GENERAL INS. CO., ETC. v. Pathfinder Petroleum Co.

• Decision Date: 30 October 1944
• Docket Number: No. 10494.,10494.
• Citation: 145 F.2d 368
• Parties: GENERAL INS. CO. OF AMERICA v. PATHFINDER PETROLEUM CO. PATHFINDER PETROLEUM CO. v. GENERAL INS. CO. OF AMERICA.
• Court: U.S. Court of Appeals — Ninth Circuit

145 F.2d 368 (1944)

GENERAL INS. CO. OF AMERICA v. PATHFINDER PETROLEUM CO.

PATHFINDER PETROLEUM CO. v. GENERAL INS. CO. OF AMERICA.

No. 10494.

Circuit Court of Appeals, Ninth Circuit.

August 29, 1944.

As Amended on Denial of Rehearing October 30, 1944.

W. O. Schell and Gerald F. H. Delamer, both of Los Angeles, Cal., for appellant General Ins. Co. of America.

George Penney, Jean Wunderlich, and Earl Glen Whitehead, all of Los Angeles, Cal., for appellant Pathfinder Petroleum Co.

Before GARRECHT, DENMAN, and STEPHENS, Circuit Judges.

DENMAN, Circuit Judge.

The General Insurance Company of America, hereinafter called the insurer, appeals from a judgment of the district court awarding $30,327.57 as a loss for which it held insurer liable upon a use and occupancy policy insuring Pathfinder Petroleum Company, hereinafter called the insured, against its loss of "net profits of the business" and certain fixed charges which were occasioned by a fire destroying insured's plant for the manufacture of gasoline. The insured appeals from the same judgment which awarded only a portion of the fixed charges and expenses claimed by it under a provision of the policy insuring such charges and expenses during the period of loss of use and occupancy caused by the fire. The physical loss from the fire was insured in a separate policy with which we are not here concerned.

The Insurer's Appeal.

The policy provision in question, customarily issued in this class of insurance, is clear and direct in its terms. The policy covered the "actual loss sustained" during a ninety day period of suspension by fire of the use and occupancy of insured's gasoline refining plant "consisting of: Item I. The net profits on the business which is thereby prevented: * * *."

The problem presented to the insured to sustain its burden of proof of the loss of net profits ordinarily consists of determining (a) the total cost, including depreciation,¹ of manufacturing the merchandise the production of which is prevented during the period of the use and occupancy coverage — in this case ninety days — and, (b) the price at which the product would have been sold in that period, either by prior sales agreement or the current market price in the absence of such commitments. The manufacturing cost is ordinarily shown by the prior experience of the plant in producing the merchandise. The prior sales price may or may not be relevant. It may be of no value if the actual sales price may be shown either by prior commitment or the market price current during the period of prevented production covered by the insurance and the prior sales experience show no logical connection with the sales price during the suspension period.

Instead of making proof in the method customary to business, the insured offered different evidence. The reason is obvious. Insured's plant began its operations on January 1, 1940. It was destroyed by fire on August 31, 1940. Its average cost of producing gasoline in the eight months was 4.608 cents per gallon. During the first five months the average sales price per gallon rose steadily, as follows:

                             Price received
                              per gallon in
                  Month          cents
                  --------   --------------
                  January        6.485
                  February       6.561
                  March          6.671
                  April          7.014
                  May            7.203
                

There was a substantial drop in the sales price for the succeeding three months to the fire, as follows:

                  June    6.467
                  July    6.171
                  August  5.973
                

Again it dropped during the three months of the ninety days of the coverage to

                  September  6.177
                  October    6.146
                  November   5.928
                

The average sales price for the three periods was as follows:

                  January-May inclusive  6.787
                  June, July, August     6.203
                  September, October
                    November — the
                    suspension period    6.084
                

The average profits per month for the second period dropped with the selling price of the gasoline. They were

                  Average profits (without depreciation)
                                per month
                     January to May 31     $8,296.09
                     June, July, August    $2,598.03
                

It is obvious that with the succeeding still lower selling price of the gasoline of 6.084 cents per gallon, the profits in the suspension period in question well could be much less and, when depreciation is added to cost in determining profit, quite likely would disappear, even granting a ten percent raise in the plant's production in the three month period as claimed by insured.

