Central Nat. Ins. Co. of Omaha v. Devonshire Cov. Corp.

• Decision Date: 16 July 1976
• Docket Number: Civ. No. 74-0-300.
• Citation: 426 F. Supp. 7
• Parties: CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska Corporation, Plaintiff, v. DEVONSHIRE COVERAGE CORPORATION, a California Corporation, Defendant.
• Court: U.S. District Court — District of Nebraska

426 F. Supp. 7

CENTRAL NATIONAL INSURANCE COMPANY OF OMAHA, a Nebraska Corporation, Plaintiff, v. DEVONSHIRE COVERAGE CORPORATION, a California Corporation, Defendant.

Civ. No. 74-0-300.

United States District Court, D. Nebraska.

July 16, 1976.

COPYRIGHT MATERIAL OMITTED

Francis P. Matthews, and Martin Cannon, of Matthews, Kelley, Cannon & Carpenter, P. C., Omaha, Neb., for plaintiff.

John W. Morrison, of Karon, Morrison, Savikas, Ltd., Chicago, Ill., and Harry L. Welch, of Gross, Welch, Vinardi, Kauffman & Day, Omaha, Neb., for defendant.

RICHARD E. ROBINSON, Senior District Judge.

This matter is before the Court after trial to the Court without a jury. Jurisdiction is established under 28 U.S.C.A. § 1332 (1966). In this action the plaintiff, Central National Insurance Company of Omaha, Nebraska, has filed suit against the defendant, Devonshire Coverage Corporation of Los Angeles, California, for breach of contract.

I.

On February 1, 1970, the plaintiff, insurance company, and the defendant, insurance agency, entered into an "Agency Agreement"¹ which authorized the defendant to write certain types of property insurance contracts on behalf of the plaintiff.² From the inception of the Agency Agreement until December 1, 1972, the parties conducted business on the basis of their written agreement, as modified or supplemented by an oral agreement that the defendant would not obligate the plaintiff to any single risk which was valued in excess of $1 million unless the defendant provided reinsurance to cover the risk in excess of $1 million.³ This oral agreement was amended in a written addendum to the Agency Agreement, on December 1, 1972, which provided in pertinent part:

"A. LIMITATIONS

. . . . .

2. With respect to risks incepting on or after December 1, 1972, the General Agent (Devonshire) will not write risks in excess of $500,000 total sum insured for any risk (irrespective of the PML) unless reinsured as follows. Should the amount of the total sum insured on any one risk exceed $500,000 then the excess over the above-mentioned $500,000 limitation must be reinsured on a pro rata basis, not on an excess of loss basis, with financial (sic) sound and reputable reinsurers.

. . . . .

4. In the event that the General Agent exceeds or violates any one of the above limitations or if the General Agent does not provide valid and collectable reinsurance in accordance with these limitations then in such event the General Agent shall indemnify and hold harmless the . . . (plaintiff) from and against all claims, judgments, judgments (sic) or liabilities, including interest and reasonable costs of defense. . . ."

On December 19, 1972, the defendant agency wrote policy number SMP 59 83 77 bearing an effective date of December 31, 1972. In general, this policy provided blanket insurance coverage⁴ on five (5) separate locations in Pennsylvania and Texas. Location number "1" under the policy is identified as Drexelbrook, which is an apartment complex with Clubhouse and Shopping Center in Upper Darby, Pennsylvania. The policy indicates that the Drexelbrook Complex was insured on a blanket basis in the amount of $9,190,000 for buildings, $160,000 for contents, $1,280,000 for rents, and $150,000 for gross earnings, totalling $10,780,000. However, since the Drexelbrook Complex is composed of 463 separate units, only the Drexelbrook Clubhouse was assigned a value for underwriting purposes which exceeded the $500,000 limitation on Devonshire's authority. The Clubhouse was valued at $700,000 for building, $150,000 for contents, $150,000 for gross earnings, and $100,000 for rents, totalling $1.1 million.

It is undisputed that the defendant did not procure pro rata⁵ reinsurance on the risk in excess of $500,000 covered under the above-mentioned policy.

On October 27, 1973, the Drexelbrook Clubhouse was heavily damaged by fire. Initial estimates made by a representative of Devonshire placed the loss of buildings, contents, rents, and earnings at approximately $1,000,000. On November 16, 1973, the plaintiff notified the defendant of the absence of the required reinsurance and submitted its claim under the indemnity clause of the addendum to the parties' Agency Agreement.

