American Ins. Co. v. Freeport Cold Storage, Inc.

• Decision Date: 26 May 1987
• Docket Number: Civ. No. C85-257G.
• Citation: 703 F. Supp. 1475
• Parties: The AMERICAN INSURANCE COMPANY, a New Jersey corporation, Plaintiff, v. FREEPORT COLD STORAGE, INC., a Utah corporation, Defendant.
• Court: U.S. District Court — District of Utah

703 F. Supp. 1475

The AMERICAN INSURANCE COMPANY, a New Jersey corporation, Plaintiff, v. FREEPORT COLD STORAGE, INC., a Utah corporation, Defendant.

Civ. No. C85-257G.

United States District Court, D. Utah, C.D.

May 26, 1987.

Donald J. Purser, Salt Lake City, Utah, for plaintiff.

John A. Adams, Colin King, Salt Lake City, Utah, for defendant.

MEMORANDUM DECISION AND ORDER

J. THOMAS GREENE, District Judge.

This matter came before the court on March 23, 1987, pursuant to Motions for Summary Judgment by both parties. Plaintiff, the American Insurance Company ("American") was represented by Donald J. Purser. Defendant, Freeport Cold Storage, Inc. ("Freeport") was represented by John A. Adams, and defendants-in-intervention, Underwriters at Lloyds, London and the Pillsbury Company, were represented by Colin King. Plaintiff and defendant both submitted extensive memorandums and presented substantial oral arguments after which the matter was taken under advisement. The court now being fully advised sets forth its Memorandum Decision and Order.

FACTUAL BACKGROUND

Freeport operates a cold storage warehouse facility in Clearfield, Utah. This case arises out of the collapse of a portion of the roof of Freeport's facility. The collapse caused damage to Freeport's building and equipment as well as to the property of others stored in Freeport's facility. At the time of the roof collapse American insured Freeport's facility. For some years prior to the collapse Freeport had arranged for its insurance needs through the firm of Rollins, Burdick Hunter of Oregon, Inc. ("RBH"). RBH is a licensed insurance broker. RBH may place insurance with as many as one hundred insurance companies, but most of its business is done with twenty-five to thirty companies. RBH entered into an "Agency Agreement" with American which became effective on January 1, 1981. The agreement provided RBH with the authority to "offer and receive proposals for insurance" for the lines of business indicated in certain schedules which were incorporated into the agency agreement. The agreement also provided RBH with authority "to accept and bind proposals for insurance" as provided within another schedule entitled "Schedule of Commission and Limits of Authority."

Prior to 1982, Freeport had contracted through RBH for property insurance with Affiliated FM Insurance Company ("Affiliated FM"). Coverage under that pre-existing policy was to expire on March 1, 1982. It is not clear from the agreed facts whether RBH or Freeport initiated negotiations to obtain a replacement to the coverage under the Affiliated FM policy. In any event, on February 26, 1982, Edward Arietta, an employee of RBH, sent Freeport a letter indicating that coverage broader than that under the Affiliated FM policy could be obtained at a lesser cost from American. Freeport apparently acquiesced to the suggestion contained in the letter, and Harold M. Barnett, the Commercial Lines Manager in American's Portland office, entered into negotiations with H.A. Richard Locke, RBH's Marketing Manager, for issuance of a new policy to Freeport. Thereafter, American issued policy number F-417 11 70 to Freeport, effective March 1, 1982.

From time to time, both before and after the American policy was issued, RBH suggested that Freeport acquire "Warehouseman's Legal Liability" insurance. In a letter dated July 27, 1977, RBH quoted Freeport a rate for insurance coverage for Warehouseman's Legal Liability. In a letter dated July 11, 1978, RBH again offered Warehouseman's Legal Liability insurance to Freeport, enclosing a blank policy form for Freeport's review. Similar letters were sent at other times, including one which was dated June 1, 1983, after Freeport had obtained insurance from American, but before the roof collapse. Freeport declined to obtain this additional coverage for which substantial additional premiums would have been payable.

On March 3, 1984, a portion of the roof of Freeport's warehouse collapsed damaging Freeport's building and some of its equipment, and damaging frozen vegetables owned by the Pillsbury Company. Pillsbury and its insurance company, Lloyd's of London, filed a lawsuit seeking to hold Freeport liable for the damage to Pillsbury's vegetables. On February 14, 1985, Freeport's counsel made written demand upon American to undertake to defend and indemnify Freeport with regard to Pillsbury's claim. American then filed this declaratory judgment action, seeking a ruling that the policy it issued to Freeport does not cover damages to the goods of Freeport's customers.

