American Universal Ins. Co. v. Scherfe Ins. Agency

• Decision Date: 31 December 1954
• Docket Number: Civ. No. 1-60.
• Citation: 135 F. Supp. 407
• Parties: AMERICAN UNIVERSAL INSURANCE COMPANY, a corporation, Douglas Arthur Cole, William Dunsterville Denham and T. R. Ching, Plaintiffs, v. SCHERFE INSURANCE AGENCY, a corporation, and Paul C. Baughman, Defendants.
• Court: U.S. District Court — Southern District of Iowa

135 F. Supp. 407

AMERICAN UNIVERSAL INSURANCE COMPANY, a corporation, Douglas Arthur Cole, William Dunsterville Denham and T. R. Ching, Plaintiffs, v. SCHERFE INSURANCE AGENCY, a corporation, and Paul C. Baughman, Defendants.

Civ. No. 1-60.

United States District Court S. D. Iowa, E. D.

December 31, 1954.

E. J. McManus and R. P. McManus, Keokuk, Iowa, and Gordon R. Close, of Lord, Bissell & Kadyk, Chicago, Ill., for plaintiffs.

J. Francis Phelan, Fort Madison, Iowa, for defendants.

RILEY, District Judge.

In this proceeding, commenced here by reason of diversity of citizenship of the parties, four insurers combine their actions against defendant Scherfe Insurance Agency, a corporation, and its president, Paul C. Baughman, for damages related to plaintiffs' insurance coverage on the property of Nabeeha Rashid, Fort Madison, Iowa.

The insured property was wholly destroyed by fire November 25, 1950. Plaintiffs made payment of losses under their several policies and subsequently commenced this action, claiming damages for the amount of the losses paid because of false and fraudulent representations alleged to have been made to the plaintiffs by the defendants to procure the insurance, and claimed by plaintiffs to have been believed and relied upon to their damage in the issuance and delivery of the separate policies.

The case was tried to a jury. At the close of all the evidence plaintiffs presented a motion for directed verdict in their favor as to both defendants. The motion to direct was denied. On his motion a verdict was directed for the defendant Baughman. A like motion by his co-defendant was denied. The case was then submitted to the jury, which returned a verdict for the defendant Scherfe Insurance Agency. Plaintiffs filed a timely motion under Rule 50(b), 28 U.S.C.A. for judgment notwithstanding the verdict and in the alternative for a new trial. These motions have been orally argued and submitted with written briefs. The motion for new trial, in addition to specifying as error the action of the trial court in denying plaintiffs' motions for directed verdicts at the close of all the evidence, asserts also as error the court's dismissal as to the defendant Baughman and the giving and refusal of certain instructions.

It is without dispute in the record that plaintiffs issued policies of insurance against loss by fire on a building of Nabeeha Rashid, which was located on the highway four miles west of Fort Madison, Iowa, was used as a restaurant and had been completed about three months.

Paul C. Baughman, president of the defendant Scherfe Insurance Agency, a corporation (hereafter called Scherfe), conducted the correspondence separately with Chicago insurance brokers George F. Brown & Sons (hereafter called Brown) and Stewart, Smith, Inc. (hereafter called Smith). These two latter, by a general mail solicitation which included Scherfe, were answered by the latter's letter of August 16, 1949, to Brown, saying among other things, "We have a risk upon which we are having difficulty securing sufficient fire and extended coverage," and described the location, use, amount of coverage, rate and needs, and asked Brown "whether or not you will be able to place the desired amount with your London underwriters." Brown answered on August 18, 1949, that "before we can tell you what we can do for you on this risk, there are several things we would like to know," which included total insurable value of buildings, contents, co-insurance and rates on existing coverage, and also "the assured's previous loss experience." To this Scherfe replied, August 19, 1949, stating among other things:

"The insured owns a similar restaurant building in Fort Madison with a value of around $20,000.00. In February 1945 there was a fire in this building which started in the basement from a defective stoker. The loss on the building amounted to around $7500.00 with only $3000.00 insurance. The damage was immediately repaired."

In answer to the Smith letter, Scherfe wrote June 2, 1949, also saying, "We have a risk upon which we are having difficulty securing sufficient fire and extended coverage," and stating ownership, location, use for a "restaurant," recent completion, insurance needs, existing coverage and rates. Smith answered June 7, 1949, that "It is very likely that we can handle this risk for you. Please let us have the following information." Six items were listed, including "b. His past record as respects bankruptcies, failures and fires." On June 8, 1949, Scherfe answered:

"She has never had any bankruptcies or failures. In February 1945 there was a fire in a building owned by her which started in the basement from a defective stoker. The loss on the building amounted to around $7500. At the time she carried but $3000. insurance. The damage was immediately repaired."

