Fred A. Chapin Lumber Co. v. Lumber Bargains, Inc.

• Decision Date: 01 March 1961
• Citation: 11 Cal.Rptr. 634,189 Cal.App.2d 613
• Court: California Court of Appeals Court of Appeals
• Parties: FRED A. CHAPIN LUMBER COMPANY, a corporation, Plaintiff and Appellant, v. LUMBER BARGAINS, INC., a corporation, Defendant, Gibson Lumber Company, a corporation, Defendant and Respondent. Civ. 6615.

Page 634

11 Cal.Rptr. 634

189 Cal.App.2d 613

FRED A. CHAPIN LUMBER COMPANY, a corporation, Plaintiff and Appellant, v. LUMBER BARGAINS, INC., a corporation, Defendant, Gibson Lumber Company, a corporation, Defendant and Respondent.

Civ. 6615.

District Court of Appeal, Fourth District, California.

March 1, 1961.

Fullerton & Morris, San Bernardino, for appellant.

Surr & Hellyer, San Bernardino, for respondent.

COUGHLIN, Justice.

This is an appeal from a judgment on the pleadings in favor of a lessee in an action by a lessor to recover damages for the destruction of its buildings as the result of a fire caused by the lessee's negligence. Due execution of the subject lease was alleged in the answer of the defendant Gibson Lumber Company, a corporation; a copy thereof was attached; no denial was filed; therefore, the allegation of due execution was admitted. Code Civ.Proc. § 448. Apparently the defendant Lumber Bargains, Inc., is a dissolved corporation.

The issue on this appeal concerns the effect of the following provision of the lease upon the liability of the lessee:

'Lessor agrees to maintain in full force and effect and to pay all premiums for fire, earthquake and storm insurance to cover the value of the buildings.'

The trial court concluded that by the foregoing provision, the lessor agreed to maintain fire insurance on its buildings for the benefit of both parties to the lease and as between them, with respect to any loss covered thereby, agreed to seek reimbursement for such loss solely from the proceeds of such insurance. The plaintiff, lessor and appellant herein, contends that this conclusion constitutes a 'holding that lessee was exonerated under the lease from liability for its negligent destruction by fire of lessor's improvements'; that the lessee's negligence arose out of the violation of a local fire prevention ordinance; that an agreement exonerating a lessee from such negligence is contrary to the provisions of Section 1668 of the Civil Code; and, therefore, the conclusion of the trial court was erroneous. In reply, the defendant, lessee and respondent herein, contends that the decision of the trial court did not constitute a 'holding' that it was exonerated from liability for its negligent conduct but, instead, was based on the conclusion that the provision in question 'represents in effect an agreement that in case of fire, the plaintiff will look solely to the proceeds of a fire insurance policy which it is obligated to procure'; is an agreement among the parties 'to provide mutual protection by purchase of insurance against insurable losses'; and required to 'lessor to insure an insurable interest for the benefit of both parties to the lease and to seek his recovery from the proceeds of such insurance.'

Section 1668 of the Civil Code provides:

'All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of law.'

The public policy codified in Section 1668, however, does not purport to prohibit the parties to a contract from agreeing that one of them shall maintain fire insurance and apply the proceeds therefrom toward the reimbursement of any fire loss covered by such insurance, although caused by the other's negligence. Cf. Ins.Code, § 533; O'Neill v. Union Assur. Soc., Ltd., 166 Cal. 318, 320, 135 P. 1124; Pellas v. Ocean Accident & Guarantee Corp., 24 Cal.App.2d 528, 535, 75 P.2d 635. The vital question, therefore, is whether the provision in question, which requires the lessor to maintain fire insurance to cover the value of the buildings, is a provision made for the benefit of the lessee as well as the lessor. The trial judge aptly expressed the answer to this question in his written memorandum opinion wherein he said:

'It seems obvious from reading the whole lease that the parties, in this particular portion thereof, were seeking to protect themselves from certain losses and liabilities. There can be no reason for this paragraph unless it was intended that the buildings would be so insured that any fire loss would be paid out of the insurance.'

The lease provides that the lessee, at its own expense, shall make all repairs to the buildings and keep them in good order and repair, excepting ordinary wear and tear and 'destruction or damage by acts of God or such other acts beyond the control of the Lessee'; also that, upon the termination of the lease, the lessee shall deliver up the premises in as good condition as when received, 'reasonable wear and tear and damage by acts of the elements, or acts of God or other similar causes excepted.' Destruction or damage caused by the lessee's negligence was not included in the foregoing exceptions. Morris v. Warner, 207 Cal. 498, 501-504, 279 P. 152. As a consequence, these covenants imposed an obligation upon the lessee which would subject it to a loss in the event a fire caused by its negligence resulted in destruction or damage to the leased premises. The lessee lawfully could protect itself against this loss through insurance even though such loss might result from its negligence. Ins. Code, §§ 281, 284, 533; O'Neil v. Union Assur. Soc., Ltd., 166 Cal. 318, 320, 135 P. 1124; Pellas v. Ocean Accident & Guarantee Corp., 24 Cal.App.2d 528, 535, 75 P.2d 635. A policy of insurance "is a special agreement of indemnity with the person insuring against such loss or damage as he may sustain." Alexander v. Security-First Nat. Bank, 7 Cal.2d 718, 723, 62 P.2d 735, 737. Although a lessor and a lessee may have separate insurable interests (Alexander v. Security-First Nat. Bank, supra, 7 Cal.2d 718, 723, 62 P.2d 735), the extent of these interests, depending upon the loss to be indemnified, may differ very little. Such is the case at bar. Where the parties to a lease agree that one of them shall maintain insurance for their mutual protection, 'and the party obligated, in violation of his agreement, procures insurance payable to himself alone, the other party for whose benefit the agreement was made has an equitable lien on the proceeds of such insurance.' Alexander v. Security-First Nat. Bank, supra, 7 Cal.2d 718, 724, 62 P.2d 735, 738. If the lessor in the instant case maintained the fire insurance on its buildings in its name alone, assuming the lease contemplated that such insurance should be maintained for the benefit of the lessee as well as the lessor, the latter holds the proceeds of any such policy subject to the aforesaid equitable lien of the lessee. The amount of this lien would offset the amount of the damage which the lessor sustained as a result of the destruction of its buildings, because the loss against which the lessee was indemnified was that sustainable as a result of its liability for the damage which the lessor sustained. On the other hand, if the lessor breached its obligation and did not maintain fire insurance as agreed, its liability for breach of the lease would offset the lessee's liability for negligent use of the premises; except as hereinafter noted, the amount of damages recoverable upon these respective liabilities would be the same. In either event the decision of the trial court was proper.

A demonstration of the distinction between the contention of the lessor, i. e., that the insurance provision in question exculpates the lessee from liability for negligence, and the contention of the lessee, i. e., that this provision does not free it from liability but, instead, imposes upon the lessor the obligation to insure it against loss from such liability, is found in a comparison between the extent of the loss against which the lessee was indemnified by the insurance which the lessor was required to maintain, and the extent of the loss which the lessee might sustain as a result of its liability for negligence. The insurance which the lessor agreed to maintain was 'to cover the value of the buildings.' It was not to cover all loss resulting from a fire which damaged or destroyed the buildings. The lessee's liability for damage resulting from a negligently caused fire might extend not only to the value of the buildings destroyed, but also to the value of any personal property destroyed, and would include all consequential damages proximately resulting from the fire, such as that which might arise from loss of use. Higgins v. Los Angeles Gas & Electric Co., 159 Cal. 651, 662, 115 P. 313, 34 L.R.A.,N.S., 717; Stillwell v....