USCA1 Opinion
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT FOR THE FIRST CIRCUIT
____________________
No. 94-1576
BROWN DALTAS & ASSOCIATES, INC., ET AL.,
Plaintiffs, Appellees,
v.
GENERAL ACCIDENT INSURANCE COMPANY OF AMERICA, ET AL.,
Defendant, Appellee,
____________________
NORTHBROOK EXCESS & SURPLUS INSURANCE CO.,
Defendant, Appellant.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Morton A. Brody,* U.S. District Judge] ___________________
____________________
Before
Selya, Circuit Judge, _____________
Bownes, Senior Circuit Judge, ____________________
and Stahl, Circuit Judge. _____________
____________________
Erik Lund, with whom Sibley P. Reppert, Jon C. Cowen, and __________ ___________________ ______________
Posternak, Blankstein & Lund were on brief for appellant. ____________________________
William Shields, with whom Day, Berry & Howard was on brief for _______________ ____________________
plaintiffs-appellees.
____________________
February 21, 1995
____________________
_____________________
* Of the District of Maine, sitting by designation.
BOWNES, Senior Circuit Judge. This appeal arises BOWNES, Senior Circuit Judge. _____________________
out of an insurance coverage dispute between defendant-
appellant Northbrook Excess & Surplus Insurance Company
("Northbrook"), and plaintiffs-appellees Brown Daltas &
Associates, Inc. ("BDA"), Brown Daltas & Associates Saudi
Arabia Ltd. ("BDASA"), Benjamin I. Brown, and Spero Daltas
(collectively, "the insureds").1 At issue is whether
Northbrook must indemnify the insureds under the discovery
clause of a $1,000,000 claims-made architects and engineers
professional liability policy ("the Policy") covering the
period May 5, 1981 through June 4, 1982. The Saudi Arabian
Monetary Authority ("SAMA") made an underlying claim of
architectural design negligence in April 1987; the insureds
and the SAMA settled it in February 1990. After a jury-
waived trial, the district court resolved the coverage
dispute in favor of the insureds, entering judgment for them
in the amount of $788,637.57.
Although Northbrook asserts that this ruling was
infected by several deficient factual determinations, its
flagship appellate argument is that the court clearly erred
in finding that the insureds first became aware during the _____
policy period of the circumstances subsequently giving rise
____________________
1. Individual plaintiffs Brown and Daltas are architects and
the founders of BDA. They also hold significant stakes in
BDASA. Both were named insureds on the insurance policy at
the heart of this litigation.
-2- 2
to the SAMA's claim. Such awareness on the part of the
insureds is one of the conditions precedent to coverage under
the Policy's discovery clause -- the only means by which
coverage under the Policy was possible. After carefully
reviewing the record and considering the parties' arguments
on this question, we agree with Northbrook. Accordingly, we
reverse.
I. I. __
The background of this litigation has been fully
set forth in a published opinion by the district court. See ___
Brown Daltas & Assocs. Inc. v. General Acc. Ins. Co. of Am., ___________________________ ____________________________
844 F. Supp. 58 (D. Mass. 1994). The facts will be
reiterated here only to the extent necessary to explain and
resolve the dispositive issue -- i.e., whether the insureds
first became aware during the policy period of the
circumstances subsequently giving rise to the SAMA's claim of
design negligence.
A. General Background A. General Background ______________________
In 1974, BDA, which was then operating as a
partnership, entered into a contract with the SAMA to design
branch bank buildings in the Saudi cities of Riyadh, Jedda,
Damman, Mecca, and Medinah. BDA completed the designs during
the period 1974-1978. In 1978, BDA (which was by then
incorporated) and Xenel, a Saudi company, formed BDASA as a
joint venture. That same year, BDASA entered into a contract
-3- 3
with the SAMA to administer and supervise the construction of
the banks. In 1983, BDASA and the SAMA entered into a second
supervision contract.
From 1979 through 1986, BDASA was insured for
liability arising out of its supervision of the banks' ___________
construction under consulting engineer's indemnity policies
issued by underwriters at Lloyd's of London. From 1978
through 1985, BDA and, at least in some cases, BDASA were
insured for liability arising out of their design of the ______
banks under professional liability policies issued
consecutively by Lloyd's underwriters, Northbrook, the
Evanston Insurance Company ("Evanston"), and the General
Accident Insurance Company of America ("General Accident").
