American Diver's Supply & Manufacturing Corp. v. Boltz, 72-1786.

• Decision Date: 09 July 1973
• Docket Number: No. 72-1786.,72-1786.
• Citation: 482 F.2d 795
• Parties: AMERICAN DIVER'S SUPPLY AND MANUFACTURING CORPORATION, a Colorado Corporation, Bankrupt, Pacific Indemnity Company, Petitioner on Review-Appellee, v. Jon D. BOLTZ, Trustee, Respondent on Review-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

482 F.2d 795 (1973)

AMERICAN DIVER'S SUPPLY AND MANUFACTURING CORPORATION, a Colorado Corporation, Bankrupt, Pacific Indemnity Company, Petitioner on Review-Appellee, v. Jon D. BOLTZ, Trustee, Respondent on Review-Appellant.

No. 72-1786.

United States Court of Appeals, Tenth Circuit.

Argued and Submitted May 24, 1973.

Decided July 9, 1973.

John R. Trigg, and William J. Kirven, III, of Yegge, Hall & Evans, Denver, Colo., for petitioner on review-appellee.

Robert W. Caddes, Denver, Colo., for respondent on review-appellant.

Before SETH and HOLLOWAY, Circuit Judges, and LARAMORE,^* Senior Judge.

LARAMORE, Senior Judge.

Appellant seeks review of the District Court's holding that their entire fire loss insurance claim is barred by the unsuccessfully inflated, fraudulent claims of the insured's former agents. The principal issue presented herein is whether reliance is a necessary element of a policy defense based on fraud, or is the entire policy, in fact, voided when the insured attempts to present fraudulent claims which the insurance company detects prior to payment and thus before having detrimentally acted upon the misrepresentations.

The loss claims of American Diver's Supply & Manufacturing Corporation ("ADS&M") stem from a major warehouse fire which it suffered in February 1970, at which time a valid, comprehensive-multi-peril insurance policy was in effect with Pacific Indemnity Company ("Pacific"). After the fire, but before the insurance adjuster arrived, a considerable amount of undamaged or slightly damaged inventory was moved, at the direction of the insured's sole shareholder, from the scene of the fire to another warehouse across the street. According to testimony of the insured's employees, this was done with the express intent of claiming these items as having been destroyed in the fire and thereby facilitating an unjustified increase in the insurance recovery.

Neither Donald Wilkerson, President of ADS&M, nor Jim Sexton, the inventory control clerk, apprised the insurance adjuster, Mr. Palmer, that this large amount of undamaged goods had been removed from the premises, but instead gave him the inventory control cards and indicated that any listed items not present in the amounts recorded on the cards were either destroyed by the fire or stolen. (There had been a certain amount of pilferage immediately after the fire.) Mr. Palmer apparently used these cards to compile his initial damage-loss list, but he and his assistants also proceeded to sift thru the debris to determine what corresponding charred residue remained. After so proceeding, Mr. Palmer compiled a second list which evidently enumerated fewer loss items than the original list. However, in some cases the adjuster still relied on the employees' claims that the insured had lost certain amounts of particular items, even though no residue for said items was to be found — since they had, in fact, been removed undamaged. Notwithstanding this method of derivation, the total amount of loss arrived at by Mr. Palmer was apparently less than what Mr. Wilkerson believed to be the actual damage loss. No proof of loss or official written claim of any kind was ever filed by the insured, except for the aforementioned written and verbal misleading assistance given to Mr. Palmer.

Following the adjuster's investigation, differences apparently arose over the coverage of certain items and Pacific filed suit for declaratory judgment in the District Court in and for the City and County of Denver, Colorado. On March 8, 1971, ADS&M, having been in financial straits even before the fire, was adjudicated bankrupt. Thereafter, the Trustee filed a petition for Order to Show Cause directed to Pacific as to why it should not pay over the value of the actual damage loss sustained by the insured. After abandoning its declaratory judgment action, Pacific resisted the Bankruptcy Court's show cause order on the grounds of fraud and no coverage. Following a hearing at which the foregoing facts were established, the Referee in Bankruptcy entered an order favorable to the Trustee. Pacific appealed to the U.S. District Court which subsequently reversed the Referee's order on the grounds that fraud had been established, as a matter of law, since reliance was not a necessary element in a defense of fraud under an insurance policy. The Trustee in Bankruptcy, Jon D. Boltz, has in turn perfected this appeal.

Appellant contends on this appeal, as he has earlier, that all of the elements of common law fraud as set forth in the landmark Colorado Supreme Court case of Morrison v. Goodspeed, 100 Colo. 470, 68 P.2d 458, 462 (1937), must be proven and, as a result, Pacific's defense must fall for failure to establish that they relied or acted upon insured's concealments and misrepresentations to their detriment. Pacific maintains, on the other hand, that such reliance is not necessary here since the insurance contract provides:

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, or the interest of the insured therein, or in case of any fraud or false swearing by the insured relative thereto. Emphasis added.

Both parties have admittedly bound themselves to the terms of the fire insurance contract, including the above "fraud clause," and thus we believe that this clause, on its face, should be dispositive of the appellant's allegations, for it is apparent that the provision not only prohibits "fraud" in the ordinary sense, but also willfully concealed or misrepresented material facts or circumstances concerning the subject of the insurance, i. e., the damaged or destroyed property, regardless of whether there has been detrimental reliance thereon.

However, the appellant further contends that it would be inequitable and unjust to require reliance in the "ordinary fraud" case, yet not in an insurance case. Although we consider the very existence of the "fraud clause" evidences the grounds for distinction, we shall elaborate on the...