2006 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

1-31-2006

Westchester Fire Ins v. Household Intl Inc

Precedential or Non-Precedential: Non-Precedential

Docket No. 05-1989

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Recommended Citation

"Westchester Fire Ins v. Household Intl Inc" (2006). 2006 Decisions. Paper 1692.

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NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

____________

No. 05-1989

____________

WESTCHESTER FIRE INSURANCE CO.

v.

HOUSEHOLD INTERNATIONAL, INC.;

HOUSEHOLD RETAIL SERVICES, INC.;

HOUSEHOLD BANK (SB) N.A.;

BENEFICIAL NATIONAL BANK USA

Appellants

____________

Appeal from the United States District Court

for the District of Delaware

(D.C. No. 02-cv-01328)

District Judge: Honorable Joseph J. Farnan, Jr.

____________

Argued January 17, 2006

Before: BARRY, AMBRO and ALDISERT, Circuit Judges.

(Filed: January 31, 2006)

Christopher C. Dickinson, Esq. (Argued)

Jenner & Block

One IBM Plaza

Chicago, IL 60611

Counsel for Appellants

Michael T. Glascott, Esq. (Argued)

Randolph E. Sarnacki, Esq.

Lustig & Brown LLP

400 Essjay Road, Suite 200

Buffalo, New York 14221-8228
2

J.R. Julian, Esq.

824 Market Street

P.O. Box 2171

Wilmington, DE 19899

Counsel for Appellees ____________

OPINION OF THE COURT

____________

ALDISERT, Circuit Judge

Defendants in this declaratory judgment action, Household International, Inc.,

Household Retail Services, Inc., Household Bank, N.A., and Beneficial National Bank

USA (“Policyholders”), appeal from a stipulated entry of judgment in favor of Plaintiff

Westchester Fire Insurance Company (“Westchester”) following the denial of several

motions to compel discovery. The District Court had jurisdiction pursuant to 28 U.S.C.

§ 1332(a)(1) and we have appellate jurisdiction under 28 U.S.C. § 1291. We will affirm.

I.

Because we write only for the parties, who are familiar with the facts, procedural

history and contentions presented, we will only briefly revisit them here.

This action stems from a barrage of lawsuits filed against Policyholders by

consumers who alleged that salesmen and others swindled them in the sale of home

satellite television systems, furniture, vinyl siding and other products. Although

Policyholders’ primary role in these sales was to provide financing to the consumers by

way of private label credit card accounts, the consumers’ lawsuits sought to hold

Policyholders responsible for the misconduct of the salesmen and distributors.
 1

In the early to mid-1990s, when Westchester sold the policies at issue, Household and

Beneficial were wholly unrelated companies. Household and Beneficial subsequently

merged on June 30, 1998.

3

At the time these claims arose, Westchester insured Policyholders under umbrella

policies (“the Policies”) that contained a Financial Institutions Endorsement, or FIE.1

 The

Policies were obtained through Policyholders’ insurance brokers, who are not parties to

this litigation. The FIE provides:

This policy does not apply to “Bodily Injury”, “Property Damage”,

“Personal Injury”, or “Advertising Injury” . . . arising out of any negligent

act, error, omission or breach of duty in performing or failing to perform

banking or “fiduciary” services, or in giving financial, economic or

investment advice, or in rendering investment, advisory or management

services.

In March 1998, Beneficial filed a complaint in the District Court for the District of

Delaware contending that Westchester had a duty to defend and insure against these

claims. See Beneficial Nat’l Bank USA v. Westchester Fire Ins. Co., No. 98-115 (slip op.)

(D. Del. Oct. 13, 2000). Following discovery, the District Court determined that the FIE

in the policy issued by Westchester was unambiguous and relieved it from the obligation

to cover claims arising from Beneficial’s issuance of credit card financing. On appeal,

this Court affirmed. See Beneficial Nat'l Bank, USA v. Westchester Fire Ins. Co., 276

F.3d 575 (3d Cir. 2001) (unpublished opinion).

