Present: All the Justices
ITT HARTFORD GROUP, INC.
OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 982400 September 17, 1999
VIRGINIA FINANCIAL ASSOCIATES, INC.
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY
Herbert C. Gill, Jr., Judge
Traditionally, insurance products are marketed through
independent agents selling directly to individuals or other
single entities. Such products also are sold using the
technique involved in this case, Commercial Mass Marketing
(CMM). CMM, known as "affinity marketing," involves selling
insurance products to groups the members of which have similar
interests, or to a group association, instead of to individuals.
This litigation arose from a joint venture between two
insurers, appellant ITT Hartford Group, Inc. (Hartford), with
headquarters in Connecticut, and The Medical Protective Company
(MedPro), based in Indiana. The purpose of the venture was to
create an insurance product, called "The Package," to be sold by
CMM and tailored to the needs of dentists.
Appellee Virginia Financial Associates, Inc. (VFA), a
Virginia corporation based in Chesterfield County, acted as a
"marriage broker" and introduced MedPro and Hartford in the
spring of 1994. VFA, a licensed insurance agency, served as
liaison between Hartford and MedPro as their relationship
developed. The main actor for VFA was William Montgomery
("Monty") Dise, an insurance agent and "part-owner" of VFA. The
Hartford employee with whom Dise dealt was James D. Sinay, among
others.
A dispute over the compensation to be paid VFA for its part
in the corporate marriage triggered this lawsuit. In September
1996, plaintiff VFA filed a motion for judgment, later amended,
against defendants Hartford and Sinay. Plaintiff sought
recovery of compensatory and punitive damages based upon
"express or implied contract," "quantum meruit," and fraud. In
a grounds of defense, defendants denied plaintiff was entitled
to any recovery and asked for dismissal of the action.
The plaintiff alleged that in 1991 it entered into an
agency agreement with Hartford regarding commissions to be paid
it for sales of certain insurance products. The agency
agreement specified the commission to be received by plaintiff
when it insures a client through Hartford; it also permitted
compensation, known as "override" commissions, for insuring
clients in special programs such as CMM accounts, according to
the allegations.
The plaintiff further asserted, in allegations admitted by
defendants in the grounds of defense, that Monty Dise approached
Hartford in the spring of 1994 with a proposal for providing
workers' compensation insurance coverage for dentists to
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complement an insurance package offered by MedPro containing
other insurance coverages. MedPro had approximately 20,000
dentist clients to whom Hartford could "cross-sell" its workers'
compensation insurance and other coverages, according to the
admitted allegations. The plaintiff alleged, and defendants
admitted, that Hartford entered a joint venture with MedPro,
which ultimately led to development of The Package, a program
for dentists including business and professional insurance
coverages.
The plaintiff further alleged that the program conceived by
plaintiff would benefit all parties: Hartford would acquire new
customers; MedPro would retain its accounts, receive a
commission from Hartford, and have ability to write new dental
clients; and, plaintiff "would receive a two percent (2%)
commission override on all premiums generated from sales of The
Package."
The plaintiff further alleged that from April 1994 through
August 1995, Dise and another officer of VFA, "with the express
encouragement and approval of" Hartford's authorized
representatives, developed and marketed The Package. The
plaintiff's work in acting "as liaison between [Hartford] and
other entities" included, according to the allegations, many
hours of meetings and travel, telephone conferences, and
document drafting as well as significant expenditures of
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expenses. The plaintiff alleged that all the work was performed
with Hartford's and Sinay's "explicit or implicit assurances
that VFA would be compensated for its efforts in connection with
The Package" at specific rates. These assurances were made,
plaintiff alleged, "with the intent to induce VFA to continue
its work on The Package and to induce VFA not to market MedPro
and the program to another insurance company with which VFA had
an agency contract. At the time the assurances to VFA were
made, [Hartford] and Sinay had no intent to fulfill them."
