The Aetna Casualty & Surety Company, Plaintiff-appellant, v. Hirschell L. Guynes and Mable Ann Guynes, Defendants-appellees, 713 F.2d 1187 (5th Cir. 1980)

From a judgment for the assureds in a diversity action on a $25,000 home fire insurance policy, the plaintiff-insurer, Aetna Casualty & Surety Company ("Aetna"), appeals the District Court's instructed verdict, denial of a new trial, and final judgment. We affirm.

Facts

In 1978 the assureds, Hirschell Lee and Mable Ann Guynes, bought a four-room frame house in wooded Onalaska, Texas off of Lake Livingston.¹  In October of the following year, they applied for a $25,000 fire insurance policy on the house with Aetna. Aetna declined to inspect the house and issued the policy after the Guyneses paid the necessary premiums. In the early morning hours of June 7, 1980, the house burned to the ground. By then, Aetna still had not inspected the house.

Aetna suspected the worst. Its investigators eventually concluded that the fire had been intentionally set probably by someone using some type of flammable liquid. Moreover, early on in the investigation, the Guyneses gave wrong accounts of exactly how much they had originally paid for the house and of where Mr. Guynes had been on the night of the fire which they later corrected. Aetna decided not to pay on the policy and filed suit in the Southern District of Texas, seeking declaratory relief from liability on the affirmative defenses of arson and misrepresentation. The Guyneses counter-claimed for the total proceeds of the policy.

At trial, the District Judge instructed a verdict against Aetna on a motion by the Guyneses on the misrepresentation claim, finding that the conflicting statements had not been material to Aetna's liability under the policy. Then, after a two-day trial, the jury found that the Guyneses had not set the fire themselves nor had they caused anyone else to set the fire. The Court entered judgment against Aetna for $25,000, plus interest and costs of the court. Aetna moved for a new trial based on several alleged errors by the Court during trial and was denied.

Aetna appeals the decisions of the District Court in instructing verdict for the Guyneses, in denying Aetna's motion for a new trial, and in granting judgment for the total proceeds of the policy.

Instructed Verdict Against Aetna

Aetna had asserted that the Gyneses' statements made during the investigation of the loss of the house were willful misrepresentations of material facts or circumstances which, under the Guyneses' fire policy,²  relieved Aetna of liability. The Guyneses had said to Aetna's fire investigator shortly after the loss that they had paid $22,000 for their Onalaska house and Mr. Guynes had stated that, on the evening of the fire, he had been at their home in Cleveland alone.³  At trial, the Guyneses correctly stated that they had paid $10,000 for the house (as the former owner of the house had testified) and Mr. Guynes said that he had been at a campaign victory party on the night of the fire.⁴ 

At the close of plaintiff's case, counsel for the Guyneses moved for an instructed verdict on both the arson and misrepresentation issues. The Trial Judge denied the motion as to the arson claim but instructed a verdict against Aetna on its defense of material misrepresentation, on the grounds that the misrepresentations were not of facts material to Aetna's liability under the policy nor had they induced Aetna to originally issue the policy.⁵ 

Looking to Texas Law--which is controlling in this diversity suit--it is clear we would enforce Aetna's misrepresentation clause absent a contrary State policy or statute. As this Court said in Chaachou v. American Central Insurance Co., 241 F.2d 889, 892 (5th Cir. 1957) (footnote omitted), in upholding a similar insurance provision in Florida,

Clearly, in the absence of a statute, the law, which is founded on truth and justice, will not regard it as unsound that a person has lost the benefit of the contract by wilful, immoral, dishonest acts which the contract itself condemns.

The Guyneses point to Tex.Ins.Code Ann. art. 21.16 (Vernon 1981)⁶  as stating the general rule in Texas. Article 21.16, though, is directed to misrepresentations made prior to the issuance of a policy, "in the application for ... or in the contract of insurance." See, e.g., Robinson v. Reliable Life Insurance Co., 554 S.W.2d 231, 234 (Tex.Civ.App.--Dallas), aff'd, 569 S.W.2d 28 (Tex.1977). Aetna alleges only that the Guyneses made misrepresentations which "after a loss" void the policy.

We may find such a contradictory statute or policy in Tex.Ins.Code Ann. art. 21.19 (Vernon 1981),⁷  the consumer-oriented, "anti-technicality" statute directed to forfeiture clauses such as Aetna's here. Aetna argues that "in proofs of loss or of death," see note 7, supra, precludes misrepresentations made in anything other than such proofs. Thus, they argue, policy-holders giving false statements during an insurance company's investigation of the loss fall outside the protections of Article 21.19, and to avoid liability the company must only satisfy the general requirements that the false statements were "willfully made with respect to a material matter and with the intention of thereby deceiving the insurer." (citing 44 Am.Jur.2d Insurance § 1501 (1969)). In light of the available precedent on this question, we must disagree.