As we have stated, at issue here is a $1,000,000 Northbrook
professional liability claims-made contract issued for the
period May 5, 1981 through June 4, 1982. The underwriter of
the Policy was Shand, Morahan & Company ("Shand").
Because of its "claims-made" nature, the Policy
generally provided coverage only for claims first made
against the insureds during the coverage period. An
exception to this general rule was, however, set forth in the
Policy's discovery clause. In relevant part, this clause
provided:
If during the policy period the Insured
shall first become aware of any _____ ______ _____ __ ___
circumstances which may subsequently give _____________ _____ ___ ____________ ____
rise to a claim against the Insured by ____ __ _ _____ _______ ___ _______
-4- 4
reasons [sic] of any act, error or
omission for which coverage would be
afforded hereunder and if the Insured
shall during the policy period herein
give written notice to [Northbrook] of
such circumstances, any claim which may
subsequently be made against the Insured
arising out of such act, error or
omission shall be deemed for the purpose
of this Policy to have been made during
the policy period stated in the
declarations.
(Emphasis supplied.)
Because the underlying claim here was not made by
the SAMA until April 1987 -- nearly five years after the
expiration of the Policy -- coverage for the insureds
depended upon operation of the discovery clause. And the
discovery clause establishes as a condition precedent to its
operation that the insureds first become aware during the _____
policy period of the circumstances subsequently giving rise
to any claim for which they might seek coverage.
Construction of the Riyadh and Damman branch banks
began in late 1978 or early 1979. Construction at the other
three sites began later. At some point between 1978 and 1981
(the evidence relating to exactly when will be set forth
below), Laing Wimpey Alireza Ltd. ("LWA"), the contractor at
the Riyadh, Damman, and Jedda sites, told BDA and BDASA that
the heating, ventilation, and air conditioning ("HVAC")
system was defectively designed. On November 25, 1981,
following meetings with LWA in October 1981, BDA wrote to
Shand and advised it of the possibility of a claim "in
-5- 5
connection with the mechanical services in the building in
Riyadh now nearing completion." In the first part of 1982,
Shand wrote BDA and requested additional information. By
letter dated June 30, 1982, BDA responded that (1) the
potential claim was at the Riyadh branch; (2) the potential
claimant was LWA; (3) "the areas of conflict surround the
mechanical services, more particularly the heating,
ventilation and air conditioning (HVAC) system"; and (4)
"[i]t is important to understand that the Riyadh and Damma[n]
Branches are identical designs."
Meanwhile, on April 6, 1982, BDASA also gave
written notice to its Lloyd's underwriters of the possibility
of a claim involving the air conditioning system. The April
6, 1982 notice did not specify the Riyadh plant as the site
of the potential claim; nor did it explain how the claim
might be covered under BDASA's supervision policy. It did,
however, state that LWA was the potential claimant.
Moreover, it listed "October 1981" as "the date on which
[BDASA] first became aware of circumstances which may give
rise to a claim being made against [it]." This date
corresponds to the following assertions, which were included
in a statement attached to the circumstances/claim
notification form:
1. [BDASA] was informed by [LWA] in May
1981 that there were certain problems
in commissioning the airconditioning
[sic] plant.
-6- 6
2. BDASA convened a meeting in Riyadh in
June 1981 together with [LWA] and the
representative of York International
the equipment supplier, with the
design mechanical engineer and the
Rome project manager also present.
3. The next meeting was on 21 October
1981, when [LWA] said that he [sic]
was not responsible, but had only to
install the specified equipment. We
replied that it was their
responsibility to install a workable
system. At this point we became
aware that there was a possibility
of a claim being made.
Although the controversy involving the banks' HVAC
systems never completely subsided, no claim was made against
BDA or BDASA for the next several years. In the interim,
several attempts were made to commission the air conditioning
systems at several of the banks. For a variety of reasons,
none enjoyed sustained success. During this same period, BDA
and BDASA periodically submitted to the SAMA requests for the
payment of fees (monthly payments on design work) and claims
(extra costs that arose during design) owed for their work.