The plaintiff further alleged that defendants "repeatedly
assured" VFA it would be "significantly compensated for its work
on The Package." Plaintiff asserted that on February 1, 1995,
Sandra L. Shearer, an employee in Hartford's "commercial
affinity department," asked Dise to request in writing the
compensation VFA was seeking; Dise complied with the request.
Responding for Hartford, Sinay telephoned Dise and said:
"'Monty, do you trust me,'" plaintiff alleged. Plaintiff
further asserted Sinay told Dise "that it was too early in the
negotiations" for Hartford to commit to specific compensation in
writing but that Dise should "trust" Hartford to handle the
compensation issue "fairly." Plaintiff alleged it continued to
work on The Package "instead of marketing MedPro and The Package
with another insurer."
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Plaintiff further alleged that it attempted to establish a
direct relationship between Hartford and plaintiff's client,
MedPro. In April 1995, a meeting was held in plaintiff's
Virginia office; attending were Dise and executives of the
plaintiff, Hartford, and MedPro, according to the allegations.
At this meeting, the plaintiff asserted, a "top" MedPro
executive authorized Hartford "to put together a firm proposal
for The Package which was to be presented at an August meeting
between the parties." "On short notice," according to the
allegations, Hartford excluded plaintiff and Dise from the
August meeting "and from any other participation in connection
with The Package." Plaintiff also alleged that in October 1995,
at a meeting in plaintiff's Chesterfield County office, a
Hartford executive offered to pay plaintiff a $100,000 "finder's
fee"; the offer was refused.
In January 1996, Hartford and MedPro executed the joint
venture agreement. The venture's initial product was The
Package, which combined Hartford's property, general liability
and workers' compensation coverages with MedPro's dental
malpractice coverage.
In the amended motion for judgment, plaintiff alleged it is
entitled to recovery of commissions amounting to "a significant
percentage" of what it says will be "tens of millions of dollars
in premium payments" to be received on The Package. The
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plaintiff sought commissions on premiums generated during the
initial five-year term of the joint venture agreement and during
renewal periods of the coverage extending to at least the year
2015.
During a three-day jury trial, the plaintiff presented
credible evidence supporting the foregoing factual allegations
regarding the relationship of the parties; the work done by
plaintiff, especially Dise, in acting as liaison between
Hartford and MedPro; the discussions among the principals for
the parties regarding plaintiff's campaign for compensation for
its efforts; and the fact that plaintiff and Dise were excluded
from the August meeting held after Hartford authorized
formulation of a firm proposal involving MedPro for marketing of
The Package.
In an attempt to prove its damages, plaintiff presented the
testimony of Peter M. Redlich, of Lanexa, Kansas, who was
qualified as an expert "[i]n the insurance industry to talk
about the mass marketing area, what insurance companies do with
mass marketing, the custom in the industry for mass marketing."
The defendants did not object to Redlich's testimony on those
subjects. Over defendants' objection, however, the trial court
permitted Redlich also to testify as an expert "in the area of
making premium projections for insurance products" and "as an
expert in forecasting projections."
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The case was submitted to the jury on plaintiff's claim
against Hartford for breach of express and implied contract, on
its claim of fraud against Hartford and Sinay, and on the issues
of compensatory and punitive damages.
The jury found in Hartford's favor on the breach of express
contract claim. It found against Hartford on plaintiff's claim
based upon implied contract, and fixed compensatory damages at
$5 million. The jury found against Hartford, but in favor of
Sinay, on the fraud claim, fixing compensatory damages at
$200,000 and punitive damages at $1 million. In entering
judgment on the verdict, the trial court reduced the punitive
damage award to $350,000, the sum permitted by Code § 8.01-38.1.
Hartford appeals.
On appeal, Hartford says the "core issue" involves its
contention that the trial court erred in permitting Redlich's
testimony projecting future income from The Package upon which
plaintiff's past and future compensation by way of commissions
could be calculated. Relevant to this issue is the length of
time the premiums reasonably can be expected to be generated,
the amount of those premiums, and the rate of any commissions to
which the plaintiff may be entitled.
