Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-1_99-cv-05583/USCOURTS-caed-1_99-cv-05583-41/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF CALIFORNIA

UNITED STATES FIDELITY & )

GUARANTY COMPANY, )

)

)

)

Plaintiff, )

)

vs. )

)

)

LEE INVESTMENTS, LLC dba THE )

ISLAND, et al., )

)

)

Defendant. )

)

)

No. CV-F-99-5583 OWW/SMS

MEMORANDUM DECISION DENYING 

LEE INVESTMENTS LLC'S MOTION

FOR JUDGMENT PURSUANT TO

RULE 50(b), FEDERAL RULES OF

CIVIL PROCEDURE (Doc. 703)

Lee Investments LLC (hereafter Lee) moves pursuant to Rule

50(b), Federal Rules of Civil Procedure, for judgment as a matter

of law on the ground that no reasonable jury would have a legally

sufficient evidentiary basis to find for United States Fidelity &

Guaranty Company (hereafter USF&G) and Aon Risk Services Inc. of

Central California Risk Services (hereafter Aon) in that:

1. As a condition or exception limiting

coverage, Mr. Sackett’s August 11, 1998

letter (Exh. 833) was required to be, but was

not, as a matter of law, clear, plain and

conspicuous;

2. As a matter of law in this case, it was

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an element of USF&G’s claim for rescission

that Lee have been provided with, completed,

signed and returned, an application for the

workers’ compensation policy issued by USF&G;

3. As a matter of law, USF&G and Aon failed

to show that Lee’s employees engaged in

activities that were outside of a water park

workers’ compensation classification code;

and 

4. As a matter of law, Lee did not make a

misrepresentation to Aon, Lee did not intend

to induce any reliance by Aon on a

misrepresentation, and no reliance of Aon was

a substantial factor in causing harm to Aon.

A. Governing Standards.

The standards governing a motion for judgment as a matter of

law pursuant to Rule 50, Federal Rules of Civil Procedure, are

reiterated in Gibson v. City of Cranston, 37 F.3d 731, 735 (9th

Cir.1994):

When confronted with a motion for judgment as

a matter of law, whether at the end of the

plaintiff’s case or at the close of all the

evidence, a trial court must scrutinize the

proof and the inferences reasonably to be

drawn therefrom in the light most amiable to

the nonmovant ... In the process, the court

may not consider the credibility of

witnesses, resolve conflicts in testimony, or

evaluate the weight of evidence ... A

judgment as a matter of law may be granted

only if the evidence, viewed from the

perspective most favorable to the nonmovant,

is so one-sided that the movant is plainly

entitled to judgment, for reasonable minds

could not differ in the outcome ....

Further, a party cannot raise arguments in a post-trial motion

for judgment as a matter of law that it did not raise in its preverdict motion. Freund v. Nycomed Amersham, 347 F.3d 752, 761

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(9 Cir.2003). th

B. Was the Sackett’s August 11, 1998 letter (Exh. 833) A

Condition or Exception Limiting Coverage, and Required To Be As a

Matter of Law, Clear, Plain and Conspicuous?

Lee asserts that the August 11, 1998 letter “stated what

USF&G claims was a condition to coverage that Lee’s employees (a)

stay within their designated classification as water park

employees and (b) that claims arising from ‘construction’ not be

reported under the workers’ compensation policy”, and contends:

USF&G and ASI never made clear to Lee what

was and was not included within the

designated classification for water park

employees, nor did USF&G and ASI inform Lee

that they were interpreting ‘construction’ in

a layperson’s terms instead of in the sense

that would require a construction

classification code under the Uniform

Statistical Reporting Plan. Dr. Levine

established that ‘designated classification’

and ‘construction’ in this context would be

understood by persons in the insurance

industry in their technical sense, but USF&G

claimed that any activity that a layperson

could call construction was impermissible. 

This was never clarified for Lee, which, like

Mr. Lemasters, understood it was not unusual

for water park maintenance employees to erect

water slides as part of park operations. 

Lee asserts that, because USF&G and American Specialty were not

clear, plain and conspicuous in their statement of condition or

exception to the policy, that condition or exception cannot be

enforced. Lee cites Thompson v. Occidental Life Insurance Co., 9

Cal.3d 904, 912 (1973):

[A]n insurance company is not precluded from

imposing conditions precedent to the

effectiveness of insurance coverage despite

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the advance payment of premium. However, any

such condition must be stated in conspicuous,

unambiguous and unequivocal language which an

ordinary layman can understand.

Lee also cites E.M.M.I., Inc. v. Zurich American Ins. Co., 32

Cal.4th 465, 471 (2004):

As we have declared time and again, ‘any

exception to the performance of the basic

underlying obligation must be so stated as

clearly to apprise the insured of its

effect.’ Thus, ‘the burden rests upon the

insurer to phrase exceptions and exclusions

in clear and unmistakable language.’ The

exclusionary clause ‘must be conspicuous,

plain and clear.’ This rule applies with

particular force when the coverage portion of

the insurance policy would lead an insured to

reasonably expect coverage for the claim

purportedly excluded. 

Lee’s contention assumes that the August 11, 1998 letter

imposed a condition or restriction on coverage. It did neither.

As USF&G responds, Lee’s contention that the August 11, 1998

letter constituted a condition modifying the terms of an

integrated policy is “completely unfounded as a matter of law”

and fact. The August 11, 1998 letter was not part of the

insurance policy, did not address any term or provision of the

insurance policy, and did not constitute a condition or exclusion

to the policy itself. The cases upon which Lee relies discuss

rules for the interpretation of an insurance policy that is in

force, and not, as here, written representations made by the

applicant before the written and fully integrated policy contract

was issued or came into effect. As USF&G contends:

Sackett’s August 11, 1998 letter ... clearly

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was not part of the policy. Rather, it

constituted only a request by the insurer in

the course of the policy application process

for confirmation that Lee would not use its

employees to perform construction work. That

inquiry was made to allow USF&G and American

Specialty to determine whether they would be

willing to issue the policy in the first

place.

Furthermore, Lee, over the objections of USF&G, requested

and obtained Jury Instruction No. 29:

If you find that USF&G imposed any condition

to its issuance of the workers’ compensation

policy to Lee, you should determine if any

language of such condition is uncertain or

ambiguous. If you find that the language of

any condition to the issuance of the workers’

compensation policy is uncertain or

ambiguous, you should consider the language

it its narrowest sense.

