Automobile Ins. Co. v. Barnes-Manley Wet Wash Laundry Co.

• Citation: 168 F.2d 381
• Decision Date: 29 June 1948
• Docket Number: No. 3521.,3521.
• Parties: AUTOMOBILE INS. CO. OF HARTFORD, CONN., v. BARNES-MANLEY WET WASH LAUNDRY CO. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

168 F.2d 381 (1948)

AUTOMOBILE INS. CO. OF HARTFORD, CONN., v. BARNES-MANLEY WET WASH LAUNDRY CO. et al.

No. 3521.

Circuit Court of Appeals, Tenth Circuit.

April 30, 1948.

Rehearing Denied June 29, 1948.

W. E. Green and Robert J. Woolsey, both of Tulsa, Okl. (J. C. Farmer, of Tulsa, Okl., on the brief), for appellant.

Robert S. Trippet, of Tulsa, Okl. (Rodolf, Pinson & Lupardus, M. C. Rodolf, and Paul Pinson, all of Tulsa, Okl., on the brief), for appellees.

Before PHILLIPS, BRATTON, and HUXMAN, Circuit Judges.

PHILLIPS, Circuit Judge.

Barnes-Manley Wet Wash Laundry Company¹ is an Oklahoma corporation. It is engaged in the laundry and dry cleaning business. On January 1, 1931, The Automobile Insurance Company of Hartford, Connecticut,² issued to the Laundry Company its Bailees' Customer policy of insurance by which it insured the Laundry Company "for account of whom it may concern" against loss or damage, with certain exceptions not here material, of goods and articles accepted by the Laundry Company from its customers to be laundered or dry cleaned, while in the laundry premises, or while being transported to and from the Laundry Company's customers.

The policy was a continuing contract, subject, however, to cancellation by either party by the giving of 15 days' notice in writing. The premium rate was based on a percentage of each $100 of gross receipts from laundry operations and from dry-cleaning operations. The rate was changed from time to time by endorsement on the policy. On July 20, 1945, it was fixed at 61 cents on each $100 gross receipts from laundry operations and 95 cents on each $100 gross receipts from dry-cleaning operations. The policy in part read as follows:

"1. Loss, if any, at the option of this Company to be adjusted with and paid to the assured for account of whom it may concern, or adjusted with and paid direct to its customers."

"8. Records and Monthly Reports. — The Assured agrees to maintain and keep an accurate record of its business, and on or before the 10th day of each month to report to this Company the total amount of its gross receipts (either collected or uncollected) from its business during the preceding month or such time as is within the policy period."

"10. The Company through its authorized representative and at all reasonable times shall have access to the assured's books and records for the purpose of determining the actual premium due, and any evasion or attempted evasion by the assured in the matter of rendering such reports hereinbefore required, or payment of premium hereunder, shall be an absolute defense to any suit or action brought under this policy."

In December, 1945, the Laundry Company's plant was destroyed by fire. The Laundry Company gave notice to the Insurance Company of such loss and demanded indemnification and payment for the loss of customers' property in the possession of the Laundry Company for laundering and dry cleaning. The loss of customers' property amounted to $211,410.56, of which $209,103.56 was paid by the Insurance Company.

During the period from the issuance of the policy to the date of the fire, the Laundry Company intentionally and knowingly, with intent to defraud and deceive the Insurance Company, from month to month, reported its gross receipts from dry cleaning and laundry in amounts substantially less than the actual amounts received. During that period, the Laundry Company reported its gross receipts at $1,823,914, when its actual gross receipts for the period were $4,097,138. The Laundry Company paid premiums aggregating $10,100.27. The premiums which it should have paid were $22,359.87. From actuarial experience, the Insurance Company, on the basis of the monthly reports of gross receipts, was able to determine an approximation of the amount of the risk, from month to month, under the policy.

When the paid claims reached $40,000, the Insurance Company became suspicious, because, on the basis of the gross receipts reported, the loss should not have greatly exceeded $40,000. When the paid claims reached $90,000, the Insurance Company caused an audit to be made, which disclosed that the Laundry Company had reported only approximately 43 per cent of its gross business and paid only approximately 43 per cent of the premiums due under the terms of the policy.

