Putney School v. Schaaf

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 89-253


The Putney School, Inc.                      Supreme Court

                                             On Appeal from
     v.                                      Windham Superior Court

Joseph Schaaf                                November Term, 1990


John P. Meaker, J.

John H. Fitzhugh of Sheehey Brue Gray & Furlong, Burlington, for plaintiff-
  appellant

Allan R. Keyes of Ryan Smith & Carbine, Ltd., Rutland, for defendant-
  appellee CNA Insurance Companies

Jeffrey W. White of Theriault & Joslin, P.C., Montpelier, for defendant-
  appellee National Union Fire Insurance Company


PRESENT:  Gibson, Dooley and Morse, JJ., and Barney, C.J. (Ret.), and
          Martin, Sup. J., Specially Assigned


     MORSE, J.   We are asked to decide whether insurance policies
underwritten by CNA Insurance Companies and National Union Fire Insurance
Company provided coverage to Putney School for the wrongful discharge of a
music teacher, Joseph Schaaf.  After trial, the superior court ruled that
CNA was properly notified of the teacher's claim, but in a later proceeding
held that its policy did not cover Putney School for breach of contract.
The court also ruled that National Union's policy excluded the Schaaf claim
because National Union was not given notice of it according to a provision
requiring notice of preexisting potential claims.  Putney School, bereft of
any insurance coverage, appealed.  We affirm in part and reverse in part.
     The essential facts are not in dispute, but they and the procedural
posture of this lawsuit are complicated.  In January 1984, the Putney
School's headmaster (called school director) became dissatisfied with Schaaf
and informed him that his employment would be terminated at the end of that
school year.  Schaaf was advised of his appeal rights.  The school director
also told Schaaf that he could take up the matter of his employment with the
new school director when she took over.  In mid-1984, Schaaf hired an
attorney, and, on June 5, 1984, filed an appeal to the school's
administrative council.  That month the school also hired an attorney to
represent its interests in the matter.  The appeal was never heard, and
Putney gave Schaaf a sabbatical for the 1984-1985 school year.
     In January 1985, Putney's new school director upheld the decision to
discharge Schaaf and advised him of his right to appeal.  A second appeal
was filed but apparently never heard.  Protracted negotiations ensued, aimed
at settling the employment dispute but instead culminating in a lawsuit for
declaratory judgment brought by the school on May 27, 1986.  Schaaf
counterclaimed for wrongful discharge.  Later, the school brought its two
insurers, CNA and National Union, into the suit as third-party defendants to
determine their respective responsibilities, if any, to cover Schaaf's
claim.
     CNA covered Putney School with a "claims made" liability policy for a
three-year period ending May 25, 1985.  The CNA policy extended coverage
for wrongful acts occurring within the policy period so long as written
notice was given the insurer within one year of notice to the school of the
claim.  CNA's policy, however, excluded "any amounts due, under the terms of
any contractual obligation."
     When CNA's policy terminated, National Union's coverage of the school
commenced.  Its policy covered a three-year period beginning May 25, 1985.
A prior acts endorsement in the policy provided:
           In consideration of the premium charged, it is hereby
         understood and agreed that this policy is extended to
         cover Wrongful Acts committed prior to the beginning of
         the Policy Period.

           All references in this policy to Wrongful Acts
         committed during the Policy Period are hereby amended to
         include Wrongful Acts committed prior to the beginning
         of the Policy Period.

           It is further understood and agreed that the following
         exclusion is hereby added to this policy.

         (K)  To Wrongful Acts committed prior to the beginning
         of the Policy Period if, on or before 5/25/85 any
         Insured knew or could have foreseen that such Wrongful
         Acts would result in a claim or suit against the
         Insured.

