Case Title: ITT Hartford v. Virginia Financial Assoc.

Citation: 

Docket Number: 982400

State: virginia

Court: Virginia Supreme Court

Date: 1999-09-17T00:00:00Z

Document:
Present:  All the Justices 
 
ITT HARTFORD GROUP, INC. 
 
 
 
OPINION BY JUSTICE A. CHRISTIAN COMPTON 
v.  Record No. 982400 
September 17, 1999 
 
VIRGINIA FINANCIAL ASSOCIATES, INC. 
 
 
FROM THE CIRCUIT COURT OF CHESTERFIELD COUNTY 
Herbert C. Gill, Jr., Judge 
 
 
Traditionally, insurance products are marketed through 
independent agents selling directly to individuals or other 
single entities.  Such products also are sold using the 
technique involved in this case, Commercial Mass Marketing 
(CMM).  CMM, known as "affinity marketing," involves selling 
insurance products to groups the members of which have similar 
interests, or to a group association, instead of to individuals. 
 
This litigation arose from a joint venture between two 
insurers, appellant ITT Hartford Group, Inc. (Hartford), with 
headquarters in Connecticut, and The Medical Protective Company 
(MedPro), based in Indiana.  The purpose of the venture was to 
create an insurance product, called "The Package," to be sold by 
CMM and tailored to the needs of dentists. 
 
Appellee Virginia Financial Associates, Inc. (VFA), a 
Virginia corporation based in Chesterfield County, acted as a 
"marriage broker" and introduced MedPro and Hartford in the 
spring of 1994.  VFA, a licensed insurance agency, served as 
liaison between Hartford and MedPro as their relationship 
developed.  The main actor for VFA was William Montgomery 
("Monty") Dise, an insurance agent and "part-owner" of VFA.  The 
Hartford employee with whom Dise dealt was James D. Sinay, among 
others. 
 
A dispute over the compensation to be paid VFA for its part 
in the corporate marriage triggered this lawsuit.  In September 
1996, plaintiff VFA filed a motion for judgment, later amended, 
against defendants Hartford and Sinay.  Plaintiff sought 
recovery of compensatory and punitive damages based upon 
"express or implied contract," "quantum meruit," and fraud.  In 
a grounds of defense, defendants denied plaintiff was entitled 
to any recovery and asked for dismissal of the action. 
 
The plaintiff alleged that in 1991 it entered into an 
agency agreement with Hartford regarding commissions to be paid 
it for sales of certain insurance products.  The agency 
agreement specified the commission to be received by plaintiff 
when it insures a client through Hartford; it also permitted 
compensation, known as "override" commissions, for insuring 
clients in special programs such as CMM accounts, according to 
the allegations. 
 
The plaintiff further asserted, in allegations admitted by 
defendants in the grounds of defense, that Monty Dise approached 
Hartford in the spring of 1994 with a proposal for providing 
workers' compensation insurance coverage for dentists to 
 
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complement an insurance package offered by MedPro containing 
other insurance coverages.  MedPro had approximately 20,000 
dentist clients to whom Hartford could "cross-sell" its workers' 
compensation insurance and other coverages, according to the 
admitted allegations.  The plaintiff alleged, and defendants 
admitted, that Hartford entered a joint venture with MedPro, 
which ultimately led to development of The Package, a program 
for dentists including business and professional insurance 
coverages. 
 
The plaintiff further alleged that the program conceived by 
plaintiff would benefit all parties:  Hartford would acquire new 
customers; MedPro would retain its accounts, receive a 
commission from Hartford, and have ability to write new dental 
clients; and, plaintiff "would receive a two percent (2%) 
commission override on all premiums generated from sales of The 
Package." 
 
The plaintiff further alleged that from April 1994 through 
August 1995, Dise and another officer of VFA, "with the express 
encouragement and approval of" Hartford's authorized 
representatives, developed and marketed The Package.  The 
plaintiff's work in acting "as liaison between [Hartford] and 
other entities" included, according to the allegations, many 
hours of meetings and travel, telephone conferences, and 
document drafting as well as significant expenditures of 
 
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expenses.  The plaintiff alleged that all the work was performed 
with Hartford's and Sinay's "explicit or implicit assurances 
that VFA would be compensated for its efforts in connection with 
The Package" at specific rates.  These assurances were made, 
plaintiff alleged, "with the intent to induce VFA to continue 
its work on The Package and to induce VFA not to market MedPro 
and the program to another insurance company with which VFA had 
an agency contract.  At the time the assurances to VFA were 
made, [Hartford] and Sinay had no intent to fulfill them." 
 