Redlich had "been in the business of selling property and
casualty insurance" for 28 years. Also, he had been "involved
in mass marketing of insurance products," participating in over
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twenty "affinity mass marketing accounts" in the last ten years.
The preparation for Redlich's testimony involving projections
included his review of the depositions of principals of both
Hartford and MedPro, including Raymond F. Wise, Jr., all
witnesses in the case. Wise, a Hartford employee, was the
general manager of the special program center established at
MedPro's headquarters in Fort Wayne, Indiana, to administer The
Package. Formerly, Wise had been the director of commercial
mass marketing for Hartford's western division. Redlich also
had reviewed the agency agreement between plaintiff and Hartford
as well as the joint venture agreement between MedPro and
Hartford.
Redlich testified that "generally" a mass marketing program
"could run 5, 10, 15, 20 years" and that one had "been on the
books since 1935." Previously, he had been engaged in a mass
marketing program with Hartford in which he "just brought them
the account" and "was not allowed to do any sales, marketing,
solicitation, underwriting," and he had been paid a four percent
commission on new business generated in the program and four
percent on renewal premiums. Redlich stated that "where you
bring to an insurance company an affinity group and you serve as
a liaison after the insurance company sells the product,"
commissions range from as low as one percent, when the agent is
"doing absolutely zero," to as high as eight percent.
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Redlich opined that the custom in the industry is to pay
commissions on premiums generated from new business, and from
renewal business for "[a]s long as the policies are still in
force." He stated that, under the circumstances of this case,
if an express contract between plaintiff and Hartford did not
apply, a three to four percent "override" commission would be
appropriate for merely bringing Hartford "the idea" and bringing
the two parties together. He said: "I notice Mr. Dise asked
for 2 to 2 ½ percent. That's certainly very minimal." Redlich
stated payment of "flat fees" was not customary for the work
plaintiff performed.
Turning to the "core issue," Redlich explained his method
of making "projections of premiums." First, he said, "you need
to know the population of the group" and then "you take an
average of the premiums written . . . in the state or in the
region." Multiplying the two figures, he said, produces a
"total potential." This "potential" depends upon the strength
of "the endorser" of the product, such as a statewide dental
association. From this "potential," Redlich arrived at a
"penetration" rate which he defined as the number of persons
"you expect to be able to write in a course of the year and then
in each year going on."
Next, according to Redlich, an evaluation of the strength
of "penetration" of the affinity group must be made to determine
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how "competitive your product is." Then, the renewal potential
of the product must be determined in order to project the amount
of renewal premiums to be expected. Redlich opined that the
"penetration figure" should increase annually. He said:
"Generally, the first few years of a program, you're going to
have a lot of interest generated because that's when a good part
of the marketing is done." Thereafter, he stated, the success
of the first years "increases the faith of the population in the
program and their willingness to participate and to buy the
services that are being sold to them."
Next, he stated, a "retention rate" must be ascertained in
order to determine how much premium income will be realized in
future years. This, of course, must depend upon how long "the
program would last."
Redlich presented a three-page exhibit, laden with
calculations, demonstrating and summarizing his projections for
the years 1996 through 2015. He drew heavily on projections for
1998-2000 made by Hartford's employee Wise, which were based on
sales of The Package from 1996 through the time of trial in May
1998. Redlich altered Wise's numbers up or down as he developed
assumptions for his own conclusions.
Redlich assumed: A total population of the group initially
as 22,000 dentists; an average annual policy premium of $1,000;
a "penetration rate" of 28% in 1998 and 1999, 42% in 2000, 52%
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in 2001, and 65% during 2003 to 2015; and, that new premiums
would be derived one-half from existing MedPro clients and one-
half from new clients. Redlich then estimated the renewal
premiums by multiplying the total premiums from the previous
year of his assumptions by a renewal retention rate, which he
assumed would be 92%. He then added the products of his
assumptions and arrived at the sum of $369,572,106 for the total
new and renewal premiums to be derived for The Package for the
period 1996 through 2015.