(Emphasis added).
     Written notice of the Schaaf claim was sent June 10, 1986, to Putney's
insurance broker, Brewer & Lord, which in turn notified National Union, but
not CNA.  Ten months later, after repeated attempts by Putney to prompt
National Union to take action, it learned the carrier might decline
coverage.  National Union sent a letter dated June 24, 1987, declining
coverage on the basis of the wrongful acts exclusion.  Thereupon, Putney
notified CNA of the Schaaf claim, but CNA promptly denied coverage due to
late notice.
     CNA answered the school's third-party complaint by raising only the
affirmative defense of untimely notice.  On April 28, 1988, the trial court
ordered that by August 1, 1988, the parties were to file a statement of
"significant issues of fact and law."  On May 31, 1988, motions for summary
judgment were filed by the carriers.  CNA's motion rested solely on the
ground that the Schaaf claim was not within the policy period and, if it
was, that proper notice was not received.  Putney then filed a cross-motion
for summary judgment refuting the defenses raised by the companies and
asserting that National Union was estopped from denying coverage because it
neglected to respond promptly.  Because the trial court concluded that the
motions for summary judgment raised disputes concerning genuine issues of
material fact, it denied them and ordered a trial.
     Trial on the merits of the third-party action was held on August 8,
1988.  At the close of evidence, the court ruled from the bench that
National Union had properly declined coverage because its policy's prior
wrongful act exclusion applied but that CNA had been properly notified and
"there was coverage under the CNA policy for Putney for the circumstances
surrounding the termination of Mr. Schaaf."  On August 12, 1988, the court
ordered:
            1. CNA Insurance Companies (CNA) shall provide insur-
          ance coverage in accordance with its Insurance Policy
          with the Putney School which is in evidence.

            2. National Union need not provide insurance coverage
          in accordance with its Insurance policy with the Putney
          School which is in evidence.

     The Schaaf claim then proceeded to trial and, after a few days of
evidence, was settled.  A stipulation was signed, and it became an order of
the court dated August 17, 1988, which included the following provision:
"This order plus the August 12, 1988 Coverage Order fully dispose of all
claims herein."
     Thereafter, CNA filed a motion under V.R.C.P. 54(b) and 59(e) to amend
the August 17th judgment, raising for the first time the defense that its
policy excluded coverage for breach of contractual obligation.  The court,
without stating why, reopened the third-party dispute and, on April 12,
1989, granted CNA summary judgment.
     Putney appealed from the court's amended judgment.  CNA challenges the
original judgment on its obligation to provide coverage.  Although CNA did
not cross-appeal, the issue is preserved.  See Staruski v. Continental
Telephone Co., ___ Vt. ___, ___ n.3, 581 A.2d 266, 267-68 n.3 (1990).
                                    I.
     CNA argues that the court was wrong in finding that its policy's
notice-of-claim requirement was satisfied.  The policy provided that (1) the
insured must report a claim in writing to the insurer, paragraph VII(c); (2)
notice to the insurer shall be given to the firm shown in Item G of the
declarations, paragraph VII(e); (3) CNA, CNA Plaza, Chicago, Illinois, is
the firm indicated in Item G of the declarations; and (4) "[n]otice to any
agent of knowledge possessed by any agent or by any other person shall not .
. . estop the Insurer from asserting any right under the terms of this
policy," paragraph VIII(g).  CNA asserts that because Putney School only
notified its insurance broker, Brewer & Lord, CNA is not estopped from
asserting improper notice.
     Anticipating that the dispute over Schaaf's termination might warrant
notice to its insurer, Putney's business manager in June 1984 telephoned
Brewer & Lord, the brokerage firm that arranged for the policy with CNA and
to which Putney made premium payments.  Brewer & Lord was told that Schaaf
had been terminated and that a dispute existed.  Because Brewer & Lord did
not think the incident serious enough, it did not pass on the information to
CNA.  On these facts, the trial court concluded that Brewer & Lord was
acting as an agent on CNA's behalf and that notice to it was notice to CNA.
     Two years later, on June 10, 1986, Putney's lawyer sent Brewer & Lord a
letter explaining that settlement had failed and a lawsuit was about to be
brought.  Brewer & Lord forwarded the information to National Union, but not
to CNA.  CNA's first notice of the Schaaf dispute was a letter from Putney
in June 1987.
                                    A.
     CNA submits that the court's agency finding was clearly erroneous.
V.R.C.P. 52(a)(2).  In finding that Brewer & Lord acted as CNA's agent, the
court properly looked to the circumstances of their relationship and their
conduct.  Rule v. N.H.-Vt. Health Service, 144 Vt. 323, 326, 477 A.2d 622,
624 (1984).
     The court made findings on several key areas of the relationship
between CNA and Brewer & Lord: (1) although it could not bind CNA to
policies, Brewer & Lord solicited business on CNA's behalf; (2) premiums
were paid to Brewer & Lord, which forwarded them to CNA; (3) CNA paid
Brewer & Lord a percentage of the premiums for policies Brewer & Lord sold;
and (4) Brewer & Lord evaluated reports from insureds about potential claims
and decided which ones were serious enough to warrant notice to CNA.  Based
on the totality of the relationship, but most particularly the last factor,
the court found that Brewer & Lord "perform[ed] a dual function," that is,
it acted as agent for both the insurer and the insured at the notice-of-
claim stage.
     The court's findings were based on the testimony of Roger Wilson, a
partner at Brewer & Lord who handled Putney's business.  Although Wilson
denied that he or his firm ever acted as an agent for CNA, his testimony on
Brewer & Lord's role supports each of the court's findings.  On the fourth
factor, the court questioned Wilson directly:
         COURT:     For whom are you doing the evaluating at the
         incident stage?

