Marie Alma James v. Pennsylvania General Insurance Company

349 F.2d 228, 121 U.S. App. D.C. 251, 1965 U.S. App. LEXIS 5056

• Court: Court of Appeals for the D.C. Circuit
• Decided: June 30, 1965
• Docket: 18537_1
• Status: Published

Opinions

BAZELON, Chief Judge:

Appellee Pennsylvania General Insurance Company sought a declaratory judgment that it was not liable to appellants under an automobile liability insurance policy. The policy’s stated expiration date was July 14, 1960. Although the Company indicated that a 21-day grace period would be allowed for renewal, it received nothing from the insured until August 28 or 29, 1960, when it received by mail a renewal application together with a premium check dated July 16, 1960. The Company’s employees then deleted the “lapsed” notation that had been placed on the insured’s policy and cashed his check.

After expiration of the grace period but prior to appellee’s receipt of the insured’s renewal application, the insured’s automobile was involved in an accident in which serious personal injuries were sustained. The Company initially undertook defense of the lawsuit arising out of the accident, but only after first notifying the insured that it was acting without prejudice to a later denial of coverage. Approximately a year before the lawsuit came to trial, the Company withdrew and instituted this suit. Despite appellants’ timely demand for a jury trial, the court heard this case without a jury and held for the Company. The court found that the insured had pre-dated his premium check for the purpose of deceiving appellee into treating the renewal application as if it had been mailed during the grace period, when in fact it had not.

On this appeal we reject appellants’ contentions that they proved a valid renewal of the insured’s policy as a matter of law, and alternatively that the Company waived any right to object to the renewal’s validity.¹ Nor can we accept their contention that by originally undertaking defense of the lawsuit arising out of the accident, the Company es-topped itself from later denying coverage. In the absence of a showing of prejudice by appellants, the Company’s prompt notification to the insured that it was defending the lawsuit without prejudice to a later denial of coverage was sufficient to prevent estoppel. See Fisher v. Firemen’s Fund Indemnity Co., 244 F.2d 194, 196 (10th Cir. 1957).

But there is possible merit in appellants’ claim that they were erroneously deprived of a jury trial. In providing for declaratory judgments, Congress left unaffected the right to jury trial. Rule 57, Fed.R.Civ.P.; American Lumberman’s Mut. Casualty Co. of Illinois v. Timms & Howard, Inc., 108 F.2d 497 (2d Cir. 1939). The right to jury trial in a declaratory judgment action depends, therefore, on whether the action is simply the counterpart of a suit in equity — that is, whether an action in equity could be maintained if declaratory judgment were unavailable — or whether the action is merely an inverted lawsuit. See Pacific Indemnity Co. v. McDonald, 107 F.2d 446 (9th Cir. 1939); James, Right to a Jury Trial in Civil Actions, 72 Yale L.J. 655, 685-86 (1963); Borchard, Declaratory Judgments 400 n. 63 (1941).

The issue tendered by appellee’s complaint was fraud in the procurement of the insured’s renewed policy.² At common law an action to rescind a contract for fraud in the procurement could be maintained in equity only if the matters giving rise to the right of recision could not be adequately presented in defending against a legal action on the contract, thus affording no adequate remedy at law. For example, if delay in presenting the defense of fraud would be prejudicial, the party asserting the defense was permitted to bring an action in equity rather than awaiting a legal action on the contract.³ But no such prejudice was deemed to occur where an insurance claim had already arisen and a suit on the policy was pending or threatened. Enelow v. New York Life Ins. Co., 293 U.S. 379, 55 S.Ct. 310, 79 L.Ed. 440 (1935); DiGiovanni v. Camden Fire Ins. Ass’n, 296 U.S. 64, 56 S.Ct. 1, 80 L.Ed. 47 (1935).

When the Company initiated this suit, the loss under the policy had not been established, but an action was then pending in which the loss was subsequently established. The adequacy of the Company’s legal remedy depends upon the nature of its proof of fraud. For example, it has been held that an insurer in these circumstances could maintain an equitable action for recision where its claim of fraud rested on the testimony of witnesses not generally available to it and who might have disappeared before a legal action on the policy could or would be instituted. Massachusetts Bonding & Ins. Co. v. Anderegg, swpra ⁴ Here, however, the alleged fraud is in large part based on documentary proof, such as the insured’s premium check. The Company’s employees would seem to be generally available to it to show that the check date induced them to delete the “lapsed” notation on the policy. Moreover, the Company could preserve the testimony of its employees by deposition pursuant to Rule 27, Fed.R.Civ.P. Finally, this suit was instituted when it was known that the pending lawsuit to establish a loss would likely come to trial in about a year.⁵

Although the foregoing factors suggest that the Company’s legal remedy was adequate, and consequently that appellants’ demand for a jury trial should have been honored, the parties have never had an opportunity to address themselves to the adequacy of appellee’s legal remedy, since the trial judge denied a jury trial without inquiring into that issue. We think that such an opportunity should be afforded now. Factors not presently appearing in the record may exist which demonstrate that delay in adjudicating the fraud issue likely would have prejudiced appellee’s case seriously.⁶ Accordingly we remand with directions to hold a hearing to determine whether appellee’s legal remedy was adequate at the time this suit was filed, with the contingency of a new trial before a jury to abide the result.

