Ohio Cas. Group of Ins. Companies v. Gray

• Decision Date: 19 October 1984
• Docket Number: No. 83-2865,83-2865
• Citation: 746 F.2d 381
• Parties: OHIO CASUALTY GROUP OF INSURANCE COMPANIES, Plaintiff-Appellee, v. Raymond GRAY and Carl J. Hallgarth, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 381

746 F.2d 381

OHIO CASUALTY GROUP OF INSURANCE COMPANIES, Plaintiff-Appellee, v. Raymond GRAY and Carl J. Hallgarth, Defendants-Appellants.

No. 83-2865.

United States Court of Appeals Seventh Circuit.

Argued May 18, 1984.

Decided Oct. 17, 1984.

As Amended Oct. 19, 1984.

Matthew Jay Lane, Walker, Chatfield & Doan, Cincinnati, Ohio, for defendants-appellants.

Charles E. MacGregor, Orbison, O'Connor, MacGregor & Mattox, New Albany, Ind., for plaintiff-appellee.

Before PELL, CUDAHY, and ESCHBACH, Circuit Judges.

PELL, Circuit Judge.

This appeal presents a question of Indiana law involving an ambiguity in an insurance contract. The district court ruled that, as a matter of law, the insurance policy issued by plaintiff Ohio Casualty Group of Insurance Companies (Ohio Casualty) to the Town of Moores Hill, Indiana did not provide liability coverage for the alleged contretempts of defendant Raymond Gray, town marshal of Moores Hill.

Ohio Casualty requested a declaratory judgment that it was not obligated to defend or indemnify defendant Gray in a pending personal injury suit brought by defendant Carl J. Hallgarth. The injuries in the underlying suit occurred when a service revolver belonging to Gray discharged and wounded Hallgarth; at the time of the incident Gray was acting as town marshal. Ohio Casualty had issued a general liability insurance policy for the Town of Moores Hill, providing coverage for acts of the insured's "executive officers, directors, and stockholders" when they were acting within the scope of their duties. The request for declaratory judgment was based on Ohio Casualty's contention that Gray, as town marshal, was not an executive officer of the municipality and that his acts were therefore not covered by the insurance policy.

The district court granted judgment for Ohio Casualty, holding that application of the policy term "executive officer" to the facts of the case created a patent ambiguity and consequently raised a question of law, not fact. Looking to the terms of the contract to determine the "manifest intent of the parties," the district court further held that policemen, and consequently town marshals, were not "executive officers" of their municipality.

Defendants appeal from that ruling. They dispute the court's conclusion that the term executive officer excludes policemen as a matter of law. Their principal argument, however, is that the ambiguity in the contract is latent, not patent, and therefore raises a question of fact as to the intent of the parties at the time of formation. They contend that parol evidence should be admitted to determine this question of fact at trial, and they offer the affidavits of two members of the Moores Hill Town Board indicating that the board intended to provide coverage for Gray's official acts and was of the impression that it had done so.

I.

The initial determination to be made is whether the ambiguity contained in the insurance contract is latent or patent. The ambiguity recognized by the district court and both parties arises from the fact that the municipality was insured by a contract whose terms were designed for individuals, partnerships, corporations, and joint ventures. The policy contains the following provision:

II. PERSONS INSURED

Each of the following is an insured under this insurance to the extent set forth below:

* * *

(c) if the named insured is designated in the Declarations as other than an individual, partnership, or joint venture, the organization so designated and any executive officer, director or stockholder thereof while acting within the scope of his duties as such;

The named insured is described as "municipality" in the Declarations of the policy in question. The individuals whose acts are covered by the policy would be more capable of identification if the named insured were a corporation. However, the descriptions do not clearly fit positions associated with a municipality. A contract is ambiguous where reasonable people could find its terms susceptible to more than one interpretation. Marksill Specialities, Inc. v. Barger, 428 N.E.2d 65 (Ind.App.1981). Here, the terms "executive officer, director or stockholder" could reasonably be interpreted in several different ways when those terms are applied to a municipality. Therefore, as all parties agree, an ambiguity is present.

