Swift River . . . v. Zurich Ins. CV-95-594-SD 09/16/96 UNITED STATES DISTRICT COURT FOR THE

DISTRICT OF NEW HAMPSHIRE

Swift River Hafslund Co., et al

v. Civil No. 95-594-SD

Zurich Insurance C o .; Philadelphia Gear Corp.

O R D E R

In this diversity action, plaintiffs Swift River Hafslund,

et al. (collectively, SRH), seek relief on a number of causes of

action against defendants Zurich Insurance Company and

Philadelphia Gear Corporation (PGC) . The claims arise out of the

failure of a gear box which was manufactured by PGC and used in

plaintiffs' hydroelectric plant in Errol, New Hampshire. Zurich

issued the insurance policy which covered the Errol plant.

Plaintiffs allege, inter alia, that Zurich breached the insurance

contract by failing to make complete payments for losses suffered

by the plaintiffs as a result of the gear box failure.

Plaintiffs filed their complaint in the United States

District Court for the District of Maine on May 22, 1995,

bringing claims against Zurich alone. On May 24, 1995,

plaintiffs filed their first amended complaint, naming PGC as a co-defendant. The Maine federal court (Carter, C.J.) transferred

the case to this district on November 14, 1995. See Memorandum

of Decision and Order Conditionally Granting Joint Motion to

Transfer Venue, Nov. 14, 1995, docket no. 16. SRH filed their

second amended complaint in this court on January 22, 1996.

Currently before the court is Zurich's motion to dismiss

Counts III-VI of the second amended complaint. Also before the

court is PGC's motion for summary judgment1 on Counts VII and IX,

to which plaintiffs object, in part.2

Background3

The plaintiffs, owners and operators of a hydroelectric

plant located in Errol, New Hampshire, purchased from defendant

Zurich an "all risk" property insurance policy covering property

damage and lost income due to business interruption. The policy

also covered other SRH operations in Maine and New Hampshire.

On or about July 7, 1994, plaintiffs discovered that a gear

1Pursuant to Rule 12(b), Fed. R. Civ. P., the court has previously converted PGC's motion to dismiss Count IX into a motion for summary judgment and has given the parties appropriate time to supplement their filings. See Order of July 10, 1996.

2Both Zurich and PGC have also filed reply memoranda to plaintiffs' objections.

3The facts in this section are taken from the second amended complaint unless otherwise noted.

2 box manufactured by defendant PGC was broken. As a result of the

failed gear box, the Errol plant was out of operation from

July 7, 1994, to September 8, 1994, during which time PGC made

temporary repairs to the gear box. The gear box was reinstalled

after the temporary repairs were completed, and the plant resumed

power generation, subject to some restrictions, on September 9,

1994. On January 8, 1995, the gear box was again taken out of

service, this time to be fitted with replacement gears

manufactured by PGC. The plant remained out of service until

March 16, 1995.

Plaintiffs claim that Zurich was obligated under the

contract to indemnify them for an amount in excess of $435,000

for property damage, and an amount in excess of $690,000 for lost

income from business interruption. Zurich has made payments to

plaintiffs of $346,995.24 for property damage and $271,932 for

lost income due to business interruption. Plaintiffs maintain

that under the insurance contract Zurich owes an additional

$88,000 for property damage and $420,000 for lost profits.

Zurich refuses to make the payments and invokes two clauses of

the contract: (1) an exclusion for loss or damage caused by

faulty workmanship, material, construction, or design, and (2) a

limitation on coverage for business interruption to the length of

time reguired, with the exercise of due diligence, to repair the

3 damaged property.