The plaintiff further alleged that defendants "repeatedly 
assured" VFA it would be "significantly compensated for its work 
on The Package."  Plaintiff asserted that on February 1, 1995, 
Sandra L. Shearer, an employee in Hartford's "commercial 
affinity department," asked Dise to request in writing the 
compensation VFA was seeking; Dise complied with the request.  
Responding for Hartford, Sinay telephoned Dise and said:  
"'Monty, do you trust me,'" plaintiff alleged.  Plaintiff 
further asserted Sinay told Dise "that it was too early in the 
negotiations" for Hartford to commit to specific compensation in 
writing but that Dise should "trust" Hartford to handle the 
compensation issue "fairly."  Plaintiff alleged it continued to 
work on The Package "instead of marketing MedPro and The Package 
with another insurer." 
 
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Plaintiff further alleged that it attempted to establish a 
direct relationship between Hartford and plaintiff's client, 
MedPro.  In April 1995, a meeting was held in plaintiff's 
Virginia office; attending were Dise and executives of the 
plaintiff, Hartford, and MedPro, according to the allegations.  
At this meeting, the plaintiff asserted, a "top" MedPro 
executive authorized Hartford "to put together a firm proposal 
for The Package which was to be presented at an August meeting 
between the parties."  "On short notice," according to the 
allegations, Hartford excluded plaintiff and Dise from the 
August meeting "and from any other participation in connection 
with The Package."  Plaintiff also alleged that in October 1995, 
at a meeting in plaintiff's Chesterfield County office, a 
Hartford executive offered to pay plaintiff a $100,000 "finder's 
fee"; the offer was refused. 
 
In January 1996, Hartford and MedPro executed the joint 
venture agreement.  The venture's initial product was The 
Package, which combined Hartford's property, general liability 
and workers' compensation coverages with MedPro's dental 
malpractice coverage. 
 
In the amended motion for judgment, plaintiff alleged it is 
entitled to recovery of commissions amounting to "a significant 
percentage" of what it says will be "tens of millions of dollars 
in premium payments" to be received on The Package.  The 
 
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plaintiff sought commissions on premiums generated during the 
initial five-year term of the joint venture agreement and during 
renewal periods of the coverage extending to at least the year 
2015. 
 
During a three-day jury trial, the plaintiff presented 
credible evidence supporting the foregoing factual allegations 
regarding the relationship of the parties; the work done by 
plaintiff, especially Dise, in acting as liaison between 
Hartford and MedPro; the discussions among the principals for 
the parties regarding plaintiff's campaign for compensation for 
its efforts; and the fact that plaintiff and Dise were excluded 
from the August meeting held after Hartford authorized 
formulation of a firm proposal involving MedPro for marketing of 
The Package. 
 
In an attempt to prove its damages, plaintiff presented the 
testimony of Peter M. Redlich, of Lanexa, Kansas, who was 
qualified as an expert "[i]n the insurance industry to talk 
about the mass marketing area, what insurance companies do with 
mass marketing, the custom in the industry for mass marketing."  
The defendants did not object to Redlich's testimony on those 
subjects.  Over defendants' objection, however, the trial court 
permitted Redlich also to testify as an expert "in the area of 
making premium projections for insurance products" and "as an 
expert in forecasting projections." 
 
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The case was submitted to the jury on plaintiff's claim 
against Hartford for breach of express and implied contract, on 
its claim of fraud against Hartford and Sinay, and on the issues 
of compensatory and punitive damages. 
 
The jury found in Hartford's favor on the breach of express 
contract claim.  It found against Hartford on plaintiff's claim 
based upon implied contract, and fixed compensatory damages at 
$5 million.  The jury found against Hartford, but in favor of 
Sinay, on the fraud claim, fixing compensatory damages at 
$200,000 and punitive damages at $1 million.  In entering 
judgment on the verdict, the trial court reduced the punitive 
damage award to $350,000, the sum permitted by Code § 8.01-38.1.  
Hartford appeals. 
 
