The opinion of the court was delivered by: MATHEW KENNELLY, District Judge
FINDINGS OF FACT AND CONCLUSIONS OF LAW
On February 9-12, 2004, the Court conducted a bench trial in this
case. This constitutes the Court's findings of fact and conclusions of
law pursuant to Federal Rule of Civil Procedure 52(a).
Plaintiff Sutter Insurance Company is a California corporation with its
principal place of business in that same state. Defendant Applied
Systems, Inc. is an Illinois corporation with its principal place of
business in this state. The case was transferred here from the Northern
District of California pursuant to 28 U.S.C. § 1404(a). Sutter at one
point had named several "Doe" defendants, but these were dismissed.
Sutter sells property and casualty insurance in the West Coast region,
both directly and through agents, In 1999, the company that provided and
maintained the computer software Sutter used to produce and service its
insurance policies advised Sutter that it would no longer provide updates
of the software as of a particular future date. Sutter searched for a new
software provider and solicited proposals From a number of entities,
including Applied, Applied's
software system was called the "Diamond System." Applied's personnel made
two sales presentations to Sutter at its California offices.
Sutter's insurance business included both "direct bill" and "agency
bill" policies. Direct bill policies were those issued and billed for by
Sutter itself. Agency bill policies, which represented a significant
component of Sutter's business, were those issued through agents working
on Sutter's behalf, with the agents collecting premium payments and
remitting them to Sutter. Sutter would receive payments, some of which
were partial payments, from agents who were forwarding premium payments
on more than one insurance policy. Sutter required a mechanism to bill
the agents properly, account for partial payments, age accounts
receivable, and report on a policy-by-policy basis the amounts paid and
due. Sutter's existing software supported agency billing and these other
related reconciliation functions.
At Applied's sales presentations, Sutter's and Applied's
representatives discussed Sutter's agency billing and related needs,
Applied's personnel assured Sutter that the Diamond System was capable of
handling agency billing. It is unclear whether these discussions involved
much in me way of details, and it does not appear to the Court that there
was any significant discussion of the specifics of Applied's needs.
However, Applied's agency billing and reconciliation functions followed a
pattern standard in the insurance business, Its representatives reasonably
believed that Applied's software, represented to be an off-the-shelf
system (that is, one that could be implemented with minimal effort),
would satisfy these seemingly basic needs.
Sutter's representatives advised Applied's personnel at the sales
presentations that Sutter wanted to be able to convert all of its
software to a new system by no later than December 31, 2000. After that
date, Sutter would be required to pay additional fees to continue to
former software. Applied was hopeful that it could complete transition by
that time, but it made no firm commitment to Sutter, as the speed with
which the transition process would occur was, in significant part, in the
Sutter and Applied entered into a written contract entitled "System
Implementation and License Agreement" dated March 21, 2000. The initial
draft of the Agreement represented a standard form contract used by
Applied, with some modifications to particularize it to Sutter. Sutter
sought to revise certain substantive terms of the Agreement, but Applied
declined. Sutter was, however, able to negotiate a somewhat better price
than had been proposed in the initial draft provided by Applied.
The Agreement contemplated that the first line of Sutter's business to
be converted to the Diamond System would be Sutter's "preferred
homeowner's" line, a relatively new lire of business for Sutter which was
primarily direct-bill business. The Agreement in its original form did not
specifically identify the remaining lines to be converted and did not set
a schedule for such conversions; this was left for later negotiation.
The Agreement provided that Sutter would purchase from Applied the
software and services specified in Schedule A to the Agreement, together
with the system configuration options specified in Schedule B and the
programming options specified in Schedule C (there were none of the
latter). Schedule A listed, in summary form, the features and functions
of the Diamond System. This included a reference to "Agency and Direct
Bill Statement Options," Sutter reasonably understood this, particularly
in conjunction with Schedule A's references to "Installment Based
Billing," "Daily, Monthly, and Yearly Calculation of Written and Earned
Premium," and the like, to encompass the agency billing, accounting,
reporting functions referenced earlier. In fact, however, the Diamond
System did not support agency reconciliation in the manner expected by
Sutter, though Sutter would not find this out until much later.
The purchase price, described in Schedule F of the Agreement, was
$300,000 for the base software system, plus a total of $60,000 for the
California preferred homeowner's business line ($35,000 for the business
line and $25,000 for the state license). Additional lines of business
would also be billed at $35,000 per business line and $25,000 for each
state license. Payment was to be made as follows: $75,000 upon signing of
the Agreement, $75,000 upon signing and mutual acceptance of a system
implementation project plan and time line, $150,000 on the date of first
delivery of the base software for testing and evaluation, and $60,000 on
the date of acceptance of the California preferred homeowner's business
line. "Acceptance" was defined as the earlier of the date of delivery of
the system with the functionality needed to "go live," or the date of
operational use of the system. The Agreement also provided for payment of
support and maintenance fees of $80,000 for the base system, $15,000 for
each line of business, and $12,500 for each state.
The Agreement contemplated that Sutter would provide specifications
regarding its needs, and Applied would then develop the software to meet
those specifications. The finished product would be delivered to Sutter
for a period of testing and evaluation, and once this was finished Sutter
would "go live" and begin using the system in its day to day operations.
In May 2000, Sutter and Applied executed a supplement to Schedule D of
the agreement, setting forth a detailed system implementation project
plan culminating in final delivery and implementation of "phase 1" (the
base system and the California preferred homeowner's line) on July 8,
Applied warranted in the Agreement that "all services provided
hereunder will be performed in a good and workmanlike manner and that the
Software provided by Applied hereunder will substantially conform to and
perform in accordance with the specifications slated in Schedules A, B,
C, D, and F, and in all associated documentation." Agreement, ¶ 6(a).
Applied disclaimed any other implied or express representations and
warranties. Id. Sutter represented that "[n]o material statements or
representations have been made by Applied and upon which (Sutter) has
relied in entering into this Agreement that arc not contained herein."
Id. ¶ 6(b). The Agreement also recited that Sutter "understands that in
the design and development of complex computer software systems limited
system defects or errors may be expected," and that Sutter's "sole and
exclusive remedy in the event of programming defects is expressly limited
to correction of the defects by adjustment, repair or replacement at
Applied Systems' sole election and expense." Id. ¶ 7(c).
The Agreement provided that either Sutter or Applied could cancel the
Agreement with or without cause at any time prior to the signing of the
system implementation project plan and time line (the
previously-referenced addition to Schedule D, executed in May 2000), and
Applied would refund Sutter's down payment. Id. ¶ 5(a). The Agreement
further provided that Sutter could cancel the Agreement with or without
cause at any time prior to the initial delivery of the base system with
a cross-reference indicating this meant delivery of the system for
testing and evaluation purposes and if so, Applied would ...