(Doc. 661, p. 30). Therefore, Lee’s issue of policy condition or

exclusion was presented to and the jury fully considered Lee’s

argument that USF&G was imposing a condition in the workers’

compensation policy, that such condition had to be certain and

unambiguous and, if so, should be interpreted in its narrowest

sense. The jury unequivocally rejected Lee’s theory of the case

and version of conflicting facts. 

Lee’s assertion that Jury Instruction No. 29, given at

trial, is of “no moment” because the issue of whether the

condition was clear, plain and conspicuous is a question of law,

is without merit. The case upon which Lee relies, 20 Century th

Ins. Co. v. Liberty Mut. Ins. Co., 965 F.2d 747, 753 (9th

Cir.1992), does not so hold. Further, because Lee requested and

obtained Jury Instruction No. 29, the doctrine of invited error

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precludes Lee’s motion on this ground. See Deland v. Old

Republic Life Insurance Company, 758 F.2d 1331, 1336-1337 (9th

Cir.1985).

The jury resolved every one of the multitude of disputed

facts against Lee, finding Lee had been deceitful and had acted

with fraudulent intent in inducing USF&G to issue the worker’s

compensation insurance policy. Lee’s motion for judgment on this

ground is DENIED.

C. As a Matter of Law, Was USF&G Required to Provide Lee

With A Completed, Signed and Returned, Application For the

Workers’ Compensation Policy Issued by USF&G?

Lee argues that, as a matter of law, an application for the

workers’ compensation policy was required in this case as an

element of the claim for rescission. This claim has been fully

analyzed and rejected in Lee’s accompanying motion to vacate the

Partial Judgment. 

Lee relies on the testimony during its cross-examination of

Stanley Sheehan:

Q. In the course of doing underwriting,

American Specialty reviewed applications; is

that correct?

A. Yes, American Specialty reviews

applications as a part of underwriting.

Q. And as a matter of policy and procedures,

did you request a signed application?

A. A signed application is requested as part

of the procedure.

Q. And that was true in 1998; correct?

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A. Yes. That was true in 1998.

(Testimony of Sheehan, Feb. 7, 2007, 16:20-17:4). 

Lee argues that this testimony establishes that an

application for insurance by USF&G is an element of a claim for

rescission. Lee cites CACI Instruction 2308, “Rescission for

Misrepresentation or Concealment in Insurance Application -

Essential Factual Elements”, as including in the elements of the

claim the following:

1. That [name of insured] submitted an

application for insurance with [name of

insurer];

2. That in the application for insurance

[name of insured] [intentionally] [failed to

state/represented] that [insert omission or

alleged misrepresentation] ....

Lee contends that Lee never submitted an application for

insurance with USF&G. Rather, Lee asserts:

American Specialty pieced together

information from various outdated and

incomplete sources to write the policy,

including an unsigned application for

insurance with Industrial Indemnity. The

original application was in substantial

conflict with other information American

Specialty had within its Lee file, including,

without limitation, another supplemental

application submitted by Dibudio & DeFendis

which clearly indicated Lee’s intent to

construct and erect new slides with its

employees. USF&G now seeks to rescind based

on Lee’s alleged misrepresentations regarding

the nature and scope of Lee’s employees work

as it relates to assembling an unfinished

water slide. 

Lee contends:

Evidence was introduced at trial that the

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formality of the application puts the

applicant on notice that the information

provided will be used to determine whether to

issue a policy. Here, the application, and

the protections inherent to the applicant

therein, were missing. This missing

instruction on the element of an application

clearly prejudiced Lee and lead to an

unfavorable result.

Lee’s position is based on reference to incomplete testimony

and is incorrect as a matter of California law. The provisions

of California law governing the right to rescission under the

California Insurance Code and case law impose no “requirement” of

an application. See Mitchell v. United National Ins. Co., 127

Cal.App.4th 457, 467-469 (2005): 

United National based its right to rescind

the policy on Insurance Code sections 331 and

359. Insurance Code section 331 states:

‘Concealment, whether intentional or

unintentional, entitles the injured party to

rescind insurance.’ Insurance Code section

359 similarly provides: ‘If a representation

is false in a material point, whether

affirmative or promissory, the injured party

is entitled to rescind the contract from the

time the representation becomes false.’

Insurance Code sections 331 and 359 are part

of a larger statutory framework that imposes

‘heavy burdens of disclosure’ ‘upon both

parties to a contract of insurance, and any

material misrepresentation or the failure,

whether intentional or unintentional, to

provide requested information permits

rescission of the policy by the injured

party.’ (Imperial Casualty & Indemnity Co.

v. Sogomonian (1988) 198 Cal.App.3d 169, 179-

180 ... Insurance Code section 332, for

example, requires each party to an insurance

contract to disclose, ‘in good faith, all

facts within his knowledge which are or which

he believes to be material to the contract

...’ The disclosure obligations imposed by

these statutes are directed specifically at

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the formation of the insurance contract. 

Insurance Code section 334 states:

‘Materiality is to be determined not by the

event, but solely by the probable and

reasonable influence of the facts upon the

party to whom communication is due, in

forming his estimate of the disadvantages of

the proposed contract, or in making his

inquiries.’ (Ins. Code, § 334, italics

added.)_ Insurance Code section 356 provides:

“The completion of the contract of insurance

is the time to which a misrepresentation must

be presumed to refer.’

Requiring full disclosure at the inception of

the insurance contract and granting a

statutory right to rescind based on

concealment or material misrepresentation at

that time safeguard the parties’ freedom to

contract. ‘[An insurance company] has the

unquestioned right to select those whom it

will insure and to rely upon him who would be

insured for such information as it desires as

a basis for its determination to the end that

a wise discrimination may be exercised in

selecting its risks.’ ....

None of these Insurance Code provisions require a written or

formal “application” before a contract of insurance may be

rescinded because of misrepresentation or concealment. 

Moreover, Sheehan’s selectively quoted testimony that a

signed application is requested by American Specialty during the

underwriting process is irrelevant, because Sheehan also

testified an unsigned application is often accepted. Hugh Awtrey

testified that signed applications are usually not required as

part of the underwriting process:

Q. Let’s go down to the bottom of the page,

please. This application was not signed; is

that correct?

