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Cedar Hill Hardware and Construction Supply, Inc. v. Insurance Corp. of Hannover

April 17, 2009


Appeal from the United States District Court for the Eastern District of Missouri.

The opinion of the court was delivered by: Melloy, Circuit Judge.

Submitted: March 10, 2008

Before WOLLMAN, BOWMAN, and MELLOY, Circuit Judges.

A jury found that Plaintiff-Appellant Cedar Hill Hardware and Construction Supply, Inc. ("Cedar Hill"), was not entitled to insurance coverage for fire-related damages because Cedar Hill made material misrepresentations that voided an otherwise applicable policy. Cedar Hill appeals, arguing waiver, error in the jury instructions, and error in the district court's*fn1 admission of evidence and imposition of time constraints at trial. Cedar Hill also argues the district court erred when it granted a post-trial motion ordering Cedar Hill to pay restitution to Defendant-Appellee Insurance Corporation of Hannover ("Hannover") for sums that Hannover advanced to Cedar Hill during investigation of the fire and sums that Hannover paid to Cedar Hill's mortgage holder. We affirm.

I. Background

A. General Background

Cedar Hill operated a retail hardware store and equipment-rental business. On February 22, 2003, a fire caused substantial damage to Cedar Hill's facilities and inventory. Cedar Hill sought coverage under an insurance policy issued by Hannover. The circumstances of the fire were suspicious. A state fire marshal told Hannover he believed that the fire was intentional and that a principal of Cedar Hill had started the fire. Hannover commenced an investigation. Experts' opinions were mixed as to whether the cause of the fire was intentional or undetermined. Cedar Hill submitted a proof-of-loss form seeking payment in an amount near the policy limits, including a claim for business interruption, but Cedar Hill was not forthcoming with documents or other support for its claim.

Eventually, Hannover instituted an action seeking a declaration that it had no duty to provide coverage to Cedar Hill. Hannover raised three defenses to coverage:

(1) arson, (2) misrepresentations in the claims process, and (3) breach of the policy's cooperation clause. Cedar Hill instituted a separate action alleging breach of contract and vexatious refusal to pay. The district court dismissed Hannover's initial action, and Hannover refiled its declaratory-judgment claims as counterclaims and affirmative defenses in Cedar Hill's action. In investigating the matter further, Hannover discovered an undisclosed second mortgage on the insured property. Hannover then raised Cedar Hill's failure to disclose the second mortgage when procuring insurance as a further argument in favor of a declaration that Hannover owed no duty to provide coverage. Specifically, Hannover argued that Cedar Hill's failure to disclose the second mortgage served as an intentional, material misrepresentation or omission regarding Cedar Hill's interest in the insured property and that Missouri law and the terms of the policy treated this as grounds for voiding the policy.

The dispute went to trial, and the district court bifurcated the trial. The first phase dealt with Hannover's arson defense. The second phase dealt with Hannover's other defenses and Cedar Hill's claims of vexatious refusal to pay and breach of contract. The jury found in favor of Cedar Hill in the arson phase. Hannover does not appeal from that phase of the trial, and we need not recount the factual details of the fire.

In the second phase, the jury rejected Cedar Hill's breach of contract and vexatious refusal to pay claims. The jury also rejected Hannover's claim that the policy was void due to Cedar Hill's failure to comply with the cooperation clause. The jury, however, found for Hannover on the claim that the policy was void due to Cedar Hill's intentional and material misrepresentations. It is unclear from the verdict whether the jury found a misrepresentation or omission as to a mortgage or as to the insurance claim. Even though the jury found in favor of Hannover on the misrepresentation claim, it awarded zero damages to Hannover. After the trial, the district court granted a motion by Hannover and ordered Cedar Hill to pay restitution. We address below facts relevant to the issues on appeal.

