U.S. v. Lumbermens Mut. Cas. Co., Inc.

Decision Date10 May 1990
Docket NumberNo. 89-2004,89-2004
Citation917 F.2d 654
PartiesUNITED STATES of America, Plaintiff, Appellee, v. LUMBERMENS MUTUAL CASUALTY COMPANY, INC., Defendant, Appellee. Ossipee Insurance Agency, Inc., Third-Party Defendant, Appellant. . Heard
CourtU.S. Court of Appeals — First Circuit

Francis G. Murphy, Jr., with whom David W. Hess, and Nixon, Hall & Hess Professional Association, Manchester, N.H., were on brief, for appellant.

Gretchen Leah Witt, Asst. U.S. Atty., with whom Jeffrey R. Howard, U.S. Atty., Concord, N.H., was on brief for the U.S.

David Woodbury, Bedford, N.H., for defendant, appellee.

Before CAMPBELL, Circuit Judge, BOWNES, Senior Circuit Judge, and TORRUELLA, Circuit Judge.

LEVIN H. CAMPBELL, Circuit Judge.

After a fire destroyed a house and barn on real estate owned by the Veterans Administration (the "VA"), the VA sued an insurance company, Lumbermens Mutual Casualty Company ("LMC"), for coverage under a homeowner's policy that LMC had issued to a prior owner of the property. LMC defended in part on the ground that, as the VA was not named in the insurance contract, it had no right to recover under the policy. LMC also brought third-party actions against its insurance agent, Ossipee Insurance Agency, Inc. ("Ossipee"), and a plumber who allegedly started the fire.

After a bench trial, the district court rejected the VA's proposed theory of recovery--that LMC was estopped from claiming that the VA was not a party to the insurance contract. The court held, however, sua sponte, that the evidence warranted reforming the policy to substitute the VA for the named insured. The court awarded the United States damages of $48,570.90 against LMC. It further held that Ossipee and the plumber were jointly and severally liable to LMC in its third-party actions. Only Ossipee appealed.

We hold that the district court did not err in rejecting the VA's estoppel theory, but that it did err in ordering reformation of the insurance contract. We, therefore, reverse the judgment against appellant Ossipee, as it was premised on an erroneous judgment entered against LMC. Because LMC (and the plumber) chose not to appeal from the judgments entered against them, we do not disturb those judgments.


The principal facts are as follows:

1. In early 1981, Otis B. Chase III bought a house and barn (the "property") in Sanbornville, New Hampshire. To finance the purchase, Chase obtained a loan that was secured by a mortgage on the property and guaranteed by the VA. Soon after the purchase, the mortgage company that had issued the loan to Chase assigned its mortgage to First Family Mortgage Corporation ("FFMC").

2. On March 19, 1981, Chase obtained a homeowner's insurance policy from LMC, through its agent, Ossipee. The policy named FFMC as mortgagee.

3. Chase renewed the policy in each of the next two years, making the fully paid policy's termination date March 19, 1984.

4. In April 1983, after Chase defaulted on his mortgage payments, the Manchester, New Hampshire VA office sent a letter to FFMC granting FFMC permission to foreclose on the property. The letter instructed FFMC (1) not to cancel any hazard insurance on the property and (2) if any such policy existed, to "obtain endorsements naming the Administrator of Veterans Affairs (c/o Director of this VA office) as an assured, as the Administrator's interest may appear." These instructions comported with VA Regulations. See 38 CFR 36.4320(H)(2).

5. On May 5, 1983, following an unsuccessful foreclosure sale, FFMC notified the VA that it intended to convey ownership of the property to the VA as guarantor of the loan. However, before FFMC could make such a conveyance (and collect on the guarantee), FFMC was required, among other things, to obtain an endorsement to the VA of Chase's policy with LMC pursuant to 38 CFR 36.4320(H)(2).

6. On May 19, 1983, in an apparent attempt to comply with the VA's endorsement requirement, FFMC sent the following letter to Ossipee, as agent for LMC:

This letter is in regards [sic] to the hazard insurance policy on the above captioned loan.

Please be advised in the future all correspondence is to be forwarded to the VA address below.

We also request that you remove First Family Mortgage Corporation from the Mortgagee clause and change the owner to the Administrator of Veterans Affairs. If there is a refund due to cancellation of the above referenced policy, the check should be made payable to the Administrator of Veterans Affairs, at the address below.

If you have any further questions, please contact our office.

