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GREAT NORTHERN INS. CO. v. DAYCO CORP.

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK


July 15, 1986

GREAT NORTHERN INSURANCE COMPANY, Plaintiff,
v.
DAYCO CORPORATION, Defendant

The opinion of the court was delivered by: POLLACK

MILTON POLLACK, Senior United States District Judge

AMENDED AND SUPPLEMENTAL FINDINGS

 In an opinion dated June 12, 1986, this Court awarded judgment to Dayco Corporation ("Dayco") on its counterclaim against Great Northern Insurance Co. ("Great Northern") for $3,759,523.21, plus interest.

 I. Modification of Damage Award

 Dayco submitted a post-trial brief requesting a modification of the damages awarded.

 4350 belt

 The Court found that the actual cash value of the 4350 belt was approximately $3 to $4 less than Dayco's standard manufacturing cost based on the fact that European competitors had sold the belt at these lower prices.

 Dayco contends that there was no credible or admissible evidence showing that the belt was sold below its unit sales price of $10.57. Dayco asserts that the only evidence introduced at trial that competitors had sold the belt at lower prices was a statement by Edith Reich which was not credible. Further, Dayco contends that there was no evidence which showed that the belts sold by the competitors were comparable to the 4350 belt.

 Great Northern argues that the Court's judgment as to the 4350 belt was proper since an internal Dayco memorandum stated that European competitors were selling the belt for $3 to $4 less than Dayco's cost and Dayco's Director of Accounting admitted that some of the 4350 belts which Dayco shipped to Russia were actually purchased from European competitors for less than Dayco's cost.

 Evaluation

 Great Northern introduced Plaintiff's Exhibit 52 in evidence as proof of the actual cash value of the 4350 belt. The Exhibit is an internal Dayco memorandum, dated February 8, 1980, discussing the production of the 4350 belt. The memorandum states that Dayco is not capable of producing the quantity of belts ordered, and that it will have to purchase 120,000 pieces of the belt from competitors to meet the contract requirements. The memo refers to a statement made by Edith Reich that certain European manufacturers were selling the belt for approximately $5 or $6. No other testimony was introduced to show that the competitors actually sold the 4350 belt at such prices.

 It is questionable whether the statement attributed to Reich in the memo is credible evidence, given Reich's fraud. Moreover, it seems that the statement is hearsay and, as such, is inadmissible as evidence. Thus, there was no reliable proof that European manufacturers sold the 4350 belt for $3 to $4 less than Dayco's standard manufacturing cost.

 However, there was credible evidence introduced which proved that the 4350 belt had an actual cash value lower than Dayco's unit sales price. Ronald Powers, Dayco's Director of manufacturing accounting, testified that Dayco bought approximately half of the 4350 belts which it shipped to Russia from European competitors at a price which was approximately $2 lower than Dayco's standard manufacturing cost. See Transcript at 575-76 (Powers recalled that Dayco purchased one belt -- which he believed was the 4350 belt -- from some European manufacturer at a price which was cheaper than they could manufacture the belt; Powers stated that the belt was purchased from the competitor for approximately $2 less than Dayco's cost); Transcript at 579 (Powers stated that the 4350 belt was manufactured by a competitor, Optibelt, and sold for less than Dayco's cost); Transcript at 583 (Powers stated that he was aware of one manufacturer who could sell one of the belts cheaper than Dayco could manufacture it); Transcript at 587 (Powers stated that Dayco bought the 4350 belt from a competitor for a price less than Dayco standard cost and that approximately 50% of the belts shipped to Russia were bought from competitors).

 This evidence is credible proof that the 4350 belt *fn1" was sold by competitors for $2 less than Dayco's cost. *fn2" On the basis of the above, the actual cash value for the 4350 belt is $7.18. Accordingly, there should be an increase in the award to Dayco of $220,358.40. *fn3"

 3585 belt

 The Court found that the actual cash value of the 3585 belt was $3.75 based on Dayco's sale of the belt to the Russians in 1984 for that price.