Following this decision, the Policyholders initiated another action in the Northern

District of Illinois, alleging, inter alia, common law fraud, violations of Illinois’ and New

Jersey’s consumer fraud acts, and unjust enrichment, all arising from Westchester’s sale
4

of the policies (the “Illinois Action”). The essence of Policyholders’ fraud claims is that

Westchester tacitly represented that all of Policyholders’ “core business functions,”

including banking operations, would be covered by the umbrella policies. They contend

that the usual practice in the insurance industry is for the broker to send to the insurer a

description of a company’s core business functions. The insurer then provides a quote

and ultimately issues a policy oriented around those core business functions. If there is an

issue with respect to covering one of the company’s business functions, the insurer is

expected to raise the issue with the broker and detailed negotiations regarding the

coverage then ensue.

Policyholders contend that, here, Westchester knew that banking operations were

one of Policyholders’ core business functions and that they expected that these operations

would be covered by the Policies. Notwithstanding this knowledge, Policyholders argue,

Westchester surreptitiously inserted the FIE and never raised any problem with insuring

the banking operations. Policyholders also contend that the premiums they paid –

approximately $85,000 by Beneficial for the policy period of July 1, 1994 to July 1, 1995

and approximately $100,000 by Household for that same period – far exceeded the actual

values of the Policies.

In response, Westchester filed a mirror-image declaratory judgment action in the

District Court for the District of Delaware seeking a declaration rejecting the claims

asserted in the Illinois Action. The Court granted Policyholders’ motion to stay pending

resolution of the Illinois Action. In October 2002, the District Court for the Northern
5

District of Illinois granted Westchester’s motion to transfer the Illinois Action to the

District of Delaware. The District Court then consolidated the two actions. The parties

thereafter agreed that Illinois law governs the Household policy and that New Jersey law

governs the Beneficial policy.

After the District Court denied Westchester’s motion to dismiss, see Westchester

Fire Ins. Co. v. Household Int’l., 286 F. Supp. 2d 369 (D. Del. 2003), Policyholders

initiated discovery. On November 26, 2003, Policyholders served their First Set of

Document Requests and their First Set of Interrogatories. They sought, inter alia,

information relating to the drafting of the FIE; the drafters’ intent; any internal guidelines

Westchester uses to determine the scope of the FIE; Westchester’s analysis of the FIE

with respect to Household or Beneficial; claims similar to Policyholders’ that were

submitted to Westchester by an insured under a policy containing the FIE; and the

identification of all persons who had a role in drafting the FIE. On April 19, 2004,

Policyholders noticed the deposition of Westchester’s corporate representative. The Rule

30(b)(6) notice identified deposition topics pertaining to, inter alia, Westchester’s intent

in both drafting the FIE and including it in the Policies.

Westchester objected to the discovery requests on the grounds of burdensomeness,

privilege and irrelevancy and refused to designate a corporate representative. On June 19,

2004, Policyholders filed three motions to compel seeking: (1) discovery relating to the

drafting, meaning, interpretation and intent behind the FIE; (2) discovery related to the

factual underpinnings of Westchester’s denials of certain allegations in Policyholders’
6

complaint, and of its defenses to Policyholders’ claims; and (3) designation of

Westchester’s corporate representative to testify on these topics.

In response, Westchester reasserted its objections, arguing that there was no

dispute as to the meaning of the FIE and that Policyholders’ requests were cumulative and

irrelevant. Westchester also filed a motion for a protective order seeking to limit the

scope of the depositions of Westchester’s Rule 30(b)(6) witnesses and to vacate or limit

Policyholders’ document requests.

On September 14, 2004, the District Court held oral argument on the discovery

motions. The District Court determined that prior to permitting discovery into

Westchester’s alleged fraudulent intent, Policyholders would have to prove through the

testimony of their insurance brokers that they specifically requested coverage for

Policyholders’ banking operations. 