So ordered.

1 . Appellants’ waiver argument is based on the trial court’s finding that appellee’s agent was notified of the accident prior to the receipt of the insured’s renewal application. Since the trial court held held that by falsely pre-dating his check, the insured intentionally induced appellee to consider his renewal application as if made within the grace period, it is irrelevant whether appellee had imputed knowledge of the accident at the time it struck the “lapsed” notation from insured’s policy. See generally 3 Pomekoy, Equity Jurisprudence § 876 et seq. (5th ed. 1941). Appellants might argue that in view of the Company’s imputed knowledge of the intervening accident, it was not justified in relying on the veracity of the date on the insured’s check without first having conducted an independent investigation. See id. at § 891. Appellants have not made that argument in either court, however, and we are not inclined to consider it initially at this time.

2 . The trial court’s memorandum opinion indicates it considered the issue to be one of acceptance of the insured’s offer to renew his policy. The trial court apparently reasoned that because the insured intentionally deceived the Company into treating his renewal application as if made during the grace period, the striking of the “lapsed” notation from the insured’s policy and the cashing of his check did not constitute a valid acceptance. The Company’s prompt disclaimer upon learning the true facts was therefore viewed as an effective rejection of the offer to renew. Although the same facts need be established to sustain either theory of the Company’s cause of action, we think the issue is properly viewed as one of fraud. Ordinarily, striking the “lapsed” notation and cashing the check would constitute an acceptance of the offer to renew. The insured’s misrepresentation of the check date, like fraudulent misrepresentations in an application concerning age, principal place of garaging, etc., does not convert the otherwise valid acceptance into a non-acceptance. See, e.g., Massachusetts Bonding & Ins. Co. v. Anderegg, 83 F.2d 622 (9th Cir. 1936).

3 . “The rule is generally adopted that a suit will not be sustained to cancel an executory, non-negotiable, personal contract, — for example, a policy of insurance,11 — when the fraud might be set up as a defense to an action on the contract, and there are no special circumstances which would prevent the defense from being available, adequate, and complete. * * * On the other hand jurisdiction has been exercised to cancel instruments, although not negotiable, where delay and other circum-stanees might ultimately hinder a defense in an action at law. For instance, a right to maintain a suit in equity often arises from the fact that a defense at law in an action on an insurance policy may be lost to the insurer because of uncertainty as to the time when loss may occur, the danger that witnesses may disappear, or because the policy may become incontestable after a limited period unless such a suit is begun by the insurer.” 3 Pomeroy, Equity Jurisprudence § 914a, at- 590-92 (1941).

Compare American Life Ins. Co. v. Stewart, 300 U.S. 203, 57 S.Ct. 377, 81 L.Ed. 605 (1937), with Prudential Ins. Co. of America v. Saxe, 77 U.S.App.D.C. 144, 134 F.2d 16 (1943).

4 . We think State Farm Mutual Auto Ins. Co. v. Mossey, 195 F.2d 56 (7th Cir.) cert. denied, 344 U.S. 869, 73 S.Ct. 109, 97 L.Ed. 674 (1952), upon which the Company relies, is unsound to the extent that it may be-read to uphold denial of a jury trial wherever no loss under the insurance policy has been sustained. The court there upheld denial of a jury trial, although the insurer’s claim of fraud was based entirely on documentary proof. Not only is that view inconsistent with past cases, but it would tend to induce insureds to compromise damage claims unfavorably in order to win the proverbial “race to the courthouse door.”

5 . Since equity’s jurisdiction was determined at common law as of the time an action was filed, the fact that the insured had already sustained a loss on the policy by the time this case was called for trial is irrelevant to the determination of the adequacy of the Company’s legal remedy. American Life Ins. Co. v. Stewart, 300 U.S. 203, 215, 57 S.Ct. 377 (1937).

If prior to trial in this case appellants had filed a counterclaim for damages under the policy- — as they could have done once the judgment against the insured became final — perhaps they would have been entitled to a jury trial on the fraud issue, which would then have been common to both claims. See Beacon The-atres, Inc. v. Westover, 359 U.S. 500, 79 S.Ct. 948, 3 L.Ed.2d 988 (1959) ; Dairy Queen Inc. v. Wood, 369 U.S. 469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962). We need not consider the issue, however, since no such counterclaim was filed.

6 . We must reject the suggestion that a judgment n.o.v. would have been required on this record, had a jury found for appellants, since the principal issue for the jury would have been appellants’ credibility.