Central Nat. Ins. Co. of Omaha v. Devonshire Coverage Corp., s. 76-1768

• Decision Date: 08 November 1977
• Docket Number: Nos. 76-1768,76-1718,s. 76-1768
• Citation: 565 F.2d 490
• Parties: CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska Corporation, Appellee-Appellant, v. DEVONSHIRE COVERAGE CORPORATION, a California Corporation, Appellant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 490

565 F.2d 490

CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska

Corporation, Appellee-Appellant, v. DEVONSHIRE COVERAGE CORPORATION, a California Corporation,

Appellant-Appellee.

Nos. 76-1768, 76-1718.

United States Court of Appeals,

Eighth Circuit.

Submitted April 13, 1977.

Decided Nov. 8, 1977.

John W. Morrison, Karon, Morrison & Savikas, Chicago, Ill., for Devonshire Coverage Corp.; Victor G. Savikas and Stephen J. Spitz, Chicago, Ill., on brief.

Frank Matthews, Omaha, Neb., for Central Nat. Ins. Co. of Omaha; Martin A. Cannon of Matthews, Kelley, Cannon & Carpenter, Omaha, Neb., on brief.

Before LAY, WEBSTER and HENLEY, Circuit Judges.

WEBSTER, Circuit Judge.

On October 27, 1973, the clubhouse at the Drexelbrook Apartments in Upper Darby, Pennsylvania, was substantially destroyed by fire. The property was insured by appellant, Central National Insurance Company. In a subsequent indemnity action brought by Central National against its general agent, Devonshire Coverage Corp., the District Court ¹ held that because Devonshire had breached a provision of its agency agreement requiring it to purchase reinsurance on the apartment complex, it was liable to Central National for that portion of the loss which would have been covered by reinsurance had it been obtained. After making offsetting adjustments, the District Court entered judgment in favor of Central National in the sum of $806,473.54. Both parties appeal.

The Agency Agreement

On February 1, 1970, Devonshire became a general agent of Central National, with authority to market fire and allied lines, and special multi-peril policies. The agency agreement was drafted by Central National, and was to be "subject to and construed under the Laws of the State of Nebraska." By oral agreement, Devonshire was not to obligate Central National to any single risk valued in excess of $1,000,000, unless Devonshire By a written addendum to the agreement, dated November 30, 1972, the circumstances in which reinsurance was to be obtained were modified. The addendum provided:

provided reinsurance on that portion of the risk in excess of $1,000,000. Under this arrangement, known as excess-of-loss reinsurance, Central National would be liable for the first $1,000,000 of any loss, but the reinsurer would be liable for any excess; Central National's potential liability was thus limited to that amount.

2. With respect to risks incepting on or after December 1, 1972, the General Agent will not write risks in excess of $500,000 total sum insured for any one risk (irrespective of the PML) unless reinsured as follows. Should the amount of the total sum insured on any one risk exceed $500,000 then the excess over the above mentioned $500,000 limitation must be reinsured on a pro rata basis, not on an excess of loss basis, with financial (sic) sound and reputable reinsurers.

Devonshire agreed to indemnify Central National against all liabilities resulting from violations of the addendum's limitations, or for any failure to provide reinsurance. ²

The Helmsley-Spear Policy

On October 20, 1972, Helmsley-Spear, Inc. requested Devonshire to submit a quotation for insurance on the Drexelbrook Apartments, a complex consisting of ninety, two-story apartment buildings, a shopping center, swimming pool, and a club. In its letter of inquiry Helmsley-Spear assigned the clubhouse and its contents a value of $850,000, with possible business interruption loss of $150,000, and loss of rents of $100,000. The value assigned to the entire complex totaled $9,350,000, with an additional $1,430,000 for loss of rents and business interruption.

Thereafter, Helmsley-Spear was issued Central National policy SMP 59 83 77, a "special multi-peril policy" covering the Drexelbrook complex and four other locations. In a "supplemental declaration endorsement" attached to the policy, each location was assigned a value; the total value assigned to the Drexelbrook location ($9,190,000 building and $160,000 contents) was identical to that submitted by the insured in its request for a quotation. The sum of the values listed, $26,284,447, was given as the "limit of liability" under the policy. There was no co-insurance. ³

In late December 1972, when the Helmsley-Spear policy was written, Central National was pressuring Devonshire to do as much business as possible before year's end. In consequence Devonshire, which had basic responsibility for underwriting under the agency agreement, approved some policies and forwarded them to Central National without the usual supporting material. The Helmsley-Spear policy was forwarded without reinsurance being obtained. Supporting engineering reports were also missing. Central National accepted and retained the full premium on the policy.

