Bituminous Fire & Marine Ins. Co. v. Izzy Rosen's, Inc.

• Decision Date: 21 March 1974
• Docket Number: No. 73-1313.,73-1313.
• Parties: BITUMINOUS FIRE & MARINE INSURANCE COMPANY, Appellant, v. IZZY ROSEN'S, INC., Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

493 F.2d 257 (1974)

BITUMINOUS FIRE & MARINE INSURANCE COMPANY, Appellant, v. IZZY ROSEN'S, INC., Appellee.

No. 73-1313.

United States Court of Appeals, Sixth Circuit.

Argued November 27, 1973.

Decided and Filed March 21, 1974.

Eugene C. Gaerig, Memphis, Tenn., on brief, for appellant.

Thomas R. Prewitt, and Edward M. Kaplan, Memphis, Tenn., on brief, for appellee.

Before PHILLIPS, Chief Judge, and CELEBREZZE and MILLER, Circuit Judges.

WILLIAM E. MILLER, Circuit Judge.

This appeal is from a judgment in favor of appellee, Izzy Rosen's, Inc., against appellant, Bituminous Fire & Marine Insurance Company, for failure to take over the defense, and otherwise fully to insure appellee, in an action brought against it for slander and false arrest. The insurance company denied coverage, and this action followed.

In 1962 Harry Rosen, acting for appellee, purchased a multi-peril insurance policy from United States Fidelity & Guaranty Company through the insurance agency of Ronald Gruenewald. When that policy was about to expire, Gruenewald was ill, so Rosen purchased another policy from a different agent. In December of 1968 Gruenewald again solicited Rosen's business and was successful. This policy was issued by appellant. Subsequently, in December of 1969, an action was brought against appellee by one Shelton for false arrest and slander, and appellee requested appellant to defend on its behalf. Appellant denied that the policy it had issued to appellee covered such personal injury risks as slander, libel and false arrest. The action against appellee was eventually settled for $9,000.00.

Appellee instituted the present action in the court below, on the basis of diversity of citizenship, seeking the funds which it had paid in settlement and also the attorney's fees expended in its defense. Three alternative theories of liability were presented: (1) That the insurance policy covered slander and false arrest, and therefore, appellant owed a duty to defend and insure; (2) that if the policy did not provide coverage, the court should reform the policy to provide coverage and award damages due to mutual mistake; and (3) that damages should be awarded against appellant because of the negligence of its agent, Gruenewald.

At trial Harry Rosen testified that one of his concerns, as he considered which insurance policy to buy, was whether his company would be protected from any liability that might arise from the arrest of any person in the store whom an employee might accuse of illegal activity. Shoplifting and forgery had always been problems, but the civil unrest that occurred in the wake of the assassination of Dr. Martin Luther King, Jr. seemed to aggravate the problem. Rosen stated that he told Gruenewald: "Ronnie, there is one thing that concerns me now, and that is liability coverage, and I want full liability coverage." He testified that the agent replied: "You've got full liability coverage; you've got a very complete policy." Rosen took the policy to his downtown store but never read it.

Gruenewald testified that Rosen's major concern had been with the possible theft of a large amount of merchandise. Consequently, the policy contained a very high limit on damage or theft of property. However, Gruenewald denied that Rosen asked for "full liability protection" or that he (Gruenewald) made the statement that such protection was provided. In fact, he testified that at the time the policy was written, specific coverage for false arrest, libel and slander were not common risks covered by insurance policies. Most people in the retail trade had told the agent, as he testified, that they did not wish to pay the high premium for this type of policy.

At the conclusion of the appellee's case, and again after all of the evidence had been presented, appellant moved for a directed verdict. Both motions were denied. The court then instructed the jury on such general matters as the preponderance of the evidence, the burden of proof and the credibility of witnesses. It gave no instructions on any legal principle or standard to be applied to the facts which the jury should find. Four special interrogatories were submitted to the jury which it answered as follows:

1. Did Harry Rosen at the time the Bituminous Fire & Marine Insurance Company policy was delivered by Ronald Gruenewald, tell Mr. Gruenewald that he wanted full liability protection?

Answer: No.

2. Was it the intention of the plaintiff acting through Harry Rosen that the policy issued by defendant and delivered by Mr. Gruenewald include coverage for libel and slander, false arrest, false imprisonment, and malicious prosecution?

