Gust K. Newberg Const. Co. v. E.H. Crump & Co.

• Decision Date: 18 June 1987
• Docket Number: No. 86-1681,86-1681
• Citation: 818 F.2d 1363
• Parties: GUST K. NEWBERG CONSTRUCTION COMPANY, an Illinois Corporation, Plaintiff-Appellant, v. E.H. CRUMP & COMPANY, a Delaware Corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1363

818 F.2d 1363

GUST K. NEWBERG CONSTRUCTION COMPANY, an Illinois Corporation, Plaintiff-Appellant, v. E.H. CRUMP & COMPANY, a Delaware Corporation, Defendant-Appellee.

No. 86-1681.

United States Court of Appeals Seventh Circuit.

Argued Oct. 24, 1986.

Decided May 15, 1987.

Rehearing Denied June 18, 1987.

Edward M. White, Carey, Filter, White & Boland, Chicago, Ill., for plaintiff-appellant.

Don W. Fowler, Lord, Bissell & Brook, Chicago, Ill., for defendant-appellee.

Before WOOD and POSNER, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

ESCHBACH, Senior Circuit Judge.

Gust K. Newberg Construction Company ("Newberg"), the plaintiff in this case, appeals from a judgment entered in favor of the defendant, E.H. Crump & Company ("Crump") following a bench trial. In this diversity action, the district court held that Crump had no duty, under Florida law, ¹ to inform Newberg that an "all risk" insurance policy purchased by Newberg to cover its risk of loss regarding a construction project in Dade County, Florida, excluded loss caused by subsurface water. Under the circumstances of this case, we agree and therefore affirm.

I

Newberg, an Illinois corporation with its principal place of business in Illinois, is engaged in the construction business throughout the country. Crump, a Delaware Corporation ² with its principal place of business in Tennessee, is engaged in the insurance brokerage business. The business relationship of the parties dates back to 1973, when Crump began obtaining bid bonds and performance bonds for Newberg. Some time later, Crump became the exclusive broker for all surety bonds (bid and performance) written for Newberg. Crump has also sometimes acted as a broker to obtain "builder's risk" insurance for Newberg. Crump also sought unsuccessfully to become Newberg's "general comprehensive liability and workmen's compensation" insurance broker.

A word of explanation about the types of insurance commonly carried by construction companies is warranted. Bid and performance bonds and "builder's risk" insurance are typically obtained on a job-specific basis, while the comprehensive liability and workmen's compensation insurance are carried on a continuous basis. "Builder's risk" insurance, the type involved in this lawsuit, is designed to cover the risk of loss that the builder bears under the construction contract in the event certain catastrophes strike the structure to be built.

"Builder's risk" policies are of two types: "specified peril" insurance, which covers only those perils specified in the insurance contract, and "all risk" insurance, which covers all losses except those specifically excluded. In sum, under an "all risk" policy, the insurer bears the risk that a catastrophe not mentioned in the policy will occur; in a "specified peril" policy, the insured bears that risk.

Frequently the construction contract will require the builder (rather than the owner) to obtain "builder's risk" insurance. In such cases, the contract usually specifies which type of insurance is required. If "specified peril" insurance is called for, the perils to be insured against are usually listed. Even though a contract might only call for "specified peril" insurance, however, the builder is always free to obtain better coverage. It was Crump's policy to always recommend "all risk" insurance. It is uncontested that whenever Crump obtained "builder's risk" insurance for Newberg, it was of the "all risk" variety. Additionally, Newberg claimed that its practice was to always require "all risk" insurance and that it informed Crump of this policy at the onset of their relationship. Crump denied ever having been informed of such a practice.

As noted above, even "all risk" policies contain some exclusions. These exclusions are not uniform, but vary from company to company within the insurance industry. One such exclusion is for damage due to subsurface water. Slightly more than half of available insurance policies contain this exclusion, but some companies whose policies contain the exclusion will write over it for an additional premium. Although Crump was unaware that some policies did not contain the exclusion, it did know that some companies would write over it.

Newberg obtained the bid for a construction contract in Miami, Florida, which required it to construct concrete and masonry tanks for a sewage treatment plant. The tanks were to be built underground and, it turns out, under the water table. The construction was to be done "in the dry," i.e., the builder was required to use pumps and other equipment to "dewater" the construction site so that subsurface water would not impede construction.

