Transit Casualty Company, a Body Corporate, et al., Appellants, v. Transamerica Insurance Company, Successor to American Surety Company of New York, et al., Appellees, 387 F.2d 1011 (8th Cir. 1967)

This is an appeal in a diversity action brought in the Eastern District of Missouri. A leased building, located in Detroit, Michigan, was damaged in a windstorm. Thereafter, it was extensively damaged in a fire which occurred while the wind damage was being repaired. Transit Casualty Company¹  paid its insured, the lessee, $255,000 for the fire loss and brought action against the Transamerica Insurance Company²  alleging that Transamerica had elected to repair the windstorm damage, that the negligence of the subcontractor performing the work caused the fire, and that Transamerica was liable for the damage caused by the subcontractor's negligence. The case was submitted to the jury and a verdict was returned for the defendant. Transit's motion for a new trial was denied. It appeals. We remand for a new trial.

I. It was an error to permit the subject of reinsurance to be interjected into the law suit by the defense.

During the cross-examination of an officer of Transit, the defense counsel interjected the fact that Transit had reinsurance treaties with other companies:

"Q. * * * [W]as there any arrangement with any other company made by Transit Casualty to reduce its loss, reinsurance or excess insurance?

"Mr. O'Doherty: I object.

"The Court: Be overruled.

* * * * * *

"Mr. O'Doherty: * * * [T]he court has indicated here that it's going to allow defense counsel to inquire into reinsurance treaties —

* * * * * *

"Mr. O'Doherty: * * * I feel it is prejudicial to this plaintiff's case to allow Mr. Cleary to interrogate this witness regarding reinsurance treaties, which every insurance company in the United States carries on * * all of its business written, * * * but if it's the question of whether we have the right to bring the action, that's not in dispute in this case. It was never raised by any affirmative pleading, * * *

"Mr. Cleary: I would like the record to show that Transit Casualty is one of two plaintiffs here and it is suing in an effort to recover from this jury [$308,000]. Now, I'm interested in ascertaining, and I have a right to know, what loss it actually sustained. Companies, of necessity, or necessarily, or however, it was described, carry excess or reinsurance on a loss, some of them do, some of them don't. Certainly, the real party in interest here is not Transit Casualty Company if it only sustained, say a $50,000 loss, and I'm entitled to inquire into that in view of the pleadings here.

"The Court: I don't think it's a question on an affirmative defense; it's a question of defense period. You people have the burden of doing the other. I'll overrule the objection." (Emphasis added.)

As this colloquy indicates, the defense justified interjecting the issue of reinsurance on the grounds that Transit was not the real party in interest. It has, for all practical purposes, abandoned this argument on appeal conceding, in effect, that the evidence was irrelevant. It now argues that the evidence, though irrelevant, was not prejudicial.

We do not agree. The interjection of the issue of reinsurance was prejudicial error under either Rule 61, Fed. R. Civ. P., or Missouri case law.³  E. g., Whitman v. Carver, 337 Mo. 1247, 88 S.W.2d 885 (1935); Olian v. Olian, 332 Mo. 689, 59 S.W.2d 673 (1933).

In Olian, the Court stated:

"* * * [T]he fact that the liability of a defendant in a tort action is covered by insurance will, in the minds of the average jury, not only justify a verdict for plaintiff but a very generous assessment of damages as well. * * * With this in mind, plaintiffs' counsel in actions such as this, and we speak generally, cannot resist the temptation of bringing into the view of the jury an insurance company, a corporate entity that is able to discharge, and whose business it is to discharge, any liability that they may assess for defendant's wrongdoing. * * *" Id. at 677.

The reasoning of Olian is applicable here. The fact that Transit was reinsured and stood to bear only five percent of this loss is a fact that obviously would impress the jury, and might well lead it to return a defendant's verdict, as the alternative to such a verdict, in its mind, could well be a windfall to Transit.⁴ 

If counsel, interjecting the issue of insurance, demonstrates that it was done in good faith and was slight, a new trial might not be required. Pitcher v. Schoch, 345 Mo. 1184, 139 S.W.2d 463 (1940); Carter v. Rock Island Bus Lines, 345 Mo. 1170, 139 S.W.2d 458 (1940). Here, however, the interjection was neither in demonstrable good faith nor slight.