The plaintiff sought recovery of commissions based on the
$369 million figure reduced by the testimony of an accountant to
present value. The lowest commission rate assumed by the
accountant was 2.5 percent. The accountant figured the present
value of that assumed rate of commission computed upon the $369
million figure to be $5,393,111 for the 20-year period.
The verdict of $5 million appears to be based upon the
present value of a commission rate approximating 2% on that
amount for the period. Indeed, the jury first returned a
verdict for a nonspecific sum. It reported an award "in the
amount of 2% of all existing premiums since inception of the
program, as well as all new and renewal premiums written
nationwide for as long as 'The Package' program exists." As
directed by the trial judge, the jury resumed its deliberations
and returned a verdict for a specific sum.
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On appeal, Hartford contends that the trial court erred in
permitting Redlich to opine that plaintiff was entitled to a
commission on the future premiums that Redlich projected The
Package would generate over the next 17 years. We agree.
Expert testimony "cannot be speculative or founded upon
assumptions that have an insufficient factual basis. Such
testimony also is inadmissible if the expert has failed to
consider all the variables that bear upon the inferences to be
deduced from the facts observed." Tittsworth v. Robinson, 252
Va. 151, 154, 475 S.E.2d 261, 263 (1996) (citations omitted).
See Code §§ 8.01-401.1 and -401.3.
Moreover, when expert testimony consists of an array of
numbers conveying an illusory impression of exactness, on a
subject in which a jury's common sense is tested in order to
evaluate the array, scrutiny of expert testimony is especially
important. Tyger Constr. Co., Inc. v. Pensacola Constr. Co., 29
F.3d 137, 145 (4th Cir. 1994), cert. denied, 513 U.S. 1080
(1995), cited with approval in CSX Transp. Inc. v. Casale, 250
Va. 359, 366-67, 463 S.E.2d 445, 449 (1995).
And, a verdict based upon speculative expert testimony "is
merely the fruit of conjecture, and cannot be sustained."
Stover v. Norfolk & W. Ry. Co., 249 Va. 192, 200, 455 S.E.2d
238, 243, cert. denied, 516 U.S. 868 (1995).
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In the present case, Redlich attempted to project the
plaintiff's lost income for 17 years in the future in a new
business enterprise. When an established business, with a
proven earning capacity is involved, evidence of the prior and
subsequent record of the business is relevant to permit an
intelligent and probable estimate of damages. But when, as
here, a new business is involved, the rule is not applicable
because such a business is a speculative venture, the successful
operation of which depends upon future bargains, the status of
the market, and too many other contingencies to furnish a
safeguard in fixing the measure of damages. Commercial Bus.
Sys., Inc. v. BellSouth Servs., Inc., 249 Va. 39, 50, 453 S.E.2d
261, 268 (1995). See Clark v. Scott, 258 Va. ___, ___, ___
S.E.2d ___, ___ (1999), decided today. The two-and-one-half-
year history of the premium income from 1996 to May 1998 is
insufficient in this case to qualify the business of marketing
The Package as an established business.
In Maher v. Continental Cas. Co., 76 F.3d 535 (4th Cir.
1996), the court applied West Virginia law which, like that in
Virginia, requires anticipated lost income to be proved with
reasonable certainty. There, the plaintiff sought to prove lost
future income by taking actual sales for the past three years,
and using "the smallest annual growth rate in sales" to project
future sales. Id. at 540. Affirming the trial court's
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exclusion of such evidence, the Fourth Circuit pointed out that
although the plaintiff "submitted historical sales figures for
the relatively brief three-year period," the plaintiff "failed
to conduct any scientifically valid surveys assessing the
relevant future market" for the products. Id. at 541.