B. Cedar Hill's History and the Insurance Application Process

Brad and Denise Burgan (the "Burgans") are the owners of Cedar Hill. They purchased the business as a going concern from Russell and Elaine Rose (the "Roses") in September 1996. The Burgans financed the business with a mortgage of over $400,000 from the Roses and a secured line of credit of over $300,000 from Rockwood Bank. Rockwood Bank's security interest extended to Cedar Hill's equipment, business contents, and real property.

Cedar Hill used an insurance agent, Pete Nichols of Wilkerson Insurors, Inc., to obtain insurance. Nichols procured policies for Cedar Hill from Vesta Insurance Company ("Vesta") for 1996 to 1998. The 1998 Vesta policy, included in the underwriting file for subsequent years, listed the Roses and Rockwood Bank as loss payees, but it did not indicate that these parties were mortgage holders.

In 1999, Nichols sought coverage from other insurers on behalf of Cedar Hill. Nichols used an industry-standard application form called an "Acord" application. Nichols "blast-faxed" the Acord application to several insurers seeking quotes for coverage on Cedar Hill's business. The 1999 application listed three loss payees (two equipment-finance companies and a construction firm) but listed neither the Roses nor Rockwood Bank. The application also contained a box to check if there were mortgagees or lienholders and included a space beside the box for identification of such parties. Neither Nichols nor Cedar Hill checked the box to disclose the mortgages held by the Roses and Rockwood Bank.

An underwriting firm, F.B. Beattie and Co., responded to the blast-faxed Acord application on behalf of Safeco Insurance Company ("Safeco"), sought additional information, and eventually provided a quote and issued a Safeco policy to Cedar Hill for September 30, 1999 to September 30, 2000. In response to a request for additional information, Nichols submitted an ARA membership form and an application that the parties refer to as an "ARA" application, both signed by the Burgans.*fn2 Like the 1999 Acord application, the 1999 ARA application contained a space for listing mortgage holders, but Nichols and the Burgans failed to list the Rockwood Bank or Rose mortgages.

After Safeco issued the 1999 policy, the Wilkerson agency notified Safeco of the Roses' mortgage. Safeco then amended the policy with an endorsement to list the Roses' mortgage interest and to name the Roses as loss payees. Although Cedar Hill's agent specifically informed Safeco of the Roses' mortgage, neither Cedar Hill nor its agent informed the insurer or underwriter of Rockwood Bank's mortgage nor sought to add Rockwood Bank to the policy as a mortgage holder. Safeco continued to insure Cedar Hill for the following two years. For policies issued in September 2000 and 2001, ARA served as the underwriter for Safeco and did not require a complete re-application process. Rather, ARA sought updated information and corrections. When responding to these update requests, Nichols and the Burgans again failed to disclose the Rockwood Bank mortgage. Safeco discontinued its coverage of hardware store and equipment rental businesses in 2002.

For 2002, ARA served as an underwriter of policies for Hannover. In July 2002, ARA requested updated information from Cedar Hill, but ARA did not seek a new application. The request, sent to Nichols at the Wilkerson agency, did not specifically ask for details regarding mortgages. It did, however, quote insurance with a twenty-percent increase in coverage and ask for corrected and updated information. Nichols failed to provide updated information by the deadline listed on the request. Nevertheless, Cedar Hill, through Nichols, paid the premium for policy renewal at the increased level of coverage, accepting the quote with the increase in coverage. Hannover, through ARA, issued a policy for September 30, 2002 to September 30, 2003. At the time, ARA had in its possession the prior policies and applications discussed above. When Hannover issued the 2002--2003 policy, it provided Nichols with information regarding the policy and a request to review the policy and report any inaccuracies, errors, or omissions.

In November 2002, subsequent to issuance of the 2002--2003 policy, Nichols reported to ARA that the Roses' mortgage was not listed on the policy. ARA and Hannover issued an amendment to the 2002--2003 Hannover policy listing the Roses as mortgagees and additional insureds. Neither Nichols nor Cedar Hill notified Hannover or ARA of the Rockwood Bank mortgage nor sought to add Rockwood Bank to the policy.