The policy in question as issued March 1, 1982, is entitled "Standard Fire Insurance Policy." It consists of a number of printed pages, and twelve typed pages. The typed pages are designated as "Marketing Form 701" ("Form 701").¹ RBH submitted Form 701 to American to use as the basis for coverage of Freeport. The dispute here centers on interpretation of Form 701. First, there is a dispute over the meaning of the section entitled "Property Covered," which reads as follows:

Except as specifically excluded herein, this policy covers all property of an insurable nature, now existing or hereafter acquired, including the insured's interest in improvements and betterments, at all locations, owned, used, leased, occupied, or otherwise at the risk of the insured, or for which the insured is legally liable or for which the insured has assumed liability prior to loss. (Emphasis added.)

Second, there is a dispute over whether the policy contains a provision for co-insurance. Freeport contends there is no co-insurance requirement under the policy because there is no co-insurance clause in Form 701. Third, there is dispute over the meaning of paragraph "C" of the "Property Excluded" section which excludes from coverage:

Property which, at the time of loss, is covered by specific marine, inland marine, or transportation insurance.

The case is now before the court on motions for summary judgment by both parties. American seeks summary judgment against Freeport as to Freeport's Counterclaim for bad faith and punitive damages, and Freeport's Counterclaim for breach of contract. American also asks the court to rule that RBH was acting as Freeport's agent in negotiations for insurance with American. Freeport urges the court to grant summary judgment against American. In the alternative, Freeport moves for partial summary judgment on three issues: (1) that the language of the "Property Covered" section of the policy, described above, provides coverage to Freeport for loss to goods of third persons, and that there is such coverage absent mutual mistake; (2) that there is no co-insurance requirement under the policy; (3) that the "Property Excluded" section of the policy dealing with specific marine, inland marine or transportation coverage applies only to exclude goods covered by policies in which Freeport is the named insured. The court will discuss the parties' motions in the order presented.

ANALYSIS

A. AMERICAN'S MOTIONS

1. Bad Faith Claim based upon Failure to Perform Alleged Duty to Defend

American asks the court to grant summary judgment in its favor on Freeport's third counterclaim in which Freeport alleges that American has a duty to defend Freeport in its litigation with Lloyds, and that American's failure to pay Lloyds' claim or to defend the lawsuit constitutes a breach of American's implied covenant of good faith and fair dealing. For breach of this covenant Freeport requests compensatory and punitive damages. American contends that it is entitled as a matter of law to judgment dismissing this counterclaim in its entirety. American argues that the facts of this case do not present a cognizable bad faith claim. Utah law recognizes two basic types of bad faith claims. In Beck v. Farmer's Insurance Exchange, 701 P.2d 795 (Utah 1985), the Utah Supreme Court stated that a contract action could be maintained for breach of duty of good faith, in cases involving first-party insurance relationships.² In Beck, the Utah Supreme Court stated that the implied obligation of good faith requires at least "that the insurer will diligently investigate the facts to enable it to determine whether a claim is valid, will fairly evaluate the claim, and will thereafter act promptly and reasonably in rejecting or settling the claim." Beck, 701 P.2d at 801. The Utah Supreme Court has also recognized a tort cause of action for an insurer's breach of its duty of good faith in third-party relationships in Ammerman v. Farmer's Insurance Exchange, 19 Utah 2d 261, 430 P.2d 576 (1967). In Ammerman, the Utah Supreme Court stated that an insurance company "must act in good faith and be zealous in protecting the interests of its insured as compared to its own. Whether it discharges that duty may depend upon various considerations including the certainty or uncertainty as to the issues of liability, injuries and damages." Ammerman, 430 P.2d at 579.

There is no claim in this case that American failed to investigate or to evaluate Freeport's claim or that American did not act promptly in settling and rejecting Freeport's claims. The sole basis for Freeport's bad faith cause of action is that American was obligated to indemnify or defend Freeport under the policy, and that American failed to do so. American contends that a good faith dispute over the scope of coverage provided by an insurance policy, as a matter of law, will not alone support a cause of action for bad faith where the interpretation the insurer urges is neither strained nor fanciful. See Gorman v. Southeastern Fidelity Insurance Co., 775 F.2d 655, 659-60 (5th Cir.1985); Olive v. Great American Insurance Co., 76 N.C.App. 180, 333 S.E.2d 41 (1985); International Indemnity Co. v. Woods, 175 Ga.App. 490, 333 S.E.2d 640 (1985).

This court has previously ruled that questions of fact surround the making of the insurance contract here which prevent the court from determining the scope...