Beautytuft, Inc. v. Factory Insurance Association, 20075.

• Decision Date: 02 September 1970
• Docket Number: No. 20075.,20075.
• Parties: BEAUTYTUFT, INC., Jorges Carpet Mills, Inc., and Moccasin Bend Carpet Mills, Inc., Plaintiffs-Appellees, v. FACTORY INSURANCE ASSOCIATION et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

431 F.2d 1122 (1970)

BEAUTYTUFT, INC., Jorges Carpet Mills, Inc., and Moccasin Bend Carpet Mills, Inc., Plaintiffs-Appellees, v. FACTORY INSURANCE ASSOCIATION et al., Defendants-Appellants.

No. 20075.

United States Court of Appeals, Sixth Circuit.

September 2, 1970.

W. Neil Thomas, Chattanooga, Tenn., and Sam F. Lowe, Jr., Atlanta, Ga., for defendants-appellants; Smith, Cohen, Ringel, Kohler, Martin & Lowe, Atlanta, Ga., Bishop, Thomas, Leitner, Mann & Milburn, Chattanooga, Tenn., on brief.

John C. Stophel and Charles J. Gearhiser, Chattanooga, Tenn., for plaintiffs-appellees; Stophel, Caldwell & Heggie Chattanooga, Tenn., on brief.

Before EDWARDS, PECK and McCREE, Circuit Judges.

EDWARDS, Circuit Judge.

Appellants in this case are 58 insurance companies and their agent, the Factory Insurance Association, which insured the three appellee carpet manufacturers against "business interruption" due to fire.

Appellees sued on the insurance policy to recover for business losses which resulted when a fire destroyed the manufacturing facilities then occupied by the three companies on the premises of the Rossville Development Corporation (hereinafter referred to as RDC) at Rossville, Georgia.

The maximum coverage of the policy was $1,188,000, and after a jury trial before the United States District Court for the Eastern District of Tennessee (Southern Division) in Chattanooga, the jury awarded that sum.

Jurisdiction is founded upon diversity of citizenship. 28 U.S.C. § 1332 (1964). Two of the carpet manufacturing companies are Tennessee corporations. None of the insurance companies are Tennessee corporations or have their home offices there. All of them, however, were found to be doing business in Tennessee.

Appellants contend that the verdict is excessive because the District Judge erroneously interpreted the insurance contract in his charge to the jury. Appellants phrase the most substantial issue in this appeal in this fashion:

"Is the period during which insureds are entitled to recover:

"(a) the time theoretically required, in the exercise of due diligence, to rebuild at the R.D.C. site at Rossville, Georgia, premises reasonably equivalent to those occupied by the insured at the time of the fire (as charged by the Court)

or

"(b) such length of time as was actually required to replace the leased premises with other leased premises reasonably equivalent to those occupied by the insureds at the time of the fire (as defendants contended)?" (Emphasis in original.)

The problem in this case arises from the fact that appellees did not rebuild the destroyed facilities at the Rossville site but quickly found another location at Fort Oglethorpe, Georgia, and began to reassemble the machinery and equipment necessary to their operations. It is appellants' contention that the length of time for payment of the actual loss should start on June 14, 1967, when the fire occurred, and terminate on October 1, 1967, when it contends appellees were back in full production at the Fort Oglethorpe site.

Appellees contend that the language quoted above applies to rebuilding the destroyed facilities at the original site and that they contracted for the payment of business interruption damages for such period of time as it would theoretically have taken to accomplish this, even if in fact they went back into business earlier at another location. They claim, however, that the direct effects of the fire continued long after October 1, 1967.

We note that there is no dispute as to the time which would have been required to rebuild at the Rossville site. Appellants' brief concedes:

"There was no issue as to the time required to rebuild the premises. Mr. Peerson, Consulting Engineer, testified that the net overall time from the day of the fire to completion of the building where it could be occupied, being a reconstruction of a building similar to Mill Building No. 2 at RDC premises in Rossville, would be twelve and one-half months."

The key contract provisions which we are required to construe are:

"2. Recovery in the event of loss hereunder shall be the ACTUAL LOSS SUSTAINED by the Insured directly resulting from such interruption of business, but not exceeding the reduction in gross earnings less charges and expenses which do not necessarily continue during the interruption of business, for only such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such described property as has been damaged or destroyed, commencing with the date of such damage or destruction and not limited by the date of expiration of this Policy. Due consideration shall be given to the continuation of normal charges and expenses, including payroll expense, to the extent necessary to resume operations of the Insured with the same quality of service which existed immediately preceding the loss.