For the years discussed above, Nichols issued numerous certificates of insurance to Rockwood Bank as evidence that Cedar Hill had obtained insurance. The certificates stated that they did not amend the policies and that they were provided to Rockwood Bank only for informational purposes. The certificates did not indicate that Rockwood Bank was a mortgage holder nor state why Rockwood Bank had sought assurance of Cedar Hill's insurance status.

Nichols was without authority to issue such certificates, and in early 2002, when ARA discovered that Nichols had issued a certificate for the policy in effect from September 2001 through September 2002, ARA instructed Nichols that "all such certificates must be issued by our office." The Wilkerson agency, nevertheless, issued a certificate of insurance to Rockwood Bank in October 2002 without disclosing the certificate to ARA.

C. Cedar Hill's Claim Submission and Hannover's Response

The fire occurred in February 2003. Shortly after the fire, a state fire marshal told Hannover that he believed the fire was intentional and Brad Burgan was responsible. Hannover*fn3 sent a notice to Cedar Hill that included a proof-of-loss form and asked Cedar Hill to fill out the form. Hannover highlighted those portions of the policy that required cooperation from the insured and that called for a detailed listing of items claimed as damaged. The notice specifically stated, "Please note that Insurance Corporation of Hannover is also requesting that you provide complete inventories of all damaged and undamaged property as required by the conditions set forth above."

Cedar Hill submitted a one-page, sworn proof of loss on April 11, 2003, seeking $1.74 million. The proof of loss named Rockwood Bank and the Roses as lien holders, but it did not indicate what property was subject to liens. Accordingly, the proof of loss, on its face, did not indicate that Rockwood Bank was a mortgage holder rather than merely the holder of a lien against equipment or inventory. Hannover did not immediately investigate the nature of Rockwood Bank's interest. Upon receiving proof of the outstanding principal and interest on the Rose mortgage, however, Hannover paid the Roses $423,035.19. There is no allegation of delay or vexatiousness regarding Hannover's payment to the Roses.

Hannover commenced its investigation shortly after the fire, hiring engineers, technical experts, and a forensic accountant to review the amount of the loss. Hannover used a law firm that specializes in the areas of insurance fraud and arson to coordinate its investigation. Early in the investigation, Hannover advanced $50,000 to Cedar Hill, even though Hannover suspected the fire was intentional. Throughout 2003 and into 2004, Hannover sought additional details to support Cedar Hill's one-page proof of loss, but Cedar Hill was not forthcoming until April 2004, at which time Cedar Hill made a partial disclosure of itemized information. Eventually, Hannover concluded that Cedar Hill had overstated its losses by approximately $1 million. This perceived overstatement of losses was the foundation for Hannover's initial misrepresentation-based defense to coverage. At no time did Hannover accept or deny the claim. Rather, Hannover filed the declaratory-judgment action seeking judicial resolution of the coverage issue.

D. Discovery and Pre-trial Motions

Hannover filed its initial complaint on June 5, 2004. Cedar Hill filed a separate action. In its initial complaint, Hannover alleged an arson defense, a misrepresentation defense, and a failure-to-cooperate defense. The misrepresentation defense, as originally pleaded, alleged misrepresentations regarding the fire and the claim but not regarding mortgages or Cedar Hill's interest in the insured property. On January 1, 2005, after the district court consolidated the cases, Hannover presented its claims as affirmative defenses and counterclaims. It then included allegations that Cedar Hill had made policy-voiding misrepresentations while procuring insurance.

Based on Hannover's allegations regarding misrepresentations in the procurement of insurance, Cedar Hill sought discovery as to underwriting standards. Cedar Hill sought to show that no misrepresentations or omissions were material to the decision to issue insurance or price the insured risk. Cedar Hill invoked Federal Rule of Civil Procedure 30(b)(6) and sought to depose a Hannover corporate representative as to all issues in the case, including the issue of underwriting standards. Hannover designated Richard Peterson.