A. That is correct.

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...

THE COURT: Is there some reason for that?

THE WITNESS: Unless companies require

signatures, we generally don’t have

signatures of apps. If they come back at the

time of binding, sometimes I will come back

and say before we bind coverage, we will need

a signature, but otherwise, policies are done

over the phone and we submit it and it’s

written without a signature.

There are certain types of policies where I

might come back and say we need a signature. 

Workers’ Compensation, there is generally

never signatures on applications.

(Testimony of Awtrey, Feb. 8, 2007, 170:7-20). Bennett Bibel

also testified that an underwriter can use any form of

documentation it chooses in making an underwriting decision:

Q. Do some workers’ comp insurers make

determinations whether to issue policies to

particular applicants based solely on this

standard Acord application?

A. I would have to say that’s the norm. The

normal circumstance. In most circumstances,

the Acord application, which was developed by

the insurance industry, answers or asks the

questions that an underwriter needs to write.

Q. Okay. Is there some guideline as to what

an underwriter has to have in order to write

- to decide to write a workers’ compensation

insurance policy?

A. At the risk of being facetious, he needs

a contract to have the pen in order to be

able to have the authority to write. 

Underwriting is an art as well as a science. 

And underwriters have wide latitude in the

process of accepting or declining a given

risk. And an underwriter on a given day may

ask for something, another day he may not ask

for it. It depends on how much he knows

about the nature of a particular risk and who

is submitting it.

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(Testimony of Bibel, Feb. 17, 2007, 38:4-21).

As USF&G argues, Lee’s contention that it was prejudiced

because the “formality” of the application would have placed Lee

on notice that the information provided would be used to

determine whether to issue the policy is contradicted by the

reality of Lee’s relationship with its broker, Aon, and workers’

comp insurance industry practice:

As a matter of fact, Lee’s broker, Aon,

obviously was aware that the information it

was providing to American Specialty in the

August 12, 1998 letter, which it drafted,

would be utilized to determine whether to

issue the policy. 

Lee replies that USF&G previously cited Cohen v. Penn Mut.

Life Ins. Co., 48 Cal.2d 720, 726 (1957), for the proposition

that the fact the insurer asked specific questions on the

application makes the answers material as a matter of law. Lee

asserts that it previously argued that, without a corresponding

request for certain information on the application, the

information is presumed immaterial, citing Reserve Ins. Co. v.

Apps, 85 Cal.App.3d 228, 231 (1978) and Ashely v. American Mut.

Liab. Ins. Co., 167 F.Supp. 125, 132 (N.D.Cal. 1958). Lee argues

the application itself is such an important and necessary

document that it may be used to prove or disprove the element of

materiality. Lee claims the issue of an application and the

presence of it was key to show the absence of fraud and the lack

of a misrepresentation:

As set forth in the cases above, the

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application gives notice to the applicant

that the information sought is important. 

Along with this, is the assumption that the

applicant will see and review the

application, see the questions asked, review

the questions with either the insurer or the

applicant’s broker, and thus be informed of

what the insurer wants to know and also to

know that the information is sought for the

purposes of an underwriting determination. 

All of these factors are the reasons for the

importance, and necessity of an application. 

This is supported by the CACI instruction ...

which lists an application as the first

element of a claim for rescission.

At trial, USF&G failed to establish the

existence of an application. This is not

surprising because USF&G was unable to meet

this element. In the present case, two

separate applications were filled out on

Lee’s behalf prior to the cancellation of the

original policy issued by Industrial

Indemnity. Neither were signed by Lee. The

most recent application, and not

surprisingly, the one not completed by Aon,

clearly answered the question regarding

whether the employees were building or

erecting slides in the affirmative! The

unequivocal testimony at trial was that this

application was in the Lee file at ASI when

the USF&G policy was issued. ASI testified

that it reviewed the file in determining

whether to issue the USF&G policy. 

Accordingly, it was uncontroverted that on

this earlier application Lee informed ASI

that it intended to perform acts that USF&G

would later construe as construction.

Moreover, Lee was not provided another

‘fresh’ application despite the change in

circumstances and experience of Lee in

operating the park. Lee knew what remained

to be completed (the red slide) and that it

intended, as long as Bruce Calomiris was a

part of the operation, that Lee would

maintain all the slides and might assemble

the red slide if it was completed. On the

other hand, Lee did not know the contents of

the August 11, 1998 letter. Thus, Lee did

not have sufficient notice of information

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which should have been in the application.

Lee contends that the Partial Judgment must be vacated, altered

and/or amended for failure to decide an essential issue in the

case.

Lee’s position is inaccurate. A contract of insurance was

issued to Lee by USF&G at the instance of Aon, as Lee’s insurance

broker, through American Specialty. This transaction follows

industry practice whereby the insured’s broker seeks workers’

comp coverage for the insured that may or may not be accompanied

by a signed, completed application for the policy. Lee’s

position would negate any ability of USF&G to rescind that policy

merely because an application was not completed and signed by

Lee. The course of dealing between Lee and Aon and industry

practice explains fully how the USF&G insurance policy came into

force after the Industrial Indemnity policy was cancelled. In

accordance with industrial practice, Lee’s broker “shopped” the

risk and located an insurer willing to issue a workers’ comp

policy based on Aon’s presentation of “the case” for Lee. Lee’s

arguments concerning the importance of the application pertain to

materiality, which were made by Lee to the jury on the issue of

liability. There was no failure of proof on an essential issue

nor any instructional error regarding a completed application for

the policy. 

For all the reasons stated above, Lee’s motion for judgment

as a matter of law on this ground is DENIED.

D. Whether USF&G and Aon Failed to Show that Lee’s

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Employees Engaged in Activities Outside of a Water Park Workers’

Compensation Classification Code?

Lee asserts that USF&G reported Ms. Conley’s accident to the

Workers’ Compensation Insurance Rating Bureau (WCIRB) as

occurring under classification code 9016, as was made clear by 

Master Stat Report Facsimile (Ex. 675). Lee contends that there

was no evidence that Ms. Conley’s injury was ever classified by

USF&G or the WCIRB as occurring under any other classification

code:

This admission by USF&G proves that Ms.

Conley was working within water-park [sic]

classifications in accordance with Mr.