The SAMA was not very responsive to these requests.
Finally, in November 1986, BDA and BDASA completed
their design and supervision work, and requested financial
resolution meetings with the SAMA. Contemporaneously, BDA
issued a comprehensive report documenting SR 13,192,3372 in
unpaid fees and claims. On April 7, 1987, the SAMA responded
____________________
2. The applicable exchange rate between the Saudi Riyal and
the dollar is SR 3.75 per $1.00.
-7- 7
to this report with a letter stating its intention to make
claims of its own against BDA and BDASA in the amounts of SR
9,000,000 for negligence in the design of the electrical
systems; SR 4,139,249 for negligence in the design of the
HVAC systems; and over SR 5,000,000 for other errors
(including supervision errors). The letter also stated that
the SAMA was willing "to renounce all claims against BDA in
return for a zero settlement of your final account."
Although it took several years to consummate, the parties
eventually entered into a zero-sum settlement in February
1990. The settlement was reached without either party
initiating an adversarial proceeding.
B. Proceedings Below B. Proceedings Below _____________________
Subsequent to their zero-sum settlement with the
SAMA, the insureds sought indemnification from several of
their insurers. Because the insureds could not obtain the
relevant insurance at the time the SAMA's claim actually was
made, coverage depended upon operation of discovery clauses
in various of the insurance contracts. The insureds were
able to obtain a $600,000 recovery from Lloyd's for that
portion of the settlement attributable to supervision claims;
the design insurers, however, contested coverage. The
insureds therefore initiated the instant action.
In their complaint, the insureds alleged that
Northbrook's failure to provide indemnification (up to the
-8- 8
Policy's limit) for that portion of the settlement
attributable to negligence in the design of the HVAC systems
constituted a breach of contract and a violation of
Massachusetts' unfair trade practices statute. See Mass. ___
Gen. L. ch. 93A, 2 and 11 (1993). The same allegations
were made with regard to General Accident's failure to
provide indemnification for that portion of the settlement
attributable to negligence in the design of the banks'
electrical systems. After a four-day bench trial, the court
ruled in favor of the insurers on the Ch. 93A claims, and
also ruled that the insureds' breach of contract claim
against General Accident failed because of inadequate notice.
See Brown Daltas, 844 F. Supp. at 66-68. None of these ___ ____________
rulings is challenged on appeal.
The court also ruled that Northbrook had breached
the Policy in failing to indemnify the insureds under the
Policy for their settlement of the SAMA's claim of negligence
in the design of the HVAC systems. Id. at 67. In so doing, ___
the court found BDA's November 25, 1981 letter to Shand
sufficient to invoke coverage under the Policy's discovery
clause. See id. Of critical importance, the court rejected ___ ___
Northbrook's assertion that the insureds had notice prior to _____
the policy period of the circumstances subsequently giving
rise to the SAMA's HVAC claim. Id. at 62 n.3. The court's ___
finding on this issue reads:
-9- 9
Defendants maintain that LWA noticed [the
HVAC] problem to BDASA in 1979. They
cite a July 19, 1981 letter from LWA to
BDASA that states:
This company has no design
obligations. The error within
your specification was pointed
out in 1979 and at no time were
revised on/off coil conditions
placed with us. We would
confirm your designers [sic]
own words at the recent
meetings where he stated that a
"mistake was made."
This letter reference alone is
insufficient to prove that BDA or BDASA
had notice in 1979.
Id. ___
C. Evidence Relating to the Insureds' "Notice of C. Evidence Relating to the Insureds' "Notice of _________________________________________________
Circumstances" Circumstances" ______________
Although the portion of the July 19, 1981 letter
from LWA to BDASA quoted by the district court is certainly
relevant to the notice question, it is not the only part of
the letter that pertains to the issue. Moreover, there is
significant other evidence -- including the April 6, 1982
notice of circumstances from BDASA to Lloyd's, see supra at ___ _____
6-7 -- relating to notice in this record. Because this is
the basis upon which we resolve the dispute, we believe it
important to relate the evidence in some detail.