During his deposition on October 7, 2005, Peterson proved unknowledgeable as to underwriting standards and was unable to answer specific questions regarding the impact that the undisclosed mortgage information would have had on Hannover's decision to insure a risk or on its calculation of premiums. Peterson explained that ARA had served as the underwriter for the policy and that ARA had exercised delegated authority to make underwriting decisions on lines of coverage up to $2 million. He stated that an ARA representative would have information regarding the specific standards used in association with making the underwriting decision.

Cedar Hill and its agent knew prior to the fire that ARA was the underwriter through whom they had obtained insurance. In addition, prior to Peterson's deposition, Hannover disclosed information to Cedar Hill regarding underwriting. In an initial Rule 26(a)(1) disclosure provided to Cedar Hill on December 23, 2004, Hannover identified Cindy Prowell as a person knowledgeable as to underwriting. Also, on August 15, 2005, Hannover submitted an affidavit from Phil Kelling, President of ARA, in which Kelling stated that he had personal knowledge regarding the underwriting of property and casualty policies by ARA and personal knowledge regarding Cedar Hill's file. Cedar Hill's attorneys stated during Peterson's deposition that they were aware of Kelling's affidavit. Finally, in a supplemental disclosure under Federal Rule of Civil Procedure 26(a)(1)(A), which Hannover claims to have provided to Cedar Hill on December 12, 2005, Hannover disclosed Kelling as a person with knowledge pertaining to "the underwriting file and other related matters."*fn4

Cedar Hill did not attempt to depose Kelling or Prowell at any time prior to trial. Also, Cedar Hill did not seek assistance from the court regarding Hannover's failure to designate a corporate representative knowledgeable as to the underwriting aspect of Cedar Hill's multi-faceted request for information. On February 13, 2006, however, Cedar Hill filed a motion in limine seeking to preclude Hannover from presenting any evidence on the topic of underwriting standards. Cedar Hill sought this exclusion as a sanction for designating an inadequate corporate representative. The district court denied the motion.

When Hannover deposed Cedar Hill's experts and obtained statements under oath from potential witnesses, it became clear that Hannover had not received all documents relevant to the itemized listings needed to support Cedar Hill's sworn proof of loss. Hannover eventually obtained an order from the district court directing Cedar Hill to disclose previously withheld documents relevant to Cedar Hill's claim as set forth in the sworn proof of loss. At trial, Hannover's accounting expert testified as to the amount of Cedar Hill's loss based, in part, on these documents.

Cedar Hill moved the court for an order compelling Hannover to produce its communications with the law firm that coordinated Hannover's investigation of the fire. The court granted the motion, ultimately ruling that privilege had been destroyed. Based on this determination, the court ruled that an insurance-industry expert working for Cedar Hill could rely upon and reference Hannover's attorney-client communications in his testimony.

Prior to trial, Cedar Hill filed several motions in limine seeking to exclude a wide variety of evidence and testimony. This evidence, in broad categories, included:

(1) prior insurance claims and fires involving the Burgans or persons closely related to the Burgans; (2) "rumor, gossip, and innuendo"*fn5 regarding suspicious actions by Brad Burgan prior to the fire; and (3) expert testimony of Lewis Christ, a former Director of Insurance for the State of Missouri, regarding insurance-industry standards, the vexatious-refusal claim, the breach-of-contract claim, the materiality of misrepresentations or omissions regarding the Rockwood Bank mortgage, and the opinion that Brad Burgan had caused the fire. The district court ruled on the motions in limine, holding that evidence of the prior claims and fires was to be excluded. The court permitted some, but not all of the purported "rumor, gossip, and innuendo" to be admitted as circumstantial evidence in the arson phase. As described by the district court, the evidence admitted showed that:

Brad Burgan stored a large amount of paint thinner on the premises, that he told the employees to leave the office door propped open at night, to chain the gates at night, and to park heavy equipment in front of the gate at night, that he installed a new thermostat for a furnace, that he had flammable items stored near a furnace, and that he "tampered" with the alarm system.