Sackett’s August 11, 1998 letter to

Hildebrand (Exh. 833) and Ms. Platt’s August

12 letter (Exh. 374).

Clearly, Lee’s August 12 letter which USF&G

claims serves as the basis for Lee’s

misrepresentation notified USF&G that Lee

employees’ ‘duties would be limited to park

operations.’ (Exh. 374.) Classifications

9016 and 9180 were the only code

classifications that were pertinent to the

water park operations in issue. Accordingly,

the great weight of the evidence, and indeed

the only evidence, was that Ms. Conley was

injured in the course of her employment with

Lee while conducting tasks that were clearly

‘park operations.’

USF&G rejoins that Ms. Conley’s classification in the Master

Stat Report Facsimile is not an admission by USF&G.

First, USF&G correctly observes there was no evidence at

trial as to who made the report to the WCIRB or whether the

source of the information for the report was anything other than

the report of injury filed by Lee. 

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Second, USF&G maintains that the insurer was required to

report injuries to the WCIRB using only the classification codes

set forth in the policy. USF&G refers to the trial testimony of

Lee’s workers’ compensation expert, Dr. Arthur J. Levine:

Q. It says under No. C, ‘Report the standard

classification code to which the claim has

been assigned. No claims can be assigned any

standard classifications, unless payroll or

other appropriate exposure also has been

reported for the standard classification.’

So you have to - if you are going to make a

report on the Unit Stat Report, it has to be

for a classification that’s in the existing

policy; is that right?

A. Yes, unless the insurance company tells

the Bureau that they think the classification

should be added or changed.

...

THE COURT: At the time of an injury, the

insurer reports to the Board under the

classifications that are in the policy. And

unless there is a change to those

classifications in the policy by endorsement

or some other means, then those are the

classifications used for reporting?

THE WITNESS: Right. It’s a control

mechanism. The Bureau does not - if

something is going on in a classification

that isn’t in the policy, the Bureau needs to

know about it. They can’t just have

insurance companies assigning claims to

classes that aren’t on there.

(Testimony of Levine, Feb. 14, 2007, 56:11-20, 57:24-58:8).

From this, USF&G contends when Ms. Conley was injured, her

injury was reported to the WCIRB under the classifications

actually contained in the USF&G policy, as an amusement park

maintenance worker, classification 9016:

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The injury was reported as required by law,

and the manner in which it was reported was

not an admission that construction

classifications come within the scope of an

amusement park operations employee.

USF&G contends that by the time the classification was

reported, USF&G had filed its action for rescission. It was

clear that USF&G contended that the work performed by Ms. Conley

was a construction activity not covered by the policy. Even if

the Master Stat Report Facsimile was an admission, there was

contrary evidence that USF&G did not accept or make such an

admission, which the jury could and did consider by expressly

finding that there was no waiver or estoppel by USF&G based on

all the evidence.

Lee replies that USF&G misleads the Court concerning its

admission because “USF&G fails to remind the Court that the only

expert testimony concerning the Master Unit Stat Report was that

the purpose was to accurately report injuries.” Lee contends

that further testimony by Dr. Levine established that although

the reporting party must initially report under an existing

classification, the reporting party has a continuing duty to

revise the classifications and amend the Master Unit Stat Report

so that it accurately reported the classification under which the

injury occurred:

Q. Now, by custom and practice in the

insurance industry, is the carrier’s

assignment of the 9016 classification code to

an accident on this Master Unit Statistical

Facsimile relied on as accurate?

MR. SMYTH: Objection, no foundation.

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THE COURT: Lay the foundation. Sustained.

...

Q. Dr. Levine, do you know what use is made

of the reported classification code for the

injuries that employees suffer on the job?

A. Yes, I do.

... 

Q. What use is made?

A. The two uses I just mentioned. The first

is rate-making by the Rating Bureau, and the

second is Experience Modification

Determination by the Rating Bureau for the

individual employer.

Q. And to your knowledge, by custom and

practice, is an insurance company required to

report accurately what classification code

applies?

A. Yes. If they don’t, then it contaminates

or subverts the whole rating basis as well as

gives the employer a potential advantage or

disadvantage in their Experience Modification

competing with other competitors in the

industry.

...

The Rating Bureau is, first and foremost, a

rating organization, and it takes tremendous

pains and is extremely concerned about the,

let’s call it ‘purity’, or accuracy, of its

database.

In many of the meetings I attend, the

president of the Rating Bureau comments that

a proposed rule change or a particular

procedure will have an impact or won’t have

an impact on the credibility and accuracy of

the database.

There is probably nothing that they are more

concerned about than making sure that this

information is properly reported and

accumulated because is it’s not right, then

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they are not giving the right results to the

Insurance Commissioner, and their own

members, the insurance companies, are using

data that’s skewed.

So both for their own self-interest and for

their role for the Insurance Commissioner,

they want to get it right.

(Testimony of Levine, Feb. 14, 2007, 35:8-37:10)

Relying on this testimony, Lee asserts that “this” was

ultimately USF&G’s responsibility and that the reporting occurred

after the rescission action was filed “only makes the admission

more egregious [and] does not ... excuse USF&G from its

admission.

Third, USF&G contends, whether Ms. Conley’s work could be

covered by a construction code classification is irrelevant:

USF&G asserted in argument and during the

case that the issue was whether Lee’s

employees, not just Ms. Conley, would be

performing construction work, as that term

was normally interpreted using common

language. The jury could and did reject

Lee’s hypertechnical interpretation of the

August 12 letter as referring only to work

requiring a separate classification under a

construction code. More importantly, none of

the parties who participated in the drafting

of the August 12, 1998 letter, Hugh Awtrey

and Christy Platt, testified to any

understanding of a ‘special meaning’ of

construction work different than its common

meaning. Finally, as testified by Bennett

Bibel, even if construction work were such

performed [sic] normally by a water park

employee, it still had to be separately

classified under the WCIRB if it constituted

new construction. Testimony of Bennett

Bibel, February 13, 2007 at 63:13-22 ... It

was clear and undisputed that the water slide

on which Conley was injured was a completely

new slide under original construction.