 Dayco contends that it was improper for the Court to consider the 1984 sale as evidence of the actual cash value of the 3585 belt because the sale was not at the time of the loss and further, because the 1984 sale was a "fire sale".

 Great Northern contends that no evidence was offered to demonstrate that the 1984 sale was a "fire sale."

 At trial, Dayco claimed that the 3585 belt had an actual cash value equal to its unit sales price of $16.10. However, Great Northern presented evidence at trial which showed that Dayco had sold the 3585 belt, for $3.75 in 1984. Transcript at 590-91.

 The insurance policy required that the property be valued at its actual cash value at the time of the loss. Although the 1984 sale did not occur at the time of the loss, it is still evidence of the value of the belt at the time of the loss. Without an explanation of the price disparity, it is difficult to believe that the value of the 3585 belt dropped by more than $8 in three years. Dayco failed to submit any evidence at trial to explain the disparity in price. See Transcript at 591 (Powers was asked to explain the disparity and he could not). In fact, the first time that Dayco attempted to explain the low 1984 sales price was in its post-trial brief and even then Dayco offered no factual evidence to support its assertion that the 1984 was a "fire sale".

 95,040 pieces of the 4000 mm belt

 The Court found that Dayco could not recover for 95,040 pieces of the 4000 belt because it sent a telex to Tractoroexport stating that payment for these belts should be made to FTC.

 Dayco contends that it had attempted to obtain payment for these belts prior to sending the telex, but was told by the Russians that payment could only be changed with the agreement of FTC. Dayco thus argues that since it had no rights of recovery against Tractoroexport, the telex had no substantive effect and could not be considered a release of its rights. Dayco contends that the telex was merely sent in an effort to settle its dispute with Reich.

 The Court's opinion used the term "release" or "releasing" in explaining why Dayco was denied recovery for the 95,040 pieces of the 4000 mm belt. The use of this term may have been misleading. The basis on which Dayco is denied recovery for these goods is not that its actions had the legal effect of a release, but because Dayco did not prove that these goods were lost. By directing Tractoroexport to pay Reich for the 95,040 pieces of the 4000 belt, Dayco could no longer claim that these belts were stolen by Reich. Thus, Dayco failed to sustain its burden of proof to recover for these belts under the policy.

 Deductible Clause

 The insurance policy at issue in this case provided for a $10,000 deductible for each loss claimed. The insurance policy states:

 "Deductible : No claim shall be made under this policy unless loss or damage so caused exceeds the amount indicated below and then this company shall be liable for the amount of loss in excess of the amount indicated below not exceeding, however, the limit of this policy.

 $10,000 for Property Damage."

 Pursuant to the policy deductible, Dayco's award should be reduced by $90,000. *fn4"

 Accordingly, on the basis of the modifications stated above, Dayco's award is increased in the amount of $130,358.40.

 II. Attorneys' Fees

 In its June 12, 1986 opinion, the Court stated that Dayco is entitled to an award of attorneys' fees for its defense of the declaratory judgment action.

 Dayco has submitted an application for attorneys' fees incurred in defending the declaratory judgment action brought by Great Northern. Great Northern opposes this application. Relying on Puritan Insurance Co. v. Eagle Steamship Co. S.A., 779 F.2d 866 (2d Cir. 1985), Great Northern contends that fees are not recoverable in this case because there was no duty to defend.

 Evaluation

 Puritan Insurance Co. involved an action brought by an insurance company seeking damages and a declaration that a maritime insurance policy, covering the hull and machinery, was void. The district court dismissed the claim and awarded the insured attorneys' fees.

 On appeal, the Second Circuit upheld the dismissal, but remanded the case for a reconsideration of the attorneys' fee award. The Second Circuit had two difficulties with the award of fees. First, the Court stated that the district court should have considered whether federal admiralty, rather than state law, governed the availability of attorneys' fees. Second, the Court questioned whether New York law, if applicable, would permit the award of fees in a case where the insurer was under no obligation to defend since the New York cases which permitted the award of attorneys' fees seemed to be based on the breach of the insurer's responsibility to defend.

