In September 1988, Haverhill Realty Development Trust (HRD), through its trustee and its controlling stockholder, Pasquale Franchi, inquired of John J. Stella Insurance Agency about insurance to protect the trust against damage to real and personal property during conversion of property into residences, stores, and offices. The Stella Agency had been handling insurance business for Franchi for more than eight years.
Stella inquired whether there would be a fence around the work site and was told that there was no fence at that time but that there would be when construction began. The agent also inquired whether there was a mortgage on the property and was told that there would be when work began. The agent was also told that Franchi usually obtained construction loans from Guaranty First Bank & Trust Company. The amount of insurance was to be $1 million for the three existing buildings and $3 million for construction improvements.
Stella placed the insurance with United Capitol Insurance Company (United) through Montgomery and Collins, Inc., a specialty insurance broker licensed to purchase insurance policies from companies that were not, in the ordinary course, authorized to do business in Massachusetts. The application which Stella prepared on behalf of Franchi stated that the job site would be fenced and there would be a mortgage. On September 28, 1988, the specialty broker issued a binder for "Builders Risk Completed Value Form All Risks" coverage. That binder did not show either a mortgagee or a protective fence. It did show the premium for the insurance as $21,000.
In the meantime, Stella had prepared and delivered to HRD his own binder also issued on September 28, 1988, but that binder showed Guaranty First Trust Company as mortgagee but did not show the amount of premium. No special conditions were shown.
In due course, United issued its policy effective September 27, 1988, through March 27, 1990, and mailed it to Stella who retained the policy in his office and did not deliver it or a copy to Franchi. That policy consisted of 35 pages including cover sheets, inserts and endorsements. One of those pages was a "Protective Safeguards" endorsement which required a "fenced site during construction." Another page listed Guarantee First Trust Company as mortgagee.
Eastern Builders was given the contract to gut the three buildings and save the walls and supporting timbers. On February 11, 1989, fire damaged the property so badly that what remained had to be demolished. HRD filed a proof of loss for $1,000,000 for the real estate, plus $565,585.29 for demolition, building and architectural costs, imputed interest, insurance, legal expenses and taxes. The claim was denied by United on the ground that the insured had failed to fence the work site and had misrepresented the existence of a mortgage. Further, United said the fire was caused by arson and that the criminal act had been facilitated by the failure to fence the area.
The jury in the trial court returned a verdict that United was liable on the policy, that the actual cash value of the buildings before the fire was $1,250,976.44 and the cost of removal of the debris was $119,000. The jury also found that the Stella Agency had been negligent and that negligence had caused Franchi damage in the amount of $3,255,976.55--$1,886,000 in excess of the value of the buildings as improved by gutting, plus the debris removal.
Stella's counsel protested on the inconsistency of the jury's answers on damages and asked the court to call back the jury, which had been discharged. The judge agreed that the verdict was inconsistent but did not recall the jury. After various legal maneuvers, the judge ordered a new trial on the issue of damages, which she said were excessive unless the insureds accepted $1,969,000 in damages. In the interim, United had paid Franchi $1,725,000 in settlement, leaving a balance of damages payable by Stella of $244,000.
On appeal, the court found that a jury should decide whether the insured was damaged by the Stella Agency since United had ultimately been found liable and had settled with the insured. The judgment entered in the lower court against the Stella Agency was vacated and remanded for new trial on that issue.
Pasquale Franchi, trustee et al. v. John J. Stella, Jr.--No. 95-P-1095--Appeals
Court of Massachusetts, Middlesex--February 26, 1997--676 North
Eastern Reporter 2d 56.