Auto-Owners Ins. Co. v. Hansen Housing

• Decision Date: 26 January 2000
• Docket Number: No. 20745.,20745.
• Citation: 604 N.W.2d 504,2000 SD 13
• Parties: AUTO-OWNERS INSURANCE COMPANY, Plaintiff and Appellant, v. HANSEN HOUSING, INC., Defendant and Appellee.
• Court: South Dakota Supreme Court

604 N.W.2d 504

2000 SD 13

AUTO-OWNERS INSURANCE COMPANY, Plaintiff and Appellant, v. HANSEN HOUSING, INC., Defendant and Appellee.

No. 20745.

Supreme Court of South Dakota.

Considered on Briefs September 13, 1999.

Decided January 26, 2000.

Roy A. Wise of Richardson, Groseclose, Wyly, Wise & Sauck, Aberdeen, South Dakota, Attorneys for plaintiff and appellant.

Lonald L. Gellhaus of Gellhaus, Gerdes & Gellhaus, Aberdeen, South Dakota, Attorneys for defendant and appellee.

KONENKAMP, Justice.

[¶ 1.] Auto-Owners Insurance Company appeals a declaratory ruling that its "Businessowners Policy" covered damages to a vacant commercial building owned by Hansen Housing, Inc. We uphold coverage for most but not all the claimed losses. Affirmed in part and reversed in part.

Facts

[¶ 2.] Hansen Housing purchased the former Ipswich Community Hospital and adjacent properties at public auction in November 1989. Included in the $74,000 purchase were all the contents of the hospital, except the x-ray machine and the beds. Mike and Nancy Hansen, the principals of Hansen Housing, intended to convert the hospital into an apartment for the elderly.

[¶ 3.] To secure insurance coverage for the building, Mike Hansen contacted independent insurance agent Robert Johnston who had an agency contract with Auto-Owners Insurance Company. Hansen first sought a policy to cover only the purchase amount, but after Auto-Owners inspected the property and visited with underwriters, it determined that the building should be insured for $1.6 million through co-insurance.¹ Auto Owners issued a "Businessowners Policy" with an initial coverage period of July 9, 1990 to July 9, 1991. The policy was renewed for another year on July 9, 1991, and the coverage on the building was increased to $1.7 million. As of November 1991, Hansen Housing had yet to transform the former hospital into apartments. For a short time, Mike Hansen's sister operated a day care in the building, but that ended sometime in October, 1991.

[¶ 4.] A boiler system provided the building's main heat source, with auxiliary electric heating. As the building was providing no income, to avoid the $900 monthly cost of running the boilers, Hansen planned to winterize the structure and maintain the temperature at 45 to 50 degrees using electric heat. To help transfer the heat throughout the building, the boiler system's circulating pumps were kept operating.

[¶ 5.] In a further effort to save expenses, Mike Hansen met with agent Johnston on November 4, 1991, to discuss substituting the "Businessowners Policy" for less expensive coverage. Johnston died before this suit was brought; so, aside from Johnston's follow-up note to Hansen, we have only Hansen's rendition of what was discussed during their meeting. According to Hansen, Johnston could not immediately suggest a policy to fit Hansen's requirements, but Johnston said he would find a policy for Hansen to review. Hansen testified that Johnston told him a new policy could not be placed in effect until the "Businessowners Policy" was cancelled. Hansen signed a cancellation form. He testified that it was his understanding with Johnston that the policy would not be cancelled until a new one replaced it. As he recalled, the form "was not all filled out." On the top part of the cancellation form, however, the date and time of "XX-X-XX-X P.M." was handwritten in the box labeled "Effective Date/ Hour of Cancellation." Hansen testified that he stressed to Johnston that it was important that no lapse in coverage occur because that would jeopardize compliance with FHA requirements. Johnston wrote a note to Hansen on November 5, 1991 stating:

Nancy and Mike - we are going to need permission from the home office on this one - going from $1,750,000 to $60,000 made Pat Miller, underwriter, a little nervous. I will keep it insured as is until I hear back from the home office - Thanks, Bob.

Auto-Owners later issued a "Cancellation Invoice" dated January 7, 1992, declaring the "Businessowners Policy" to be "cancelled as of 11-05-91." Auto-Owners issued its "Tailored Protection Policy," with an effective period of November 5, 1991 to November 5, 1992.

[¶ 6.] On the very night after the meeting between Hansen and Johnston, at approximately 8:20 p.m., November 4, 1991, the damage occurred that gave rise to this suit. As the building had yet to be winterized, cold temperatures above the ceiling caused the sprinkler system pipes to freeze and break. The fire suppressant alarm activated, electronically summoning emergency services. When they arrived, fire department officers shut off the main water valve and, for safety reasons, had the utility company switch off the electricity to the building. Emergency personnel noticed that the penthouse door leading to the roof was open. It was later reported to the Edmunds County Sheriff's Department that the building had been broken into. Items were later reported missing.

