Town of Allenstown v. National Casualty Co.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 94-1106

TOWN OF ALLENSTOWN,

Plaintiff, Appellant,

v.

NATIONAL CASUALTY COMPANY,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Paul J. Barbadoro, U.S. District Judge]

Before

Torruella, Circuit Judge,

Campbell, Senior Circuit Judge,

and Boudin, Circuit Judge.

Glenn R. Milner with whom Cook & Molan, P.A. was on brief for

appellant.
John A. Lassey with whom Wadleigh, Starr, Peters, Dunn & Chiesa

was on brief for appellee.

September 30, 1994

BOUDIN, Circuit Judge. In May 1986, an officer of the

Allenstown, New Hampshire, Police Department arrested Paul

Cutting for a number of traffic offenses. At trial Cutting

was acquitted of all charges. In April 1988, counsel for

Cutting and his wife wrote a letter to the Allenstown Board

of Selectmen advising that his clients were making a claim

for damages against the town, arising from the arrest.

At that time the National Casualty Company had in force

a comprehensive law enforcement liability policy protecting

Allenstown and its employees against claims of the kind made

by the Cuttings. National Casualty opened a file on the

incident and obtained from the town copies of various

documents relating to the Cutting arrest. In June 1988 the

Cuttings brought a civil rights action against the town and

the arresting officer in the federal district court in New

Hampshire.

When the federal suit was filed, the Cuttings served

copies of their summons and complaint on the town. The

National Casualty policy provided if a claim is made or suit

brought against the insured, the insured "shall immediately

forward to the Company every demand, notice, summons or other

process" received by the insured; the policy made compliance

with this requirement a condition precedent to any suit

against National Casualty. Allenstown contends that it

mailed the summons and complaint to National Casualty about

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eight days after it received them; National Casualty says

that it never received the papers and denies that they were

mailed.

Neither the town nor National Casualty appeared to

defend against the Cuttings' suit, and a default judgment was

entered. After a hearing on damages, the district court in

March 1989 entered judgment for $424,909.88 in favor of the

Cuttings, including compensatory damages, punitive damages

and attorneys' fees. After a year's wait, Fed. R. Civ. P.

60, the Cuttings obtained a writ of execution in April 1990.

Allenstown then moved for relief from the default judgment.

In August 1990, the district court denied the motion. On

appeal this court affirmed. Cutting v. Town of Allenstown,

936 F.2d 18 (1st Cir. 1991).

In May 1990, after the writ of execution had issued,

National Casualty learned--assertedly, for the first time--

that the Cuttings filed their threatened suit. Not long

afterwards, Allenstown wrote to National Casualty requesting

it to provide coverage for the Cuttings' law suit and the

judgment they had obtained. In June 1990, National Casualty

declined to do so on the ground that the town had failed to

notify National Casualty of the law suit's filing in a timely

fashion and had failed immediately to forward the summons and

complaint as required by the policy.

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Allenstown then sued National Casualty in New Hampshire

state court seeking a declaratory judgment under N.H. Rev.

Stat. Ann. 491:22 that National Casualty was required to

provide coverage for the Cuttings' suit. Section 491:22

permits declaratory actions to determine insurance coverage,

if such an action is brought within six months of the

underlying suit that seeks to impose liability on the

insured. Section 491:22-a provides that in an action under

section 491:22, "the burden of proof concerning the coverage

shall be upon the insurer . . . ." There is also a provision

for attorneys' fees. N.H. Rev. Stat. Ann. 491:22-b.

National Casualty removed the town's declaratory action

against it to federal district court in New Hampshire on

grounds of diversity. Thereafter, the town amended its

complaint to include claims for breach of contract and bad

faith against National Casualty. After a number of delays

because of reassignment of the case from one judge to

another, and finally to a third, the trial commenced on

November 30, 1993.

At trial, the town presented testimony of one of its

police officers that he had mailed the summons and complaint

in the Cuttings' suit to National Casualty within two weeks

after they had been served on the town. A witness for

National Casualty testified that no such documents had been

received and that the company had no record that the suit had

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been filed. There was also some, but not conclusive,

evidence that might suggest that the officer who claimed to

have mailed the summons and complaint might have partly

misaddressed it. Under these circumstances, the burden of

proof has assumed some importance.

Well before trial, in July 1993, the district court had

ruled that section 491:22, and its ancillary burden shifting

and attorney's fee provisions, did not apply in this case.

The court ruled that under New Hampshire law, a declaratory

action under section 491:22 could be brought to determine

insurance coverage only where the underlying action to impose

liability on the insured had been brought in New Hampshire

state court. The district court also took the view that

where the statute did not apply, the burden under New

Hampshire law was upon the insured to establish coverage.