         WITNESS:   Well, for the insured.  And we also are
         acting, we feel, in the best interest also of the
         insurance carrier, both parties.

         . . . .

         COURT:      How do you know where your loyalties lie
         when you are doing this evaluation?  . . . [F]rom what
         you're saying it sounds like you wear two hats.  If
         not, can you clear that up?

         WITNESS:    Well, we obviously represent our clients,
         the insured party.  But we also have an obligation to
         the carriers to keep them informed and protect their
         interest.

         . . . .

         COURT:      Is there any industry standard that affects
         your operation . . . that customarily establishes which
         hat you are wearing under circumstances where there may
         be an incident or a situation or even a claim?

         WITNESS:    I don't believe there are any strict
         standards, no.  We're thought of as representing the
         client obviously.  But you can only represent the client
         to whatever extent you also we feel represent your
         carriers.  There is a bond there.

     The court's finding that Brewer & Lord acted as an agent for both
parties at the notice-of-claim stage was supported by reasonable and
credible evidence -- and despite Wilson's protestations to the contrary  --
was not clearly erroneous.  Community Feed Store, Inc. v. Northeastern
Culvert Corp., 151 Vt. 152, 154-55, 559 A.2d 1068, 1069 (1989) (in
determining whether fact findings are clearly erroneous, evidence must be
viewed in the light most favorable to the prevailing party and findings will
be upheld if supported by reasonable or credible evidence, even if contrary
evidence exists).
                                    B.
     CNA next maintains that, because notice was not in accordance with the
express direction that notice be sent to CNA at its Chicago address,
coverage was not afforded.  CNA reasons that notice requirements should be
strictly enforced in a "claims made" policy because, if liberally construed,
the insured receives coverage substantially broader than provided in the
policy.  Whatever merit there is to that argument, we fathom no such
prejudice to the carrier here.  Lateness of notice may affect the risk, but
here notice was delivered to Brewer & Lord in a timely manner.  Had Brewer &
Lord done its job, notice would have reached CNA promptly.
     In order for the insured to appreciate the requirement that notice must
be sent to CNA in Chicago or its coverage would evaporate, it would have to
read paragraph VII(e) (notice to be given to "person or firm(s) shown under
Item G)," then refer to Item G (which named CNA, Chicago), and then
conclude that notice to Brewer & Lord is insufficient.  CNA argues that the
policy warns the insured of the latter conclusion by reference to paragraph
VIII(g) ("notice to any agent of knowledge . . . shall not effect a
waiver").
     We conclude that this labyrinth of obscurely written clauses does not
reasonably appraise the insured of this purported requirement.  It should be
apparent to reasonable insurers that doing business through a "middleman"
with whom the insured communicates and to whom premiums are paid, creates
the distinct impression that notice to the "middleman" is all that is
required.  The policy, fairly read, did not dispel that impression.  See
Fish v. Nationwide Mutual Insurance Co., 126 Vt. 487, 492, 236 A.2d 648, 651
(1967) (insurance contract provisions must be interpreted as they would be
understood by the ordinary reader and construed against the insurer if there
is "real substantial doubt" about their meaning).
     We conclude that the trial court's finding of agency was not clearly