On November 18, 2004, Policyholders filed a supplemental brief containing broker

testimony showing that: (1) the brokers conveyed information to Westchester concerning

the nature of Policyholders’ businesses, including the credit card operations; (2) the

brokers intended to procure coverage for all of Policyholders’ business functions; (3) that

Westchester’s underwriters offered premium quotes and bound coverage without

requesting any additional information; and (4) if the FIE had been presented by

Westchester as taking away coverage, there would have been much more

contemporaneous correspondence.
7

In a January 5, 2005 Memorandum Opinion and Order, the District Court denied

Policyholders’ motions to compel written and oral discovery relating to the FIE, and

denied Westchester’s motion for a protective order as moot. The pertinent portion of the

Opinion states:

After reviewing the deposition testimony, Defendants’ arguments, and

documents provided in support of Defendants’ motions to compel

discovery, I conclude that Defendants have not demonstrated the relevance

of the discovery requested with regard to the FIE. Defendants do not

contend that Westchester withheld from Defendants or their brokers the

existence or the contents of the FIE at any time during negotiation of the

purchase of the umbrella policy. Rather, Defendants focus on the parties’

contemporaneous intent, understanding, and representations with regard to

the FIE’s meaning. I find that there is no testimony suggesting that

Defendants’ insurance brokers requested or relied upon having the type of

coverage that the FIE excludes . . . . Notwithstanding the liberal discovery

standard in the Third Circuit, for these reasons I conclude that Defendants

have not demonstrated that discovery as to the meaning, scope,

interpretation, drafting, or origin of the FIE is relevant to their fraud claim

against Westchester, or that such discovery is reasonably calculated to lead

to the discovery of admissible evidence. Thus, I will deny Defendant’s

Motion to Compel discovery relating to [the FIE].

Policyholders then moved to certify the Order for immediate appellate review

pursuant to 28 U.S.C. § 1292(b), or, in the alternative, for entry of judgment in favor of

Westchester on all remaining claims to enable Policyholders to appeal the otherwise

interlocutory order. The District Court denied the motion to certify an interlocutory

appeal, but granted the motion for entry of judgment. Policyholders then appealed.

II.

We generally review a decision to grant a motion to compel for abuse of

discretion. See In re Cendant Corp. Sec. Litig., 343 F.3d 658, 661 (3d Cir. 2003). We
8

will not upset a district court’s control of discovery “except upon the clearest showing

that the procedures have resulted in actual and substantial prejudice to the complaining

litigant.” In re Fine Paper Antitrust Litig., 685 F.2d 810, 818 (3d Cir. 1982) (quotation

omitted). When a discovery order is based upon the interpretation of a legal precept,

however, our review is plenary. In re Cendant Corp. Sec. Litig., 343 F.3d at 661.

III.

For the purposes of our analysis, the information that Policyholders seek to

discover can be divided into two categories. First, they have demanded information

relating to the intent, drafting and formulation of the FIE generally. Second, they seek

discovery regarding Westchester’s intent regarding the FIE as it relates to them,

specifically, whether the FIE was inserted into the policy with full knowledge that

Household expected coverage for claims relating to its banking and credit services.

A.

With respect to the first category, we agree with Westchester that the information

regarding the intent and drafting of the FIE as a general matter is irrelevant to

Policyholders’ fraud claims. Policyholders are simply attempting to relitigate our prior

determination that the FIE unambiguously excludes this type of coverage. The clear

intent of Westchester in drafting a provision that unambiguously excludes coverage for

claims relating to banking services is, quite logically, to exclude coverage for banking

services. Policyholders cannot circumvent our prior ruling by contending that

Westchester did not understand the plain meaning of a policy provision that it drafted. 
 2

As an initial matter, Policyholders vigorously argue that they were entitled to full

discovery once their claims survived Westchester’s motion to dismiss. They contend that

the District Court erred in requiring a preliminary showing before permitting discovery

into Westchester’s fraudulent intent and that neither the Federal Rules of Civil Procedure

nor the caselaw permits a district court to structure discovery in this manner. We

disagree. A district court has wide latitude in structuring discovery and its rulings will

not be overturned absent a showing of clear abuse of discretion. See McMullen v. Bay