1. The July 19, 1981 Letter 1. The July 19, 1981 Letter ____________________________
In addition to the passage cited by the district
court, the lengthy July 19, 1981 letter from LWA (the
contractor) to BDASA contains several other passages which at
least suggest that the conflict over alleged negligence in
-10- 10
the design of the HVAC systems predated May 5, 1981 -- the
effective date of the Policy. The letter is a point-by-point
response to nine assertions made to LWA by BDASA in a July 6,
1981 letter that is not in evidence; understanding it
therefore is not particularly easy.
In paragraph one, LWA details a series of undated
"recent meetings" between LWA and BDASA. The paragraph then
states: "This recent meeting [sic], we were advised, was to
finally agree [sic] the solutions to your long outstanding
problems." Similarly, paragraph six asserts:
Please advise on what basis your [sixth
point in the July 6, 1981 letter] to be
correct. Condensing Unit No. 5 was
clearly specified by yourselves. The
machine on site was approved by
yourselves and we confirm that the
compressor is larger than standard for
this package.
The possibilities of the problems
actually experienced on site were raised
by us in late 1978. We have on file your
telexed reply dated 12 October 1978 which
refutes our concern and effectively
advises us to proceed without concern.
We categorically refute any allegation of
responsibility in this matter.
Finally, after responding to the ninth and final
point in the July 6, 1981 letter, LWA states:
We fail to see how this company having
brought to your attention these problems
as early as 1978 and continually
throughout the contract and having
demonstrated the problems and offered
workable solutions, can be of more help.
-11- 11
Your apparent wish to ignore, reject and
refute our assistance continually is the
major factor with regard to the total
situation and all consequent delays.
We must insist that the financial
consequences and liabilities are resolved
prior to the placement of any orders.
2. Testimonial Evidence 2. Testimonial Evidence ________________________
In addition to the July 19, 1981 letter, evidence
pertaining to plaintiffs' notice of circumstances came in
through the testimony of Benjamin I. Brown, a principal of
BDA and plaintiffs' most significant witness. Mr. Brown
touched on the notice issue three times during the course of
his extensive testimony.
Mr. Brown first gave testimony relating to this
issue on direct examination:
Q (By [Plaintiffs' Counsel]): Mr.
Brown, in the insurance policies we
looked at there was notification to
[Shand] of a potential claim or incident
under the name of [LWA], can you tell us
what that was all about[?]
A During the first year-and-a-half, two
years, the contractor for the Riyadh
branch named [LWA] brought it to the
attention of the client and ourselves
that their view of the HVAC system
indicated that it would not function
satisfactorily.
And they said that on account of
this, they could foresee that there would
be additional costs to make revisions and
corrections in the equipment before they
could guarantee that the equipment would
function properly.
In Saudi Arabia the contractors are
rather like in Europe are responsible
[sic] for producing a workable project,
-12- 12
consultants don't have quite as much
leeway there as they do here. So they
would hold the contractors [sic] feet to
the fire before they would ours.
Q. Now, Mr. Brown, are you sure that
they were '78 or '71 [sic]?
[DEFENDANTS' COUNSEL]: Objection.
THE WITNESS: I am not -- I am sure it
was -- it wasn't.
THE COURT: Just a moment, please.
THE WITNESS: I don't think I said --
THE COURT: Just a moment. Mr. Brown,
when you hear an objection if you just
sort of pause and give me a chance to
address it.
[DEFENDANTS' COUNSEL]: I think it's a
key factual issue here, and he is trying
to lead the witness in my opinion.
THE COURT: Well, what I am interested in
is what is indeed the fact. I will
overrule the objection.
THE WITNESS: I am not sure I said '78
when LWA discovered it, it was several
months, maybe a year-and-a-half or two
after construction started in '78 when we
received the first very serious criticism
of the HVAC system from a reputable
contractor who [sic] we had to
investigate very seriously.
The question of notice was extensively revisited
during Mr. Brown's cross-examination:
Q. (By [Defendants' Counsel]): I would
like to move to the HVAC claim.
The notification as to that claim I
believe you testified was in 1981, to
Northbrook, is that right?
A. As I recall, yes.
-13- 13
Q. Now, the problem that gave rise to
the notification was low suction
pressure; is that correct?
