Hanover Bldg. Materials, Inc. v. Guiffrida

• Decision Date: 17 December 1984
• Docket Number: No. 83-1471,83-1471
• Parties: HANOVER BUILDING MATERIALS, INC., Plaintiff-Appellee, Cross-Appellant, v. Louis O. GUIFFRIDA, Director, Federal Management Agency, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1011

748 F.2d 1011

HANOVER BUILDING MATERIALS, INC., Plaintiff-Appellee, Cross-Appellant, v. Louis O. GUIFFRIDA, Director, Federal Management Agency,

Defendant-Appellant, Cross-Appellee.

No. 83-1471.

United States Court of Appeals, Fifth Circuit.

Dec. 17, 1984.

William Kanter, Atty. Appellate Staff, Christine R. Whittaker, Atty., Civil Div., Dept. of Justice, Washington, D.C., for defendant-appellant, cross-appellee.

Rinehart & Nugent, Jerry Nugent, Steven E. Hein, Austin, Tex., for plaintiff-appellee, cross-appellant.

Appeals from the United States District Court for the Western District of Texas.

Before GARZA, RANDALL, and TATE, Circuit Judges.

TATE, Circuit Judge:

The plaintiff, Hanover Building Materials, Inc. ("Hanover"), obtained government-sponsored flood insurance upon its building and contents pursuant to the National Flood Insurance Act, 42 U.S.C. Secs. 4001 et seq. As is authorized by that statute, Hanover sues the Federal Emergency Management Agency ("the Agency") through its director, 42 U.S.C. Sec. 4053, see also 28 U.S.C. Sec. 1331, for the latter's disallowance of its claim for the contents of its roofed and two-walled structure. The policy provided that the contents of the building were covered only if the building was "enclosed." The district court granted Hanover judgment and also awarded it attorney's fees against the government. The government appeals the latter award, while Hanover cross-appeals to re-urge its contention that the loss was covered under the terms of the policy. ¹

The determinative issue of this appeal as to the government's liability on its flood insurance policy, as we view it, is whether the applicable policy provision (that a contents loss be covered only if the building be "enclosed") unambiguously excluded from coverage the contents of Hanover's two-walled building. Finding the "enclosed" provision ambiguous, and applying principles that ambiguities are construed against the insurer, we affirm (for different reasons, see note 1, supra,) the award to Hanover of some fifty-eight thousand dollars contents damage. However, we reverse the award of attorney's fees against the government, finding that the government was substantially justified in defending this suit.

I.

Before adverting to the facts of this litigation, we set forth the administrative context of the coverage of flood insurance policies issued under this government-sponsored insuring program.

The National Flood Insurance Act of 1968 established a national flood insurance program that enables property owners to purchase insurance against flood risks at reasonable rates. Administration of the program is now entrusted to the Federal Emergency Management Agency. 42 U.S.C. Sec. 4011(a). The Act authorizes the Director of the Agency to "provide by regulation for general terms and conditions of insurability which shall be applicable to property owners eligible for flood insurance coverage under [the Act]." 42 U.S.C. Sec. 4013(a).

Pursuant to this authority, the Director has issued regulations pertaining to rates and coverage, 44 C.F.R. Secs. 59.1 and 61.1 et seq., and which also provide a standard flood insurance policy for dwellings (44 C.F.R., Part 61, Appendix A(1)), and for "general property" (44 C.F.R., Part 61, Appendix A(2)). The policies provide separately for coverage of the dwellings/buildings and of their contents. Hanover was issued a general property form of the standard flood insurance in effect prior to revision in 1982. 44 C.F.R., Part 61, Appendix A(2) (1981).

By the general definitions applicable to both forms of the standard policy, a building or structure was defined as "a walled and roofed building", 44 C.F.R. Sec. 59.1 (see "Building" and "Structure"), and "contents coverage" was defined to include "personal property within an enclosed structure", Id. (emphasis added). Clause B ("Contents") of both Dwelling Form and General Property Form of the standard policy provided for coverage of contents within the "enclosed structure" or "within the described enclosed building", respectively. Nowhere in the regulations or in the Standard Policy, or in the Act itself, was the word "enclosed" defined, however, nor was the extent a structure must be "walled" to be enclosed, nor was the purpose for such limitation on coverage of contents expressed or implied--a hiatus, we might add, at least partially cured by the 1982 amendment of the regulations, see notes 3 and 4 and text infra. As will be seen, the Agency itself during the period preceding the 1982 revision did not interpret and apply these requirements literally so as to exclude coverage of buildings or their contents unless the structure was totally walled without aperture on all four sides.