On appeal, Hartford says the "core issue" involves its 
contention that the trial court erred in permitting Redlich's 
testimony projecting future income from The Package upon which 
plaintiff's past and future compensation by way of commissions 
could be calculated.  Relevant to this issue is the length of 
time the premiums reasonably can be expected to be generated, 
the amount of those premiums, and the rate of any commissions to 
which the plaintiff may be entitled. 
 
Redlich had "been in the business of selling property and 
casualty insurance" for 28 years.  Also, he had been "involved 
in mass marketing of insurance products," participating in over 
 
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twenty "affinity mass marketing accounts" in the last ten years.  
The preparation for Redlich's testimony involving projections 
included his review of the depositions of principals of both 
Hartford and MedPro, including Raymond F. Wise, Jr., all 
witnesses in the case.  Wise, a Hartford employee, was the 
general manager of the special program center established at 
MedPro's headquarters in Fort Wayne, Indiana, to administer The 
Package.  Formerly, Wise had been the director of commercial 
mass marketing for Hartford's western division.  Redlich also 
had reviewed the agency agreement between plaintiff and Hartford 
as well as the joint venture agreement between MedPro and 
Hartford. 
 
Redlich testified that "generally" a mass marketing program 
"could run 5, 10, 15, 20 years" and that one had "been on the 
books since 1935."  Previously, he had been engaged in a mass 
marketing program with Hartford in which he "just brought them 
the account" and "was not allowed to do any sales, marketing, 
solicitation, underwriting," and he had been paid a four percent 
commission on new business generated in the program and four 
percent on renewal premiums.  Redlich stated that "where you 
bring to an insurance company an affinity group and you serve as 
a liaison after the insurance company sells the product," 
commissions range from as low as one percent, when the agent is 
"doing absolutely zero," to as high as eight percent. 
 
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Redlich opined that the custom in the industry is to pay 
commissions on premiums generated from new business, and from 
renewal business for "[a]s long as the policies are still in 
force."  He stated that, under the circumstances of this case, 
if an express contract between plaintiff and Hartford did not 
apply, a three to four percent "override" commission would be 
appropriate for merely bringing Hartford "the idea" and bringing 
the two parties together.  He said:  "I notice Mr. Dise asked 
for 2 to 2 ½ percent.  That's certainly very minimal."  Redlich 
stated payment of "flat fees" was not customary for the work 
plaintiff performed. 
 
Turning to the "core issue," Redlich explained his method 
of making "projections of premiums."  First, he said, "you need 
to know the population of the group" and then "you take an 
average of the premiums written . . . in the state or in the 
region."  Multiplying the two figures, he said, produces a 
"total potential."  This "potential" depends upon the strength 
of "the endorser" of the product, such as a statewide dental 
association.  From this "potential," Redlich arrived at a 
"penetration" rate which he defined as the number of persons 
"you expect to be able to write in a course of the year and then 
in each year going on." 
 
Next, according to Redlich, an evaluation of the strength 
of "penetration" of the affinity group must be made to determine 
 
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how "competitive your product is."  Then, the renewal potential 
of the product must be determined in order to project the amount 
of renewal premiums to be expected.  Redlich opined that the 
"penetration figure" should increase annually.  He said:  
"Generally, the first few years of a program, you're going to 
have a lot of interest generated because that's when a good part 
of the marketing is done."  Thereafter, he stated, the success 
of the first years "increases the faith of the population in the 
program and their willingness to participate and to buy the 
services that are being sold to them." 
 
Next, he stated, a "retention rate" must be ascertained in 
order to determine how much premium income will be realized in 
future years.  This, of course, must depend upon how long "the 
program would last." 
 
Redlich presented a three-page exhibit, laden with 
calculations, demonstrating and summarizing his projections for 
the years 1996 through 2015.  He drew heavily on projections for 
1998-2000 made by Hartford's employee Wise, which were based on 
sales of The Package from 1996 through the time of trial in May 
1998.  Redlich altered Wise's numbers up or down as he developed 
assumptions for his own conclusions. 
 