Ship Mgmt., 335 F.3d 215, 217 (3d Cir. 2003). Here, the District Court did not exceed the

permissible bounds of discretion in requiring Policyholders to make a preliminary

showing that they can satisfy other elements of their fraud claim – namely

“representation” and “reasonable reliance” – before permitting discovery into fraudulent

intent. See Massachusetts School of Law at Andover, Inc. v. Am. Bar Ass., 107 F.3d 1026

(3d Cir. 1997) (holding that the district court did not exceed the permissible bounds of

discretion by requiring a showing that the ABA considered plaintiffs’ salaries in denying

accreditation before permitting discovery into the ABA’s development and

implementation of the faculty salary standard). Indeed, even if we characterize the

9

Although this Court employs a liberal discovery standard, see Pacitti v. Macy's, 193 F.3d

766, 777 (3d Cir. 1999), Policyholders have not persuaded us that information relating to

the intent, drafting and formulation of the FIE is reasonably calculated to lead to the

discovery of admissible evidence.

B.

With respect to the second category, we do not dispute the relevance of the

information sought. Evidence regarding Westchester’s knowledge of Policyholders’

expectations goes to fraudulent intent, which is an element of fraudulent

misrepresentation under both Illinois and New Jersey law. Nonetheless, we agree with

the District Court that Policyholders have not made a sufficient preliminary showing that

they can satisfy the other elements of a fraudulent misrepresentation claim. Accordingly,

they are not entitled to discovery regarding Westchester’s alleged fraudulent intent.2
District Court’s requirement of an evidentiary showing as a sua sponte partial summary

judgment on the fraud claims, Policyholders were given both notice and an opportunity to

present evidence. See Celotex Corp. v. Catrett, 477 U.S. 317, 326 (1986) (noting that

district courts have inherent power to enter summary judgment sua sponte so long as the

losing party is given notice and an opportunity to present evidence).

10

Under both New Jersey and Illinois law, fraudulent misrepresentation has five

elements: (1) a representation of material fact; (2) made with knowledge of its falsity;

(3) with the intent to induce plaintiff to act; (4) that was relied upon by plaintiff to his

detriment; and (5) that reliance is reasonable. See Glazewski v. Coronet Ins. Co., 483

N.E.2d 1263, 1266 (Ill. 1985); Gennari v. Weichert Co. Realtors, 691 A.2d 350, 368 (N.J.

1997).

Here, Policyholders have not shown that Westchester made any material

representation regarding the coverage of the policy. In the absence of an express request

for a certain type of coverage, the mere issuance of an insurance policy does not

constitute a representation that the policy covers everything the insured expects. 

Although the Supreme Court of Illinois has recognized that an insurer may make a tacit

representation regarding the scope of coverage when it sells a policy that lacks any value

whatsoever, see Glazewski, 483 N.E.2d at 1266, it has refused to extend this rule to cases

where the policy does in fact have some value. See Charles Hester Enterprises, Inc. v.

Ill. Founders Ins. Co., 499 N.E.2d 1319, 1325 (Ill. 1986) (holding that plaintiffs failed to

state a cause of action for tacit misrepresentation where the policy had some value); see

also Friesz ex rel. Friesz v. Farm & City Ins. Co., 619 N.W.2d 677, 681 n.1 (S.D. 2000)
 3

Although silence may constitute a misrepresentation under Illinois law, the silence

must be accompanied by deceptive conduct or active concealment. See Heider v.

Leewards Creative Crafts, Inc., 613 N.E.2d 805, 814 (Ill. App. 2d 1993). Here,

Westchester did not conceal anything – the Policies clearly and unambiguously stated that

there was no coverage – and did not engage in any deceptive conduct that would

transform its silence into a representation of coverage.

