court: Before TJOFLAT and FAY; FAY; TJOFLAT; Tjoflat
• Citation: 760 F.2d 1520
• Parties: T.D.S. INCORPORATED, d/b/a Lord & Lady Restaurant, Thomas Starr, and Dorothy Starr, Plaintiffs-Appellees, v. SHELBY MUTUAL INSURANCE COMPANY, a foreign corporation authorized to do business in the State of Florida, Defendant-Appellant.
• Docket Number: No. 83-3622
• Decision Date: 24 May 1985

Page 1520

760 F.2d 1520 T.D.S. INCORPORATED, d/b/a Lord & Lady Restaurant, Thomas
Starr, and Dorothy Starr, Plaintiffs-Appellees,
v.
SHELBY MUTUAL INSURANCE COMPANY, a foreign corporation
authorized to do business in the State of Florida,
Defendant-Appellant. No. 83-3622. United States Court of Appeals,
Eleventh Circuit. May 24, 1985.

Page 1523

W. Donald Cox, Chris Altenbernd, William A. Gillen, Tampa, Fla., for defendant-appellant.

John W. Berry, St. Petersburg, Fla., for plaintiffs-appellees.

Appeal from the United States District Court for the Middle District of Florida.

Before TJOFLAT and FAY, Circuit Judges, and ALLGOOD ^*, District Judge.

FAY, Circuit Judge:

Defendant Shelby Mutual Insurance Company (Shelby) appeals from a judgment awarding its insured, T.D.S. Incorporated d/b/a Lord & Lady Restaurant (TDS), $2,620,000.00 in damages. TDS claimed that Shelby breached an insurance contract by refusing to pay on a fire loss claim submitted by the corporation. TDS also sought punitive damages based on the tortious conduct of Shelby and its agents. Shelby, on the other hand, asserted the defenses of arson and material misrepresentation, and also counterclaimed for the amount it paid to another insured, Eugene Cohenour. The jury found in favor of plaintiff on all claims, and returned a verdict for $100,000.00, an amount equal to the insurance policy limit, plus special compensatory damages of $420,000.00, and $2,100,000.00 in punitive damages.

On appeal, Shelby essentially argues that (1) the district court should have directed verdicts against TDS on the punitive and special compensatory damages claims; (2) the awards on these claims are excessive; and (3) the district court committed reversible error by not ordering separate trials on plaintiff's contract and tort claims. We agree with Shelby that the award for special compensatory damages is excessive and therefore should be reduced. Our review of the record, however, convinces us that in all other respects the judgment appealed from should be affirmed.

Page 1524

I. FACTUAL BACKGROUND

In 1979, Thomas and Dorothy Starr formed TDS, a closely held corporation incorporated under Florida law, in order to open a restaurant in Bradenton, Florida. TDS purchased the business assets of the Lord & Lady Restaurant for $150,000.00 in July of that year. To finance the deal, TDS made a $40,000.00 cash down payment, assumed a promissory note owing to a local bank, and gave Belfrap, Inc., the seller of the business, a $55,000.00 promissory note. The accrual of interest and payments on this note were deferred for five years.

Contemporaneous with the purchase of the restaurant's personal property, the restaurant's lease was assigned to the Starrs individually. The lease contained an option to purchase the building in which the restaurant was located. To preserve the option, the Starrs, as lessees, were required to make an annual payment of $2,000.00 to Eugene Cohenour, the owner of the building.

TDS engaged the services of an independent insurance agent, and through him purchased from Shelby a multi-peril insurance policy. Shelby agreed in that policy to provide TDS with $100,000.00 in fire coverage for personal property including leasehold improvements.

The building which housed the restaurant also contained a warehouse, used for storage by the building's owner, and a beauty salon. On January 13, 1980, at approximately 1:30 a.m., a fire began in the building. Although the restaurant had already closed for the day, customers and several TDS employees still occupied the lounge, as did the Royal Shaft, a band engaged by TDS to provide musical entertainment. Both Mr. & Mrs. Starr were also in the building at this time. After the fire was discovered, the fire department was summoned and everyone safely evacuated the building.

Shortly thereafter, the Westside Fire Department arrived and, with the help of two other volunteer fire departments, extinguished the blaze. The building and its contents sustained extensive damage. ¹

Because the fire was of suspicious origin, the Westside Fire Department requested the assistance of the State Fire Marshall. Deputy State Fire Marshall Joseph Ladika arrived at the scene soon after the fire had been extinguished. After conducting a fire and site investigation, he concluded that the fire had only one point of origin--the locked office of the Lord & Lady Restaurant, to which only the Starrs had the keys. He also believed that the fire was of incendiary origin, fueled by some type of accellerant. In the early part of February, Mr. Ladika prepared an official State Fire Investigation Report outlining his findings.

