City of Carter Lake v. Aetna Cas. and Sur. Co.

• Decision Date: 24 July 1979
• Docket Number: No. 78-1796,78-1796
• Citation: 604 F.2d 1052
• Parties: CA 79-2759 CITY OF CARTER LAKE, a municipal corporation in the state of Iowa, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, a corporation, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1052

604 F.2d 1052

CA 79-2759 CITY OF CARTER LAKE, a municipal corporation in the state of Iowa, Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, a corporation, Appellee.

No. 78-1796.

United States Court of Appeals Eighth Circuit.

Submitted March 12, 1979.

Decided July 24, 1979.

William J. Brennan, Jr., Fitzgerald, Brown, Leahy, Strom, Schorr & Barmettler, Omaha, Neb., for appellant; Robert L. Matthews, Jr., Omaha, Neb., on the brief.

John R. Douglas, Cassem, Tierney, Adams, Gotch & Douglas, Omaha, Neb., for appellee.

Before BRIGHT and STEPHENSON, Circuit Judges, and BOGUE, ^* District Judge.

STEPHENSON, Circuit Judge.

This is a diversity case initiated by appellant City of Carter Lake, Iowa, alleging that its comprehensive general liability insurance policy issued by the appellee, The Aetna Casualty and Surety Company, provided coverage for the negligent actions of Carter Lake's personnel which resulted in six separate incidents of sewage backup into the basement of a Carter Lake residence owned by William and Kesano Mecseji. There are essentially two issues that must be resolved on this appeal: (1) whether the policy provided coverage for the risks involved, and (2) whether Aetna has waived or is estopped from asserting a defense of non-coverage under the policy because it undertook defense of the lawsuit by the Mecsejis against the city without a reservation of rights. Without specifically addressing the estoppel issue the district court ¹ ruled in favor of Aetna. The court held that the policy only covered the first incident of sewage backup, and accordingly entered judgment for Carter Lake against Aetna for $1,501.78, the amount attributable to the first backup. City of Carter Lake v. Aetna Cas. & Sur. Co., 454 F.Supp. 47 (D.Neb.1978). We agree that coverage under the policy extended only to the first flooding, but are persuaded that Aetna is estopped from asserting the defense of non-coverage as to the three subsequent backups which occurred before suit was filed. Consequently, we affirm in part, reverse in part, and remand for judgment to be entered for Carter Lake for the amount attributable to the first four backups plus interest. ²

The events that give rise to this controversy are not in dispute and were adequately delineated by the district court in its memorandum opinion.

On February 26, 1975, the basement of one William Mecseji's house was flooded with raw sewage. The (city's) sewage pump had overloaded and had shut off. The sewage began to back up into the system and flooded the lowest area in the drainage system in the Carter Lake area, which happened to be the Mecseji basement. The city maintenance personnel reset the pump and the basement began to drain. Mr. Mecseji filed a claim against the City for his damages in the amount of $418.12. The City referred this claim to Aetna who initially denied the claim on the basis that the City was not negligent.

Due to repeated, identical failures of the sewage pump, the Mecseji basement was flooded again on July 14, 1975, August 2, 1975, and August 21, 1975. The Mecsejis filed suit against Carter Lake on August 26, 1975 alleging that the damage to their property was the result of Carter Lake's negligence. Their complaint was subsequently amended in January, 1976, to include two additional incidents of flooding on December 16, 1975, and December 18, 1975, again due to failure of the sewage pump. ( ³ By letter of February 26, 1976, Aetna notified Carter Lake that it would defend the City in the lawsuit but that Aetna would not pay for any damages incurred subsequent to the first flooding, February 26, 1975. The City hired additional counsel for the trial and was represented by both private counsel and Aetna's counsel. Following trial the jury returned a verdict in favor of the Mecsejis in the amount of $11,404.14. The Mecsejis have since garnished this sum, plus interest ($12,533.78 total), from Carter Lake's account.

Id. at 48.

Carter Lake then brought this action against Aetna to recover not only the amount paid to the Mecsejis, but also the attorney fees which it incurred in appealing the adverse decision in state court after Aetna refused to appeal, and for the attorney fees incurred in bringing this action.