Indiana law, as well as the law of other jurisdictions, recognizes the distinction between patent and latent ambiguities. A patent ambiguity is one "apparent on the face of the instrument and [arising] by reason of any inconsistency or inherent uncertainty of language used so that the effect is either to convey no definite meaning or a confused meaning." Graham v. Anderson, 454 N.E.2d 870, 872 (Ind.App.1983). On the other hand, a latent ambiguity "arises not upon the face of the instrument by virtue of the words used but emerges in attempting to apply those words in the manner directed in the instrument." Id. Indiana also recognizes "Lord Bacon's ancient rule that a latent ambiguity may be explained by extrinsic evidence, but a patent ambiguity may not." Hauck v. Second National Bank of Richmond, 153 Ind.App. 245, 286 N.E.2d 852, 862 (1972).

Defendants argue that the ambiguity in this contract is latent and, therefore, that the meaning of the term "executive officer" may be determined by extrinsic evidence. They refer to the affidavits of the town board members as demonstrating their point. The existence of a latent ambiguity, however, is not established in that manner. Latent ambiguities arise, as noted above, when the terms of the instrument are clear but cannot be applied because they do not fit the factual circumstances to which they are addressed. The ambiguity must exist before extrinsic evidence can be considered. Graham v. Anderson, 454 N.E.2d at 872.

In this case, the word "municipality" was inserted in the Declarations in the space where the insured was to be described as either an individual, partnership, corporation or joint venture, but the terms of the contract were unchanged. The policy itself does not contain inconsistent or confusing provisions, and the difficulty in application arises only when the policy terms are applied to a particular fact situation. Viewed in this fashion, the ambiguity is latent. On the other hand, the insured is designated in the policy as a municipality. The identity of the "executive officers, directors or stockholders" of a municipality is a puzzle without any reference to the peculiar facts of this municipality or to the formation of this contract. So, to that extent, the ambiguity can be seen as patent.

We are aware of no Indiana case dealing with an ambiguity of precisely this nature. However, in Grant v. North River Insurance Co., 453 F.Supp. 1361 (N.D.Ind.1978), the United States District Court for the Northern District of Indiana was presented with a nearly identical situation. In that case the insured was a municipality and the North River Insurance Company's liability policy was on a form appropriate for use by individuals, partnerships, joint ventures, or corporations. That policy contained a provision describing "Persons Insured" that was identical to item II(c) in the policy now before us. In Grant, the district court found that the ambiguity arose because "the insurer utilized a form of contract common to the private business world but foreign to the world of municipal corporations," and ruled that parol evidence "bearing on the intent of the parties in negotiating the North River policy" was to be admitted. Id. at 1366.

The Grant decision did not discuss whether the ambiguity was latent or patent, but in a footnote the district court recognized the distinctions that are the result of such classification. The court noted that parol evidence would not have been admissible to eliminate coverage that was "unambiguously provided" by the contract. Id. at 1366 n. 1. As an example, the court noted that the mayor and members of the city council could be classified as "executive officers" or "directors" of the insured municipality. Therefore, parol evidence would not be appropriate to rebut the reasonable reading of the terms of the policy that those individuals were covered. But where, as in Grant, the individuals sued cannot properly be classified as executive officers or directors, extrinsic evidence is to be admitted to determine the intention of the parties regarding the scope of coverage. Id.

We believe this result accords with our earlier discussion of Indiana law and with the concept of patent and latent ambiguities. The identity of an "executive officer" (and possibly a "director") of a municipality is ambiguous, but that ambiguity is apparent on the face of the contract and is therefore patent. The reasonable meaning of "executive officer" will be given force and, as a matter of law, the policy is determined to provide coverage for those who clearly fit into that definition. We agree that...