Redlich assumed:  A total population of the group initially 
as 22,000 dentists; an average annual policy premium of $1,000; 
a "penetration rate" of 28% in 1998 and 1999, 42% in 2000, 52% 
 
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in 2001, and 65% during 2003 to 2015; and, that new premiums 
would be derived one-half from existing MedPro clients and one-
half from new clients.  Redlich then estimated the renewal 
premiums by multiplying the total premiums from the previous 
year of his assumptions by a renewal retention rate, which he 
assumed would be 92%.  He then added the products of his 
assumptions and arrived at the sum of $369,572,106 for the total 
new and renewal premiums to be derived for The Package for the 
period 1996 through 2015. 
 
The plaintiff sought recovery of commissions based on the 
$369 million figure reduced by the testimony of an accountant to 
present value.  The lowest commission rate assumed by the 
accountant was 2.5 percent.  The accountant figured the present 
value of that assumed rate of commission computed upon the $369 
million figure to be $5,393,111 for the 20-year period. 
 
The verdict of $5 million appears to be based upon the 
present value of a commission rate approximating 2% on that 
amount for the period.  Indeed, the jury first returned a 
verdict for a nonspecific sum.  It reported an award "in the 
amount of 2% of all existing premiums since inception of the 
program, as well as all new and renewal premiums written 
nationwide for as long as 'The Package' program exists."  As 
directed by the trial judge, the jury resumed its deliberations 
and returned a verdict for a specific sum. 
 
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On appeal, Hartford contends that the trial court erred in 
permitting Redlich to opine that plaintiff was entitled to a 
commission on the future premiums that Redlich projected The 
Package would generate over the next 17 years.  We agree. 
 
Expert testimony "cannot be speculative or founded upon 
assumptions that have an insufficient factual basis.  Such 
testimony also is inadmissible if the expert has failed to 
consider all the variables that bear upon the inferences to be 
deduced from the facts observed."  Tittsworth v. Robinson, 252 
Va. 151, 154, 475 S.E.2d 261, 263 (1996) (citations omitted).  
See Code §§ 8.01-401.1 and -401.3. 
 
Moreover, when expert testimony consists of an array of 
numbers conveying an illusory impression of exactness, on a 
subject in which a jury's common sense is tested in order to 
evaluate the array, scrutiny of expert testimony is especially 
important.  Tyger Constr. Co., Inc. v. Pensacola Constr. Co., 29 
F.3d 137, 145 (4th Cir. 1994), cert. denied, 513 U.S. 1080 
(1995), cited with approval in CSX Transp. Inc. v. Casale, 250 
Va. 359, 366-67, 463 S.E.2d 445, 449 (1995). 
 
And, a verdict based upon speculative expert testimony "is 
merely the fruit of conjecture, and cannot be sustained."  
Stover v. Norfolk & W. Ry. Co., 249 Va. 192, 200, 455 S.E.2d 
238, 243, cert. denied, 516 U.S. 868 (1995). 
 
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In the present case, Redlich attempted to project the 
plaintiff's lost income for 17 years in the future in a new 
business enterprise.  When an established business, with a 
proven earning capacity is involved, evidence of the prior and 
subsequent record of the business is relevant to permit an 
intelligent and probable estimate of damages.  But when, as 
here, a new business is involved, the rule is not applicable 
because such a business is a speculative venture, the successful 
operation of which depends upon future bargains, the status of 
the market, and too many other contingencies to furnish a 
safeguard in fixing the measure of damages.  Commercial Bus. 
Sys., Inc. v. BellSouth Servs., Inc., 249 Va. 39, 50, 453 S.E.2d 
261, 268 (1995).  See Clark v. Scott, 258 Va. ___, ___, ___ 
S.E.2d ___, ___ (1999), decided today.  The two-and-one-half-
year history of the premium income from 1996 to May 1998 is 
insufficient in this case to qualify the business of marketing 
The Package as an established business. 
 
In Maher v. Continental Cas. Co., 76 F.3d 535 (4th Cir. 
1996), the court applied West Virginia law which, like that in 
Virginia, requires anticipated lost income to be proved with 
reasonable certainty.  There, the plaintiff sought to prove lost 
future income by taking actual sales for the past three years, 
and using "the smallest annual growth rate in sales" to project 
future sales.  Id. at 540.  Affirming the trial court's 
 
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exclusion of such evidence, the Fourth Circuit pointed out that 
although the plaintiff "submitted historical sales figures for 
the relatively brief three-year period," the plaintiff "failed 
to conduct any scientifically valid surveys assessing the 
relevant future market" for the products.  Id. at 541. 
 