After the close of all of the evidence, the district

court submitted the town's contract claim to the jury which

found in favor of National Casualty.1 The district court

treated the request for declaratory relief as a matter to be

determined by the court. But, following the jury's lead, the

trial judge ruled in favor of National Casualty, holding that

the town "did not, by a preponderance of the evidence,

1The bad faith claim was not submitted to the jury
because the district court ruled, after the close of the
town's evidence, that as a matter of law judgment on this
claim should be entered in favor of National Casualty.

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establish that the suit papers in this case were immediately

forwarded."2 The town now appeals to this court.

The principal issue on appeal stems from the district

court's decision that section 491:22, including its burden-

shifting provision, did not apply in this case. At all times

pertinent here, section 491:22 allowed a declaratory judgment

action if sought within six months "after the filing of the

writ which gives rise to the question," i.e., the writ in the

underlying liability action--here, the Cuttings' law suit.

Because New Hampshire state-court actions are commenced by

the filing of a writ and federal actions by the filing of a

complaint, the New Hampshire Supreme Court had held in 1985

that "[t]he plain language of the statute [section 491:22]

clearly applies only to State actions." Jackson v. Federal

Ins. Co., 498 A.2d 757, 759 (N.H. 1985).

Jackson involved a declaratory action in state court

where the underlying liability suit had been brought in

federal court. A year later, this court applied Jackson to

bar a declaratory action under section 491:22 brought in

federal court; as in Jackson, the underlying liability suit

had been brought in federal court. Volpe v. Prudential

Property & Casualty Ins. Co., 802 F.2d 1 (1st Cir. 1986). It

2The district court had, of course, already ruled the
declaratory relief was not available under section 491:22;
but it considered declaratory relief to be available under
the federal Declaratory Judgment Act, 28 U.S.C. 2201.

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might have been enough in Volpe to say that the federal

action was barred because (as in Jackson) the underlying suit

had been brought in federal court, but this court in Volpe

went even further and held that section 491:22 was "not

available to litigants proceeding in federal court." Id. at

5.

The implication of Volpe was that the federal court

would not entertain a section 491:22 action even if the

underlying liability suit was brought in state court. This

conclusion was not a careless extension of Jackson. Although

Jackson's plain language argument rested on the statute's

reference to a "writ"--focusing attention on the forum of the

underlying suit--Jackson had also described section 491:22 as

a "court cleaning bill," saying that the bill was "intended

to expedite procedures in the State courts." 498 A.2d at

759.

Following Jackson and Volpe, the New Hampshire state

legislature amended the declaratory judgment statute by

adding section 491:22-c, which provides:

The remedy of declaratory judgment to
determine the coverage of a liability
insurance policy under RSA 491:22, 22-a,
and 22-b shall also be available in the
United States district court for the
district of New Hampshire when the court
may properly adjudicate the matter under
the laws of the United States.

This amendment, in force at the time that Allenstown brought

its declaratory judgment against National Casualty, is the

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focus of the present appeal. The town asserts that the

amendment meant that a section 491:22 action can be brought

in federal court, regardless whether the underlying liability

suit was brought in state or federal court. National

Casualty, by contrast, claims that the amendment merely makes

the section 491:22 remedy available in federal courts to

precisely the same extent that it would be available in New

Hampshire state courts--that is, when the underlying

liability suit was brought in a New Hampshire state court.

The district court agreed with National Casualty's

reading, and we take the same view. The bare language of

section 491:22-c is not conclusive. It is perfectly

consistent with National Casualty's reading; but arguably the

language is general enough so that it is also consistent with

the town's reading. The problem for the town is that

whatever the bare language of the new section, the New

Hampshire Supreme Court in 1992 held "that RSA 491:22 applies

only to underlying suits brought in our State courts."

Scully's Auto-Marine Upholstery, Inc. v. Peerless Ins. Co.,

611 A.2d 635, 636 (N.H. 1992).

Scully was a declaratory action brought in the New

Hampshire state court involving underlying liability suits

both in federal district court and in Maine state court.

Although decided after section 491:22-c became effective,

Scully made no reference to the amendment but simply

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reiterated the court's earlier reasoning in Jackson. What we

have, therefore, is a flat declaration that section 491:22

does not apply unless the underlying liability suit is

brought in New Hampshire state court. Accord Town of

Peterborough v. Hartford Fire Ins. Co., 824 F. Supp. 1102,

1107 (D.N.H. 1993). Unfortunately for the town, the

Cuttings' suit was brought in federal court.

Allenstown urges in its brief that the legislative

history of section 491:22-c shows that it was intended to

permit a section 491:22 action in federal court even where

the underlying liability suit was brought in federal court.