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Lee contends that the testimony of Lee’s workers’

compensation expert, Arthur Levine, confirms that Ms. Conley was

performing water park operations when she was injured. Lee

asserts that Dr. Levine “is one of the preeminent experts on

California Workers’ Compensation Insurance, arguably one of the

most knowledgeable outside the actual workers’ compensation

administration”, that he has authored a book and taught classes

on workers’ compensation and liability insurance, and has served

as the attorney for the Public Members of the Governing Committee

on the Workers’ Compensation Insurance Rating Bureau. Lee

asserts:

Dr. Levine testified that work performed by

Ms. Conley during the time of her injury, and

any construction-related activity performed

by Ms. Conley or Mr. Calomiris after the park

opened for business was considered to be part

of park operations and as such, it was

covered under the water park classification

codes 9016 or 9180. This evidence was

unrebutted by other expert testimony. This

evidence cannot be disregarded absent

contradicting expert testimony. Dr. Levine’s

opinion was supported by Lee’s water park

expert Kent Lemasters who testified that it

was not unusual for water parks to use their

own employees to erect new slides, depending

on the skills of park personnel and other

issues.

As set forth above, the key communications,

all indicate that American Specialty would

agree to insure Lee’s employees performing

‘their designated classification as water

park employees,’ and Lee agreed that its

employees ‘would be restricted to park

operations.’ Taken together, and in light of

Dr. Levine’s uncontroverted testimony, it is

clear that Ms. Conley (and Mr. Calomiris and

the remaining Lee employees assembling the

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Red Wave Slide in February 1999) was

performing within park operations and

performing a task that is within a designated

water park classification code.

Thus, even though classification codes are

technically only used to calculate premiums,

the clear weight of the evidence was that

they were used by the parties in this case to

designate and describe USF&G’s claimed

underwriting limitation and Lee’s expected

and anticipated scope of work by its

employees. The clear weight of the evidence

was that water park operations included

erecting water slides, Lee’s employees would

perform those tasks, Lee expected to be

insured for those tasks, and USF&G and

American Specialty should have expected to

insure those tasks. Accordingly, the clear

weight of the evidence is that there was no

misrepresentation concerning the nature and

scope of Lee employees’ work and that Ms.

Conley was performing a task contemplated and

accepted by USF&G.

Both USF&G and Aon oppose this conclusory opinion and refer

to the disputed evidence. Both assert that Lee’s contention

ignores all of the evidence at trial and all of the relevant

legal issues. USF&G contends:

First, Lee ignores the clear and explicit

language in its August 12, 1998 letter that

Lee would no longer employ construction

laborers and that any construction work would

be performed by independent contractors. 

Although Lee would like to rephrase the

language of that letter to state that Lee’s

employees would only perform construction

work requiring a separate classification

under the Uniform Statistical Reporting Plan

of the WCIRB, the letter clearly did not so

state. In determining the falsity of Lee’s

representations and its intentional

concealment of its plans to use its own

employees to finish construction of the water

park slide, whether or not its employees fell

within a workers [sic] compensation

classification is irrelevant. Any alleged

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testimony by Levine that Conley’s work fell

within a water park operations classification

thus also was irrelevant. Lee’s contention

that the clear weight of the evidence

established the classification codes were

used by the parties to designate USF&G’s

claimed underwriting limitation as to the

expected and anticipated scope of work by its

employees ... is absurd. No one, not even

Ms. Ehrlich, testified to that effect.

Second, Lee’s representation that it would

not perform construction work with its own

employees was not limited to Conley. During

trial, Bruce Calomiris testified that he

utilized a ten-ton crane and reach forklifts

to assemble the water park slide. Conley

herself testified that she performed work,

including bolting together portions of the

slide while other workers were on manlifts 30

to 40 feet in the air, which clearly

constitute construction.

Third, as even Lee admits ...,

‘classification codes are technically only

used to calculate premiums, ...’ ... It thus

was irrelevant as to whether the work of any

construction worker, including Conley, fell

within an amusement park classification. Lee

represented that it would not use its own

employees to perform construction work. It

did not reference workers [sic] compensation

classifications. In any event, USF&G’s

expert, Bennett Bibel, testified that under

the WCIRB, new construction must always be

separately classified ... Even Levine

testified that new construction had to be

separately classified.

Finally, Levine in fact did not testify

specifically that Conley was performing work

that fell within a water park classification. 

However, he did provide his preposterous and

unbelievable testimony that while

construction of a six-story building

constituted ‘construction,’ construction of a

six-story water slide did not and that while

construction of a temporary structure over a

college graduation ceremony was considered

assembly and not construction, even though

the USRP had a construction classification

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for tent erection. The weight of the

evidence was that Levine’s testimony was

preposterous and unbelievable.

Aon argues that Lee’s contention that Ms. Conley was

performing work within the scope of water park operations is

irrelevant:

[T]here was evidence that (1) all of the

parties understood American Specialty’s

concern to be any type of construction work

performed by Lee’s employees, and (2) Lee

understood the August 12, 1998 letter to mean

that Lee’s employees would not perform such

work.

Aon refers to the trial testimony of Christy Platt:

Q. ... If you look to the last sentence of

the letter, and it says ..., ‘The coverage

with [USF&G] has been issued on the premise

that there will be no construction laborers

employed by [Lee].’

Now, that was your understanding as well?

A. Correct.

Q. So in your dealings with Mr. Awtrey and

Aon around the time of the August 12 letter th

... you understood that Mr. Awtrey was

relaying to you ... the new insurance

company’s concerns about water park employees

doing construction, correct?

A. Yes.

Q. Okay. And you understood that the August

12 letter was intended to address those th

concerns, correct?

A. Correct.

Q. And you discussed the insurance company’s

concerns with Lisa Ehrlich, correct?

A. I’m sure I did.

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(Testimony of Platt, Feb. 14, 2007, 16:3-21). Aon also refers to

the trial testimony of Cathy Hacker:

Q. And do you recall what Stan said about

potentially issuing a USF&G policy to

American Specialty to The Island for Workers’

Compensation insurance?

A. My recollection is that he would consider

writing it only on the condition that we had

verification that Splash Island employees no

longer would perform any construction work.

(Testimony of Hacker, Feb. 2, 2007, 55:16-21)

Aon contends that since the jury reasonably could conclude as a

matter of fact, that Ms. Conley was performing construction work,

the jury’s verdict was not against the clear weight of the

evidence.