erroneous and that the policy notice requirements were met.
                                    C.
     Alternatively, CNA contends that Putney violated paragraph VII(a) of
the policy, which requires written notice to the insurer within one year of
becoming informed of the Schaaf claim.  Paragraph VII(a) provides:
            If the School District . . . shall receive written or
          oral notice from any party that it is the intention of
          such party to hold the Assureds responsible for a Wrong-
          ful Act which occurred during the policy period, they
          shall give written notice within one year to the Insurer
          of the receipt of such written or oral notice . . . .

CNA claims the June 10, 1986 letter from Putney to Brewer & Lord was too
late because notice of the Schaaf dispute was first known more than a year
previously.  The rule in Vermont is that substantial compliance with notice
requirements will suffice.  See Stonewall Insurance Co. v. Moorby, 130 Vt.
562, 566-67, 298 A.2d 826, 829 (1972)(insurance policy provisions are
liberally construed in favor of the insured, and substantial rather than
strict compliance will suffice).  We do not read the policy's written notice
provision to defeat coverage when the receipt of oral notice, here the
telephone notice to Brewer & Lord in June 1984, is admitted.
     As a general rule, where an insurance policy provides for written
notice to the insurer, oral notification is insufficient.  See 8 J.
Appleman, Insurance Law and Practice { 4737 (1981).  Nonetheless, policy
provisions on notice must be "reasonably construed, so as to conserve the
true purpose of their presence in the contract."  Id. { 4731, at 6.  It is
universally recognized that the purpose of a notice provision is to give the
insurer the opportunity to make a timely and adequate investigation of
potential claims in order to assess its rights and liabilities.  Id. { 4731,
at 2; see 13A G. Couch, Cyclopedia of Insurance Law 2d { 49:2 (rev. ed.
1982).  Thus, some courts have held that where the insurer has received
timely actual notice in whatever form, it must show prejudice in order to
deny coverage.  Phico Insurance Co. v. Providers Insurance Co., 888 F.2d 663, 668-69 (10th Cir. 1989) (Kansas law); Fox v. National Savings Insurance
Co., 424 P.2d 19, 25 (Okl. 1967).  Other courts have gone even further,
holding that, absent a showing of prejudice, the insured's failure to give
any timely notice does not discharge the insured's duty to provide
coverage.  Insurance Co. of Pennsylvania v. Associated International Ins.
Co., 922 F.2d 516, 523 (9th Cir. 1990) (California law); Aetna Casualty and
Surety Co. v. Murphy, 206 Conn. 409, ___, 538 A.2d 219, 223-24 (1988)
(collecting cases); Johnson Controls, Inc. v. Bowes, 381 Mass. 278, 280-82,
409 N.E.2d 185, 187-88 (1980).
     The purpose of the written notice requirement is to avoid a dispute
over whether notice was given, and if so, when.  But Brewer & Lord admitted
it received timely notice.  Any prejudice to CNA's ability to investigate
the Schaaf matter resulted, not from the form of Putney's notice to Brewer &
Lord, but from Brewer & Lord's decision, acting as CNA's agent, that the
incident was not worthy of CNA's attention.
                                    D.
     CNA's final argument on the issue of notice is that by statute Brewer &
Lord is a broker and as such cannot be CNA's agent.  Section 4792(b) of
Title 8 states:
            Every insurance broker . . . who solicits an appli-
          cation for insurance of any kind shall, in any contro-
          versy between the insured . . . and the insurer issuing
          any policy upon such application, be regarded as rep-
          resenting the insured . . . and not the insurer . . . .

