Moorhead Mach. & Boiler v. EMP. COMMERCIAL UNION, No. 49086.

• Citation: 285 NW 2d 465
• Decision Date: 12 December 1979
• Docket Number: No. 49086.
• Parties: MOORHEAD MACHINERY AND BOILER COMPANY, Appellant, v. EMPLOYERS COMMERCIAL UNION INSURANCE CO. OF AMERICA, Respondent, Great American Insurance Co., Defendant.
• Court: Supreme Court of Minnesota (US)

285 N.W.2d 465 (1979)

MOORHEAD MACHINERY AND BOILER COMPANY, Appellant, v. EMPLOYERS COMMERCIAL UNION INSURANCE CO. OF AMERICA, Respondent, Great American Insurance Co., Defendant.

No. 49086.

Supreme Court of Minnesota.

July 20, 1979.

Rehearing Denied December 12, 1979.

Speeter, Johnson, Hautman & Olson, Vincent E. Johnson and Patrick V. Johnson, Minneapolis, for appellant.

Meagher, Geer, Markham Anderson, Adamson, Flaskamp & Brennan, Mary Jeanne Coyne and O. C. Adamson, II, Minneapolis, for respondent.

Heard before ROGOSHESKE, KELLY, and SCOTT, JJ., and considered and decided by the court en banc.

KELLY, Justice.

Plaintiff Moorhead Machinery and Boiler Company (hereinafter Moorhead) contracted to design and build two meal storage tanks on a customer's site. While the completed tanks were in use, one of the tanks collapsed due to a design flaw, and, because the tanks were joined by a rigid conveyer and catwalk structure, the other was also destroyed.

Moorhead carried liability policies with defendant Employers Commercial Union Insurance Company of America (hereinafter Employers Commercial). Employers Commercial paid $137,992.10 for other claims involved but refused to pay the cost of replacing the tanks that totalled $172,136.59. Moorhead thereupon reconstructed the units and brought suit against Employers Commercial seeking indemnification for the costs of reconstruction to the extent of the policy limits. The trial court found that the coverage Moorhead sought was excluded by the insurance policy in question and found for the defendant. We affirm.

This case involves the interpretation of three exclusions to a liability policy.¹ Moorhead contends that the exceptions to exclusion (i) are completely covered by exclusions (l) and (m). Moorhead concludes that this results in a conflict in the clauses which must be decided in favor of the insured. Moorhead also claims that an exception to an exclusion indicates that coverage exists though the coverage is later excluded by other exclusions.

We believe Moorhead's contention that the exceptions to exclusions (i) are completely covered by exclusions (l) and (m) is incorrect. For example, Moorhead might construct a tank next to a pre-existing tank and join the two by a catwalk. If, in attaching the catwalk, Moorhead were to damage the pre-existing tank so that it collapsed later while in use, the exceptions to exclusion (i) preclude exclusion (i) from eliminating coverage. Also exclusions (l) and (m) do not apply to the tank which collapsed beyond the cost of attaching the catwalk to it. Thus, this situation is within the exclusions to (i), but not then eliminated by (l) and (m).

In the present case, however, the exceptions to exclusion (i) as well as exclusion (l) apply to the factual situation presented. Moorhead also argues that a situation which falls into an exception to one exclusion cannot be excluded by another exclusion without being misleading to the insured.

Several courts and treatises have considered the problem of exceptions to exclusions. An exception was first thought to eliminate only the effect of the exclusion wherein it occurred. In Dolph v. Maryland Casualty Co., 303 Mo. 534, 261 S.W. 330 (1924), the policy in question contained a clause which provided that the policy did not cover accidents to persons making additions, alterations or extraordinary repairs to an elevator without a written permit to work on the equipment, "except that ordinary repairs * * * may be made without such permit." 303 Mo. 542, 261 S.W. 331. The court held that the exception in the exclusion did not mean that the person making ordinary repairs without a permit was covered, but that "his injury does not come within the terms of the policy * * unless an injury occurs in the manner covered by other terms of the policy." 303 Mo. 547, 261 S.W. 333. Though the "other terms" in this case were insuring clauses, rather than exclusions, Couch relied on the case to state:

"When a policy exception itself contains an `exception\' clause, the effect of the latter is to restrict the sphere of operation of the exception and thus make the exception inapplicable and allow recovery if the harm sustained is otherwise within the coverage of the policy." Couch, Insurance (2 ed.) § 44.416. (Italics supplied.)

The courts have not generally followed this rule, however.

Employers Commercial referred to another treatise to support its position that an exception to an exclusion is not a grant of coverage:

"Present policies contain exceptions from the exclusions which led courts in some jurisdictions to conclude that an exception from an exclusion stated in terms of `except with respect to\' was a grant of coverage. This was not the intent of the insurers.

"Under the new policy exceptions are stated thus, `but this exclusion does not apply to\'; this unambiguous language avoids any inference that another exclusion may not apply." 3 Long, Liability Insurance, Appendix B, § 10 (1978).

But only Haugan v. Home Indemnity Co., 86 S.D. 406, 197 N.W.2d 18 (1972), provides direct support to Employers Commercial's position that an exception to an exclusion does not grant coverage in derogation of all other exclusions. The court (one judge dissenting) held that an exception to an exclusion was subject to, and limited by, other policy exclusions.

On the other hand, several cases have held that an exception to an exclusion is a grant of coverage. In Weedo v. Stone-E-Brick, Inc., 155 N.J.Super. 474, 382 A.2d 1152 (1977), certification granted, 75 N.J. 615, 384 A.2d 845 (1978), the court was interpreting an exclusion with an exception which under the facts of the case was excluded by a later exclusion. The court held that an ambiguity was created which would be resolved in favor of the insured. The court stated that a right granted in one provision may not be taken away in another. See also Federal Insurance Company v. P. A. T. Homes, Inc., 113 Ariz. 136, 547 P.2d 1050 (1976); Fontainebleau Hotel Corp. v. United Filigree Corp., 298 So.2d 455 (Fla. App.1974) certiorari denied, 303 So.2d 334 (Fla.1974).

In Commercial Union Assur. Companies v. Gollan, N.H., 394 A.2d 839 (1978), the court (two judges dissenting) interpreted certain exclusions in an insurance contract to reach a result similar to the cases cited above, though none of the earlier cases was relied upon. The court noted that the exclusion the insurer cited as precluding coverage was in small type, 78 lines below the exclusion which "granted" coverage by its exception. The court concluded that the two clauses were irreconcilable and held that the first controlled. The court stated:

"Our holding in this case is limited to situations in which, taking the insurance policy as a whole, a reasonable person could believe that certain occurrences were covered by the insurance policy, notwithstanding that the insurance company intended and considered them to be excluded. In order to exclude occurrences from coverage in an insurance policy, the insurer must clearly state the exclusion in conjunction with whatever sections it is intended to modify." N.H., 394 A.2d 842.

Whether an exception to an exclusion is considered a grant of coverage should be determined on the language of the individual policy, in light of the normal rules of construction. Fairness to the insured is the primary consideration. The approach of Haugan, that an exception to an exclusion limits only the exclusion wherein it occurs, ignores the possibility of misleading the insured. The approaches of Weedo, Federal Insurance Company, and Fontainebleau, that an exception is essentially a grant of coverage, ignore the actual language of the policy and assume that an insured may read and rely on only a part of his policy. The approach of Commercial Union, which we find persuasive, reaches a reasonable middle ground by looking at the individual insurance contract. The existence of an exception to an exclusion should only indicate that the exception is a grant of coverage if the policy as a whole is ambiguous.

The question, then, is whether the policy is ambiguous. Exclusions (l)...