[¶ 7.] A claims adjuster examined the damages and began negotiations with Hansen Housing. After negotiations failed, Hansen Housing submitted a water damage claim to Auto-Owners on April 19, 1993. A theft loss claim was submitted on April 21. On May 10, Auto-Owners rejected both claims because: (1) the policy on which the claims were made had been canceled just before the loss; (2) there were inaccuracies in the amounts claimed and some items said to be damaged were not covered under the policy; (3) the actual cash value of the property at the time of the loss was not stated; and (4) Michael Hansen signed the form but did not indicate his relationship to the named insured. Auto-Owners included new proof of loss forms with the rejection, and these were returned by Hansen Housing on April 21, 1994.

[¶ 8.] Auto-Owners brought a declaratory action seeking a ruling that it "is under no duty or obligation to provide coverage to [Hansen Housing] arising out of the loss sustained on or after November 4, 1991." The circuit court first decided that the "Businessowners Policy" was in force on the evening of November 4, 1991. Then the court ruled that the claimed losses were not excluded under the provisions of that policy. Auto-Owners now appeals asserting that (1) Hansen Housing cancelled the "Businessowners Policy" and thus it was not in force at the time of the loss; (2) any coverage is limited to Hansen Housing's financial interest in the property, which is the purchase price; (3) the frozen pipe loss is excluded because Hansen Housing failed to maintain heat in the building; (4) Auto-Owners is not obligated to pay for loss or damage caused by acts or decisions taken by those who responded to the emergency alarm; (5) the claims are barred because Hansen Housing failed to submit proofs of loss within the required time; (6) Hansen Housing is precluded from recovery because its agent intentionally concealed or misrepresented material facts about the water damage and theft claims; (7) the theft claim should be barred because Hansen Housing failed to give Auto-Owners prompt notice; and (8) the claimed frozen pipe and theft losses are barred because Hansen Housing failed to comply with the express terms of the policy in the event of loss or damage to the covered property.

Standard of Review

[¶ 9.] We review declaratory judgments as we would any other order, judgment, or decree. SDCL 21-24-13; Mid-Century Ins. v. Lyon, 1997 SD 50 ¶ 4, 562 N.W.2d 888, 890; Schull Constr. Co. v. Koenig, 80 S.D. 224, 228-29, 121 N.W.2d 559, 561-62 (1963). A trial court's findings of fact are examined under the clearly erroneous standard. Muhlenkort v. Union County Land Trust, 530 N.W.2d 658, 660 (S.D.1995). These findings remain inviolate unless we are "firmly and definitely convinced a mistake has been made." Wood v. South Dakota Cement Plant, 1999 SD 8, ¶ 9, 588 N.W.2d 227, 229 (citation omitted).

[¶ 10.] Insurance contract interpretation, as well as statutory construction, are questions of law, reviewable de novo, with no deference given to the trial court's legal conclusions. National Farmers Union Property and Cas. Co. v. Universal Underwriters Ins. Co., 534 N.W.2d 63, 64 (S.D.1995); State Farm Mut. Auto. Ins. Co. v. Vostad, 520 N.W.2d 273, 275 (S.D.1994). When an insurer invokes a contract exclusion to disallow coverage, "the insurer has the burden of proving that the exclusion applies." American Family Mut. Ins. Co. v. Purdy, 483 N.W.2d 197, 199 (S.D.1992) (citation omitted). If the terms of an insurance contract are susceptible to different interpretations, we adopt the interpretation most favorable to the insured. Chord v. Reynolds, 1999 SD 1, ¶ 14, 587 N.W.2d 729, 732 (citing Olson v. United States Fidelity and Guar. Co., 1996 SD 66, ¶ 6, 549 N.W.2d 199, 200).

Analysis and Decision

1. Policy Cancellation—Parol Evidence

[¶ 11.] Auto-Owners contends that Hansen Housing cancelled the "Businessowners Policy" on the afternoon before the loss: "Because of the Cancellation, Hansen was without insurance coverage from 4:00 p.m. on November 4, 1991, to 12:01 a.m. on November 5, 1991." The trial court ruled that Hansen's cancellation of November 4 "was never accepted by the... company. Instead, they issued their written cancellation invoice which stated that the policy was canceled as of November 5, 1991." Auto-Owners directs our attention to its policy language: "The ... Insured ... may cancel this policy by mailing or delivering to us advance written notice of cancellation." This provision allows unilateral cancellation of the policy. No action was required by Auto-Owners to accomplish the cancellation: "the policy is effectively cancelled as of the date requested...." Coppola v. Ins. Placement Facility, 386 Pa.Super. 413, 563 A.2d 134, 138 (1989) (emphasis and citations omitted).

[¶ 12.] By the terms of the policy language, the insurer's acceptance was not required. Nonetheless, a notice must be unconditional to effect cancellation. McQuarrie v. Waseca Mut. Ins....