This statute does not foreclose the possibility that a broker may for some
purposes be acting as an agent for the insurer.  3 G. Couch, supra, { 25:96,
at 459-60 ("statutes may declare that a broker is the agent of the insured
but such statutes do not preclude the creation of an actual agency between
the insurer and the broker"); see also Maloney v. Rhode Island Ins. Co., 115 Cal. App. 2d 238, 245, 251 P.2d 1027, 1031 (1953) (stating that "[i]t has
uniformly been held that such a provision does not prevent an actual agency
relationship different from that described in the [statute], from arising
from the fact of conducting a transaction" and collecting cases from other
jurisdictions to that effect).
                                     II.
     Putney contends that CNA's belated effort to raise a defense that its
policy excluded coverage for breach of contract should not have been
considered by the trial court.  We agree.
     A dispute existed between CNA and Putney over coverage.  The coverage
issue raised in the pleadings went to trial, was argued, and decided.
Coverage having been decided by the court's judgment, the underlying dispute
between the school and Schaaf then went forward, and a settlement was
reached.  CNA gave no reason why it failed to litigate the issue earlier,
apparently raising it as an afterthought once judgment was entered.  The
court abused its discretion by reopening the proceedings when no
justification was alleged or proved.
     CNA brought its motion to amend the court's order pursuant to V.R.C.P.
54(b).  That rule provides that, where an action involves multiple claims or
parties, the court may enter a final judgment on fewer than all the claims
if it determines that there is no just reason to delay doing so.  If the
court does not make this determination, its "order . . . is subject to
revision at any time before entry of judgment adjudicating all the claims."
The court's August 12th order, requiring CNA to "provide insurance coverage
in accordance with its Insurance Policy with the Putney School" was
interlocutory.  Consequently, the court had the "plenary power" to revise
its judgment "as justice requires" without reference to the strictures of
V.R.C.P. 60(b), which apply only to final judgments.  Dudley v. Snyder, 140
Vt. 129, 131, 436 A.2d 763, 764 (1981).
     Plenary power, however, is not arbitrary power.  The court's power to
reopen any issue under V.R.A.P. 54(b) can be exercised only "as justice
requires," that is, in accordance with the principles of equity and fair
play.  See Marconi Wireless Telegraph Co. v. United States, 320 U.S. 1, 47-
48 (1942) (decisions to reconsider or reopen interlocutory orders are
matters for the court's discretion).  As with all matters within the court's
discretion, the court's action is subject to an abuse-of-discretion standard
of review.  In re Burlington Bagel Bakery, Inc., 150 Vt. 20, 22, 549 A.2d 1044, 1045 (1988).
     After a settlement was reached by the school, at which point CNA was
"on the risk," CNA moved the court to amend its August 12th order to provide
that nothing in it would be "deemed to adjudicate or prejudice the rights of
CNA."  This was an odd request, given that controversy over coverage of the
Schaaf claim was the sole issue at trial and given that CNA had
unequivocally lost on this very issue.  CNA did not assert that the court's
order was ambiguous, and it did not explain why its plain meaning should not
control.  Nor did CNA assert that it had not had an opportunity to fully
litigate its case or give any reason whatsoever why it was entitled to
relief from the judgment arrived at.  Rather, it simply stated that the
trial court "did not adjudicate whether the coverage available under the
policy is, in whole or in part, applicable to the specific claims of Joseph
Schaaf in the underlying action."
     The purpose of resolving the coverage issues before the Schaaf trial
was to give the parties a sense of the risks to be allocated in the Schaaf
litigation.  As a result of the court's August 12th order, Putney reasonably
relied on CNA to cover its liability to Schaaf, subject only to any appeal
of the issues litigated.  The school went forward with its suit, ultimately
settling with the teacher.  Its willingness to do so was undoubtedly based
in part on its belief that CNA would provide coverage.  Prejudice to Putney
is obvious; after Putney settled a lawsuit subject to the trial court's
judgment that CNA was responsible for the risk, the court allowed CNA to
spring a new ground to avoid the risk and thereby changed the calculus
Putney used in settling the Schaaf claim.  On the other hand, CNA, which had
a full and fair opportunity to litigate the issue of coverage, sought a
gratuitous second chance in violation of principles of finality and
judicial economy.  CNA did not rely on any excuse caused by human error or
unavoidable circumstance.  The court abused it discretion by considering
CNA's request.
                                   III.
     Putney contends that the trial court erred in finding that National
Union's policy excluded coverage of the Schaaf claim.  Exclusion K of the
policy exempts from coverage,
         Wrongful Acts committed prior to the beginning of the
         Policy Period if, on or before 5/25/85 any Insured knew
         or could have foreseen that such Wrongful Acts would
         result in a claim or suit against the Insured.