When policy SMP 59 83 77 was originally issued it included a special endorsement known as an average clause (stipulated amount).⁶ The endorsement of the average clause (stipulated amount) had the effect of waiving the policy's coinsurance clause.⁷ However, the policy also contained a replacement cost endorsement which entitled the insured to recover its replacement cost, rather than the actual cash value of the insured property in the event of any loss, and this replacement cost endorsement contained its own coinsurance clause. In the initial phase of adjusting the loss involved in this case the plaintiff proceeded under the assumption that a coinsurance clause would apply to any claim filed under the policy's replacement cost endorsement. Consequently, a local appraiser was hired to determine the replacement value of the Drexelbrook Complex. The appraiser found that the Complex had a total replacement value of $19,267,735 and that the Clubhouse had a replacement value of $1,188,867. Of course, since the Clubhouse was covered under a blanket policy, Central National was exposed for the entire $1,188,867 in addition to its exposures for contents, rents and lost earnings, unless a coinsurance penalty was applicable. When it was subsequently learned that the average clause (stipulated amount) endorsement had also waived the coinsurance clause of the replacement cost endorsement, the parties realized for the first time that Central National was not only exposed to a single risk of approximately $1.6 million which was not reinsured, but also that it was exposed for the entire $1.6 million, without coinsurance penalty, even though the risk had been undervalued at the time the policy was underwritten by about one-third ( 1/3 ).

The loss was finally adjusted by the parties, and a settlement was reached with the insured and paid by Central National in the amount of $778,782 for repair to the building, $160,000 for the repair and replacement of contents, and $160,000 for lost earnings and rents. An additional $144,385.00 is due pursuant to the settlement under the policy's replacement cost endorsement for a total settlement figure of $1,243,167. In addition, Central National incurred $31,759.56 in expenses associated with the adjustment of the loss as well as a disputed sum of $1,242.83 billed to the plaintiff by the defendant, for a total loss to Central National of $1,276,169.39.

II.

The evidence in this case has left no doubt as to the following facts:

(i) Under the December 1, 1972 addendum to the parties' Agency Agreement, Devonshire was obligated to procure pro rata reinsurance on any risk in excess of $500,000, total sum insured;⁸

(ii) Policy number SMP 59 83 77, in dispute in this case, insured a single risk in excess of $500,000;

(iii) Devonshire did not procure pro rata reinsurance to cover all or any portion of the risk covered under the above-mentioned policy.

Nevertheless, Devonshire denies that it is liable to the plaintiff under the circumstances of this case.

A.

The evidence has shown that during the month of December, 1972 (the first month the parties functioned under the December 1st addendum to their Agency Agreement, and the month the policy in question was written) there was a push on to write as much business as possible for Central National before the end of the year 1972. As a consequence a large amount of paper work was generated between the parties which was not processed with the customary speed and diligence. As noted above, the policy in question was written on December 19, 1972. The plaintiff received its first evidence of the issuance of the policy on January 25, 1973. As a result of the information received by the plaintiff, a letter, dated February 6, 1973, was written by the plaintiff's assistant underwriting manager to the defendant's underwriting manager which stated:

"We have now received the report on the Clubhouse, which is location # 1 on the policy, and note that the report indicates that it is valued at $850,000 and is 100% exposed.

"Since this policy is effective on December 31, 1972, it is my understanding that the maximum limit on any one risk written by your office would be $500,000.

"I would appreciate your review of this and letting us have your advice and any necessary Reinsurance Certificate as soon as possible." (Emphasis added).

(PE8). The plaintiff received no response to this letter and the matter of reinsurance did not arise again until after the loss occurred.

Devonshire contends that Central National is barred from indemnity in this case because after January 25, 1973, Central National knew that it was exposed to a risk in excess of $500,000 for which no collectable reinsurance had been acquired, yet it failed to take reasonable steps to see to it that the necessary reinsurance was obtained; that the plaintiff's failure to either procure the necessary reinsurance for itself or order the defendant to do so constituted an acquiescence in, or ratification of, the absence of reinsurance on this policy.

The contention that Central National should have procured the necessary reinsurance for itself is wholly repudiated by the evidence. Though it is clear that Central National attempted to oversee the underwriting of policies issued by Devonshire, Devonshire was principally responsible for underwriting, and made most, if not all, of the significant underwriting judgments.⁹ Therefore, even though Central National had been credited for the full premium on the Drexelbrook policy, including that portion of the premium which should have been used to procure reinsurance, it is clear that Central National could not have procured the necessary reinsurance because it could not have made the determination of...