Discussion

1. Rule 12(b)(6) Standard

To resolve defendant PGC's Rule 12(b) (6) motion, the court

must "take the well-pleaded facts as they appear in the

complaint, extending plaintiff[s] every reasonable inference in

[their] favor." Pihl v. Massachusetts Pep't of Educ.,

(1st Cir. 1993) (citing Coyne v. City of Somerville,

(1st Cir. 1992)) . A Rule 12 (b) (6) dismissal is

appropriate "'only if it clearly appears, according to the facts

alleged, that the plaintiff cannot recover on any viable

theory.'" Garita Hotel Ltd. Partnership v. Ponce Fed. Bank,

F .S .B .,

(1st Cir. 1992) (guoting Correa-Martinez

v. Arrillaga-Belendez,

(1st Cir. 1990)).

2. Count III: Choice-of-Law

The threshold guestion is which state's--Maine's or New

Hampshire's--choice-of-law rules should be applied to determine

the law governing Count III, which seeks conseguential damages

associated with Zurich's breach of contract.

When making choice-of-law determinations, " [a] federal court

which exercises diversity jurisdiction over state law claims must

4 apply the choice-of-law rules of the state in which it sits."

Crellin Technologies, Inc. v. Equipmentlease Corp.,

(1st Cir. 1994) (citing Klaxon v. Stentor Elec. Mfg. Co.,

(1941)). The determination of which forum's choice-of-

law rules apply after transfer of venue depends on the grounds

for the transfer. The choice-of-law rules of the transferor

forum govern in a case transferred pursuant to

,

regardless of whether plaintiff or defendant moved totransfer.

See Kerens v. John Deere Co.,

(1990).4 In

contrast, the choice-of-law rules of the transferee forum govern

in a case transferred pursuant to section 1406(a) . Muldoon v.

Tropitone Furniture Co.,

(9th Cir. 1993); M o o r e 's ,

supra note 4, 5 0.345[.4-5]; Wright, supra note 4, § 3827, at 267.

SRH originally filed the complaint in the United States

District Court for the District of Maine. SRH, joined by PGC,

subseguently moved that court to transfer venue pursuant to

either

(a) or § 1406(a).5 The court granted the

4See also 1A, Part 2, J a m e s W m . M o o r e , e t a l . , M o o r e 's F e d e r a l P r a c t i c e 5 0.345 [.4-5] (2d ed. 1989); 15 C. W r i g h t , A. M i l l e r & E. C o o p e r , F e d e r a l P r a c t i c e a n d P r o c e d u r e § 3827, at 2 67 (198 6, 1996 Supp.) .

provides, in relevant part:

(a) For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been

5 motion, concluding that transfer would be appropriate under

either section 1404(a) or section 1406(a). The court did not

determine whether venue was properly laid in that district. See

Order of November 14, 1995, at 4 n.3 (Carter J.).

Ordinarily, the Maine federal court's failure to specify

which rule it was using to transfer would create a difficulty in

the determination of which state's choice-of-law rules are

applicable to the case at bar. However, as will be shown, the

applicable choice-of-law analysis of both New Hampshire and Maine

yields the same result, and therefore it is immaterial which

state's rules are applied.

Zurich contends Count III should be dismissed because

conseguential damages arising out of the alleged breach of an

insurance contract cannot be recovered under Maine or New

Hampshire law. The court must first determine whether, under

relevant choice-of-law rules, Maine or New Hampshire law controls

the contract issues in this case. Then, the court will decide

brought.

provides, in relevant part:

(a) The district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.

6 whether the applicable law allows for the recovery of

consequential damages.

In both Maine and New Hampshire, casualty insurance

contracts are generally governed by the substantive law of the

state which the parties understood to be "the principal location

of the insured risk." See Maine Drilling & Blasting v. Insurance

C o . of North Am.,

, 3 n.l (1st Cir. 1994) (citing

Bavbutt Constr. Corp. v. Commercial Union Ins. Co.,

(Me. 1983), overruled on other grounds. Peerless Ins. Co.

v. Brennon,

(Me. 1989)); Consolidated Mut. Ins. Co.

v. Radio Foods Corp.,

,

(1968).