The Insurance Company brought this action against the Laundry Company. In its original complaint, it set up two causes of action. In its first cause of action, it pleaded the facts hereinbefore stated, sought rescission of the insurance contract, and recovery from the Laundry Company of the amounts paid out by the Insurance Company to customers. In its second cause of action, it sought, in the alternative, the recovery of the balance of the unpaid premiums.

The Laundry Company filed an answer which contained a motion to dismiss the first cause of action.

After a hearing on the motion to dismiss, the trial court sent a letter to counsel in which it stated that the purpose of the monthly reports of gross business was to determine the premium; that the effect of the alleged misconduct of the Laundry Company was a failure to pay the full amount of the premiums earned on the policy and that the policy was not subject to cancellation for nonpayment of premiums. It stated, however, that it would reserve its ruling on the motion until the Insurance Company's evidence had been introduced. Thereupon, the Insurance Company filed an amended complaint containing three causes of action. In the first cause of action, it sought rescission and recovery of the amounts paid out under the policy. In the second cause of action, it alleged the facts above stated and further alleged that the Laundry Company charged each customer a 1 per cent service charge to cover insurance; that, as a result of the fraudulent reports of gross receipts made by the Laundry Company, the Insurance Company assumed a risk in excess of $200,000, and was compelled to pay the total loss incurred by customers of the Laundry Company, and that it was entitled to recover from the Laundry Company approximately 57 per cent of the amounts paid to customers by the Insurance Company under the policy. In the third cause of action, it sought, in the alternative, the recovery of the unpaid premiums.

The audit was filed in the trial court and the Laundry Company admitted its correctness.

The issue of fraud was submitted to the jury by a special interrogatory, and the jury found that the Laundry Company, during the period the policy was in force, intentionally and knowingly reported its gross receipts in amounts less than they actually were, with intent to defraud and deceive the Insurance Company.

The trial court held that the measure of damages for the fraud was the balance of the premiums due, and awarded the Insurance Company judgment on its third cause of action for the amount of the unpaid premiums, less an amount expended by the Laundry Company to facilitate the adjustment of claims asserted in the counterclaim of the Laundry Company.

The Insurance Company has appealed.

At the hearing, the Insurance Company offered evidence which established these facts: In the late Twenties, the laundry and dry-cleaning industry advised insurance companies that the industry needed a new type of policy that would provide unlimited coverage for loss of customers' property. Prior to the issuance of the policy in suit, an agent of the Insurance Company explained to an agent of the Laundry Company that the insurance companies had obtained actuarial information with respect to customers' goods in laundries; that from such information and monthly reports of gross receipts by laundries, an insurance company could determine, with a fair degree of accuracy, the total amount of risk from month to month under a policy; that if the Insurance Company were furnished with monthly reports of the gross receipts by the Laundry Company, it could make a fairly accurate estimate of the value of customers' goods in the plant of the Laundry Company and the amount of risk assumed under the policy from month to month, and that by watching the reports of gross receipts from month to month, the Insurance Company could safely issue an unlimited policy to the Laundry Company. The Insurance Company had fixed the maximum amount of liability which it was willing to cover on property of customers in the plant of the Laundry Company at $65,000, to be arrived at from the monthly reports of gross receipts. Thus, it will be seen that the monthly reports of gross business serve two purposes: (1) A basis for the computation of premiums, and (2) a basis for an approximation by the Insurance Company of the amount of the risk from month to month.

The Insurance Company offered the deposition of Mr. Welk. He was the Chief Underwriter of the Inland Marine Department of the Aetna Life Insurance Company, of which the Insurance Company is an affiliate. Mr. Welk, in his deposition, testified that he was acquainted with the insurance risk here involved; that the maximum risk which the Insurance Company would have carried on goods in the Laundry Company's plant was $65,000; that had it known the risk exceeded $65,000, it would have placed reinsurance for the excess. The trial court held that this evidence was immaterial.

The policy was a third party beneficiary contract. Policies written "for account of whom it may concern" are valid.³ The Laundry Company, in procuring the insurance, acted as the agent of the customers who were third party beneficiaries under the contract. The customers could ratify the act of the Laundry in procuring insurance, even after the loss.⁴ Here, the customers ratified the act of the Laundry Company by asserting their claims of loss, which the Insurance Company recognized.

A warranty in a contract of insurance may either be affirmative or promissory. The former affirms the existence of a fact at the time the policy is entered into, and the...