A. Your memory is better than mine.
THE COURT: Are we talking now about the
claim with regard to Riyadh or the claim
in general?
[DEFENDANTS' COUNSEL]: Yes [sic]. This
is the notification that was given in
1981 regarding the HVAC in Riyadh. I am
going to show you [the July 19, 1981
letter from LWA to BDASA] . . . . It
appears to be a letter from [LWA] to
[BDASA].
A. I am sure the letter is authentic. I
don't recall it specifically, but it
looks --
Q. [LWA] was the contractor from whom
the notification of potential claim came,
right?
A. Yes, and Mr. Wilson was the project
manager on the site at that time as the
signer of the letter.
After taking Mr. Brown through several of the
specific problems alluded to in the July 19, 1981 letter,
defendants' counsel continued his cross-examination:
Q. Now, isn't it correct to say that
[LWA] criticized the design back as early
as 1978?
A. Certainly before this letter in '81.
Q. First reference to the timing of
their criticisms of the design is on the
first page, as I see it, the last, the
second paragraph, the paragraph
indicating No. 2 on the first page where
it states, "The company, this company has
no design obligations. The error within
your specification" --
-14- 14
A. Sorry, I've lost you.
Q. If you look at the first page of the
document, sir, down at the bottom.
A. Okay.
Q. The second numbered paragraph, it
states, "This company has no design
obligations. The error within your
specification was pointed out in 1979,
and at no time were revised on/off coil
conditions placed with us."
Do you see that?
A. Yes, I do.
Q. And isn't it correct to say that
[LWA] did notify the company about its
objections about the design back in 1979?
A. That's correct.
Q. And the -- on Page 3 under numbered
Paragraph 6, there is a paragraph that
says, "The possibilities of the problems
actually experienced on site were raised
by us in late 1978. We have on file your
telex reply dated 12 October 1978 which
refutes our concern, and effectively
advises us to proceed without concern."
Do you see that?
A. Yes.
Q. And do you have knowledge regarding
that telex?
A. I don't recall that incident.
Q. Do you have any reason to believe
that there was no such telex --
A. No.
Q. -- Back in 1978 from your company?
A. I am sure if he said it in writing it
occurred.
-15- 15
Q. So it's fair to say that the problems
asserted by LWA, regarding the air
conditioning were asserted back in '78 to
'79 time period?
A. Yes.
The notice question arose again on redirect
examination:
Q. (By [plaintiffs' counsel]):
[Defendants' counsel] raised with you
Exhibit 105, Mr. Brown. This was a
letter from [LWA], dated 19 July 1981.
Do you recall talking with him about
that?
A. Yes, I do.
Q. All right. In October, in October
1981, do you recall attending a meeting
with [LWA] or anybody on your staff?
A. I am sure I did not. I couldn't
swear to the exact dates of meetings, but
[LWA] had, had many questions about the
design from the beginning which we had
been able to satisfy until, I suppose
it's the letter that was the -- that they
sent to the SAMA where they said we
believe, we, [LWA], believed that it,
that the corrections to the system will
cost so many millions of rials [sic] for
this that and the other, and the cost
implications made us begin to worry about
it that it may be a serious problem if
they are --
Q. Did you notify your insurance carrier
when that happened?
A. I'm sure that's the point at which we
asked on our notification.
II. II. ___
In reviewing a factual finding of a trial court
made in connection with a bench trial, we almost invariably
-16- 16
apply the clear-error standard of review. See Fed. R. Civ. ___
P. 52(a). Thus, we must give the finding effect unless we
are "`left with the definite and firm conviction that a
mistake has been committed.'" See Anderson v. City of ___ ________ ________
Bessemer City, 470 U.S. 564, 573 (1985) (quoting United ______________ ______
States v. United States Gypsum Co., 333 U.S. 364, 395 ______ ___________________________
(1948)); accord Dedham Water Co. v. Cumberland Farms Dairy, ______ ________________ _______________________