Both Maine and New Hampshire have also addressed multiple-

risk contracts, like the one here, where the location of the

insured risk is spread over several states:

In a multiple risk policy which, as in the instant case, was clearly intended to afford comprehensive liability in the three states of Maine, New Hampshire and Vermont, the authorities have treated such policies in respect to the location of a particular risk in one of the states covered by the contract as if a separate policy had been issued to cover only the risks in that state. The rationale for such a holding is based on the fact that the location of the insurance risk in a particular state pinpoints the jurisdiction that has the greatest interests in the contract and any issues arising therefrom.

Bavbutt, supra,

(emphasis added) (citing

Consolidated Mut. Ins. Co., supra,

,

7 4 9; R estatement (Se c o n d ) o f C o n f l i c t s , supra, § 193, cmt. f) . Accord

Gates Formed Fibre Prods, v. Plasti-Vac, Inc.,

(D. Me. 1988); Ellis v. Roval Ins. Co.,

,

(1987) (insurance policy covering "a multitude

of risks in various [s]tates" should be governed by New Hampshire

law because particular risk at issue was located in New

Hampshire).

The insurance contract giving rise to SRH's claims is a

multiple-risk policy covering sites in New Hampshire and Maine.

Zurich argues that the parties negotiated and executed the

contract in Maine and that SRH's principal place of business was

in Portland, Maine. Zurich then contends that because "the

principal location of the insured risk" was in Maine, Maine law

should govern.

However, given that the policy covered multiple risks and

that the insurance contract specifically lists the Errol, New

Hampshire, site as an insured risk, the court must construe the

policy as if Zurich had issued a separate policy covering that

site. Therefore, under both Maine's and New Hampshire's choice-

of-law rules. New Hampshire law governs the contract issues in

this case.6

6To the extent that Zurich relies on Maine Drilling for the proposition that Maine was the principal location of the insured risk, the court notes that Maine Drilling is inapposite. Unlike With respect to consequential damages, the New Hampshire

Supreme Court has held that "because an insurance policy is a

contract, its breach may result in an award of consequential

damages if they were foreseeable and can be proved." A .B .C .

Builders, Inc. v. American Mut. Ins.,

,

(1995) (citing, inter alia, Lawton v. Great South West

Fire Ins. Co.,

,

(1978)). Accordingly, Zurich's motion to dismiss Count III of

the second amended complaint is denied.

3. Counts IV and V, Unfair Claims Practices

Counts IV and V of SRH's second amended complaint allege

that Zurich committed unfair claims practices in violation of

Maine Revised Statutes Annotated tit. 24-A, § 2436-A (West 1996)

and the New Hampshire Consumer Protection Act, Revised Statutes

Annotated (RSA) 358-A (1995), respectively. Zurich argues that

the claim is governed by the law of Maine because it believes

Maine law governs the contract, and therefore Count V should be

dismissed. Plaintiff, predictably, argues that New Hampshire law

governs, and states that it will be generous enough to withdraw

Bavbutt and this case, where the locations of the multiple risks were specified in the contract, Maine Drilling involved a general liability policy which did not cover specific sites outside of the insured's home state. See Maine Drilling, supra,

n.l. the Maine count if the court agrees. Unfortunately, neither

side's position has the benefit of reasoned or developed

argumentation, and therefore they have left the court to its own

devices in approaching the problem. See Crellin Technologies,

supra,

("a defendant in a contract case governed by

one state's law nonetheless may be subject to the provisions of

another state's unfair trade practices statute").

For choice-of-law purposes, a claim made pursuant to a

consumer protection statute may be treated as a tort or a

contract, depending upon the nature of the claim. Compare

("We hold that, at a minimum when a [claim under the

Massachusetts Consumer Protection Act, Mass. Gen. L. ch. 93A] and

the reguested remedy are highly analogous to a tort claim and

remedy, the chapter 93A claim should be considered as a tort for

choice-of-law purposes.") with Northeast Data Svs., Inc. v.

McDonnell Douglas Computer Svs. Co.,

(1st Cir.