United States Fire Insurance Co. v. Skatell, 596 S.W.2d 166 (Tex.Civ.App.--Texarkana 1980, writ ref'd n.r.e.), an appeal from an action to collect insurance benefits for certain allegedly stolen pieces of jewelry, is the most recent case that extends Article 21.19 beyond its literal terms. There, the plaintiff had denied having a previous criminal record at an oral examination under oath conducted by the insurance companies during its investigation of the loss. Later, at another oral examination, he admitted a record of several offenses of fraud, hot checks, and theft by false pretenses. The insurance companies denied his claims, contending that the misrepresentation clauses in their policies⁸  relieved them of liability. At trial, the jury found specifically that the jewelry had been stolen and that the plaintiff had concealed a material fact. Based on Article 21.19, the Trial Court disregarded the jury's findings of concealment and rendered judgment in full for the plaintiff. The Court of Civil Appeals affirmed.

Trying to escape the consequences of the statute, the insurance companies argued that a post-loss examination under oath did not come within Article 21.19. Chief Justice Cornelius for the Court held that such an examination, "although not a formal proof of loss, nevertheless is an elaboration upon and partakes of the nature of a proof of loss, and therefore comes within the statute even though not specifically mentioned." Id. at 169. Relying on this Court's decision in Vernon v. Aetna Insurance Co., 301 F.2d 86 (5th Cir.), cert. denied, 371 U.S. 819, 83 S. Ct. 33, 9 L. Ed. 2d 59 (1962), the Court reasoned that,

if false statements in the more formal proof of loss will not void the policy unless they are fraudulent, material and harmful to the insurer, certainly the intent of the statute is that false statements of lesser consequence should not be allowed to void a policy unless they, too, meet such requirements.

Id. The District Court's disregard of the jury's finding of concealment was affirmed because there was "no allegation or proof ... that the false statements were fraudulently made, were material to the issue of liability, or caused the insurers to waive or lose any valid defense to the policies." Id.

The Court also relied on Fireman's Fund Insurance Co. v. Reynolds, 85 S.W.2d 826 (Tex.Civ.App.--Waco 1935, writ ref'd), which held that false statements by an insured, made during a post-loss examination required by the insurance company in connection with proofs of loss, fell within the scope of the predecessor to Article 21.19. There, through Chief Justice Gallagher, the Court stated that,"The false statements relied on to work a forfeiture of the rights of the insured under a policy must have been willfully made and must not have resulted from inadvertance or mistake.... Our courts have uniformly required an insurer seeking to defeat liability on the ground of fraud and false swearing to fully meet the requirements of [the precedessor to Article 21.19].

Id. at 829.⁹ 

Vernon, on which the Texas court in Skatell relied, was an appeal from an action on a personal property insurance policy for the loss of jewelry. After the suit was filed, the daughter of the assured-plaintiff gave a sworn statement to the insurer (Aetna) that the alleged burglary was a sham, staged by the daughter, her mother, and the plaintiff. On the eve of trial, she renounced the confession in another sworn statement. The District Court granted summary judgment for Aetna, finding that the daughter's two conflicting affidavits established "misrepresentation" in the words of the policy¹⁰  as a matter of law.

In reversing the Trial Court's summary judgment, Judge Hutcheson for this Court but over a powerful dissent of then Chief Judge Tuttle looked to Articles 21.16 and 21.19 as they "bespeak the public policy of Texas in insurance matters." Id. at 89. Such statutes are "construed liberally to accomplish the legislative purpose, with the evil to be remedied kept clearly in view." Id.¹¹ 

The policy plainly revealed by these provisions is one flatly opposed to the use of forfeiture clauses to avoid the obligations of insurance contracts solely upon a showing that the insured has made, at any time, a false statement with respect to the insurance or the subject thereof. Under the statutory scheme, only those falsehoods which are ... material, fraudulently made, and which mislead the insurer and cause it to lose some valid defense, if made after the loss occurs, may be made the basis for voiding a policy pursuant to a forfeiture clause.

Id.

This Court opined that the Texas Legislature had written Articles 21.16 and 21.19 to cover, in precise terms, certain false statements--in applications for insurance or proofs of loss--because those were the most usual, sometimes only, and thus most important communications between assured and insurer.