Inc., 972 F.2d 453, 457 (1st Cir. 1992). "Where there are ____
two permissible views of the evidence, the factfinder's
choice between them cannot be clearly erroneous." Anderson, ________
470 U.S. at 573.
If, however, an appellant can demonstrate that the
trial court based its finding upon a mistaken impression of
applicable legal principles, the reviewing court is not bound
by the clearly erroneous standard. Inwood Labs. v. Ives ____________ ____
Labs., 456 U.S. 844, 855 n.15 (1982); accord Cumpiano v. _____ ______ ________
Banco Santander Puerto Rico, 902 F.2d 148, 153 (1st Cir. _____________________________
1990) ("It is settled that one way around the rigors of the
`clearly erroneous' rule is to show that the trial court
mistook the applicable law." (Citations omitted.)). "[T]o
the extent that findings of fact can be shown to have been
predicated upon, or induced by, errors of law, they will be
accorded diminished respect on appeal." Dedham Water, 972 _____________
F.2d at 457.
-17- 17
The parties have treated Massachusetts law as
controlling in this dispute. Because there is at least a
"reasonable relation" between this litigation and the forum
whose law has been selected (plaintiffs BDA and Mr. Brown
were citizens of Massachusetts at all relevant times), we
shall forego an independent choice-of-law inquiry and look to
Massachusetts law for our rules of decision. See Bird v. ___ ____
Centennial Ins. Co., 11 F.3d 228, 231 n.5 (1st Cir. 1993). ____________________
Thus, in deciding whether legal error infected the crucial
finding, we will be guided by Massachusetts law.
III. III. ____
Here, we think it clear that the trial court's
finding regarding when the insureds first had notice of
circumstances subsequently giving rise to the SAMA's claim
was predicated upon an error of law. Northbrook makes much
of the fact that, in making its finding, the court seems to
have relied upon only the paragraph of the July 19, 1981
letter discussing the defectively designed on/off coil
conditions. See Brown Daltas, 844 F. Supp. at 62 n.3 ___ ____________
(setting forth the paragraph at issue and finding that
"[t]his letter reference alone is insufficient to prove that _____
BDA or BDASA had notice in 1979") (emphasis added). While it
is unfortunate that the court failed to mention the balance
of the evidence on this issue, we think that another serious
error lurks in the challenged finding: an erroneous shift to
-18- 18
Northbrook of the burden of proof. And although the parties
have largely skirted burden questions throughout this
litigation, we think that proper resolution of the burden of
proof question effectively disposes of this appeal.3
Although we cannot find a Massachusetts case which
discusses the burden of proof in a discovery clause issue
like the one here, a general principle of Massachusetts
insurance law settles the question:
"[A] plaintiff seeking to recover for
breach of a duty or obligation created by
a general clause of a contract, which
also contains an exception descriptively
limiting such duty or obligation, must
allege and prove that his cause of action
is within the contract and outside the
exception; but . . . where the exception
is in another separate and distinct
clause of the contract defining the duty
____________________
3. Although Northbrook has not specifically argued that an
erroneous shift in the burden of proof was implicit in the
court's notice of circumstances finding, it can in no way be
seen as having conceded that the burden was its own. In its
appellate briefs and throughout the course of this case,
Northbrook has treated the burden of proving coverage as
being properly placed upon the insureds. The insureds never
disputed this position. Moreover, at oral argument, counsel
for the insureds acknowledged that the insureds bore the
burden of proof on another issue -- the question whether the
November 25, 1981 letter from BDA to Shand constituted
adequate notice under the Policy's discovery clause --
analytically analogous to the instant question. Thus, we
discern no procedural bar to our analyzing the correctness of
the trial court's finding through the lens of the burden of
proof. Contrast Dedham Water, 972 F.2d at 458-59 (party's ________ ____________
acquiescence in the application of a rule of law in the trial
court precludes it from subsequently challenging the rule);
Templeman v. Chris Craft Corp., 770 F.2d 245, 247-48 (1st _________ __________________
Cir.) (party's failure to object below to magistrate judge's
choice-of-law ruling barred appeals court challenge to the
ruling), cert. denied, 474 U.S. 1021 (1985). _____ ______
-19- 19
or obligation, then the burden is upon
the party relying upon the exception."