Lee replies that the August 11 and August 12, 1998, postpolicy-insurance letters make clear that USF&G intended to cover

any work done by Lee employees if properly classified within

water park classification and that Lee clearly informed American

Specialty that it intended its workers to perform normal water

park operations. Lee refers to the August 11, 1998 letter (Ex.

833):

Attached is a copy of The Island’s workers’

compensation loss runs. Bill, I think we

have a problem. The loss runs seem to

evidence an interchange of labor between the

water park employees and the construction

employees. Please review the type of losses

that have occurred and help us understand how

this fits with our understanding of the

client/employee relationship. We would have

anticipated training losses rather than

construction losses.

After seeing the loss runs, we are concerned. 

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The loss runs seem to support Industrial

Indemnity auditors’ position. Please help me

to prove to our underwriter the following:

1. Island employees will not be performing

tasks outside of their designated

classification as water park employees;

2. Construction has ceased at The Island and

all construction laborers working for Rexford

Development Corporation have moved to a

different job site. Therefore, workers’

compensation claims arising from construction

will not be reported under Lee Investments

workers’ compensation policy. [Emphasis

added]

Lee again contends that neither Kent LeMasters’ testimony or Dr.

Levine’s testimony has been rebutted. Lee refers to Dr. Levine’s

trial testimony:

Q. ... Dr. Levine, I would like you to assume

that in response to the underwriter’s inquiry

on the previous hypothetical that I gave to

you, the prospective insured responded using

the term or phrase ‘construction laborers,’

and stated that the prospective insured would

not employ construction laborers.

In 1998, would that phrase have been

generally understood in the insurance

industry to have had a specialized meaning?

...

A. Yes.

Q. Dr. Levine, I would ask you to assume the

same facts, except the prospective insured

has stated that the prospective insured will

not to do [sic], ‘construction.’ In 1998,

would that term have generally been

understood in the insurance industry to have

had a specialized meaning?

A. Yes.

Q. Now, I want you to further assume that

the prospective insured stated that the

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insured would limit its activities to ‘park

operations.’ In 1998, would such phraseology

generally have been understood in the

insurance industry to have had a specialized

meaning?

...

THE WITNESS: When you said ‘park operations,’

you are talking about a water park?

... 

Q. Any kind of park for hypothetical

purposes, an amusement park,

...

THE WITNESS: I mean as opposed to a public

park with grass in it?

MR. JAMISON: Right.

...

THE WITNESS: Yes. That would have a - that

would be understood in the insurance industry

to have a particular meaning.

...

Q. And what meaning would it have?

A. Well, once again, it would mean

operations that are performed by a contractor

or by a construction company that was

classified or for some other reason had to be

classified under one of the several dozen of

specific construction codes or - I’m using

‘code’ and ‘classification’ interchangeably.

Q. Okay. And earlier in this series of

hypotheticals, I asked you about the phrase,

quote, ‘construction laborers,’ and you

indicated that it would have been generally

understood in the insurance industry to have

a specialized meaning. What would that

meaning have been?

A. I would distinguish it from, say,

maintenance workers, repair workers, general

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grounds workers. All of those kinds of

people can do what might be considered in a

lay sense or generic sense construction work,

but that’s not what it means in the Workers’

Comp industry. And maybe an example of that,

let’s talk about a water park.

If the - one of the sections of a slide at

the top, I don’t know how high the things

are, 70 feet or whatever they are, were to

break and need to be welded. You could have

a park maintenance employee go up or operate

a crane or whatever was required, and

disassemble this thing and load this heavy

pipe to the ground and weld it and then

reverse the process. That might sound like a

construction activity if you just generally

talked about construction.

But very clearly, it’s a repair activity and

‘repair’,’ it doesn’t matter how heavy duty

it is, if it’s repair, then in the Workers’

Comp rules, the classification language and

so on, that’s included in whatever the basic

nonconstruction classification is.

So construction laborers, to me, doesn’t mean

people who are doing maintenance repair and

other kinds of activities that are in the

regular classification. It means people that

are doing specifically construction

classification things, usually contractors,

employees those do those sorts of things

[sic].

...

Q. In other words, you have to look at the

fact that it’s being used in a Workers’

Compensation insurance context; is that

right?

A. Yes.

(Testimony of Levine, Feb. 14, 2007, 45:9-49:80). Lee contends

that because Dr. Levine’s testimony establishes that, in the

context of Workers’ Compensation insurance, the terms

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“construction” and “construction laborer” do not refer to

incidental construction work that may be performed by a

maintenance employee, Ms. Conley’s work on the red slide in

February 1999 was normal park operations and would be covered and

expected within water park classifications 9180 or 9016.

All these arguments center on factual disputes over the

parties’ intent in contracting, most especially Lee’s

credibility, in responding to the underwriter’s questions and

requirements. The jury was free to reject Dr. Levine’s testimony

which the jury could have found was not coherent, or so biased or

arbitrary as to be of no help to the trier of fact. The

testimony established that there were no discussions about code

classifications when the policy was sought for Lee by Aon,

especially not in relation to USF&G’s “no construction” by Lee’s

employees requirement. The secret intent of Lee to refer solely

to “construction” activities as defined by specialized complex

workers’ comp classification codes, which even the experts do not

fully understand, nor could Dr. Levine cogently or comprehensibly

explain, is not supported by the evidence. There was a total

absence of evidence and failure of proof by Lee that before the

policy was bound and issued that Lee and Aon ever discussed such

classification codes with ASI or USF&G so as to vary the common

meaning of construction or to expand coverage to such unintended

construction activities. This dispute was factual, not assisted

by Levine’s legal conclusions and the jury rejected Lee’s

evidence based on credibility findings adverse to Lee.

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Lee’s motion for judgment on this ground is DENIED.

E. Whether, As a Matter of law, Lee Made a

Misrepresentation to Aon, Lee Intended to Induce Any Reliance by

Aon on a Misrepresentation, and Whether A Reliance of Aon Was a

Substantial Factor in Causing Harm to Aon?

Lee maintains there was no legally sufficient evidence for a

reasonable jury to find Lee liable for attorneys’ fees to Aon for

commission of a “tort of another.” Lee asserts Christy Platt’s

August 12, 1998 letter and all of Lisa Ehrlich’s statements to

Hugh Awtrey in response to his questions on August 12, 1998 were

intended to be transmitted to American Specialty. Lee argues:

Lee did not intend to induce any reliance on

the part of Aon on any representations by Lee

and Aon did not in fact rely on any such

representations. Instead, Aon on [August 12,

1998] was, with the exception noted below,

only delivering communications between Lee

and American Specialty. Since Aon was not

the intended recipient of any alleged

misrepresentations and did not itself rely on

any such representations, there could be no

claim for a misrepresentation to Aon or other

breach of duty by Lee.