The legislative history is something of a tangle; a broad

expansion of section 491:22 was originally proposed, but the

version enacted was a narrower one supported by the insurance

industry. But even if the legislative history were more

clearly favorable to Allenstown than it appears to be, Scully

is a holding of New Hampshire's highest court construing a

New Hampshire statute. We are bound by that court's

determination. E.g., Della Grotta v. Rhode Island, 781 F.2d

343, 347 (1st Cir. 1986).3

3In April 1994, the state legislature again amended
section 491:22, effective January 1, 1995, to say that a
section 491:22 action can be brought "even though the action
giving rise to the coverage question is brought in a federal
court or another [non New Hampshire] state court." R.S.A.
491:22, as amended by 1994 N.H. Laws ch. 37. No one claims
that the amendment itself applies retroactively to the
present case.

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We turn now to the town's second assignment of error.

The town argues that, even if section 491:22's burden-

shifting provision did not apply in this case, New Hampshire

common law still places the burden of proof on the insurer to

prove that the insured provided a required notice of suit.

Here, of course, the district judge placed the burden of

proof on the insured both when he charged the jury on the

contract claim and when he decided the declaratory action

himself.

There is some dispute about whether the town has

preserved its common-law argument. It made no objection to

the charge on this issue, as required by Fed. R. Civ. P. 51,

and such failures to object normally preclude arguing the

point on appeal. On the other hand, the district court also

made the same ruling on the declaratory action, which is

merely the obverse of the contract claim, and Rule 51 does

not govern legal objections in bench trials. Here, the town

certainly made its position clear to the district court in

advance of its decision on declaratory relief.

Accordingly, we think it best to consider the town's

common-law arguments on the merits, but on the merits we

reject it. Section 491:22 aside, Lumbermens Mutual Casualty

Co. v. Oliver, 335 A.2d 666 (N.H. 1975), explicitly places

the burden of showing notice upon the insured where notice is

a condition in the policy. If New Hampshire law were

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otherwise, it is difficult to see why New Hampshire would

have had to enact a separate provision (section 491:22-b)

shifting the burden to the insurer in declaratory actions.

In all events, Lumbermens is explicit: "The insured bears

the burden of showing that notice of the accident was given

[to the insurer] as soon as reasonably possible." Id. at

668; accord Sutton Mutual Ins. Co. v. Notre Dame Arena, 237

A.2d 676, 679 (N.H. 1968).

The town's argument to the contrary is based entirely

upon White Mountain Construction Co. v. Transamerica

Insurance Co., 631 A.2d 907 (N.H. 1993). White involved the

question whether a duty to defend arose when the insurer had

notice of a suit or only when it had notice and a request for

assistance. The burden of proof as to notice was not even

explicitly discussed in White, apparently because notice was

evident from the facts. See 631 A.2d at 484. The town's

attempt to extend White, because it cited cases from a state

where the burden of disproving notice may lie on the insurer,

is inventive but not persuasive.

The third issue raised by the town on its appeal

concerns its bad faith claim, an independent cause of action

that the district court withdrew from the jury after the

close of the town's evidence. Under New Hampshire law, there

are different types of good faith requirements; pertinent

here is the precept that a good faith obligation may be

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inferred where a contract allows "the defendant a degree of

discretion in performance tantamount to a power to deprive

the plaintiff of a substantial proportion of the agreement's

value." Centronics Corp. v. Genicom Corp., 562 A.2d 187, 193

(N.H. 1989).4 Under this rubric, the town sought to submit

to the jury a set of interrelated arguments.

To summarize, the town urged that the good faith

requirement had not been met in this case because National

Casualty had notice of a threatened law suit and failed ever

to contact the Cuttings' lawyer, in spite of the strong

likelihood that the suit would be brought; the company did

not instruct the town as to what to do in the event that a

complaint was served; the company never told the town that it

had previously been sent a letter (the Cuttings' attorney's

letter threatening suit) which had been improperly addressed;

and the company closed its file without ever contacting the

Cuttings or their lawyer. On appeal, the town argues that

there was enough in this cluster of charges to submit the

matter to the jury.

To enter judgment on this claim for National Casualty as

a matter of law, the district judge had to and did find that

4See also Seaward Constr. Co. v. City of Rochester, 383

A.2d 707 (N.H. 1978) (city under duty to seek federal funding
where such funding is a condition of payment to the
contractor); Lawton v. Great Southwest Fire Insurance Co.,

392 A.2d 576 (N.H. 1978) (insurer's discretion to determine
the time of payment limited to a commercially reasonable
time).