1993) (where chapter 93A claim is "essentially reduce[d]" to

contract claim, choice-of-law provision pertaining to rights and

obligations of parties under contract would be honored). Accord

Scully Signal Co. v. Joval,

(D.R.I. 1995);

but see Computer Svs. Enq'q, Inc. v. Oantel Corp.,

(D. Mass. 1983) (holding chapter 93A claims should be

uniformly treated as torts for choice-of-law purposes), aff'd .

10 740 F .2d 59 (1st Cir. 1984) .

The mere presence of improper motivation will not necessarily

cause a consumer protection claim to be treated as a tort for

choice-of-law purposes. See Scully Signal Co., supra,

. Instead, even where improper motivation has been

alleged, it is possible that the claim is still an "embroidered"

breach of contract claim that therefore should be treated like a

contract. For example, there is a distinction between willfully

breaching a contract and fraudulently forming a contract, the

former being more akin to a contract claim and the latter being a

tort for choice-of-law purposes. See Northeast Data Svs., Inc.,

supra,

.

For example, in Scully, the court found that the consumer

protection statute claim should be treated like a contract for

choice-of-law purposes. There, the alleged intentional conduct

pertained to defendant's use of plaintiff's trade secrets and

confidential proprietary information in violation of a

contractual agreement. See

.

The court found that therefore the claim resembled a breach of

contract more than a tort.

While plaintiff has included allegations of willfulness and

intentionality in its claims under the unfair trade practices

counts, it appears that such contentions concern only the manner

11 in which Zurich breached the contract. For example, plaintiff

alleges that Zurich misrepresented its services by "refusing to

reimburse the Plaintiffs for property damage and business

interruption loss." Second Amended Complaint 5 42. Plaintiff

also alleges that Zurich misrepresented its policy agreements "by

failing to pay the Plaintiffs' damages in accordance with the

terms of the policy."

5 43.

Conseguently, the court finds and herewith rules that as

plaintiffs' claims under the consumer protection statutes are

predominantly contractual in nature, they are governed by the

identical choice-of-law analysis the court has previously applied

to plaintiffs' contract claim. Therefore, in this case, as New

Hampshire law governs the contract claim, it also supplies the

governing law for the Consumer Protection Act claim. Count IV,

which is brought under Maine law, is accordingly dismissed.7

Anticipating that New Hampshire law might govern this cause

of action, Zurich argues that plaintiffs' RSA 358-A claim is

preempted by New Hampshire's Unfair Insurance Trade Practices

statute, RSA 417. Zurich contends that RSA 417 defines unfair

insurance practices and provides "the sole and exclusive remedy

for an insured aggrieved by the unfair claims and practices of

7Defendant also makes a substantive challenge to Count IV; however, such argument is now mooted by the dismissal.

12 its insurer." Zurich's Reply Memorandum at 5.

It has previously been held that the mere applicability of

RSA 417 to particular conduct does not, a fortiori, preclude a

cause of action under the New Hampshire Consumer Protection Act

(CPA). See WVG v. Pacific Ins. Co.,

(D.N.H.

1986) (providing detailed discussion of issue); cf. Gilmore v.

Bradgate Assocs., Inc.,

,

(1992) (given the broad wording of the CPA, "the legislature

. . . could [not] have intended to exclude from the protection of

the act the large number of industries which are subject to

regulation in this State simply because the legislature has

provided for regulation of that industry within a statutory

framework").

The CPA does, however, contain an exemption clause, which

provides in relevant part:

Exempt Transactions; etc. The following transactions shall be exempt from the provisions of this chapter: I . Trade or commerce otherwise permitted under laws as administered by any regulatory board or officer acting under statutory authority of this state or of the United States; . . . .

RSA 358-A:3. The purpose behind this clause is to avoid "direct

conflict with other regulatory schemes." See

,

. Accord WVG, supra,

. Thus, so long as RSA 417 does not outright permit defendants

13 to perform the acts complained of, it appears that plaintiffs

would be free to pursue a remedy under the CPA.