These are the only kinds of statements, in the vast majority of cases, which the insured will ever make to the insurer, and are by far the most important which can be made, for the former serves to provide the information upon which the insurer determines to accept or refuse the risk, and the latter notifies the insurer of the occurrence of the risk insured against and the circumstances surrounding it.

Id. at 89. The Court did, however, infer a legislative intent to include other communications--such as those made during the investigation of a loss--within the protections afforded consumers in Articles 21.16 and 21.19.

The Legislature having specifically prohibited the forfeiture of policies because of falsity (unless the insurer can demonstrate existence of the statutory prerequisites to voiding the policy) in even those communications with the insurer upon which the latter might ordinarily be expected to rely most, it follows that false statements of lesser consequence, such as the affidavits in this case, though not specified in the statute are nonetheless included within the same prohibition.

Id. at 89-90.

Finally, after concluding that the issue was controverted so that summary judgment was inappropriate and in remanding for a trial on the issue, Judge Hutcheson's opinion concluded that "the mere fact of making inconsistent statements does not establish fraud or attempted fraud under the policy as a matter of law." Id. at 90.

Consequently, we hold that the statements made by the assureds come within "proofs of loss" under Article 21.19. Aetna's misrepresentation clause voids the fire policy only if Aetna proves that the Guyneses' false statements (1) were fraudulently made, (2) misrepresented a fact material to Aetna's liability under the policy, and (3) misled Aetna and caused it to waive or lose some valid defense to the policy. In short, Aetna must show that they were purposely and significantly hurt by the Guyneses' false statements.

In reviewing the District Court's action here, we emphasize again that a motion for directed verdict should be granted only " [i]f the facts and inferences point so strongly and overwhelmingly in favor of one party that the court believes that reasonable men could not arrive at a contrary verdict." Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir. 1969) (en banc); Cora Pub, Inc. v. Continental Casualty Co., 619 F.2d 482, 484 (5th Cir. 1980). In making our review, we consider all the evidence "in the light and with all reasonable inferences most favorable to" Aetna, which opposes the motion. Boeing, 411 F.2d at 374; Cora Pub, 619 F.2d at 484.

We find, and Aetna points out, very few evidentiary facts in the record which categorically prove the Guyneses' fraudulent intent.¹²  But fraud or fraudulent intent is seldom proved by categorical facts. Rather, such a finding ordinarily arises as an inference. However, we need not now decide whether the evidence here is "of such quality and weight that reasonable and fair-minded men in the exercise of impartial judgment" might find such an intent, Boeing, 411 F.2d at 374, since Aetna fails on the third element.

Aetna also argues that the original cost of the house and the alibi of Mr. Guynes were material to its liability under the policy because the former implied a possible financial motive to, and the latter an opportunity for, arson. Clearly, there was sufficient evidence to go to the jury on the element of materiality to the insurers' liability. But, as with the element of fraudulent intent, we need not now reach this issue.

It is evident that Aetna was never misled by the Guyneses' declarations and thereby caused to waive or lose some valid defense to the policy. Aetna has not yet paid on the policy¹³  nor has it waived or lost any valid defense under it. Indeed, it urged, though unsuccessfully, the defense of arson. It gave no proof at trial nor offered any suggestion on appeal that it was so misled.¹⁴  For this reason, we affirm the Trial Court's action below.New Trial Denied

Aetna also contends that the errors the District Court made during trial, individually or in sum, required that Court to grant Aetna's motion for a new trial.

The first error was the exclusion of Aetna's evidence of Mrs. Guynes' role in a separate insurance fraud. Aetna contends that, under F.R.Evid. 404(b),¹⁵  it could have shown Mrs. Guynes' intent to commit arson through her intimate involvement in an alleged conspiracy with Barbara Morgan, apparently a relative by marriage, to commit insurance fraud at the very same time that her house burned down.¹⁶ 

Rule 404(b) is most frequently employed in criminal cases. Under it evidence of other crimes, wrongs, or acts is admissible to prove motive, opportunity, and intent. See generally United States v. Beechum, 582 F.2d 898, 910-12 (5th Cir. 1978) (en banc), cert. denied, 440 U.S. 920, 99 S. Ct. 1244, 59 L. Ed. 2d 472 (1979). Generally, though, whether proof of such a collateral matter is relevant to the immediate issues and whether "its probative value is substantially outweighed by the danger of unfair prejudice," F.R.Evid. 403, is left within the sound discretion of the trial judge. United States v. Cochran, 499 F.2d 380, 387-88 (5th Cir. 1974), cert. denied, 419 U.S. 1124, 95 S. Ct. 810, 42 L. Ed. 2d 825.