The reasons now advanced by the defendant as to why evidence of reinsurance was not prejudicial are: first, the length of jury deliberations do not indicate that it was impassioned against the plaintiff; second, the instructions admonished the jurors to decide the issues fairly and without regard to who the parties were; finally, the error, if any, went only to the issue of damage and as the jury decided against Transit on the issue of liability, it was not prejudicial.

The fact that the jury deliberated at length in this long and difficult case does not, in our view, substantiate the defendant's position that the jury was not prejudiced by the irrelevant evidence. In our view, it is more likely that the irrelevant evidence confused the jury and thus prolonged its deliberations. But cf., Sheffield Steel Corp. v. Vance, 236 F.2d 928 (8th Cir. 1956).

Even if the jury instructions had clearly admonished the jury to disregard the issue of reinsurance,⁵  the error is, nevertheless, prejudicial. Buehler v. Festus Mercantile Co., 343 Mo. 139, 119 S.W.2d 961 (1938) (en banc); Rytersky v. O'Brine, 335 Mo. 22, 70 S.W.2d 538 (1934); Olian v. Olian, supra; Lindsey v. Rogers, 220 S.W.2d 937 (Mo.App. 1949); Page v. Unttereiner, 106 S.W.2d 528 (Mo.App.1937). But cf., Robinson v. McVay, 44 S.W.2d 238 (Mo.App.1931).

Finally, the argument that the evidence as to reinsurance went only to the issue of damages is neither realistic⁶  nor supported by the case law. Whitman v. Carver, supra; Olian v. Olian, supra; Hanna v. Butts, 330 Mo. 876, 51 S.W.2d 9 (1930); Henry v. Tinsley, 240 Mo.App. 163, 218 S.W.2d 771 (1949). Cf., Walton v. United States Steel Co., 362 S.W.2d 617, 627 (Mo.Sup.1962) (dictum); Taylor v. Kansas City Southern Ry. Co., 293 S.W.2d 894 (Mo.Sup. 1956); Davis v. Gould, 234 Mo.App. 42, 131 S.W.2d 360 (1939).

II. It was an error to refuse to submit Count II to the jury.

Transit alleges that the defendant elected to repair the windstorm damage, and that the company with whom it contracted sublet to a second contractor, who in turn sublet to Bittner Boiler and Engineering Company, which performed the work.⁷  Bittner used electric arc welding equipment operating at 9000° in performing the work. The heat from this equipment ignited a fire in the building and extensive damage occurred.

The defendant denies that it elected to repair the windstorm damages. It further contends that even if it did so, the lessee had no right of recovery against it, and that Transit cannot recover as its rights are as a subrogee of the lessee.

Transit contends it can recover on either of two theories: The first of these was set out in Count I: that by electing to repair, the defendant assumed the obligations of a building contractor; that the repairs present an inherently dangerous risk in the absence of safety precautions;⁸  that the defendant is liable in tort for failing to see that Bittner took adequate safety precautions in performing the work. The second theory was set out in Count II: that the lessor was required to maintain the premises in a tenable condition; that by electing to repair, the defendant was satisfying the lessor's obligation; that the lessee was a third party beneficiary of the defendant's obligations resulting from the election to repair; that a part of the obligation to repair was a non-dischargeable duty to perform the work with due care; that the performance of the work in a negligent manner resulted in damage.

Under Count I, the defendant's liability, if any, for the acts of the independent contractor arose from its duty to see that adequate safety precautions were taken in the light of a peculiar danger inherent in the nature of the work; whereas under Count II, the defendant's liability, if any, for the act of the independent contractor stemmed from a non-dischargeable duty by reason of a contract which required that the work be done with due care.

Under Count I, Transit was required to establish that the repair presented an inherently dangerous risk in the absence of safety precautions. While under Count II, Transit need only prove simple negligence on the part of the independent contractor; it required Transit to establish that the lessee was a third party-creditor beneficiary of the defendant's obligation to repair.

The court refused to submit Count II to the jury. While the record does not indicate the court's reasons, the defendant argues that the refusal was proper because: (1) Count II failed to state a good cause of action; and (2) the doctrine of election of remedies precluded submission of both counts.

We do not agree with either contention.

