Tokio Marine & Fire Ins. Co. v. National Union F. Ins. Co.

• Decision Date: 19 July 1937
• Docket Number: No. 448.,448.
• Citation: 91 F.2d 964
• Parties: TOKIO MARINE & FIRE INS. CO., Limited, v. NATIONAL UNION FIRE INS. CO.
• Court: U.S. Court of Appeals — Second Circuit

91 F.2d 964 (1937)

TOKIO MARINE & FIRE INS. CO., Limited, v. NATIONAL UNION FIRE INS. CO.

No. 448.

Circuit Court of Appeals, Second Circuit.

July 19, 1937.

Morgan & Lockwood, of New York City (Louis J. Wolff and Harding Cowan, both of New York City, of counsel), for appellant.

Powers, Kaplan & Berger, of New York City (Abraham Kaplan and George I. Gross, both of New York City, of counsel), for appellee.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

Appellant sued at law to recover loss upon a policy of reinsurance and appellee interposed an equitable defense seeking reformation of the insurance contract upon the ground that the policy had been issued through appellee's mistake and inequitable conduct by the appellant. The equitable issue was first tried and resulted in a decree reforming the policy and denying the appellant's claim for loss thereunder.

Both parties were insurance companies authorized to transact business in the State of New York. April 4, 1932, appellant issued to S. H. Kress & Co. a policy of insurance covering risks of windstorm, tornado, earthquake, and other perils in the amount of $29,745,000, for one year on buildings and merchandise in the United States and Hawaii. Liability for loss at each location was limited to $200,000. The premium paid was $39,660. On the same day the appellant reinsured a portion of the risk known as "excess cover" with the appellee. March 10, 1933, an earthquake occurred in California, resulting in property damage to the insured of $287,500, which was paid by the appellant; in this action it is sought to recover $187,500 from the appellee as reinsurer.

A binder, issued April 4, 1932, by appellee's New York office, provided reinsurance cover of $1,000,000 and bound the reinsurer "to pay only the excess over and above $100,000 by any one loss in and/or on any building and its contents." It was "binding until delivery of our respective policies at the office of Johnson & Higgins." The policy was issued July 1, 1932, by the appellee's home office in Pittsburg, was forwarded to its New York office, which delivered it July 5, 1932, to Johnson & Higgins, brokers for the appellant. It is clear from the binder that the parties intended that the appellant should retain liability for the first $100,000 at each location and that the reinsurance coverage should apply only to the second $100,000. Inter-office communications of the appellee at the time the binder contract was concluded show an explicit understanding, in which the appellant undeniably participated, of an exposure of $100,000 at each location before the assumption of any risk by the appellee. A typewritten list detailing the Kress & Co. locations throughout the United States was furnished to the appellee by Johnson & Higgins, showing 240 locations, of which only 81 indicated an exposed valuation in excess of $100,000. Evidence of communications between the parties concerning the binder agreement clearly establishes that its terms and limitations, specifically the excess provision of $100,000 for each location, were definitely comprehended and accepted.

Appellant, through Johnson & Higgins, prepared the formal terms of reinsurance which were incorporated in the final policy as issued. Seedorf of Johnson & Higgins, who did most in the preparation of the form, testified that, after a consultation with a member of his loss department, it was concluded that the contract as embodied in the binder was improvident and that under it the possibility of loss, if it existed at all, was remote at best. June 29, 1932, the form, consisting of three closely typewritten pages, was delivered to the appellee's New York office, which immediately forwarded it to the Pittsburg office, where it was received June 30 and was submitted to one Reilly for examination.

The form contained a change in terms from the original binder agreement which gives rise to the present controversy. Instead of providing, as the binder did, that the reinsurance applied only to "the excess over and above $100,000 by any one loss in and/or on any one building and its contents," the form stipulated that the reinsurance should not attach until the amount "by any one loss shall exceed $100,000, and then only for the amount of the excess over and above the first $100,000 due from the Reinsured Company in the case of each and every loss, but in no event exceeding the limit above mentioned." In other words, as the appellant insists, a liability for any and all loss from a single catastrophe in excess of $100,000 was substituted for the previous liability which embraced only the loss in excess of $100,000 at each location. It is admitted that between the date of delivery of the binder, April 4, 1932, and the delivery of the policy, July 5, 1932, no conversations or communications took place between the parties relative to any changes, amendments, deletions, or additions to the terms set forth in the binder. Moreover, it is not questioned that it was a well-settled practice of Johnson & Higgins in its dealings with the appellee to call its attention to important changes by the submission of new binders with the forms, a procedure which was admittedly not followed in this instance. There was no notice of any kind, therefore, other than that which the changed terms themselves conveyed.

On June 30, 1932, as we have said, the form was submitted to Reilly, whose duty and office it was to examine and approve daily reports. He reviewed the form, together with the application and the previous correspondence, and concluded that the line was in accordance with the original understanding and ordered that the policy be issued. The original policy issued by the appellant to Kress & Co. was canceled September 26, 1932, and a new policy was issued. Johnson & Higgins prepared a binder, transferring the reinsurance coverage, which it presented to the appellee. Without discussion of any sort and as a routine matter, the indorsement of substitution was annexed to the policy of reinsurance. The appellant continued in ignorance of the change in its reinsurance liability until August 14, 1933, when Johnson & Higgins asserted its claim against it.

The controlling facts of this case are clear and undisputed. The original agreement between the parties, as embodied in the binder, was definitely understood; Johnson & Higgins, acting for the appellant, knowingly affected a departure from that agreement in the form which it prepared and which it submitted to the appellee; this form, after examination and approval and with notice of the literal change in terms which it contained, was attached by the appellee to its final policy — but it did so under an undisputed mistake as to the legal import of the changed terms. It believed that the reinsurance coverage of the final policy and of the binder were the same.

The mistake was only on the part of the appellee and was in no sense mutual. Clearly, if this were an error uninduced by any conduct of the other party, the appellee would be in no position to complain. A misapprehension of the legal significance of the terms contained in the form would not entitle the appellee to relief if the form, as attached to the policy, constituted the original and only agreement between the parties. In such a case the appellee would have taken its chance as to the legal scope and interpretation of the agreement which it accepted and could not rely or defend upon its mistaken understanding. International Harvester Co. v. Mississippi Land Co., 43 F.(2d) 17 (C.C.A. 8), certiorari denied 282 U.S. 905, 51 S.Ct. 333, 75 L.Ed. 797.

But here there was the previous agreement which the binder represented; and it was one which both parties unquestionably understood. The form submitted by Johnson & Higgins for incorporation into the final policy was the formalization of the earlier agreement. Ordinarily, a party had a right to rely upon the fact that the formal document prepared by the other will express their original and definitive agreement; he may expect and rely upon literal conformity if no notice to the contrary is given. Equitable Ins. Co. v. Hearne, 20 Wall. 494, 22 L.Ed. 398; Connecticut Fire Ins. Co. v. Oakley Bldg. Co., 80 F.(2d) 717 (C.C.A.6), certiorari denied 298 U.S. 687, 56 S.Ct. 954, 80 L.Ed. 1406; Home Ins. Co. of New York v. Sullivan Machinery Co., 64 F.(2d) 765 (C.C.A.10), certiorari denied 290 U.S. 633, 54 S.Ct. 51, 78 L.Ed. 551. Perhaps the...