The fine people who wrote the Federal Rules of Civil Procedure (and their state equivalents) certainly had a sense of humor. FRCP 1, for example, says: “These rules govern the procedure in all civil actions and proceedings in the United States district courts…They should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding.” (Emphasis mine.)
If you’ve had the pleasure of experiencing our court system, “just,” “speedy” and “inexpensive” may not be the first three adjectives that pop into your mind. And after reading about the recent decision by the Second Circuit in Cammeby’s v. Alliant Insurance Services, which you can access here, they really may not be.
As one of the lawyers at our firm, Ryan Milun, put it, suppose you’re driving down the New Jersey Turnpike with your six-year-old in the backseat, and he (or she) says: “Dad (or Mom), can we go to Six Flags?” (I’m going to refer to this as the “Six Flags Question.”)
How would you interpret the Six Flags Question? Would you think your kid was asking a philosophical question, like: “Assume for the purposes of argument that I were to ask you to go to Six Flags. Would that be physically possible for us to do, as human beings, with free will, in this place and time?”
Or, would you think your kid was actually asking: “Hey, can we go to Six Flags right now?”
That’s sort of what the Cammeby’s case, spawned (like many other broker liability cases) by Superstorm Sandy, involved. Cammeby’s is a real estate investment company. It had property coverage with a flood sub-limit of $10 million. At the request of its insurance consultant, its insurance broker (Alliant) got the carrier (Affiliated FM) to increase the flood sub-limit to $30 million.
Of course, an additional $20 million in flood coverage means a large increase in premium, as Cammeby’s soon learned. That resulted in unhappiness. So, a few weeks later, the Cammeby’s insurance consultant sent an email to the broker reading: “if requested, will Affiliated cancel the $20 million of additional flood coverage at the Brooklyn locations to inception? Also, can we cancel the additional NFIP coverage and receive a pro-rata refund?” And here, we have the Six Flags Question once again. Namely, did this mean: (1) Cancel the extra $20 million in coverage right now, or (2) Can we cancel the extra $20 million in coverage at some point in the future if we want?
I should pause here to say that I’ve worked with the people at Alliant in the past. I’ve found them to be bright, inquisitive, and service-oriented. So, they immediately selected Door No. 1. They complied with what appeared to be the client’s request, and got the additional flood coverage canceled. Affiliated FM issued an endorsement showing that the coverage sub-limit had been reduced to $10 million (although, unfortunately and confusingly, a separate endorsement, which modified the list of addresses covered by the policy, indicated that the coverage sub-limit was still $30 million). Alliant sent the new endorsement to Cammeby’s, and Cammeby’s later accepted a refund on the additional premium ($121,795). An internal email by a Cammeby’s Vice-President, sent shortly after the policy reduction in July 2011, read: “We have $10 million of flood coverage.”
But then along came Sandy, in October 2012, causing damage to Cammeby’s properties in excess of $30 million. Cammeby’s filed a claim with Affiliated FM, and Affiliated FM responded that the flood coverage was limited to only $10 million. This being America, Cammeby’s sued Alliant for malpractice, contending that no one with actual authority had authorized the reduction in limits.
Now, I can tell you from long experience that there are many judges who might have laughed this case out of Court. But here, the judge denied summary judgment and conducted a jury trial. During the trial, Alliant argued in part that Cammeby’s had ratified the reduction in flood insurance limits, by its acceptance of the endorsement, its internal emails recognizing that the flood limit was now $10 million, and its acceptance of the reduction in premium. The jury rejected the ratification argument, though, and returned a verdict against Alliant for $20 million. Allied then argued that a new trial was necessary, because the judge had bungled the jury instructions.
The jury instruction with respect to ratification stated: “To establish its defense of ratification, Allied must prove, by a preponderance of the evidence, that even if Allied acted behind beyond the scope of its actual authority from Cammeby’s and that, as a result, the coverage was reduced to $10 million, Cammeby’s had full knowledge that Allied had taken these actions and clearly manifested its intent to approve these actions.”
The jury was confused by this instruction, because during deliberations, they sent notes out to the judge, asking what “full knowledge” and “clearly manifest” meant. (This is what happens when we speak Law Professor-ese.) But the bigger problem was that ratification can be proven by silence. It does not require an affirmative act.
Realizing that the instructions were faulty, the judge ordered a second jury trial on the issue of ratification only. Alliant objected, arguing that the entire case had to be retried, including the issue of negligence, because the negligence and ratification issues were inextricably intertwined. But the Court disagreed. As a result, a second trial was held, in which a jury was instructed that Alliant had been negligent to the tune of $20 million, and the only question was whether Cammeby’s had ratified the negligence. (If normal human beings can’t comprehend what the legal system means by “full knowledge” and “clearly manifest,” guess the confusion that results when the judge essentially says, “Hey, those guys screwed up, and your only job is to determine whether the plaintiff actually liked it.”) Not surprisingly given the way the second trial was structured, the second jury found for Cammeby’s, also.
But this is why we have appeals courts, right? Well, statistics show that reversal rates are between 8% and 14%. And Alliant fell into the unhappy 86% to 92%.
A few takeaways:
- A less-than-favorable settlement is almost always better than a protracted litigation (except for the lawyers, I mean).
- In any business situation, make sure you’re dealing with a person with authority to enter into the agreement. Apparent authority may not be enough. 20/20 hindsight is a wonderful thing, but Alliant could’ve avoided a ton of trouble by asking for clarification on the Six Flags Question; namely, “Are we being requested by an officer with authority to go ahead and make the change?”
- Related to (2): Sloppy paperwork will kill you in litigation. The change endorsements that conflicted as to the actual limits didn’t help Alliant, for sure.