At the bottom of the letter, FFMC erroneously listed the address of the VA's Newark, New Jersey office, which had no involvement with the Chase guarantee, rather than that of the VA's Manchester, New Hampshire office, which was responsible for handling the matter.

7. The Manchester VA office received a copy of FFMC's above letter to Ossipee. Relying on that letter as adequate proof that the policy was being endorsed to it, the VA paid FFMC $48,570.90 to fulfill its loan guarantee. 1

8. On May 23, 1983, Robert Brown, the Ossipee agent in charge of the policy, received FFMC's May 19, 1983 letter. Brown professed confusion as to what the letter requested. He did little to eliminate this confusion, however. Rather than calling FFMC, Chase, or the VA's office in Manchester (or New Jersey) Brown contacted a VA management broker in the local area, Janet Mason, who told him that she did not know anything about the letter. She never got back to him, and he did nothing further. 2 FFMC thus remained as the mortgagee on the policy, and Chase remained as the owner, even though the VA now owned the property.

9. On January 9, 1984, Brown made an official visit to the property, finding the premises vacant. That same day, he wrote a letter to Chase, the named owner of the property. The letter stated that Brown "was by there the other day and it did not appear that anyone was there. Will you let me know what we should be doing with this."

10. Two days later, Chase informed Brown that he no longer owned the property and that the VA had owned the property since November 1983.

11. Brown then contacted LMC (the insurer) and recommended that LMC cancel the policy because the VA owned the property and Chase no longer lived there.

12. On January 23, 1984, LMC sent cancellation notices to FFMC and to the VA office in New Jersey. The notices stated that "[t]he property is unoccupied. Homeowners Insurance is only for occupied homes. There are other kinds of insurance for vacant property." 3 The cancellation was to take effect at noon on March 12, 1984, one week before the policy's termination date.

13. While working at the property on the morning of March 12, 1984 (the date of the policy's cancellation), John Couch, a local plumber, inadvertently started a fire that eventually destroyed the entire premises.

14. A few days later, the Manchester VA office finally received LMC's cancellation notice, which the New Jersey VA office had forwarded.

15. The VA then attempted to collect on the policy, but LMC refused coverage on the (erroneous) ground that the fire had occurred after the policy had been cancelled. In fact (the district court found) the fire had occurred a few hours before the policy had been cancelled.

16. On March 12, 1985, the United States brought this suit in federal court against LMC, seeking coverage under the insurance policy for its losses due to the fire on the premises. In addition to defending on the merits, LMC responded with third-party actions against John Couch, the plumber who started the fire, and Ossipee, LMC's agent.

17. In an order dated September 4, 1985, the district court refused to grant summary judgment against the VA, stating that the following disputed issue of fact existed: "whether VA was reasonably entitled to rely on compliance with the [May 19, 1983] request of First Family that VA be named as owner and the policy thus assigned to it." It also denied Ossipee's motion to dismiss LMC's third-party claim against it.

18. Following some discovery, LMC again filed a motion for summary judgment, which Ossipee joined. 4 The district court denied the motion on September 11, 1986.

19. On September 18, 1989, following a bench trial, the district court rejected the VA's estoppel argument, on the ground that it was the VA's fault that it had received the cancellation notice after the fire destroyed the premises. The court then found, sua sponte, that the policy should be reformed so that the VA would be substituted as owner and thus allowed to recover under the policy against LMC. The court further held Ossipee and Couch jointly and severally liable to LMC on its third-party claims, because Brown (the Ossipee representative) had failed to act with due diligence in responding to the letter from FFMC, and because Couch (the plumber) had started the fire.

20. Ossipee alone appealed, arguing that LMC's third-party judgment against it should be reversed because (1) the district court erred in ordering the policy reformed to substitute the VA as owner 5, and (2) even if reformation were proper, wrongful conduct by Ossipee was not the cause of LMC's liability to the VA under the policy. In response, (1) the VA argues that the district court committed no error with regard to the judgment against LMC, and (2) LMC argues that the court committed no error with regard to the judgment against Ossipee. 6 Neither LMC nor Couch has appealed.


New Hampshire courts have established two alternative tests for determining whether a party is entitled to reformation of a contract. Under the first test, a court reforms a contract if the party demonstrates clear and convincing evidence of "(1) an actual agreement between the parties, (2) an agreement to put the agreement into writing; and (3) a variation between the prior agreement and the writing."...

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