In early 1973, it came to the attention of W. M. Dickson, Central National's Assistant Underwriting Manager, that reinsurance had not been obtained. He wrote Russell McFarren, Devonshire's vice-president in charge of underwriting We have now received the report on the Club House, which is location # 1 on the policy, and note that the report indicates that it is valued at $850,000 and is 100% insured.

Since this policy is effective on December 31, 1972, it is my understanding that the maximum limit on any one risk written by your office would be $500,000.

I would appreciate your review of this and letting us have your advice and any necessary Reinsurance Certificate as soon as possible. Thank you.

Devonshire never obtained any reinsurance on the Helmsley-Spear policy. Central National never followed up on Dickson's February 6 letter, and likewise never obtained the reinsurance discussed therein.

The Loss, Adjustment, and Settlement

The fire occurred on October 27, 1973. Shortly thereafter, Devonshire retained George Day, a private insurance adjustor. Day visited the scene of the loss and took an active role in negotiating a settlement. He made eight reports, seven of which were sent to both Devonshire and Central National, and one directly to Central National. The reports sent to Devonshire were reviewed by Devonshire's claims vice-president, Alfred Christensen, from October, 1973, onward.

Central National ultimately paid, in settlement, the following amounts:

                Building            $  778,782
                Contents               160,000
                Rents and Earnings     160,000
                Replacement Cost       144,385
                                    ----------
                                    $1,243,167
                

In addition, Central National paid adjustment expenses of $1,242.83 to Devonshire and $31,759.56 to others, for a total cost to it of $1,276,109.39.

On March 28, 1974, the day after the meeting at which a settlement agreement was reached, Gordon of Central National conferred by telephone with Christensen, who had received Day's reports. Christensen agreed that the settlement proposed was "the best possible loss settlement available to us."

During the course of adjusting the loss, it had become apparent that the values submitted by the insured requesting the original quotation were substantially below the actual values of the Drexelbrook complex. A post-loss appraisal obtained by adjustor Day showed that the entire complex had an insurable value of $19,267,775 before the fire, rather than the $9,190,000 set out in the insured's letter, and that the clubhouse itself had an insurable value of $1,188,867, rather than $850,000. Central National chose to forego any defense to the policy on the basis of misrepresentation, however, and elected instead to enter the settlement.

The Issues on Appeal

Central National thereafter sued Devonshire, claiming indemnity under the agency agreement for Devonshire's failure to procure reinsurance. The District Court found a breach of the duty to reinsure, and entered judgment for Central National in the amount of $806,473.54.

Both parties appeal. Devonshire contends: (1) that any breach of the duty to reinsure and to indemnify was waived by acquiescence; (2) that Central National is barred from recovery because it had a valid defense against its insured and failed to tender that defense to Devonshire or to establish its own actual liability at trial; (3) that the damages were improperly computed; and (4) that the Court erred in ruling on discovery matters. Central National, cross-appealing, contends: (1) that damages were improperly computed; and (2) that it was entitled to prejudgment interest.

I. DEVONSHIRE'S DEFENSES

Central National's theory of liability is straightforward: Devonshire agreed that if a policy were written on any one risk exceeding $500,000, it would obtain pro rata reinsurance; the Drexelbrook clubhouse was such a risk; Devonshire breached the terms of the agreement by failing to procure the reinsurance; Devonshire was

therefore obligated by its contract to indemnify Central National. Devonshire concedes that reinsurance was required by the contract and was not obtained. It contends, nonetheless, that it has defenses to liability.

Acquiescence

After Dickson's letter of February 6, 1973, Central National made no further inquiry of Devonshire concerning reinsurance on the Helmsley-Spear policy. Devonshire contends that Central National thereby acquiesced in the failure to acquire reinsurance, so that its right to sue for breach of contract was defeated.

The doctrine of acquiescence as a defense to indemnity arose originally in cases in which the right to indemnity was based, not on contract, but on principles of restitution. See Pennsylvania R. R. Co. v. Erie Avenue Warehouse Co., 302 F.2d 843, 848 (3d Cir. 1962). The right to indemnity arose in such cases when a person became liable to a third party for a dangerous condition, and as between the first person and a second party, it was the second party's duty to make the condition safe. The duty of the second party to indemnify the first was held to be waived if the first party acquiesced in the continuation of the dangerous condition. Restatement of Restitution § 95 (1...