Lee relies on Aon’s action on August 12, 1998, when Aon itself

drafted for Lee the language regarding Lee’s nonperformance of

construction activities to be transmitted for Lee by Aon, to ASI.

Lee contends this was on Aon’s sole initiative and that Aon, in

Mr. Awtrey’s and Ms. Moore’s August 27, 1998 letter (Ex. 841),

for its own benefit, took it upon itself to advise Lee that the

policy had been issued on the premise that no construction

laborers would be employed by Lee. Lee asserts that Aon’s own

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conduct, and not any breach of duty by Lee to Aon, resulted in

Aon being sued by USF&G and American Specialty for indemnity and

resulted in Aon’s counterclaim against USF&G and American

Specialty for indemnity. Lee asserts that Aon cannot recover for

the “tort of another” where Lee breached no duty owed to Aon or

Aon’s own conduct necessitated its involvement in litigation,

citing Burger v. Kuimelis, 325 F.Supp.2d 1026, 1041-1043

(N.D.Cal.2004).

“[A] person who through the tort of another has been

required to act in the protection of his interests by bringing or

defending an action against a third person is entitled to recover

compensation for the reasonably necessary loss of time, attorneys

fees and other expenditures thereby suffered.” Prentice v. North

American Title Guaranty Corp., 59 Cal.2d 618, 620 (1963). 

Aon responds that Lee presents a one-sided view of the

evidence that ignores substantial trial testimony to the

contrary. Aon asserts that the jury reasonably concluded that

Lee intentionally made misrepresentations to Aon during Lee’s

effort to obtain a follow-on workers’ comp insurance policy

through USF&G, and that those misrepresentations caused Aon to be

sued by USF&G for indemnity based on alleged fault of Aon which

was attributable to Lee’s tortious conduct. Aon contends there

was substantial evidence that American Specialty and USF&G sought

confirmation that Lee would perform no further construction work

nor employ construction workers at Island Water Park. Lee knew

Aon was relying on those representations in drafting the letter

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to American Specialty and Lee intended Aon, American Specialty,

and USF&G, to rely on the truth of the representations. Aon

refers to Aon’s cross-examination of Lisa Ehrlich:

Q. He [Hugh Awtrey] may have told you that

whatever work - the insurance company wanted

to know that whatever work was going to be

done was going to be done by subcontractors

and that Lee would obtain certificates of

insurance?

A. Yes.

Q. He told you that?

A. That they wanted a letter regarding that

work that was done would be done by

subcontractors and that certificates of

insurance would be obtained.

...

Q. Whatever work was going to be done was

going to be done by subcontractors?

A. Let me see if I can remember. We talked

about - we talked about the status of

operations, and then he told me that they

wanted a letter. I know we talked about the

construction laborers, and then we did talk

about, yes, construction work, and that it

would be done by subcontractors, and

certificates of insurance would be issued.

...

Q. Okay. And in fact, this letter was

prepared and sent to Christy Platt by Mr.

Awtrey, as far as you know, right?

A. It was prepared by Mr. Awtrey and she

signed it and sent it back to him, I believe.

Q. Again, I think you testified that you

talked to Christy Platt and told her that Mr.

Awtrey would be proposing some language for a

letter, right?

A. That is correct, that is what he said,

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that he might want to do that.

Q. And that as long as the language in the

letter was consistent with your discussion

with Mr. Awtrey and with Ms. Platt, that Ms.

Platt could go ahead and sign that letter?

A. That is correct.

(Trial testimony of L. Ehrlich, Feb. 9, 2007, 7:10-18; 7:22-8:4;

8:14-9:1). Aon also refers to Aon’s cross-examination of Christy

Platt:

Q. Okay. And you were clarifying that issue

for Hugh, correct? If I could rephrase.

In other words, if the concern at the time of

the cancellation of the Industrial Indemnity

policy was that there were some employees

doing construction that were employed by the

water park, you were helping Hugh and Joanne

understand that maybe those employees were in

fact under Rexford or some other company?

A. Correct.

...

Q. ... Do you recall that Mr. Awtrey was

seeking your assistance in helping the second

insurance company, USF&G, feel more

comfortable about issuing an insurance policy

in light of these construction concerns?

A. As it relates to who was doing that work.

Q. Right.

A. I believe that to be true, yes.

(Trial testimony of Platt, Feb. 14, 2007, 5:17-25; 6:17-23).

Lee’s admissions support the jury’s findings that Lee knew

the prospective second insurer, USF&G, required affirmative

representations by Lee that Lee would not perform construction

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activities and would not utilize construction workers, who would

be subcontracted and insurance certificates provided. Aon

further contends that Aon did not “take it on itself” to write

the letter to American Specialty. Instead, Aon was acting

prudently as Lee’s broker in responding to American Specialty’s

requirement that Lee provide a letter containing these

representations before issuing the policy. Lee was well aware of

this requirement, as evidenced by the testimony set forth above,

and the trial testimony of Cathy Hacker:

Q. And do you recall what Stan said about

potentially issuing a USF&G policy to

American Specialty to The Island for Workers’

Compensation insurance?

A. My recollection is that they would

consider writing it only on the condition

that we had verification that Splash Island

employees no longer would perform any

construction work. 

...

Q. Now, in the meeting, was there any

discussion about whether the response to any

inquiry by Aon had to come from the insured,

the policy holder or prospective policy

holder?

A. Yes, we were requiring that we receive a

written response from the insured.

...

Q. Okay. Was there anything in that letter,

as you read it, that states, ‘American

Specialty is requesting a written response’?

A. Yes.

Q. And where is that?

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A. The second paragraph, the second - third

sentence, says, ‘Please help me prove to our

underwriter the following: Number 1, Island

employees will not be performing tasks

outside of their designated classification as

water park employees.’

So a proof would mean a response.

Q. All right. So you understood the

sentence, ‘Please help me to prove to our

underwriter,’ to be a request for a written

response; is that correct?