 The Second Circuit did not actually decide the insurer's obligation for the attorneys' fees in the Puritan case; the issue was left for consideration by the district court. Thus, the Second Circuit's suggestion that New York law does not permit an award of attorneys' fees in a case where there is no duty to defend is not binding precedent.

 The New York cases which permit an insured to recover its legal expenses for defending a declaratory judgment action brought by the insurer to declare non-coverage base the award of fees on the insurer's breach of its duty to defend.

 The first case where legal costs were awarded is Johnson v. General Mutual Insurance Co., 24 N.Y.2d 42, 298 N.Y.S.2d 937, 246 N.E.2d 713 (1969). In that case, the subrogee of the insured brought a declaratory judgment action against the insured and his insurance company to compel the insurer to defend. The insured cross-claimed against the insurer. The Court held that the insured was entitled to recover expenses for its defense of the action (although not for its prosecution of the cross claims) since the expense of defending the declaratory judgment action arose as a direct consequence of the insurer's breach of its duty to defend.

 Later cases extended the holding in Johnson to the situation where the insurer brought a declaratory judgment action against the insured. See, e.g., Glens Falls Insurance Co. v. United States Fire Insurance Co., 41 A.D.2d 869, 342 N.Y.S.2d 624, 627 (3d Dept. 1973). The language in some of these cases could be seen as sufficiently broad to permit the award of fees whenever an insured is cast in a defensive position by the insurer, regardless of whether there is a duty to defend. See e.g., Mighty Midgets, Inc. v. Centennial Insurance Co., 47 N.Y.2d 12, 416 N.Y.S.2d 559, 389 N.E.2d 1080 (1979) (stating that an award of fees is available when the insured is "cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations"). However, upon closer examination, it appears that the availability of fees is dependent on a breach of the insurer's duty to defend. See Glen Falls Insurance Co. v. United States Fire Insurance Co., 41 A.D.2d at 870, 342 N.Y.S.2d at 627 ("An insured is entitled to recover the expenses of defending a declaratory judgment brought as a result of an insurer's breach of its obligation to defend).

 The cases permitting an award of fees involved insurance contracts that obligate the insurer to defend, as well as to indemnify the insured against loss. Moreover, the basis on which fees were awarded is that legal expenses incurred in defending the declaratory judgment action are directly attributable to and a consequential damage of the insurer's breach of its duty to defend. See Allstate Insurance Co. v. Aetna Casualty & Surety Co., 123 Misc.2d 932, 475 N.Y.S.2d 219 (1984); Brown v. United States Fidelity & Guaranty Co., 46 A.D.2d 97, 361 N.Y.S.2d 232 (3d Dept. 1974). "Essentially, these cases find support in the theory that an insurer's responsibility to defend reaches the defense of any actions arising out of the occurrence." Mighty Midgets, 416 N.Y.S.2d at 564.

 In cases where the insurer denied coverage, but did not breach its duty to defend, the courts refused to award attorneys' fees. In Sukup v. State, 19 N.Y.2d 519, 281 N.Y.S.2d 28, 227 N.E.2d 842 (1967), the court held that the insurer was not liable for the legal expenses incurred by the insured in a worker's compensation hearing in which the question of coverage was litigated. The court denied fees because the insurer had not refused to defend the insured, but had merely suggested that the insured participate in the hearing since questions of substantive coverage were involved. Likewise, in American Motorists Insurance Co. v. E.R. Squibb & Sons, Inc., 95 Misc. 2d 222, 406 N.Y.S.2d 658 (1978), the court held that the insured could not recover fees incurred in defending a declaratory judgment action where the insurer defended the insured in the main action, with a reservation of rights. Thus, in New York, the right to recover attorneys' fees incurred in defending a declaratory judgment action brought by the insurer is limited to situations where the insurer breached its duty to defend. Accordingly, Dayco's application for attorneys' fees is denied.

 SO ORDERED

 Milton Pollack, United States District Judge


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