As Zurich has not argued that the acts complained of are

"permitted" by RSA 417 (nor does it appear to the court from its

very cursory review that such is the case), the court rejects

Zurich's argument that the mere existence of a scheme regulating

the conduct of insurance in this state would preclude a cause of

action brought pursuant to the CPA based on unfair insurance

practices. Accordingly, Zurich's motion to dismiss Count V is

denied.

4. Count V I : Bad Faith

Count VI seeks compensatory and punitive damages resulting

from Zurich's alleged "bad faith" failure to make full and timely

payments under the insurance contract. Zurich contends that

neither New Hampshire nor Maine law provides for a cause of

action sounding in tort and based on the alleged bad faith of an

insurer in breaching a first-party insurance contract.8

The New Hampshire Supreme Court in Lawton v. Great Southwest

8Because the ultimate result would be the same regardless of whether Maine or New Hampshire law is applied, it is not necessary for the court to rule on the choice-of-law guestion. See, e.g.. Fashion House, Inc. v. K-Mart Corp.,

(1st Cir. 1989) (citing Hart Enq'q v. FMC Corp.,

, 1477 n .5, 1481 (D.R.I. 1984)).

14 Fire Ins. Co.,

,

(1978),

addressed an insured's allegations of the tort of bad faith by

the defendant insurer. Although recognizing that the tort of bad

faith may exist in the third-party insurance context, the court

declined to extend the tort of bad faith to first-party claims

such as those in the case at bar.

,

("We hold that allegations of an insurer's wrongful refusal or

delay to settle a first-party claim do not state a cause of

action in tort."). Accord Jarvis v. Prudential Ins. Co.,

,

(1982). In declining to

recognize a cause of action in tort for bad faith by an insurer

in the first-party context, the court recognized "that the

legislature has established mechanisms [in RSA 417 and RSA 407]

designed to deal with insurer malfeasance in this area, which

. . . vitiates the need for recognition of a new cause of action

in tort."

,

.

Similarly, Maine also does not allow recovery for the tort

of bad faith. In Marquis v. Farm Family Mut. Ins. Co.,

(Me. 1993), the court "refuse[d] to recognize an

independent tort of bad faith resulting from an insurer's breach

of its duty to act in good faith and deal fairly with an

insured."

In particular, the court noted that the insured

already had access to the full range of traditional remedies for

15 breach of contract, as well as statutory remedies.

Accordingly, under both New Hampshire and Maine law, an

insurer has no independent tort duty to act in good faith when

dealing with an insured in the context of a first-party claim.

Count VI is therefore dismissed.

5. PGC's Motion for Summary Judgment

Defendant PGC has moved to dismiss Counts VII (negligence)

and IX (New Hampshire Consumer Protection Act, RSA 358-A:2, V and

VII) of plaintiffs' second amended complaint. As the plaintiffs

agree that such count should be dismissed, the court finds and

rules that Count VII of the complaint is dismissed. As for Count

IX, the court, having previously converted defendant's motion to

dismiss to a motion for summary judgment, will now address such

claim.

a. Summary Judgment Standard

Summary judgment is appropriate when there is no genuine

issue of material fact and the moving party is entitled to a

judgment as a matter of law. Rule 56(c), Fed. R. Civ. P.; Lehman

v. Prudential Ins. Co. of Am.,

, 327 (1st Cir. 1996) .

Since the purpose of summary judgment is issue finding, not issue

determination, the court's function at this stage "'is not [] to

16 weigh the evidence and determine the truth of the matter but to

determine whether there is a genuine issue for trial.'" Stone &

Michaud Ins., Inc. v. Bank Five for Savings,

(D.N.H. 1992) (guoting Anderson v. Liberty Lobby, Inc.,

(1986) ) .

When the non-moving party bears the burden of persuasion at

trial, to avoid summary judgment he must make a "showing

sufficient to establish the existence of [the] element[s]

essential to [his] case." Celotex Corp. v. Catrett,,

(1986). It is not sufficient to "'rest upon mere

allegation[s] or denials of his pleading.'" LeBlanc v. Great Am.