Gene Spencer, claims manager for Shelby's local office, visited the fire site on January 14, 1980. He examined the building and took some photographs. ² Mr. Spencer concluded that two fires had been intentionally set in the building; one in the office of the restaurant, and one in the warehouse. He also suspected Mr. Starr as the arsonist. Mr. Spencer submitted a memorandum containing his conclusions to Shelby's claims supervisor, William Brennan, on January 17.

A day or two after the fire, Mr. Spencer retained Equifax, Inc., to investigate the cause and origin of the fire. Equifax sent Gary Haun to conduct a site investigation on January 15, 1980. Contrary to Deputy State Fire Marshall Ladika and Mr. Spencer, Mr. Haun concluded that three separate

Page 1525

fires had been intentionally set--one in the restaurant's office, one in the warehouse, and one in the area above the restaurant's kitchen. Mr. Haun also concluded that the Starrs had set the fire. Mr. Cohenour had immediately been dismissed as a serious suspect. Based in part on the erroneous assumption that TDS stood to collect $150,000.00 from Shelby, Mr. Haun projected a clear motive for the Starrs to commit arson. He sent a report reflecting his views to Shelby on January 29, 1980.

On January 14th or 15th, Gene Spencer retained Richard Wilson, an experienced arson attorney. Mr. Spencer felt this was necessary because of his inexperience in adjusting arson claims of such complexity. Mr. Wilson, under Mr. Spencer's direct and close supervision, coordinated Shelby's fire investigation and was privy to all information given to Shelby by the fire investigators. By letter dated March 5, 1980, Mr. Wilson advised the Starrs that he was representing Shelby and was assisting in the investigation of TDS's fire loss claim. The letter noted that Shelby had reason to believe that the fire was the product of arson, and requested, pursuant to a clause in the insurance policy, an examination of the Starrs under oath. The letter also asked the Starrs to bring with them to the examination numerous financial documents.

Two days after the Starrs received the letter, Arthur Vandroff, the Starrs' business attorney, telephoned Mr. Wilson. Mr. Vandroff informed Mr. Wilson that he was not qualified to represent anyone in a case involving arson, and that he wished only to assist TDS in preparing its proof of loss. Mr. Vandroff also told Mr. Wilson that if Shelby had any information implicating his clients in arson, he wanted to know up front so he could refer the case to a qualified arson attorney. Mr. Wilson mollified Mr. Vandroff with the assurance that Shelby had no such information, and by stating that the examination under oath would involve only the proof of loss and some general questions concerning the Starrs. Mr. Vandroff was not informed at that time that Shelby had information suggesting that a fire had been set in the restaurant's locked office.

Mr. Starr's examination under oath was conducted by Mr. Wilson on March 26, 1980. Also present were Gene Spencer and Arthur Vandroff. Before the examination began, Mr. Wilson informed Mr. Vandroff that Shelby had reason to believe that four separate fires had been set--one in the office, and three in Eugene Cohenour's warehouse. Mr. Wilson then asked Mr. Vandroff to inform the Starrs that this information concerning the fire's points of origin was to be kept in the strictest confidence. Mr. Vandroff was not told, however, that Shelby had already paid Mr. Cohenour $125,000.00, his policy limits. Mr. Vandroff spoke with the Starrs, who indicated they were willing to proceed with the examination. He advised Mr. Wilson that because he was not an arson attorney, he would not allow Mr. Starr to testify if Shelby had any information or reports indicating that the Starrs had set the fires. Mr. Vandroff again was assured that Shelby had no such knowledge. The examination which followed lasted a full day. A few days later, Mr. Wilson sent Mr. Vandroff a letter thanking him and the Starrs for their cooperation.

Mrs. Starr's examination under oath was scheduled for April 10, 1980. Prior to that time, however, Mr. Starr received a letter from ASIC, the insurer which paid for the fire damage to the beauty salon. See infra note 1. The letter stated that ASIC was subrogated to the rights of its insured, and that an investigation indicated that Mr. Starr was legally liable for the fire loss. Mrs. Starr gave the letter to Mr. Vandroff the same day she was to be examined by Mr. Wilson.

Mr. Vandroff confronted Messrs. Wilson and Spencer with the letter and their prior assurances that Shelby had no information or reports implicating the Starrs in arson. Mr. Spencer stood by their earlier representations, and asked to use a phone in Mr. Vandroff's office. After making a telephone call, Mr. Spencer told Mr. Vandroff that the letter should not have been sent.

Page 1526

Mr. Spencer then reiterated his assurances concerning the Starrs and arson. The examination of Mrs. Starr proceeded as scheduled.

Mr. Starr later received a letter from ASIC informing him that the prior letter had been sent in error. Mr. Vandroff was now satisfied that Mr. Spencer had been telling him the truth.

After the April 10 examination, Mr. Wilson told Mr. Vandroff...