Canadian Universal Ins. Co., Ltd. v. Fire Watch, Inc.

• Decision Date: 02 September 1977
• Docket Number: No. 46725,46725
• Citation: 258 N.W.2d 570
• Parties: CANADIAN UNIVERSAL INSURANCE COMPANY, LTD., Respondent, v. FIRE WATCH, INC., et al., Appellants, Lockerby Sheet Metal & Roofing Company, et al., Defendants.
• Court: Minnesota Supreme Court

Page 570

258 N.W.2d 570

CANADIAN UNIVERSAL INSURANCE COMPANY, LTD., Respondent, v. FIRE WATCH, INC., et al., Appellants, Lockerby Sheet Metal & Roofing Company, et al., Defendants.

No. 46725.

Supreme Court of Minnesota.

Sept. 2, 1977.

Rehearing Denied Oct. 13, 1977.

Syllabus by the Court

When an insurer by renewal of a policy or by an endorsement to an existing insurance policy substantially reduces the prior insurance coverage provided the insured, the insurer has an affirmative duty to notify the insured in writing of the change in coverage. Failure to do so shall render the purported reduction in coverage void, and any question of an individual's insurance coverage shall then be determined in accordance with the terms of the original policy prior to the renewal or endorsement.

Primus, Primus & Primus and Richard Primus, Minneapolis, for appellants.

Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brennan and Donald Chance Mark, Jr., and Clarence A. Anderson, Minneapolis, for respondent.

Heard before TODD, YETKA, and STAHLER, JJ., and considered and decided by the court en banc.

TODD, Justice.

Fire Watch, Inc., is engaged in the business of selling, distributing, and servicing fire protection equipment. It purchased an insurance policy to cover completed operations and products liability from Canadian Universal Insurance Company, Ltd. (Canadian). A fire occurred at a building in which Fire Watch had installed equipment. Due to the failure of its equipment to function, an action for damages was commenced against Fire Watch which, in turn, tendered the defense of the action to its insurer. Canadian brought an action for a declaratory judgment that the loss in question was excluded from coverage under the insurance policy. The trial court determined that the policy and an endorsement thereto were unambiguous and excluded coverage. We reverse.

Fire Watch installed an automatic fire extinguisher system in a Mr. Quick restaurant in Faribault, Minnesota. On July 4, 1973, a fire originating from a source other than the fire protection equipment occurred at the restaurant. The failure of the fire protection system to function and thereby extinguish the fire caused extensive damage to the physical plant of the restaurant.

Thereafter, the owner and operator of the restaurant commenced an action for damages against Fire Watch alleging that (1) it negligently installed the fire protection system; (2) it negligently inspected the system; and (3) it failed to provide adequate instructions concerning the operation of the system. Fire Watch tendered the defense of the action to its insurer. Canadian conditionally agreed to defend Fire Watch in the lawsuit but at the same time brought an action for a declaratory judgment that the particular loss suffered in the present case was excluded from coverage by the terms of the insurance policy.

Canadian then made a motion for summary judgment. Although the trial court determined the language of the insurance policy and its endorsements were unambiguous, the motion for summary judgment was denied because the court was of the opinion that a genuine issue of fact remained concerning the exact cause of the fire. In a memorandum accompanying its decision, the trial court confined its analysis of the insurance policy to an endorsement and interpreted the language employed therein as only providing coverage when the fire extinguisher system itself would cause a fire:

"It would appear therefore that the only circumstances when the endorsement allows coverage for a failure of the product or work to perform the intended function is if there is, 'active malfunction of the named insured's product or work which serves to cause the fire.' Query: Just what was the cause of the fire? In the Court's opinion herein lies the crux of Plaintiff's liability, if any. Without a trial and testimony, the Court does not see how this question can be answered by it."

After the denial of its initial motion, Canadian brought a second motion for summary judgment. Accompanying the motion was an affidavit which included the pertinent portions of a deposition of the only known eyewitness to the fire. The general content of the eyewitness' testimony was that the fire originated in the "deep fat fry" area of the restaurant and not in the fire extinguisher system. After oral argument and after reviewing the materials accompanying the motion, the trial court granted Canadian summary judgment. Fire Watch appeals to this court from the judgment of the district court.

The issues which must be considered on appeal are:

(1) Whether the exclusionary language of the endorsement to the original insurance policy precludes coverage for Fire Watch in this instance.

(2) Whether an insurer has an affirmative obligation to notify the insured party that the insurance coverage provided by the policy is being reduced or modified by a subsequent endorsement to the policy.

The provisions of an insurance policy are to be interpreted according to plain, ordinary sense so as to effectuate the intention of the parties. The policy should be construed as a whole with all doubts concerning the meaning of language employed to be resolved in favor of the insured. Bobich v. Oja, 258 Minn. 287, 104 N.W.2d 19 (1960). The terms of an insurance policy should be construed according to what a reasonable person in the position of the insured would have understood the words to mean rather than what the insurer intended the language to mean. Petronzio v. Brayda, 138 N.J.Super. 70, 350 A.2d 256 (1975); McPhee v. American Motorists Ins. Co.,57 Wis.2d 669, 205 N.W.2d 152 (1973).

With these general principles in mind, initial reference must be made to the insurance contract entered into by the parties in this case. The coverage provided Fire Watch in the insurance policy issued by Canadian is entitled "Completed Operations and Products Liability Insurance." Consistent with this designation, the following general description of the coverage to be provided Fire Watch is given within the body of the policy under the heading of "Completed Operations": "Sales and installation of automatic safety first systems rated as: Completed Operations N.O.C." ¹ By confining the examination of the policy to this general language, it would be entirely reasonable for an insured party to assume that coverage would be afforded for damages resulting from the negligent installation of a fire extinguisher system.

However, the policy also included a section which specified certain events or risks that would not be protected by insurance coverage. Specifically, the policy included an exclusionary clause commonly referred to as a "business risk exclusion" ² which provides as follows:

"This insurance does not apply:

"(e) to bodily injury or property damage resulting from the failure of the named insured's products or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specifications, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury or property damage resulting from the active malfunctioning of such products or work."

A short time after the receipt of the original policy, Canadian forwarded the following endorsement, which was intended to replace the business exclusion clause, to Fire Watch:

"In consideration of the premium charged it is mutually agreed and understood that such coverage as is afforded by the policy shall not apply to * * * Physical Injury to tangible property, including the loss of use of such physically injured property resulting from fire because of the failure of the named insured's product or work completed by or for the named insured to perform the function or serve the purpose intended by the named insured, regardless of whether such failure is due to a production (employee) error or attributable to a design (management) error; but this exclusion is not intended to apply to * *...