A. A response, which, since we like to have

things in writing in the insurance world so

that we have documentation, but it

specifically does not say ‘written proof.’ 

(Trial testimony of Hacker, Feb. 2, 2007, 55:16-21, 71:17-21,

108:5-21). The factual circumstances could not be clearer. Aon

was endeavoring, as Lee’s broker, to satisfy the underwriter’s

concerns about Lee’s employees’ work activities to enable the

policy to be issued to Lee. The jury found against Lee on its

theories that Aon breached any duty of care or made any

misrepresentations. 

Aon describes Lee’s reliance on Burger v. Kuimelis, supra,

to contend that Lee breached no duty to Aon as misplaced, because

Kumeilis held: “[t]he duty not to mislead is a duty that runs

from counterdefendants [insureds] to Kumeilis [broker].” Burger,

supra, 325 F.Supp.2d at 1044. Aon responds that Lee’s argument

that Aon’s own conduct in drafting the letter necessitated its

involvement in this litigation ignores the fact that Aon was

acting for Lee and Lee provided misinformation to Aon:

Accordingly, just as the insureds in Burger

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lied to their broker to induce him to prepare

a document used to defraud HUD, Lee provided

misinformation to Aon knowing that the August

12 letter would be used to secure an

insurance policy through USF&G/American

Specialty. 

In its reply, Lee alters its position. Lee now argues:

Dr. Levine’s testimony was unrebutted that

insurance industry personnel would be

expected to understand ‘construction,’ as

used in the terminology between the parties,

not to include construction activities that

were a part of water park maintenance within

the meaning of water park classification

codes 9016 and 9180, and to include only

‘construction’ activities that were outside

of a water park classification and that would

require a workers’ compensation construction

classification code. Ms. Platt testified by

deposition to her understanding of the

terminology as referring to ‘ground-up’

construction of the park. Mr. Awtrey was

both in the insurance industry and had worked

for years at Clovis Lakes, later known as

Wild Waters Adventures, where park employees

built slides. Mr. Awtrey admitted that he

never discussed construction of water slide

[sic] with Lee. (2/8/07 Awtrey testimony at

126:13-128:4.) There was no evidence that

Mr. Awtrey, Cathy Hacker or anyone else in

the insurance industry conveyed to Lee that

they interpreted ‘construction’ differently

than Dr. Levine testified they would have

been expected to interpret it.

Lee (and Aon ...) could reasonably (and did

by Dr. Levine’s and Ms. Platt’s deposition

testimony) have understood that completion of

the red slide was not ‘construction’ within

the meaning of Mr. Sackett’s August 11, 1998

letter and Ms. Platt’s August 12, 1998 letter

(and Mr. Awtrey’s and Ms. Moore [sic] August

27, 1998 letter to Lee), but instead would be

considered activity within a water park

classification. There was no

misrepresentation if the completion of the

red slide was such activity. Uncontradicted

expert evidence from Mr. Lemasters

established that it was not unusual for water

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parks to do slide erection with their own

maintenance employees and Dr. Levine’s

testimony that such work would fall within a

water park classification was uncontradicted. 

USF&G’s citation to the testimony of both Mr.

Bibel and Dr. Levine that ‘new construction’

would be separately classified begged the

question about how to classify the completion

of the red slide. Aon cites no testimony

indicating that any expert other than Dr.

Levine answered this question.

Furthermore, by the time USF&G filed its

Master Unit Statistical Report designation of

the Conley accident as falling within

classification code 9016, USF&G has already

filed its rescission action. Dr. Levine

testified that USF&G could and should have

sought to change how it designated the

accident, but never did. Accordingly,

USF&G’s Master Unit Statistical Report was

contrary to its contention in its rescission

action and stands, along with Dr. Levine’s

testimony, as unrebutted evidence that

Conley’s accident arose from activity within

a water park classification.

Accordingly, there was no evidence to support

that Lee made a misrepresentation to Aon,

that Lee intended to induce Aon to rely on a

misrepresentation, or that Aon actually

relied on a misrepresentation. Furthermore,

if Aon had relied on Ms. Platt’s August 12,

1998 letter to mean that Lee could not

complete the red slide, that reliance, as a

matter of law and uncontradicted evidence,

would have been unjustified.

All of this ignores uncontradicted testimony that neither

Aon, American Specialty, or Lee at the time of the letters,

discussed or considered the technical meaning of workers’

compensation classification codes. No hypertechnical or logicdefying meanings for the term “construction” were considered or

used in the parties’ communications about the “no construction

activities” representations by Lee. Lee fully advanced and

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argued to the jury its claim that Aon breached the duty of care

as Lee’s workers’ comp insurance broker by not knowing or fully

explaining the meaning of construction so as to have Lee’s

construction activities covered under the USF&G policy. The jury

rejected Lee’s broker malpractice - negligence theory in its

entirety, as well as Lee’s claim that Aon misrepresented,

intentionally, or negligently, the meaning of the terms

“construction” or “construction activities” in connection with

the USF&G policy. 

There was substantial evidence to support that as principal

in its insurance broker relationship with Aon, Lee owed Aon

duties of candor and cooperation. The evidence is that Lee

misrepresented its intent and the performance of construction

activities at the Island site in July-August 1998 and thereafter,

supported the jury’s finding that Lee breached these duties to

Aon. But for Lee’s tortious misrepresentations to Aon and

American Specialty, USF&G, a third party, would not have issued

the policy and would not have sued Aon for indemnity arising from

Lee’s misrepresentations to USF&G and Lee’s breach of duty to

Aon. This evidence supports the tort of another claim. 

Lee’s motion for judgment on the tort of another claim is

DENIED, subject to allocation of recoverable fees for tort of

another where the direct claims and defense between the Lee

parties and Aon do not implicate USF&G’s indemnity case.

 CONCLUSION

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For the reasons stated above:

1. Lee’s motion for judgment pursuant to Fed. R. Civ. Proc.

Rule 50(b) is DENIED.

2. Counsel for USF&G and Aon shall prepare and lodge a form

of order that reflects the specific rulings on each issue

addressed by this decision within five (5) days following the

date of service of this decision by the Court’s Clerk.

IT IS SO ORDERED.

Dated: March 14, 2008 /s/ Oliver W. Wanger 

668554 UNITED STATES DISTRICT JUDGE

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