Ins. C o .,

(1st Cir. 1993) (guoting

), cert, denied, ___ U.S. ___ , 114 S. C t .

1398 (1994). Rather, to establish a trial-worthy issue, there

must be enough competent evidence "to enable a finding favorable

to the non-moving party." Id. at 842 (citations omitted).

In determining whether summary judgment is appropriate, the

court construes the evidence and draws all justifiable inferences

in the non-moving party's favor.

.

b. The Merits

PGC argues that as the evidence does not support that it

17 acted with bad faith or improper motive, it is entitled to

summary judgment on Count IX, the claim under the New Hampshire

Consumer Protection Act.

The Consumer Protection Act prohibits "any person [from

using] any unfair method of competition or any unfair or

deceptive act or practice in the conduct of any trade or commerce

within this state." RSA 358-A:2. The Act provides that unfair

or deceptive practices include " [r]epresenting that goods or

services have sponsorship, approval, characteristics,

ingredients, uses, benefits, or guantities that they do not have

or that a person has a sponsorship, approval, status,

affiliation, or connection that he does not have," RSA 358-A:2,

V, and " [r]epresenting that goods or services are of a particular

standard, guality, or grade, or that goods are of a particular

style or model, if they are of another," RSA 358-A:2, VII.

In general, a breach of warranty constitutes a violation of

the Consumer Protection Act.9 See Maillet v. ATF-Davidson Co.,

(Mass. 1990) (interpreting Mass. Gen. L. ch.

9New Hampshire often looks to courts interpreting Massachusetts G.L. ch. 93A for guidance when interpreting RSA 358-A. See Roberts v. General Motors Corp.,

, 538- 39,

(1994); Chase v. Dorais,

,

(1982); accord Curtis Mfg. Co. v. Plasti- Clip Corp.,

(D.N.H. 1994); Donovan v. Digital Equip. Corp.,

(D.N.H. 1994) .

18 93A). In addition, "it is not a defense to a c. 93A claim that

the defendant's conduct was negligent rather than intentional."

(guotation omitted). "[N]either intent to engage in an

unlawful act nor knowledge of its unlawfulness is reguired in

order to establish liability.'"

However, although

unnecessary to establish liability, willful or knowing violations

of the statute are relevant to the determination of whether to

award multiple damages. See Unit Owners Ass'n of Summit v.

Miller. ___ N.H. ___, ___ ,

(1996).

PGC relies on a case that admittedly contains some language

susceptible to the interpretation that a violation of RSA 358-A:2

reguires a showing of bad faith, dishonesty, or an attempt to

take unfair advantage. See Welch v. Fitzqerald-Hicks Dodge,

Inc.,

, 430 A.2d at 144, 147 (1981) ("The

plaintiffs presented no evidence, however, to establish that the

defendants acted in bad faith, dishonestly, or in any way

attempted to take unfair advantage of them."). However, the

First Circuit, rejecting the notion that Welch reguires such a

showing, has distinguished Welch because there "the defendants

complied with the literal reguirements of their warranty." See

Chroniak v. Golden Investment Corp.,

, 1147 n.14

(1st Cir. 19 93).

Conseguently, as it is unnecessary for SRH to establish

19 willfulness, bad faith, or bad motive on the part of PGC in order

to recover under the New Hampshire Consumer Protection Act, PGC's

argument fails as a matter of law, and its motion for summary

judgment on Count IX of the second amended complaint is

accordingly denied.

Conclusion

Having ruled that New Hampshire should supply the governing

law, the court grants in part Zurich's motion to dismiss

(document 19). Zurich's motion is otherwise denied. Counts IV

and VI of the second amended complaint are accordingly dismissed.

Furthermore, PGC's motion for summary judgment (document 20) is

granted as to Count VII but denied as to Count IX.

SO ORDERED.

Shane Devine, Senior Judge United States District Court

September 16, 1996

cc: All Counsel

20