Specifically, Putney disputes that there was sufficient evidence to support
the court's finding that "Putney could have foreseen that the termination of
Mr. Schaaf would result in a claim or suit against [it]."
     The court found that in January 1984, Schaaf was terminated by Putney,
and that in June 1984, he hired an attorney who communicated to the school
his belief that the termination was improper under his employment contract.
Also, in June 1984, Putney contacted its own counsel, who commenced
settlement discussions with Schaaf's attorney.
     Not only were these findings supported by the record, most were
stipulated by the parties.  In addition, there was evidence that, prior to
May 5, 1985, Putney had contacted Brewer & Lord about the Schaaf situation,
and that Putney had declined a settlement offer made by Schaaf's attorney.
     The court concluded that

          in this day and age if an employee who has a contract is
          terminated, and that employee thereafter retains counsel
          who makes a communique with the insured that something
          is amiss, under those circumstances, and as I've
          outlined the broad history, the insured could have
          foreseen that the termination . . . would result in a
          claim or a suit.

     Putney argues that the court placed too much emphasis on the parties'
retention of counsel.  It contends that the testimony of Schaaf's attorney
shows he was seeking reinstatement for his client, not a lawsuit, and that
the likelihood of settlement meant that the incident had not risen to the
level of a claim.  The presence of contrary evidence, however, does not
render the court's finding clearly erroneous.
     Exclusion K calls for notice, not of certain liability, but of the
insured's potential liability.  The provision seeks disclosure of
problematic situations that, without resolution by other means, would result
in a lawsuit.  By May 25, 1985, almost a year and a half had passed since
Schaaf's termination, and his situation had not been resolved.  Schaaf had
hired a lawyer and let the school know that he considered his termination to
be wrongful.  The school would not have hired its own attorney and entered
into settlement discussions if the Schaaf situation were not one that might
be the basis for a claim or suit.
     Putney also argues that, because National Union delayed for more than a
year in declining Putney's claim, it should be barred by equitable estoppel
from raising its policy exclusion.  The trial court made no findings on this
issue.  Because the court initially found CNA liable for coverage of the
Schaaf claim, it presumably found that Putney had suffered no prejudice from
National Union's delay.
     The court's August 12, 1988 order is affirmed; its April 12, 1989 order
is reversed.
                                             For the Court:


                                             Associate Justice