Appeal from a judgment in favor of the plaintiffs entered in the United States District Court for the Western District of New York, John T. Elfvin, Judge, after a jury trial. Plaintiffs sued on an insurance policy to recover for losses due to fire and were awarded $20,000.
Friendly, Smith and Meskill, Circuit Judges.
In November of 1973, Salvatore and Patricia Ferro purchased the C-Suzanne Beauty Salon from Dorothy Smith, its sole stockholder. C-Suzanne's business was located in leased premises in Kenmore, New York. At the time of the sale, C-Suzanne's personal property was insured against loss by fire by the General Insurance Company of America in the amount of $15,000. The Ferros decided that this amount was inadequate and in January, 1974, increased its limit to $35,000. On April 19, 1974, Salvatore Ferro telephoned his insurance agent and inquired whether the policy was in effect. It was. The next day, an incendiary fire occurred. The business closed on a permanent basis.
C-Suzanne filed a proof of loss with General Insurance on November 18, 1974. New York counsel for General Insurance responded by requesting that Mr. and Mrs. Ferro appear for an examination under oath at a specified time and place.*fn1 The Ferros' lawyer sent the following reply on December 23, 1974:
Mr. and Mrs. Ferro have consulted with the undersigned regarding this claim, and after due deliberation, they have advised our office that they do not intend to proceed.
Accordingly, they will not be present on the above date and time for the Examination under Oath.
We suggest that you mark your file ahead, and if lawsuit is not instituted within 12 months from the date of loss, then you will have a "free one".
The object of my letter is to save you the time and trouble of coming to Buffalo needlessly.
General Insurance did not insist on conducting an examination, although the policy gave it the right to do so.*fn2 The Ferros apparently changed their minds about pursuing their claim, however, for they retained a new lawyer, and on April 18, 1975, two days before the one-year limitation of action period imposed by the policy was to expire,*fn3 C-Suzanne brought suit in New York State Supreme Court in Erie County. The action was removed to the United States District Court for the Western District of New York. The basis for federal jurisdiction is diversity of citizenship.
General Insurance interposed a number of defenses to the action. Three of them are relevant here. First, it asserted that the Ferros' refusal to appear for an examination under oath constituted a breach of the "cooperation clause" of the policy, see note 2 supra, which precluded recovery. Second, it asserted that the Ferros had committed arson and, concomitantly, that they were guilty of fraud in filing a proof of loss which stated the contrary. Third, it asserted that the amount of damage alleged to have been sustained in the proof of loss was grossly and fraudulently exaggerated.
Prior to trial, General Insurance moved for summary judgment on the basis of the alleged breach of the cooperation clause. The district court denied the motion but ordered the Ferros to submit to an examination under oath. The court's order, which had been drafted by General Insurance, provided that the denial of the motion to dismiss was without prejudice to General Insurance's right to renew the motion at a later date if the delay of the examination proved to have prejudiced General Insurance's investigation of the facts. The motion was later renewed, but it was denied on the ground that there had been no showing of prejudice.
At trial, C-Suzanne sought to recover the full value of improvements that it had made at the beginning of the lease when the building was remodeled to make it suitable for a beauty salon. Before the court charged the jury, General Insurance ...