Answer: Yes.

3. Did Mr. Gruenewald assure Mr. Rosen that the Bituminous Fire & Marine Insurance Company policy which he delivered would give Izzy Rosen\'s, Inc., full liability protection?

Answer: No.

4. Did Mr. Gruenewald know or should he have known as an experienced insurance agent that it was the intention of Mr. Rosen that the policy delivered by Mr. Gruenewald was intended to include coverage for libel and slander, false arrest, false imprisonment and malicious prosecution?

Answer: Yes.

To the conclusions of the jury, the court added separate findings of fact of its own. It found that Harry Rosen was not experienced in insurance matters. Additionally, it found that Gruenewald, although he had not defrauded Rosen, "was negligent with regard to the intent of Rosen to obtain full coverage, including personal injury protection." The court then applied what it believed to be the law to its own findings of fact and the answers by the jury to the interrogatories:

If the agent of the insurer delivers to the insured a policy which is known or should be known to be defective with regard to certain coverage, such conduct is a representation that the policy contains coverage for the purpose intended. If the insured is ignorant of the omitted coverage and has no special competence or experience in insurance matters, he is privileged to rely upon that representation without reading or being charged with knowledge of the contents of the policy.

Henry v. Southern Fire and Casualty, 46 Tenn.App. 335, 364-365 330 S.W.2d 18 (1958).

Because Harry Rosen as agent of the plaintiff intended to include coverage for libel, slander and false arrest, and because Gruenewald as agent for the defendant insurance company knew or should have known that Rosen intended full coverage, the defendant is liable for the amount paid Shelton plus the expenses incurred in the State Court litigation less the amount of the cost of the coverage for personal injury protection.

As already mentioned, the conclusion of the district court and that of the jury was that Gruenewald, as appellant's agent, either knew or should have known that appellee intended to have full liability coverage. The agent, according to the court's separate finding, was "negligent" in not writing such coverage into the policy, and his negligence was imputed to the appellee. As support for its decision, the court relied principally upon the Tennessee Appeals Court decision in Henry v. Southern Fire & Casualty Co., 46 Tenn.App. 335, 330 S.W.2d 18 (1958).

In Henry the issue was whether a certain trailer which the insureds used in their logging operation was actually covered by the policy despite a clause that excluded coverage on all trailers not specifically described in the policy. This particular trailer was not so described. However, there was evidence that the insured had requested a liability policy that would cover the entire operation of its business. The insurance agent, Dr. Cox, was familiar with the business and assured the owners that they had full liability coverage. At the conclusion of the evidence the trial judge sustained a motion to dismiss. On appeal the court of appeals reversed, holding that the plaintiff's evidence, if believed by the jury, was sufficient to support a cause of action. The opinion appears to rest upon the theory of estoppel to rely upon an exclusion from coverage contained in the policy although mistake or negligence may be the basis for the estoppel. This explains the district court's quotation from the Henry opinion set forth and the wording of interrogatory No. 4. What the court overlooked, however, was that in Henry there was a specific exclusionary clause while in the present case there is neither an insuring agreement as to the risks involved nor an exclusionary clause.

An important clarification of Henry appears in E. K. Hardison Seed Co. v. Continental Casualty Co., 56 Tenn.App. 644, 410 S.W.2d 729 (1966). There an action was brought against the insured by one of its customers on the ground that seeds which were warranted to produce green lima beans actually produced white ones. When requested to defend the action, the insurance company refused because the policy did not provide coverage for breach of warranty. In spite of testimony that insured had both requested and been assured of full coverage, the trial court dismissed the case. The court of appeals affirmed, finding no basis for an action either on the policy as written or for reformation of the contract. Furthermore, the court held that although an insurance company might be estopped from asserting an exclusion in the policy which the agent negligently failed to remove, neither estoppel nor waiver would serve to write into the policy coverage which was not there originally.

So, in order for there to be a recovery on the basis of an estoppel, a paramount condition must be met, the acts of the agent relied on for the estoppel and the estoppel arising on account of these acts must result in a liability which would be within the insuring clauses of the contract. 410 S.W.2d at 733.

When the Hardison and Henry decisions are read together it is clear that under Tennessee law a showing that an insurance agent told the insured that his policy contained full liability coverage is sufficient to estop the...