Ratner v. Canadian Universal Ins. Co., 269 N.E.2d 227, 230 ______ ____________________________
(Mass. 1971) (quoting Murray v. Continental Ins. Co., 48 ______ _____________________
N.E.2d 145, 147 (Mass. 1943)). In this case, the coverage-
limiting provision upon which Northbrook relies is not set ___
forth as a distinct exclusion in the Policy; it is the first
sentence of the coverage-providing clause (i.e., the
discovery clause) upon which the insureds' claims are
anchored. It therefore was incumbent upon the insureds to
prove the non-applicability of the coverage-limiting
provision found in the first sentence of the discovery
clause. Put in concrete terms, it was the insureds' burden
to prove that they first became aware during the policy _____
period of the circumstances subsequently giving rise to the
SAMA's claim that the HVAC systems were negligently designed.
As we have stated, the trial court found that the
quoted portion of the July 19, 1981 letter was "insufficient
to prove that BDA or BDASA had notice in 1979." See Brown ___ _____
Daltas, 844 F. Supp. at 63 n.3. Implicit in this statement ______
was an erroneous view that Northbrook bore the burden of __________
proving prior notice. Thus, the deference usually due a
factual finding under Fed. R. Civ. P. 52(a) does not bind us
in this instance. See Inwood Labs., 456 U.S. at 855 n.15. ___ ____________
Mindful of our limited role as an appellate court,
we ordinarily would remand this matter to the district court
-20- 20
for a determination of the notice question under the proper
legal standard. On this record, however, such a remand would
be an empty exercise; no rational factfinder could find that
the insureds proved that they first had notice during the
policy period of the circumstances subsequently giving rise
to the SAMA's claim. Accordingly, we will resolve the issue
ourselves. See Williams v. Poulos, 11 F.3d 271, 280-81 (1st ___ ________ ______
Cir. 1993) (discussing situations where an appellate court
may decline to remand for resolution of factual and mixed
fact/law issues) (collecting cases).
As an initial matter, there is a dispute as to the
standpoint we should assume in deciding the notice of
circumstances question. Citing cases that apply Illinois
law, Northbrook asserts that the question should be viewed
from an objective perspective, and that we need decide
whether, prior to the policy period, the insureds knew of
circumstances that should have put them on notice of the ______
possibility of a claim. The insureds, however, treat the
issue as a subjective one, essentially arguing that the
question simply is whether, prior to the policy period, they
were "aware of circumstances which [they] believed might give ____ ________
rise to a claim in the future." We need not resolve the
dispute in this case.
Even if we assume arguendo that the question of ________
notice should be viewed from a subjective perspective, the
-21- 21
insureds still must show that they first became aware during
the policy period of the circumstances that did lead them to ___
notify Northbrook of the possibility of a claim. In other
words, the relevant point in time under the terms of the
Policy is not the point at which the insureds first came to
believe that a claim was possible; it is the point at which
they first became aware of the circumstances which in fact _____________
led them to file their notice of potential claim. The
distinction is critical in this case, because plaintiffs have
not established that they first became aware during the
policy period of the circumstances which led to their
November 25, 1981 letter to Northbrook.
Northbrook takes the position that LWA's criticism
of the design of the HVAC systems constitutes the notice-
triggering "circumstance" under the Policy. The insureds,
however, have not made entirely clear their stance on this
crucial question. On redirect examination, Mr. Brown
testified that the notice-triggering circumstance was a
letter that the contractor (LWA) sent to the SAMA which
allegedly stated "we believe, we, [LWA], believed that it,
that the corrections to the [HVAC] system will cost so many
millions of rials [sic] for this that and the other." See ___
supra at 16. This, of course, conflicts with the April 6, _____
1982 notice from BDASA to Lloyd's, which states that the
notice-triggering circumstances occurred at an October 21,
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1981 meeting in Riyadh. See supra at 6-7. It also conflicts ___ _____
with the insureds' brief, which contends that the notice-
triggering circumstances were "the meetings in the summer of
1981 [between representatives of BDA, BDASA, LWA, and the
HVAC equipment supplier], followed by the October meeting in
London and LWA's claim to SAMA." Regardless, close scrutiny
of the record reveals that none of the insureds' theories
vindicates their baseline position.