(1) In determining whether Count II stated a good cause of action, the Erie doctrine requires that we look to state law. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). See also, Byrd v. Blue Ridge Rural Electric Cooperative, Inc., 356 U.S. 525, 78 S. Ct. 893, 2 L. Ed. 2d 953 (1958); Guaranty Trust Co. of N. Y. v. York, 326 U.S. 99, 65 S. Ct. 1464, 89 L. Ed. 2079 (1945). The Klaxon doctrine requires that we look to the law of the state in which the District Court, including their conflict of laws rules.⁹  E. g., Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S. Ct. 1020, 85 L. Ed. 1477 (1941).

Under Missouri rules of conflict of laws, Michigan law would control the question of whether a good cause of action was stated. See, Illinois Fuel Co. v. Mobile & O. R. Co., 319 Mo. 899, 8 S.W.2d 834 (1928). Liebing v. Mutual Life Ins. Co. of New York, 276 Mo. 118, 207 S.W. 230 (1918).

The defendant does not question that under Michigan law, a builder has a non-dischargeable duty to use due care in the performance of a contract and is liable for the negligence of an independent contractor who performs the work. Wight v. H. G. Christman Co., 244 Mich. 208, 221 N.W. 314, 317 (1928); Lauer v. Palms, 129 Mich. 671, 89 N.W. 694, 58 L.R.A. 67 (1902). Nor does it question that when an insurer elects to repair a damaged building, the insurance contract is converted into a building contract. Michigan Fire Repair Con. Ass'n v. Pacific Nat. F. Ins. Co., 362 Mich. 552, 107 N.W.2d 811 (1961).

It does argue, however, that an exception to the non-dischargeable duty rule applies when the lessor has knowledge of, acquiesces in, or consents to the delegation (a fact conceded by Transit) of actual performance to an independent contractor. It cites Continental Ins. Co. v. I. Bahcall, Inc., 39 F. Supp. 315 (E.D. Wis. 1941) (Held: Promissor liable for independent contractor's destruction of leased property.), to support this proposition. We do not agree that Bahcall even by implication supports Transamerica's contention. It dealt primarily with the question of the circumstances under which a promissor is permitted to delegate its performance rather than that of the promissor's liability if performance is delegated.¹⁰ 

Here, there is no question of the defendant's right to delegate its duty to repair to an independent contractor, but rather a question of whether it could, by doing so, relieve itself of its obligation to have the work performed in a non-negligent manner. Restatement, Contracts, § 160 (1932); Simpson, Contracts, 353 (1954).

Even if it be conceded that Bahcall provides an exception to the general rule, there is no indication that Michigan would apply this Wisconsin rule. Wight v. H. G. Christman Co., supra; Lauer v. Palms, supra. The exception is neither recognized by authorities. Corbin, Contracts, § 868 (1951); Restatement, Contracts, § 160 (comment on Subsection [4]) (1932); Simpson, Contracts, 353 (1954), nor supported by logic. Thus we decline to engraft it on Michigan law.

The defendant further argues that the lessee was an incidental, rather than a third party-creditor beneficiary. Thus, neither it nor Transit, as its subrogor, had a right to maintain an action against Transamerica.

Transit argues that the lessee had that status, and cites Greenlees v. Owen Ames Kimball Company, 340 Mich. 670, 66 N.W.2d 227, 46 A.L.R.2d 1205 (1954), to support its position. There the lessee, a furrier, leased a basement shop area in a bank. A back room, which could only be gotten at through the lessee's shop, contained a safe connected by a chute to a night depository in the lobby. The lessor let a contract to a builder to remodel the lobby. In the course of remodeling, the builder went through the lessee's premises to get to the back room on at least two occasions. In removing the safe and in installing new equipment, the merchandise of the lessee was damaged. The lessee sued the builder on the theory that it was a third party beneficiary of the building contract. The Michigan Supreme Court, in reversing the lower court, held that the lessee was a third party-creditor beneficiary, rather than an incidental beneficiary.

The defendant argues that Greenlees is distinguishable from this case because there the building contract specifically stated that the work was to be done with a minimum of disturbance to tenant's daytime activities in the building, and that here the building contract contained no such clause. This position is without merit. In Greenlees, the object of the building contract was to remodel a lobby which was not a part of the tenant's leasehold. Here, the whole object of the building contract was to repair the property occupied by the lessee. When the insurer exercised his option to repair, it was evident that the lessee was the party to benefit immediately.