Insured does not question these significant facts but insists that, in spite of them, its measure of damages is the average of the monthly profits computed by adding the higher profits of the first earlier months to the much lower profits of the last three months before the fire. It claims its right arises from the words "due consideration shall be given," in a policy provision that "In determining the amount of net profits * * * for the purpose of ascertaining the amount of loss sustained * * * due consideration shall be given to the experience of the business before the fire and the probable experience thereafter."

Common sense as well as the legal maxim that "Interpretation must be reasonable," California Civil Code § 3542, requires us to interpret the "due consideration" as "rational consideration." There is no rational relationship that business men would recognize in a suit upon a contract guaranteeing, say, certain profits on a plant built by one party for another, between profits of the five high sales price months from January to May 31 and those to be estimated for September, October and November, when the sales price had such a heavy drop.

It is true that where the provisions of an insurance policy are subject to two or more interpretations, that which is adverse to the insurance company must prevail. If the figures for the period from January 1 to August 31 had shown some continuous consistent monthly profit and no substantial variation of production cost and sales price, no doubt under the policy they would prevail over a profit estimate based upon a calculation of production cost and sales price during the ninety day period. However, if the arbitrary blending of the earlier five months and the last three months were allowable, because both were "the experience of the business before the fire," then, as well, could be added together and averaged an experience of a year's loss preceding the fire and an experience of large profits in the next preceding year. Such an arbitrary "consideration" of experience is not a rational or "due consideration."

The district court's opinion accepted the insured's contention. It makes no analysis of the experience and no mention of the uncontradicted facts above set forth, but stated "As stated before, the policy provides that in ascertaining the loss due consideration shall be given to the experience of the business before the fire. Even the expert witness for the defendant testified that the plaintiff operated at a profit for the total eight months prior to the fire * * *. I therefore find that the plaintiff did operate at a profit for the eight months previous to the fire and find such profits to be the sum of $49,274.54."

In determining the profits the district court refused to consider the figures of depreciation on the plant and machinery of a book value of around $250,000, of which the insured's own auditor witness testified

"Q. * * * When you were figuring it, depreciation taking the value of the plant as the basis, did you not also, in so figuring it, take an estimated time for the life of the plant? A. Yes.

"Q. Now, I am asking you what was that estimated time of the life of the plant that you so took? A. It was based on from 5 to 16 or perhaps 20 years. I couldn't say offhand without having my report where I worked up that comparison. Some parts of the plant will wear out in 5 years. Other parts, the tanks, for instance, would last 16 2/3 years.

"Q. Did you take an average figure as representing the life of the plant in order to work it out on the basis of its valuation? A. I took the annual depreciation on each particular part of the plant — what the annual depreciation would be for the year, and after I had arrived at the total depreciation of all the different parts in the plant for the entire year, then I took a total of that. That gave me the total annual depreciation allowable under federal income tax laws. And then we based our depreciation on 10 cents per barrel throughout, which figure of $26,843.43 or 10.73-plus percent per annum on a $250,000 gasoline plant tied pretty close into the figure arrived at on a straight line depreciation method."

Instead, the district court accepted a figure of $3,034.99 for the eight months before the fire. This is at the rate of but 1.84 percent per annum on the $250,000 — an astonishing figure for a plant of intricate machinery and processes — the longest item, its housing, having a 20-year life, and its "tanks on one side, process equipment on the other, boilers and so forth," with lives of 5, 16 and 16 2/3 years. Instead, at 1.84 percent, the average life of all the machinery and its housing is over 54 years.

No analysis of the 1.84 per cent result is given. It rests upon a mere feeling of the witness Devere that it was offered because "we felt that that represented the true depreciation for the first eight months. There was considerable depreciation of material values, and we felt that that properly and correctly reflected the actual depreciation in the plant during that period." However, on cross-examination, he testified in detail regarding the figure of $26,843 or 10.73-plus percent, the depreciation for the year for the plant shown on its books, that "We arrived at that figure originally by taking the total plant value and appraising the life of the individual unit parts of the plant; tanks on one side, process equipment on the other, boilers and so forth; and working out a composite annual...