Mr. Brown's assertion that a letter from LWA to the
SAMA was the notice-triggering circumstance simply cannot
support a finding that the insureds first became aware of the
notice-triggering circumstances during the policy period.
The letter to which Mr. Brown alludes is not part of the
record, and we have no evidence that it was sent during the
policy period. Even more fundamentally, we have no
elaboration from the insureds as to how this letter altered
the then-existing landscape in such a way that, after it was
sent, the insureds first believed that a claim against them _____
was possible. One might infer from Mr. Brown's testimony
that this letter was the first time LWA attached a cost to
the design errors, and that this was the notice-triggering ____
circumstance; the insureds, however, have made absolutely no
argument to this effect.
The insureds' contention that the meetings in the
summer and fall of 1981 constitute notice-triggering
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circumstances is similarly flawed. The insureds do not say
much about what occurred at those meetings, let alone explain
how the communications at those meetings were so
qualitatively different from prior communications between
themselves and LWA that it led them, for the first time, to
believe that a claim was possible. And the scant record
evidence of what occurred at those meetings reveals nothing
beyond LWA informing BDA and BDASA of its view that the HVAC
system was, at least in some respects, incorrectly designed.
Essentially unrebutted, then, is Northbrook's argument that
LWA's assertion of this view was the notice-triggering
circumstance.4 Therefore, the question really boils down to
whether a reasonable factfinder could find that the insureds
proved by a preponderance of the evidence that LWA's view was
first expressed during the policy period. No such finding is _____
possible on the record before us.
We need not reiterate all the evidence regarding
when LWA first criticized (or seriously criticized, see supra ___ _____
note 4) the design of the HVAC systems. It is sufficient to
____________________
4. In stating in their brief that "[g]eneralized criticisms
of the design by a contractor, far from being unusual in any
construction setting, are simply not events which require a
designer to put his carrier on notice," the insureds may be
implying that no sufficiently serious or specific design
criticisms were lodged against them by LWA prior to the
policy period. Without further explication (including a
statement as to where and when the criticisms became
sufficiently serious and specific) and supporting record
evidence, however, such an implication is inadequate.
-24- 24
state that there is significant record evidence indicating
that such criticism predated the policy period. This
evidence includes the July 19, 1981 letter's indications that
problems with the design of the on/off coils had been pointed
out in 1979, and that problems with the design of Condensing
Unit No. 5 had been pointed in 1978. It also includes: (1)
Mr. Brown's direct testimony that LWA had informed the
insureds' of its view that the HVAC system "would not
function satisfactorily" within a year-and-a-half or two
years of construction beginning (in late 1978 or early 1979);
(2) Mr. Brown's direct testimony that LWA had seriously
criticized the design of the HVAC systems within two years of
construction beginning; and (3) Mr. Brown's concession on
cross-examination that the problems asserted by LWA regarding
the air conditioning had been asserted back in 1978-79. To
the extent that the insureds wish us to construe this
testimony as involving careless guesswork on the part of Mr.
Brown, we note that no attempt at clarification was made on
redirect examination.
On the other hand, there is a total absence of
evidence tending to indicate that LWA's criticism of the HVAC
system's design first occurred during the policy period.
Because such criticism was apparently the "circumstance" that
prompted the insureds to notify Northbrook of the possibility
of a claim of design negligence, and because the insureds
-25- 25
bore the burden of proving that they first became aware _____
during the policy period of the circumstances subsequently
giving rise to the SAMA's claim, this ends the matter.
Judgment should have been entered in favor of Northbrook.
IV. IV. ___
For the reasons stated above, the district court's
finding in favor of the insureds on the question of notice is
premised upon an incorrect view of the burden of proof and is
not sustainable. Moreover, while we agree completely that
generalized criticisms of shortcomings in a party's product
or performance will ordinarily be insufficient, without more,
to serve as a notice-triggering circumstance for purposes of
claims-made coverage, this is not the garden-variety case.
Here, the insureds' lack of proof is a determining factor.
In short, our reading of the record in the light of the
proper burden of proof leads us to conclude that judgment
should properly enter in favor of Northbrook. The district
court's contrary judgment is therefore reversed.
Reversed. Costs to appellant. Reversed. Costs to appellant. ______________________________
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