11

(distinguishing Glazewski on the ground that the policies at issue there had no value);

Johnson v. Safeco Ins. Co., 809 F. Supp. 602, 609 (N.D. Ill. 1992) (same); but see Old

Republic Ins. Co. v. Ness, Motley, Loadholt, 2005 WL 991909 at *3 (N.D. Ill. Apr. 12,

2005) (rejecting the distinction between policies with some value and those with no

value). Here, it is undisputed that the policy had some value. See Household Int’l, 286 F.

Supp. 2d at 378. We therefore conclude that the Supreme Court of Illinois would not

recognize Policyholders’ tacit misrepresentation theory.3

We reach the same conclusion with respect to Policyholders’ fraud claims under

New Jersey law. Our research does not disclose any New Jersey case permitting the

theory advanced by Policyholders. In the absence of a specific request for the type of

coverage excluded by the FIE, we do not believe that the New Jersey Supreme Court

would hold that an insurer’s failure to notify an insured that it was not covering all of

their business functions would constitute a representation that it was in fact covering all

of their business functions. See generally Wang v. Allstate Ins., 592 A.2d 527, 532 (N.J.

1991) (holding that there is no common law duty of a carrier or its agents to advise an

insured concerning the possible need for higher policy limits upon renewal of the policy

absent a special relationship).
12

Moreover, even if Policyholders could show that Westchester made a

representation regarding the scope of the policies, their fraud claim would nonetheless fail

because any reliance would be unreasonable in light of the plain and unambiguous

language of the Policies. Contrary to Policyholders’ suggestion, the Policies are not

contracts of adhesion. Household and Beneficial are large and sophisticated business

entities that used professional insurance brokers to negotiate the specific terms of the

Policies. We conclude as a matter of law that it would be unreasonable for Policyholders

to rely on an alleged tacit misrepresentation when the lack of coverage is apparent from

the face of the policy. See First Am. Title Ins. Co. v. TCF Bank, F.A., 676 N.E.2d 1003

(Ill. App. 2d 1997) (Hutchinson, J., concurring) (“Sophisticated business entities engaged

in arms-length transactions should not be duty bound to decipher and discern the

motivations for business decisions made by other sophisticated business entities whose

personnel fail to acquaint themselves with the clear and unambiguous meaning of the

law.”); cf. AES Corp. v. Dow Chem. Co., 325 F.3d 174, 178-179 (3d Cir. 2003) (noting

that the sophistication and relationship of parties should be considered in determining

whether reliance is reasonable).

IV.

In addition to their common law fraud claim, Policyholders have brought causes of

action under the Illinois Consumer Fraud and Deceptive Practices Act (“ICFDPA”) and

New Jersey Consumer Fraud Act (“NJCFA”). We independently observe that the

ICFDPA and NJCFA appear to apply to a broader range of deceptive and unfair conduct
13

than common law fraud, and that neither require proof of reasonable reliance. See

generally Cox v. Sears Roebuck & Co., 647 A.2d 454, 462 (N.J. 1994); Siegel v. Levy

Org. Dev. Co., Inc., 607 N.E.2d 194, 198 (Ill. 1992). Both in their briefs and at oral

argument, however, Policyholders failed to make any argument based on the ICFDPA or

the NJCFA. Instead, they have treated the consumer fraud act claims as coterminous with

the common law fraud claim. We therefore refuse to volunteer on Policyholders’ behalf a

contention that they have made a sufficient showing under the ICFDPA and the NJCFA

to entitle them to discovery on fraudulent intent, and we consider this argument waived. 

Dillinger v. Caterpillar, Inc., 959 F.2d 430, 447 (3d Cir. 1992) (“‘[A]bsent extraordinary

circumstances, briefs must contain statements of all issues presented for appeal, together

with supporting arguments and citations,’ and ‘under the specificity requirements of Fed.

Rule of Appellate Procedure 28 and Third Circuit Rule 21, a passing reference to an issue

in a brief will not suffice to bring that issue before this court on appeal.’”) (quoting

Simmons v. City of Philadelphia, 947 F.2d 1042, 1065-1066 (3d Cir. 1991)).

V.

We have considered all contentions presented by the parties and conclude that no

further discussion is necessary. The judgment of the District Court will be affirmed.