Moreover, the court said, plaintiff's expert "is not an 
economist, and he did not purport to otherwise possess any 
expertise regarding economic forecasting.  Yet, in the absence 
of long-term sales figures, [plaintiff's] best hope of proving 
his lost business income with reasonable certainty was to 
produce sufficient economic data upon which an economist could 
posit a reliable prediction."  Id.  This is such a case. 
 
Redlich was not an economist, he had performed no 
statistical studies, he had consulted no actuaries regarding 
premium calculations, and he had performed no market analysis.  
In addition, he relied upon projections made by Hartford's 
employee Wise.  But Wise testified in his deposition that his 
estimates were "just very highly speculative," were a "guess,"  
and that he was "hoping" the MedPro-Hartford relationship would 
last "continuously." 
 
In sum, Redlich projected lost income for 17 years in the 
future for this new enterprise merely by using several variables 
(premium amounts, population sizes, penetration rates, and 
retention rates) that were completely divorced from economic 
 
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reality.  Employment of these projections resulted in a verdict 
based upon speculation and conjecture, and it cannot be 
sustained. 
 
Next, Hartford contends the trial court erred in refusing 
to sustain a demurrer, in denying a motion for partial summary 
judgment, and in approving the fraud verdict and the award of 
punitive damages upon the grounds that the plaintiff had failed 
to allege and prove a cause of action based upon fraud.  We 
shall address only whether the fraud verdict was supported by 
clear and convincing evidence.  We hold that it was not. 
 
The case was submitted to the jury on the theories of 
actual and constructive fraud.  The plaintiff has the burden of 
proving all the elements of fraud by clear and convincing 
evidence.  Evaluation Research Corp. v. Alequin, 247 Va. 143, 
148, 439 S.E.2d 387, 390 (1994).  To sustain a claim of actual 
fraud, the plaintiff must prove a false representation, of a 
material fact, made intentionally and knowingly, with intent to 
mislead, reliance by the party misled, and resulting damage.  
Id.  "Constructive fraud differs from actual fraud in that the 
misrepresentation of material fact is not made with the intent 
to mislead, but is made innocently or negligently although 
resulting in damage to the one relying on it."  Id.  And, 
"'fraud must relate to a present or pre-existing fact, and 
cannot ordinarily be predicated on unfulfilled promises or 
 
15
statements as to future events.'"  Patrick v. Summers, 235 Va. 
452, 454, 369 S.E.2d 162, 164 (1988) (quoting Soble v. Herman, 
175 Va. 489, 500, 9 S.E.2d 459, 464 (1940)).  See Lumbermen's 
Underwriting Alliance v. Dave's Cabinet, Inc., 258 Va. ___, ___, 
___ S.E.2d ___, ___ (1999), decided today. 
 
Also, the jury was instructed, without objection, that 
concealment of a material fact "knowing that the other party is 
acting on the assumption that no such fact exists is as much 
fraud as if existence of the fact were expressly denied" and 
that a party is under a duty to exercise reasonable care to 
disclose to the other subsequently acquired information that the 
party knows will make untrue or misleading a previous 
representation.  See J & D Masonry v. Kornegay, 224 Va. 292, 
296, 295 S.E.2d 887, 890 (1982) (quoting Clay v. Butler, 132 Va. 
464, 474, 112 S.E. 697, 700 (1922)); Ware v. Scott, 220 Va. 317, 
321 n.3, 257 S.E.2d 855, 858 n.3 (1979). 
 
The plaintiff contends that when the facts are viewed in 
the light most favorable to it, as they should be, the jury 
could properly "find that Hartford fraudulently represented to 
VFA that it would receive override commissions.  There was also 
an abundance of clear and convincing evidence that Hartford 
fraudulently failed to tell VFA that it intended to pay it a 
finder's fee for months after Hartford had made that decision."  
Further, plaintiff contends "there can be no question that after 
 
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Hartford had decided to pay VFA a mere finder's fee, it 
continued to assure VFA that it would receive an override 
commission for bringing MedPro to Hartford as a CMM 
opportunity."  Additionally, plaintiff argues that Hartford 
decided in June 1995 to pay plaintiff a finder's fee, "but 
continued to request Dise to provide assistance and to lead him 
to believe VFA would be paid a commission commensurate with 
industry practice . . . when its present intention clearly was 
NOT to compensate VFA with a commission."  We reject these 
contentions. 
 