II.

The general principles applicable to judicial interpretation of flood-insurance policy provisions have been established by prior decision. Federal law governs disputes over coverage arising under the National Flood Insurance Act of 1968. West v. Harris, 573 F.2d 873, 880-81 (5th Cir.1978), cert. denied, 440 U.S. 946, 99 S.Ct. 1424, 59 L.Ed.2d 635 (1979). When such disputes arise, they are resolved under federal law "by drawing upon standard insurance law principles." Id. at 881; see also Drewett v. Aetna Casualty & Surety Company, 539 F.2d 496, 498 (5th Cir.1976). A number of such principles are relevant here:

The first is that, "if the language of a policy is clear and unambiguous, it should be accorded its natural meaning." Landress Auto Wrecking Company, Inc. v. United States Fidelity & Guaranty Company, 696 F.2d 1290, 1292 (5th Cir.1983). The second is that, "if the meaning of a policy provision is doubtful and the language used is susceptible of different constructions, the one most favorable to the insured is adopted." Eagle Leasing Corporation v. Hartford Fire Ins. Co., 540 F.2d 1257, 1261 (5th Cir.1976). The third is that the rule favoring the insured where ambiguity exists "should not be applied automatically: '[I]nsurance contracts are to be reasonably construed consonant with the apparent objective and intent of the parties.' " Id. at 1262, quoting Baltimore Bank & Trust Company v. United States Fidelity & Guaranty Company, 436 F.2d 743, 746 (8th Cir.1971). The fourth principle is that, "[i]n deciding what a reasonable construction of the contested provisions is, the material we may draw from consists of those provisions, the policy as a whole, and the apparent objectives of the parties in establishing this kind of contractual relationship." Eagle Leasing, supra, 540 F.2d at 1262. The final principle relevant here is that, "[i]f the meaning of the policy terms remains [in the end] unclear, the policy is generally construed in favor of the insured in order to promote the policy's objective of providing coverage." Eagle-Pitcher Industries, Inc. v. Liberty Mutual Insurance Company, 682 F.2d 12, 17 (1st Cir.1982).

With these principles in mind, we now turn to Hanover's insured building and the coverage or not of its contents by the 1981 flood insurance policy.

III.

Hanover sells lumber and building materials in Austin, Texas, in an area subject to periodic flooding. From 1975 until 1982, Hanover had in effect a flood insurance policy covering its Building No. 3 and its contents. Two prior claims, in 1975 and 1979, for flood damage to the building and contents were paid without cavil. However, when the building was again flooded in May 1981, the Agency (while paying for flood damage to the building itself) refused to pay for the damages to the contents of the building because it was not "enclosed." ² The undisputed evidence is that the H-shaped building was roofed and had walls on two sides covering slightly less than twenty-five percent of its sides.

We are unable to agree with the district court's holding that the word "enclosed" in Hanover's 1981 policy is unambiguous, that the word "has the plain ordinary meaning of being totally surrounded, encased or walled." Indeed, in the administration of this policy limitation, as the government's claims examiners indicated in their correspondence with their superiors and with Hanover of July 20 and September 1, 1981, P-12 and P-13, that an administrative standard of affording coverage or not was whether a building was "enclosed as enclosed could be, given the intended use of the building", even though the structure was not "fully enclosed." The government agents there admitted that Hanover's building fell within this standard, but, in denying coverage, they also informed Hanover that the Agency was in the process of determining whether coverage should be afforded (itself an indicia of the provision's ambiguous application), P-13, with the inter-agency correspondence noting that "[t]he decision made on whether or not coverage is to be provided impacts the entire lumber industry," possibly implicating the necessity for higher premiums. P-12. Hanover points out that, functionally, a lumber retailer cannot efficiently store and retail lumber without open bin access to the stored lumber, a position implicitly recognized by the Agency correspondence.

Thus the Agency itself recognized that, in the ordinary everyday meaning of language, a "walled" building is not necessarily required to be totally "enclosed" on all four sides. How much the building needs to be "walled" to be itself insured--and the Agency concedes that the building itself was sufficiently so walled--, and how much of it needed to be walled for it to be considered "enclosed", is not addressed in the 1981 regulations and standard forms; nor do they provide any indication that a building sufficiently walled to be insured is nevertheless not sufficiently enclosed so that its contents are insured, nor any functional reason why insureability should extend in one case and not in the other. (These ambiguous hiatuses have been at least partially clarified by the 1982 revisions of the standard forms, see notes 3 and 4 infra.)

In...