As was its usual practice, Newberg solicited bids from a number of insurance brokers, including Crump, for the builder's risk insurance on the project. It sent Crump the insurance specifications for the project, which called for "specified peril" coverage and did not specify subsurface water as one of the perils. Additionally, Newberg told Crump that the site was approximately two miles from the ocean and that flood coverage was not needed. Among the insurance brokers, Crump was the low bidder and provided Newberg with an "all risk" policy. However, subsurface water was among the perils excluded, under section 4(o) of the policy, which provided:

4. PERILS EXCLUDED. This policy does not insure:

* * *

* * *

(o) Loss or damage directly or indirectly caused by or resulting from water below surface of ground; tidal water; tidal wave or tsunami, all whether or not driven by wind.

Crump did not inform Newberg of the exclusion; Newberg did not read the policy, and thus was unaware of the exclusion. As events came to pass, the project was damaged by subsurface water; ³ the loss was uninsured; and Newberg sued Crump alleging that Crump negligently procured a policy that did not insure against the risk and negligently failed to inform Newberg of the exclusion.

Both Newberg's and Crump's experts testified that an insurance broker should inform his customer of the differing exclusions in "all risk" policies if an "all risk" policy is requested. However, Newberg's expert, relying on the contract specifications, stated that "in this case we are not dealing with a situation like that."

After a bench trial, the District Court entered its findings of fact and conclusions of law and entered judgment for Crump, holding that Crump had no duty to inform Newberg of the policy exclusions. The district court noted that Crump was not Newberg's exclusive insurance broker and that Newberg had not requested "peril analysis," informed Crump of the peril of subsurface water, or requested insurance for that risk.

II

We pause briefly to consider the standard of review that governs our inquiry. Although Crump attempts to characterize virtually all of the District Court's opinion as "findings," the key holding, that Crump had no duty to inform Newberg of the exclusions in the policy, quite clearly decides a question of law. See Restatement (Second) of Torts Sec. 328B(b), (c) (1965). Thus our review of this question is not governed by the "clearly erroneous" standard of Rule 52.

However, the trial court's finding that Newberg never asked Crump for insurance against "all perils" is a finding of fact, subject to the clearly erroneous standard. The finding is not clearly erroneous. Newberg's employees testified that they specifically told Crump that all "builder's risk" was to be of the "all risk" variety. Crump's employees testified that no such instructions were given. This conflicting testimony presented a choice to the district court, the result of which "can virtually never be clear error." Anderson v. City of Bessemer City, 470 U.S. 564, 575, 105 S.Ct. 1504, 1513, 84 L.Ed.2d 518 (1985); Hayden v. Oak Terrace Apartments, 808 F.2d 1269, 1271 (7th Cir.1987); Landau & Cleary, Ltd. v. Hribar Trucking, Inc., 807 F.2d 91, 93-94 (7th Cir.1986).

III

We agree with the district court that Crump had no duty to inform Newberg of the exclusion of subsurface water damage. Newberg was in a far better position to know the insurance coverage it needed. If it desired coverage beyond that specified in the contract documents that it sent to Crump, it should have said so. Newberg clearly either was or should have been aware of the risk of damage due to subsurface water. It was familiar both with the construction site and with the contractual provisions calling for construction "in the dry" and for "dewatering." Crump, on the other hand, had no knowledge of either.

Newberg seems to suggest that a broker must discuss each exclusion in an "all risk" policy with the insured. Yet it cites no case for this novel proposition, and we have found none. The very nature of an "all risk" policy dictates that a major portion of the policy terms will be exclusions. In the instant case, for example, the exclusion section is easily the longest portion of the policy with no fewer than fifteen different exclusions (and probably more, since many of the separately lettered exclusions, like the one in this case, actually exclude more than one type of loss). An insurance broker is under no duty to detail every term of every policy he offers to his customer, particularly where the policy plainly covers all of the risks for which the customer specifically requested coverage. The primary duty of the insurance broker is to provide insurance as agreed. See Monogram Products, Inc. v. Berkowitz, 392 So.2d 1353, 1355 (Fla.App. 2d Dist.1981). In performing this duty, a broker is entitled to assume that the insured has provided him with correct information regarding the coverage that is desired.

The authorities cited by Newberg do not support the duty that it asserts that Crump owed it. Perhaps the strongest case in support of Newberg's position is Burns v. Consolidated American Insurance Co., 359 So.2d 1203 (Fla.App. 3d Dist.1978). In Burns the court held that summary...