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no reasonable jury could find in favor of the town on the

evidence presented, and we review this determination de novo.

See Peckham v. Continental Casualty Insurance Co., 895 F.2d

830 (1st Cir. 1990). If the "good faith" label is taken

literally, there is no evidence whatever from which a jury

could infer that National Casualty acted in bad faith in the

sense of conscious wrongdoing or reckless disregard. The

town's only hope lies in diluting the good faith requirement

to one of reasonableness. It must be admitted that

Centronics does refer at one point to the question whether

"the defendant's exercise of discretion exceeded the limits

of reasonableness." 562 A.2d at 193.

Reading Centronics as a whole and taking account of the

other cited New Hampshire decisions on good faith

requirements in contract cases, we think that the town's

claim does not fit the cubby hole described by these cases.

The notice provisions of the town's policy do not confer on

the insurance company any latitude or discretion, the

situation for which the pertinent good faith duty appears to

have been crafted. The reasonableness reference in

Centronics appears to be an adjunct concept; where the

defendant takes, or declines to take, action pursuant to

discretionary authority, commercial reasonableness may

measure how far the defendant can go.

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Finally, we think the town's reading of the cases would

create a highly improbable untethered obligation of care.

Here, the most one can say is that if National Casualty had

been a little more aggressive and alert, it might have saved

the town the consequences of the town's own breach of its

explicit obligation to forward the pleadings. Even if

National Casualty could in some measure be described as

"negligent" in this respect--a point we need not decide--the

policy imposed nosuch generalduty of careon NationalCasualty.

Contracts are, after all, specific agreements to take

specific steps to accomplish particular results, and those

commitments are the central measure of each party's

responsibility. With diffidence, the courts have implied or

imposed ancillary obligations (such as good faith

requirements or implied warranties) in discrete situations.

But the unlimited implication of new, free-floating duties is

a matter in which courts have to be very careful, lest they

undo the bargain struck by the parties. Here, the town

failed to perform an important, expressly stated condition of

coverage. This is one risk that the policy did not cover.

The fourth and last claim made by the town is that the

district court erred in instructing the jury as to the

meaning of the policy's requirement that the insured

"immediately" forward the suit papers to the insurer. The

district court softened this requirement considerably in

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explaining that under New Hampshire law the term

"immediately" was not to be given its literal meaning.

Instead, the law provides that an insured
has fulfilled its duty to immediately
forward suit papers if it used due
diligence under the circumstances of the
case in forwarding the suit papers, and
the papers were forwarded without
unnecessary or unreasonable delay.
Whether the insured forwarded the suit
papers with due diligence and without
unnecessary or unreasonable delay must be
determined by considering the totality of
the surrounding facts and circumstances.

The town objected to the use of the term "due diligence"

prior to the district court's instructions, but the trial

judge rejected the objection. The town did not renew its

objection after the charge was given, even though Fed. R.

Civ. P. 51 requires such a further objection in order to

preserve the point on appeal. Here, the trial judge told the

parties at the pre-charge conference that their objections

would be preserved without renewal of the charge and further

directed the parties not to renew the same objections after

the charge was given.

We have said that Rule 51 cannot be altered by the

district court and that "[o]bjections cannot be carried

forward" even where the trial judge assures the parties that

objections raised at the pre-charge conference will be

preserved. McGrath v. Spirito, 733 F.2d 967, 969 (1st Cir.

1984); see also Carillo v. Westbulk, 514 F.2d 1214, 1219 (1st

Cir.), cert. denied, 423 U.S. 1014 (1975). In this case,

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however, the district court not only assured the parties that

their objections were preserved but also told them not to

raise the objections again after the instructions. It would

be harsh, indeed, to punish the town for obeying the trial

judge.

But on the merits, we think there is little to the

town's argument. The "due diligence" phrase actually comes

from a New Hampshire case which, while elderly, is directed

to the very question of what constitutes "immediate" notice.

See Ward v. Maryland Casualty Co., 51 A. 900 (N.H. 1902).

The town objects that due diligence is merely an example of

immediate notice and unfairly emphasizes the conduct of the

insured rather than the totality of the circumstances. It

seems to us that the conduct of the insured is normally the

precise question posed by a requirement that the insured

provide immediate notice.

One can probably imagine the unusual case where the

insured did not exercise due diligence in giving notice of a

law suit while at the same time this notice was timely

received (e.g., from other sources). In this case, no such

alternative source of knowledge is alleged. Further, we have

no reason to think that the jury was confused in this case by

any hypothetical difference between "due diligence" and

"reasonableness under all the circumstances." In short, as

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to the instruction on timeliness, we think there was neither

error nor prejudice.

Affirmed.

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