This is another situation that we have confronted before 
when the "moving party in the controversy is a disgruntled 
player in the rough-and-tumble world comprising the competitive 
marketplace."  Commercial Bus. Sys., Inc. v. Halifax Corp., 253 
Va. 292, 294, 484 S.E.2d 892, 893 (1997).  The plaintiff, 
through Dise, saw an opportunity to earn substantial override 
commissions by constructing a corporate marriage between its 
client, MedPro, and Hartford, or any other insurer who would 
listen.  There was no effort by plaintiff at the beginning of 
this side courtship between plaintiff and Hartford to obtain any 
agreement in writing or orally from Hartford about compensation. 
Instead, Dise proceeded with efforts to bring about the joint 
venture and began a campaign to procure consent from Hartford to 
pay him commissions.  These efforts were pursued in earnest long 
 
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before the marriage of MedPro and Hartford was culminated in 
January 1996. 
 
As Dise continued to press for commissions, never slowing 
his efforts to earn what he hoped would be substantial 
remuneration, there were statements that Dise would be treated 
"fairly" and with "trust."  These were promises and statements 
about future events, and were not fraudulent. 
 
Actually, the plaintiff seeks to convert a dispute 
occurring in the marketplace over what is "fair" compensation 
into a tort action for fraud.  The alleged actionable conduct of 
Hartford and its agents did not amount to false representations, 
and the trial court erred in ruling to the contrary. 
 
Finally, Hartford contends the trial court abused its 
discretion when it refused to permit its witness, Warren W. 
Pierce, to testify.  Because this case will be remanded, and 
there may be another trial, we will address this issue. 
 
Pierce, an attorney for Hartford who drafted the joint 
venture agreement, was called to testify about the intent of the 
parties and the meaning of the language in the 
"Renewal/Nonrenewal Provisions" of the agreement.  That portion 
of the agreement provides: 
"If neither party gives written notice of its desire 
to renew this Agreement, or if only one (1) party 
gives written notice of its desire to do so, the 
Agreement shall automatically terminate on January 1, 
2001.  Any party desiring to renew this Agreement must 
 
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give written notice to the other.  Notice shall be 
deemed to be given when received and shall be made in 
accordance with Section XV (Notices) of this 
Agreement.  Notice may not be sent earlier than 
January 1, 2000 and must be given by June 1, 2000 to 
be effective. 
 
If a party fails to give notice of its desire to 
either renew or nonrenew in accordance with this 
Agreement, the intent of the party that has given 
notice shall control.  If the notice given is of an 
intent to renew, the noncomplying party shall be 
liable to the other for monetary damages, attorneys 
fees and costs in lieu of specific performance.  The 
period of time for which damages may be computed shall 
be January 1, 2001 to January 1, 2006." 
 
 
 
This term of the agreement, of course, is relevant to the 
question whether the plaintiff can establish a reasonable 
probability of The Package's renewal beyond an initial five-year 
period set forth in the agreement.  Pierce's testimony was 
proffered several weeks after the trial and the trial court 
allowed it to be made a part of the record. 
 
This portion of the agreement is ambiguous and the trial 
court permitted the jury to consider extrinsic evidence in 
construing it.  Redlich, having examined the agreement, 
furnished his interpretation of the agreement in making the 
assumption that it likely would be renewed in 2001 and beyond. 
 
Therefore, given the fact that a plaintiff's witness, a 
non-lawyer, had been permitted to interpret the agreement, the 
trial court abused its discretion in refusing to allow a 
defendants' witness, who drafted the agreement, to interpret it.  
 
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If the evidence develops in the same manner upon retrial, Pierce 
should be permitted to testify in accordance with the proffer. 
 
Consequently, the judgment in favor of the plaintiff for 
compensatory damages based upon breach of an implied contract 
will be set aside, and the case will be remanded for a new trial 
limited to the issue of such damages on the implied contract 
(quantum meruit) claim against Hartford.  The judgment for 
compensatory and punitive damages based upon fraud will be set 
aside, and final judgment will be entered here in favor of 
Hartford on that claim. 
Reversed, remanded,
and final judgment.
 
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