Even assuming, for argument, that Aetna could prove all that it alleges, at least one link is missing to connect Mrs. Guynes' acts with an intent to commit arson. Aetna makes no claim that it could prove Mrs. Guynes intended to take part in Morgan's scheme, or even knew about it, or that the microwave was involved in it. Cf. Payne v. Hartford Fire Insurance Co., 409 S.W.2d 591, 594 (Tex.Civ.App.--Beaumont 1966, writ ref'd n.r.e.). The Trial Judge in his discretion could refuse to admit evidence of the alleged insurance fraud, where an intent to commit that fraud can not be shown, to prove Mrs. Guynes' intent to commit arson.¹⁷ 

Aetna next argues that the District Court erred by paring, in the middle of trial, the number of Aetna's fire investigators who could testify and then allowing the Guyneses to impeach the remaining expert with the written report of the other, excluded expert.

It is well within the discretion of a district court to limit the number of expert witnesses who testify at trial. See, e.g., Ruud v. United States, 256 F.2d 460 (9th Cir.), cert. denied 358 U.S. 817, 79 S. Ct. 28, 3 L. Ed. 2d 59 (1958); Chapman v. United States, 169 F.2d 641 (10th Cir.), cert. denied 335 U.S. 860, 69 S. Ct. 134, 93 L. Ed. 406 (1948). A trial judge can exercise this discretion before trial, see F.R.Civ.P. Rule 16(4), or during trial, after one party has put all its experts on the stand, see Ruud, 256 F.2d at 462. The Trial Judge was simply limiting cumulative testimony,¹⁸  and ruling on this subject during trial but before Aetna had put its experts on the stand was not error.

Neither was it error to allow the Guyneses to use the written report of the fire expert barred from testifying to impeach the other expert's testimony. Since the Court's limitation on Aetna to just one expert was merely conditional,¹⁹  Aetna's failure to request the use of the second expert in rebuttal amounts to a waiver of their objection. Aetna could reasonably have expected the report to be used at trial, and should thus have kept its second witness accessible,²⁰  since the report was clearly helpful to the Guyneses and was furnished to them by Aetna during pre-trial discovery.

Aetna next claims, this time correctly, that the District Court erred in not allowing it to read portions of the Guyneses' depositions directly into evidence. Rule 32(a) (2), F.R.Civ.P.,²¹  has been consistently interpreted to allow a party to introduce the deposition of an adversary regardless of the adversary's availability at trial. See, e.g., Coughlin v. Capitol Cement Co., 571 F.2d 290, 308 (5th Cir. 1969).

But such error is harmless where the substance of the deposition testimony in question is made available to the jury during trial. See, e.g., Coughlin, 571 F.2d at 308; Pingatore v. Montgomery Ward & Co., 419 F.2d 1138, 1142 (6th Cir. 1969), cert. denied, 398 U.S. 928, 90 S. Ct. 1818, 26 L. Ed. 2d 90 (1970). Clearly, counsel for Aetna should have been able to present the Guyneses' prior representations through reading their deposition testimony in court. But by calling the Guyneses as adverse witnesses at trial and using their previous deposition testimony to impeach their testimony on the stand, Aetna brought the prior inconsistent statements of the Guyneses fully before the jury. The jury believed the Guyneses. We find no reversible error.

Finally, Aetna argues that counsel for the Guyneses made improper and prejudicial jury arguments. Upon examination of the record as a whole and viewing the alleged improper statements in the context of otherwise unobjectionable arguments, and in light of the lack of objection by Aetna at trial, we find no reversible error. See Standard Fire Insurance Co. v. Reese, 584 S.W.2d 835, 839-40 (Tex.1979).

Judgment for $25,000

Lastly, Aetna complains that the District Court erred in entering judgment for the Guyneses for the full $25,000 value of the policy, in the absence of a jury finding that the wood house was a total loss. They contend that there was in fact no loss from the fire, since testimony at trial showed that the value of the Guyneses' land was unchanged after the house burned down.

This argument can be disposed of simply. In its Proposed Joint Pretrial Order, Aetna expressly stipulated in its Admissions of Fact, "That, after the fire, the dwelling structure [in Onalaska] had a value of zero dollars." The jury never made a finding on total loss because the point was never in issue.

AFFIRMED.