Furthermore, it should be noted that even though the insurance policy was in the name of the lessor, the lessee paid the premiums, and the defendant, the insurer, waived its subrogation rights against the lessee. Thus, even if the lessee negligently destroyed the premises, the lessor had to rebuild them under the terms of the lease, and Transamerica had no subrogation rights against the tenant. In such circumstances, the lessee is clearly more than an incidental beneficiary. See Keeton, Basic Insurance Law, 191 n. 1 (1960).¹¹ 

(2) The defendant argues that the trial court properly refused to submit Count II to the jury. It contends that an election between it and Count I was required, citing a Michigan case, Krause v. Hartford Accident & Indemnity Co., 331 Mich. 19, 49 N.W.2d 41 (1951), to support this view. The reliance is misplaced.¹²  Michigan law is not determinative of the issue.

This Court, in Breeding v. Massey, 378 F.2d 171 (8th Cir. 1967), looked to the Federal Rules of Civil Procedure to resolve the question. We did not discuss in Breeding whether Erie requires state election of remedy rules to be applied, but simply stated:

"* * * Rule 8(e), Fed. R. Civ. P., expressly provides:

`A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or defense or in separate counts or defenses. * * * A party may also state as many separate claims or defenses as he has regardless of consistency and whether based on legal, equitable, or maritime grounds.' Rule 8 (a) provides, `Relief in the alternative or of several different types may be demanded.' See also, Rule 18(a).

"The right of a plaintiff to try his case on alternate theories has uniformly been unheld in the federal courts and plaintiff cannot be required to elect upon which theory to proceed. Campbell v. Barnett, 10 Cir., 351 F.2d 342, 344; Pulliam v. Gulf Lumber Co., 5 Cir., 312 F.2d 505, 507; Herlihy Mid-Continent Co. v. Bay City, 6 Cir., 293 F.2d 383, 385; see 2A Moore's Federal Practice ¶ 8.31 [2]."

Id., at 177-178.

At least one Circuit has held that we must look to the law of the state in which the trial is conducted to determine the law to be applied. Berger v. State Farm Mutual Automobile Insurance Co., 291 F.2d 666 (10th Cir. 1961). The Berger case has been criticized by commentators. Wright, Federal Courts, p. 250 n. 20 (1963); 15 Okla.L.Rev. 186 (1962). However, were we to follow Berger and thus apply Missouri law, it is clear that the Missouri court would apply its own election of remedies doctrine¹³  which holds that an election is necessary only when the remedies are based on inconsistent fact situations. E. g., Davis v. Hauschild, 243 S.W.2d 956 (Mo.Sup.1951) (See cases cited therein).

The Missouri test of whether such inconsistency exists was detailed in Davis, supra:

"For such inconsistency to exist in fact the one must allege what the other denies, or the theory of the one must necessarily repudiate or be repugnant to the other. Are the facts here necessary to support one, consistent with the facts here necessary to support the other? Under any of the tests laid down by the adjudicated cases, or by the text-writers we do not find inconsistency between the two. Each is in affirmation of the validity of the note and deed of trust. Each in all respects affirms the validity and binding effect of the contract of trade of the properties made by the parties. Each asserts that defendant breached a phase of that contract. * * *"

Id at 960.

Here, the remedies are not based on inconsistent facts. Both theories require: (1) that Transit paid the lessee for its fire loss; (2) that Transamerica elected to repair the windstorm damage; (3) that Bittner was negligent. Count I required the additional finding that the work was inherently dangerous in the absence of safety precautions while Count II required the additional finding that the lessee was a third party-creditor beneficiary of a building contract that arose when Transamerica elected to repair. There is nothing factually inconsistent with these last two findings.¹⁴ 

It is thus clear that whether we apply the Federal Rules of Civil Procedure or Missouri law, it was an error to refuse to submit both counts to the jury.

Serious questions have also been raised as to: whether it was error to permit the defendant to argue that Transit ought to be denied relief in this action as it had the right to sue Bittner, and whether it was error to require that the entire direct examination of a deposed witness be read to the jury. Since it is unlikely that these issues will be raised on a retrial, and since our holdings on Points I and II are dispositive of this appeal, we do not feel compelled to reach the two remaining instances of alleged error.

Reversed and remanded to the District Court for action consistent with this opinion.¹⁵