Moreover, the court said, plaintiff's expert "is not an
economist, and he did not purport to otherwise possess any
expertise regarding economic forecasting. Yet, in the absence
of long-term sales figures, [plaintiff's] best hope of proving
his lost business income with reasonable certainty was to
produce sufficient economic data upon which an economist could
posit a reliable prediction." Id. This is such a case.
Redlich was not an economist, he had performed no
statistical studies, he had consulted no actuaries regarding
premium calculations, and he had performed no market analysis.
In addition, he relied upon projections made by Hartford's
employee Wise. But Wise testified in his deposition that his
estimates were "just very highly speculative," were a "guess,"
and that he was "hoping" the MedPro-Hartford relationship would
last "continuously."
In sum, Redlich projected lost income for 17 years in the
future for this new enterprise merely by using several variables
(premium amounts, population sizes, penetration rates, and
retention rates) that were completely divorced from economic
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reality. Employment of these projections resulted in a verdict
based upon speculation and conjecture, and it cannot be
sustained.
Next, Hartford contends the trial court erred in refusing
to sustain a demurrer, in denying a motion for partial summary
judgment, and in approving the fraud verdict and the award of
punitive damages upon the grounds that the plaintiff had failed
to allege and prove a cause of action based upon fraud. We
shall address only whether the fraud verdict was supported by
clear and convincing evidence. We hold that it was not.
The case was submitted to the jury on the theories of
actual and constructive fraud. The plaintiff has the burden of
proving all the elements of fraud by clear and convincing
evidence. Evaluation Research Corp. v. Alequin, 247 Va. 143,
148, 439 S.E.2d 387, 390 (1994). To sustain a claim of actual
fraud, the plaintiff must prove a false representation, of a
material fact, made intentionally and knowingly, with intent to
mislead, reliance by the party misled, and resulting damage.
Id. "Constructive fraud differs from actual fraud in that the
misrepresentation of material fact is not made with the intent
to mislead, but is made innocently or negligently although
resulting in damage to the one relying on it." Id. And,
"'fraud must relate to a present or pre-existing fact, and
cannot ordinarily be predicated on unfulfilled promises or
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statements as to future events.'" Patrick v. Summers, 235 Va.
452, 454, 369 S.E.2d 162, 164 (1988) (quoting Soble v. Herman,
175 Va. 489, 500, 9 S.E.2d 459, 464 (1940)). See Lumbermen's
Underwriting Alliance v. Dave's Cabinet, Inc., 258 Va. ___, ___,
___ S.E.2d ___, ___ (1999), decided today.
Also, the jury was instructed, without objection, that
concealment of a material fact "knowing that the other party is
acting on the assumption that no such fact exists is as much
fraud as if existence of the fact were expressly denied" and
that a party is under a duty to exercise reasonable care to
disclose to the other subsequently acquired information that the
party knows will make untrue or misleading a previous
representation. See J & D Masonry v. Kornegay, 224 Va. 292,
296, 295 S.E.2d 887, 890 (1982) (quoting Clay v. Butler, 132 Va.
464, 474, 112 S.E. 697, 700 (1922)); Ware v. Scott, 220 Va. 317,
321 n.3, 257 S.E.2d 855, 858 n.3 (1979).
The plaintiff contends that when the facts are viewed in
the light most favorable to it, as they should be, the jury
could properly "find that Hartford fraudulently represented to
VFA that it would receive override commissions. There was also
an abundance of clear and convincing evidence that Hartford
fraudulently failed to tell VFA that it intended to pay it a
finder's fee for months after Hartford had made that decision."
Further, plaintiff contends "there can be no question that after
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Hartford had decided to pay VFA a mere finder's fee, it
continued to assure VFA that it would receive an override
commission for bringing MedPro to Hartford as a CMM
opportunity." Additionally, plaintiff argues that Hartford
decided in June 1995 to pay plaintiff a finder's fee, "but
continued to request Dise to provide assistance and to lead him
to believe VFA would be paid a commission commensurate with
industry practice . . . when its present intention clearly was
NOT to compensate VFA with a commission." We reject these
contentions.