Brown and Smith, in reliance, it is alleged, upon the representations of the defendants, effected insurance with the plaintiffs on the Nabeeha Rashid property. On expiration, it is alleged, the policies were renewed in reliance on the same representations. On November 25, 1950, a fire of unknown origin totally destroyed the premises and the plaintiffs were required to make payment under their policies to the insured. The amounts paid are not in dispute.

This action followed, brought by the plaintiffs to recover from the defendants the damages claimed to have been suffered by the plaintiffs as the result of the alleged fraudulent misrepresentation of the defendants as to the insured risk.

In its separate answer defendant Scherfe admitted writing the letter of August 19, 1949, to Brown as to the one fire loss in February, 1945, and also admitted that:

"the said Nabeeha Rashid has since 1940 sustained three fire losses in addition to the one reported by this Defendant in its letter of August 18, 1949, as follows: a loss March 9th, 1940, in the amount of $1,015.00, a loss on June 9th, 1941, in the amount of $4,000.00, a loss on March 21st, 1944, in the amount of $75.00, but this Defendant had no knowledge thereof at the time said representation was made to Geo. F. Brown & Sons as referred to in paragraph 11 of Plaintiffs' Complaint."

Likewise, defendant Scherfe admitted the writing of the letter to Smith on June 8, 1949, as to the one fire loss in February, 1945, and restates and realleges the portion last above quoted as to "three fire losses in addition to the one reported." The defendant Scherfe denied the statements as to the fire losses "were known by defendants to be false and untrue when they were made," as alleged in paragraph 12 of the complaint; denied the alternative statement that if the defendants "did not know of the falsity of the statements when made, that they knew that they had no knowledge of the truth of the statements and were negligent in making such statements," as alleged in paragraph 13 of the complaint; and denied, as is alleged in paragraph 14 of the complaint, that had plaintiffs or their representatives "been informed by defendants of the true facts in answer to the inquiries and had the true nature and name of the premises been revealed to them and not concealed, the risk would have been rejected and no policy of insurance would have been issued."

Defendant Baughman in a separate answer adopted the answer of the defendant Scherfe, "and further states that this Defendant, as an individual or in his individual capacity, did not participate in any of the transactions and things complained of by the Plaintiffs in their Complaint and that at all times and places that this Defendant participated in the matters alleged in this Answer he was acting as an officer of the Defendant, Scherfe Insurance Agency."

Despite defendants' denial in the pleadings, the evidence of the plaintiffs stands without contradiction that plaintiffs did not know of the previous fire record of Nabeeha Rashid, that their policies of insurance were issued in complete reliance upon the representation of defendants with respect to such fire record, and that the policies were issued following such representations and would not have been issued had plaintiffs known the truth as to the history of the insured's previous fires. Defendants' admissions in answer, as quoted above, admit the falsity of the representations contained in the correspondence. The testimony is uncontradicted that the representations were material factors in the issuance of the policies. Plaintiffs made no separate investigation as to the truth of defendants' representations concerning the history of insured's previous fires, nor were required to do so. There is no dispute as to the amount of the plaintiffs' damage, if plaintiffs are entitled to recover.

As to Motion for Judgment Notwithstanding the Verdict

The law of Iowa controls. After a review of the pleadings and proof as disclosed by the record the court is of the opinion that plaintiffs were entitled by the law of Iowa to have their motion for a directed verdict, made at the close of all the evidence, sustained, and that their motion for judgment notwithstanding the verdict accordingly should be sustained.

The principal case upon which plaintiffs rely is that of Riley v. Bell, 1903, 120 Iowa 618, 95 N.W. 170, where a purchaser of realty brought an action against a broker for damages resulting from the broker's alleged fraud, misrepresentation and concealment regarding the property purchased. It was claimed that during the negotiation, in response to plaintiff's inquiry, defendant represented that to his personal knowledge the condition of the title of the land was perfect in all respects, when in fact he had no knowledge concerning the condition. The evidence showed a mortgage existed on the land, as the result of which plaintiff was required to pay a judgment on foreclosure to protect his title. In sustaining a judgment on a verdict for plaintiff the court said, 120 Iowa at page 626, 95 N.W. at page 172:

"If defendant in fact

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