It is undisputed that the substantive law of Iowa applies in this case. However, this court has neither been directed to, nor independently discovered, any Iowa law which directly controls the issues presented in this action. Cf. Continental Cas. Co. v. Jackson, 400 F.2d 285, 288-89 (8th Cir. 1968); Poweshiek County Nat'l Bank v. Nationwide Mut. Ins. Co., 261 Iowa 844, 156 N.W.2d 671, 678-79 (1968) (Iowa law definition of accident as used in accidental death policies). Because it is not our task to "formulate the legal mind of the state, but merely to ascertain and apply it," Village of Brooten v. Cudahy Packing Co., 291 F.2d 284, 288 (8th Cir. 1961), we have the usual problem of endeavoring to determine what the Supreme Court of Iowa would, on the facts before us, declare the law of that state to be.

I. Policy Coverage

An examination of Iowa case law does reveal certain broad principles which are used for interpretation of insurance contracts.

(T)he court should ascertain what the insured, as a reasonable person, understood the policy to mean, not what the insurer actually intended. Umbarger v. State Farm Mutual Automobile Insurance Company, 218 Iowa 203, 206, 254 N.W. 87, 88. We have said on several occasions a contract of insurance should not be construed through the magnifying eye of the technical lawyer but rather from the standpoint of what an ordinary man would believe it to mean. * * *

Another rule of construction in insurance cases requires doubt or ambiguity to be construed strictly against the insurer and liberally in favor of the insured.

Goodsell v. State Auto. & Cas. Underwriters, 261 Iowa 135, 153 N.W.2d 458, 461 (1967). However, "(t)his rule does not warrant an arbitrary judicial construction of the terms of the instrument. The court must give effect to exceptions and limitations in a policy as they are written and unless it may be said there is ambiguity in the words found in the policy, there is no occasion for the exercise of choice of interpretation." Hein v. American Family Mut. Ins. Co., 166 N.W.2d 363, 366 (Iowa 1969).

With these principles in mind, we examine the policy provisions in question. In the coverage part of the policy it is stated that: "The company will pay on behalf of the insured all sums which the insured shall become legally obliged to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence * * *." In a separate part of the policy labelled "Definitions," "occurrence" is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the Insured(.)" The term "accident" is not further defined in the policy.

Carter Lake contends that the policy should be construed by ascertaining the meaning of the word "occurrence," rather than the word " accident." We disagree. It is true that "occurrence" has a broader meaning than "accident" as those words are generally understood. However, when all of the provisions of the policy are considered as a whole, there is no ambiguity as to the intention of the parties to give the word "occurrence" the restricted meaning of an accident, including continuous repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. See R. Keeton, Basic Text on Insurance Law § 5.4(c), at 300 (1971) (use of word "occurrence" rather than "accidents" broadens coverage by including losses from the continuing operation as well as a sudden event, but does not change coverage with relation to degree of expectability of the loss). But see Grand River Lime Co. v. Ohio Cas. Ins. Co., 32 Ohio App.2d 178, 289 N.E.2d 360, 365 (1972) (use of occurrence broadens coverage).

It is beyond dispute that Carter Lake did not intend to cause the sewage backups. Thus, the exclusion for intentional acts is not applicable even though the underlying acts and omissions of Carter Lake were intentional. See, e. g., N. W. Elec. Power Coop., Inc. v. American Motorists Ins. Co.,451 S.W.2d 356, 361-64 (Mo.App.1969); Messersmith v. American Fidelity Co.,232 N.Y. 161, 133 N.E. 432, 433 (1921); 7A J. Appleman, Insurance Law and Practice § 4492 (1962). Nevertheless, Aetna maintains that the backups subsequent to February 25, 1976, were not occurrences or accidents as those terms are used in the policy because the subsequent backups were "expected." Aetna attempts to equate expected with reasonable foreseeability. In arguing for such an interpretation, Aetna primarily relies on the cases of City of Aurora v. Trinity Universal Ins. Co., 326 F.2d 905 (10th Cir. 1964), Gassaway v. Travelers Ins. Co., 222 Tenn. 649, 439 S.W.2d 605 (1969), and Town of Tieton v. General Ins. Co., 61 Wash.2d 716, 380 P.2d 127 (1963).

In City of Aurora v. Trinity Universal Ins. Co., supra, the policy provided coverage for losses "caused by accident." The question before the Tenth Circuit was whether a sewage backup was caused by accident. The city had absorbed the sewage system of a newly annexed area, and later discovered that it was inadequate. To prevent flooding of a lift station in this area, a small pump at the station was intermittently operated, increasing the discharge of water into the main. The combination of rainfall and the operation of the pump caused sewage and water to back up from the main into several residences. In holding that the loss was not caused by accident, the court stated that:

(A) loss which is the natural and probable consequence of a negligent act is not "caused by accident", within the meaning of policies of this kind. * * * At...