Regarding Hannover's insurance-industry expert, Lewis Christ, the district court ruled that Christ could testify in the second phase, if necessary, to illustrate the propriety of Hannover's claim handling and investigation. The district court ruled Christ could not offer testimony in the first phase as evidence to support a finding of arson.

E. The Trial

The first phase of the trial lasted twenty-nine trial days over the course of two months. The jury ultimately rejected Hannover's arson defense. Throughout the protracted first phase, the jury heard a good deal of information relevant to the issues reserved for the second phase. For example, in presenting different theories regarding the cause of the fire, the jury was made aware of the extent of the damage at Cedar Hill's store. Further, the jury heard information regarding Cedar Hill's financial condition, offered by Hannover's witnesses as circumstantial evidence to show that Brad Burgan had a motivation to commit arson.

At the outset of the second phase, the district court expressed frustration with the length of the first phase. The court was frustrated with the attorneys for conducting unnecessarily prolonged examinations and cross-examinations, contesting procedural matters that did not need to be contested, repeatedly moving for mistrials, unnecessarily seeking intervention from our court, and repeatedly demanding frivolous and time-consuming sidebars. The court noted in particular that it had already demanded a great deal of time from the jurors and did not want the second phase to be as protracted. The court stated that if the entire trial lasted too long there would be a risk of losing one or more jurors to illness or unavoidable conflict and that such a loss might result in an insufficient number of jurors and a need to retry the entire case. The district court also noted that a good deal of evidence relevant to the issues for the second phase came in during the first phase. As a result, the court imposed time limitations for the second phase, giving each side eight hours to present its case and conduct cross-examinations. Cedar Hill repeatedly objected to the time limits. Hannover also objected, but the court remained firm.

Cedar Hill also moved the court to exclude entirely the issue of misrepresentations in the procurement of insurance. Cedar Hill argued Hannover had waived this issue by not raising it in a timely fashion after receipt of the sworn proof of loss and by not including this issue in the original declaratory judgment complaint. The district court denied Cedar Hill's motion.

In the second phase, the district court revisited its earlier evidentiary rulings and held most of the previously excluded evidence admissible. In Cedar Hill's presentation of its case, Cedar Hill read several witnesses' deposition testimony into the record and also presented in-court witnesses. One in-court witness, Walter Zimmer, was an insurance-industry expert offered to discuss industry standards and opine as to the vexatious nature of Hannover's claim handling. Zimmer reviewed the correspondence between Hannover and its attorneys and incorporated these materials as foundations for his expert opinions and testimony. The district court rejected Hannover's objections to Zimmer's testimony and his reliance on the attorney-client communications.

At the close of its presentation of evidence in the second phase, Cedar Hill renewed its objection to the time constraints and made an offer of proof as to several witnesses it desired to present. The offer of proof consisted of the identification of several witnesses and unadorned claims as to the topics they would have addressed.

When Hannover presented its case, it began with William Dunn, a detective corporal with the Jefferson County Missouri Sheriff's Office. Over objection from Cedar Hill, Dunn testified that he had concluded Brad Burgan had intentionally set the fire. Dunn had been present at the scene on the night of the fire and had spoken with Brad Burgan that night. In addition, Dunn had spoken to several Cedar Hill employees and former employees who reported that Brad Burgan had previously made false claims to suppliers, claiming undamaged items as damaged. These former employees also reported several suspicious actions by Brad Burgan shortly before the fire. For example, one employee, Greta Milne, reported to Dunn that she and another employee had noted excess shipments of paint thinner and had taken pictures of leaking containers of paint thinner because they believed Brad Burgan was preparing the store for a fire. In fact, they provided the photographs for Dunn's file. In addition, Dunn testified as to his investigation of a prior fire at the Burgan's home, for which the cause was undetermined. Dunn ultimately ...

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