"3. RESUMPTION OF OPERATIONS. — It is a condition of this insurance that if the Insured could reduce the loss resulting from the interruption of business,

A. by complete or partial resumption of operation of the property herein described, whether damaged or not, or

B. by making use of other property at the location(s) described herein or elsewhere, or

C. by making use of stock (raw, in process or finished) at the location(s) described herein or elsewhere, such reduction shall be taken into account in arriving at the amount of loss hereunder." (Emphasis added.)

The District Judge actually charged that the period for which there could be recovery was the period that:

"`* * * would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such described property as has been damaged or destroyed, commencing with the date of such damage or destruction and not limited by the date of expiration of this policy.\'"

He also charged:

"Before arriving, however, at the amount of the insured\'s loss under the policy, you must take into consideration some further provisions of the policy.

"One such provision is that you must take into account the provision of Paragraph III of the policy regarding the duty of the insured to resume operations and to reduce any recovery under the policy accordingly.

"In this regard let me again read for you Paragraph III. It provides as follows: `The resumption of operations, it is a condition of this insurance that if the insured could reduce the loss resulting from the interruption of business by complete or partial resumption of operation of the property herein described, whether damaged or not or by making use of other property at the locations described herein or elsewhere, or by making use of stock, either raw, in process or finished at the locations described herein or elsewhere, such reduction shall be taken into account in arriving at the amount of loss hereunder.\'

"You will want to accordingly adjust any recovery under the policy in accordance with the provisions of Paragraph III as I have just read them to you."

We hold that the District Judge followed the express provisions of the insurance contract. We agree with him that this contract provides a theoretical as opposed to an actual replacement time as the basic time standard for computation of business interruption loss. We also agree that the contract language "such described property" was appellees' "real or personal property * * * on the premises of R.D.C., Inc., in Rossville, Walker County, Georgia." Although a substitute plant of potentially equivalent capacity was promptly obtained, appellees' actual losses as shown by the proofs continued beyond that date; and appellees were entitled to reinbursement for such losses for the term of the theoretical replacement period as provided by the contract.

The District Judge's interpretation is consistent with that of both legal and industrial experts on business interruption insurance. See K. Withers, Business Interruption Insurance Coverage & Adjustments 18-19 (1957); Clarke, Problem Claims Under Business Interruption Policies, 4 Prac.Law. 64 (May 1958). The only court which appears to have considered this exact problem interpreted the language of a similar policy in the same way. Hawkinson Tread Tire Service Co. v. Indiana Lumbermens Mut. Ins. Co., 362 Mo. 823, 245 S.W.2d 24 (1951).¹ See also Grand Pacific Hotel Co. v. Michigan Commercial Ins. Co., 243 Ill. 110, 90 N.E. 244 (1909); Anchor Toy Corp. v. American Eagle Fire Ins. Co., 4 Misc. 2d 364, 155 N.Y.S.2d 600 (Sup.Ct.1956).

Much more to the point, however, is the fact that the plain language of this contract requires the interpretation set forth above. It seems obvious to us that the appellants wanted a standard of potential replacement time which was amenable to computation in advance and which was not subject to vagaries like owner indecision, strikes, or failure of lease negotiations which might affect the actual rebuilding time. And it seems equally obvious to us that Paragraph 3 of the contract as quoted above was designed to give the insurance companies the benefit of any windfall in speedier replacement time which might actually occur due to "making use of other property." As we have noted, the District Judge gave a full instruction to the jury on Paragraph 3 and we must presume that the jury followed his instruction to take "`such reduction * * * into account in arriving at the amount of loss. * * *.'"

This contract was executed in Georgia and Georgia law applies to its interpretation. In Rothenberg v. Liberty Mutual Ins. Co., 115 Ga.App. 26, 27, 153 S.E.2d 447, 448 (1967), the Georgia Court of Appeals used language which is applicable to our instant case: "We need go no further than the provisions of this policy in making our determination. They are clear and unambiguous."

Appellants also claim error in the District Judge's failure to quash service as to the insurance companies and the Factory Insurance Association. Although all of the operative facts of this litigation...