This is another situation that we have confronted before
when the "moving party in the controversy is a disgruntled
player in the rough-and-tumble world comprising the competitive
marketplace." Commercial Bus. Sys., Inc. v. Halifax Corp., 253
Va. 292, 294, 484 S.E.2d 892, 893 (1997). The plaintiff,
through Dise, saw an opportunity to earn substantial override
commissions by constructing a corporate marriage between its
client, MedPro, and Hartford, or any other insurer who would
listen. There was no effort by plaintiff at the beginning of
this side courtship between plaintiff and Hartford to obtain any
agreement in writing or orally from Hartford about compensation.
Instead, Dise proceeded with efforts to bring about the joint
venture and began a campaign to procure consent from Hartford to
pay him commissions. These efforts were pursued in earnest long
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before the marriage of MedPro and Hartford was culminated in
January 1996.
As Dise continued to press for commissions, never slowing
his efforts to earn what he hoped would be substantial
remuneration, there were statements that Dise would be treated
"fairly" and with "trust." These were promises and statements
about future events, and were not fraudulent.
Actually, the plaintiff seeks to convert a dispute
occurring in the marketplace over what is "fair" compensation
into a tort action for fraud. The alleged actionable conduct of
Hartford and its agents did not amount to false representations,
and the trial court erred in ruling to the contrary.
Finally, Hartford contends the trial court abused its
discretion when it refused to permit its witness, Warren W.
Pierce, to testify. Because this case will be remanded, and
there may be another trial, we will address this issue.
Pierce, an attorney for Hartford who drafted the joint
venture agreement, was called to testify about the intent of the
parties and the meaning of the language in the
"Renewal/Nonrenewal Provisions" of the agreement. That portion
of the agreement provides:
"If neither party gives written notice of its desire
to renew this Agreement, or if only one (1) party
gives written notice of its desire to do so, the
Agreement shall automatically terminate on January 1,
2001. Any party desiring to renew this Agreement must
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give written notice to the other. Notice shall be
deemed to be given when received and shall be made in
accordance with Section XV (Notices) of this
Agreement. Notice may not be sent earlier than
January 1, 2000 and must be given by June 1, 2000 to
be effective.
If a party fails to give notice of its desire to
either renew or nonrenew in accordance with this
Agreement, the intent of the party that has given
notice shall control. If the notice given is of an
intent to renew, the noncomplying party shall be
liable to the other for monetary damages, attorneys
fees and costs in lieu of specific performance. The
period of time for which damages may be computed shall
be January 1, 2001 to January 1, 2006."
This term of the agreement, of course, is relevant to the
question whether the plaintiff can establish a reasonable
probability of The Package's renewal beyond an initial five-year
period set forth in the agreement. Pierce's testimony was
proffered several weeks after the trial and the trial court
allowed it to be made a part of the record.
This portion of the agreement is ambiguous and the trial
court permitted the jury to consider extrinsic evidence in
construing it. Redlich, having examined the agreement,
furnished his interpretation of the agreement in making the
assumption that it likely would be renewed in 2001 and beyond.
Therefore, given the fact that a plaintiff's witness, a
non-lawyer, had been permitted to interpret the agreement, the
trial court abused its discretion in refusing to allow a
defendants' witness, who drafted the agreement, to interpret it.
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If the evidence develops in the same manner upon retrial, Pierce
should be permitted to testify in accordance with the proffer.
Consequently, the judgment in favor of the plaintiff for
compensatory damages based upon breach of an implied contract
will be set aside, and the case will be remanded for a new trial
limited to the issue of such damages on the implied contract
(quantum meruit) claim against Hartford. The judgment for
compensatory and punitive damages based upon fraud will be set
aside, and final judgment will be entered here in favor of
Hartford on that claim.
Reversed, remanded,
and final judgment.
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