Highlands Ins. Co. v. Allstate Ins. Co.

• Decision Date: 07 October 1982
• Docket Number: No. 81-4238,81-4238
• Citation: 688 F.2d 398
• Parties: HIGHLANDS INSURANCE COMPANY, Plaintiff-Appellee Cross-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee, Tri-State Savings and Loan Association, Defendant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 398

688 F.2d 398

HIGHLANDS INSURANCE COMPANY, Plaintiff-Appellee Cross-Appellant, v. ALLSTATE INSURANCE COMPANY, Defendant-Appellant Cross-Appellee Tri-State Savings and Loan Association, Defendant-Cross-Appellee.

No. 81-4238.

United States Court of Appeals Fifth Circuit.

Oct. 7, 1982.

Joseph L. McCoy, Sinith C. Tipton, Jackson, Miss., for defendant-appellant cross-appellee.

James L. Carroll, Jackson, Miss., for plaintiff-appellee cross-appellant.

Sam E. Scott, John B. MacNeill, Jackson, Miss., for Tri-State.

Appeals from the United States District Court for the Southern District of Mississippi.

Before RUBIN and REAVLEY, Circuit Judges, and HUNTER ^*, District Judge.

ALVIN B. RUBIN, Circuit Judge:

Two insurers issued separate policies, each purporting to insure the same property against loss by fire, each with a loss payable clause in favor of the same institutional mortgagee of the property. Each policy contained a clause providing that it would not be effective if there were other insurance on the property. When the property was damaged by fire, each insurer denied liability under its policy and one contended alternatively that the loss should be prorated. After a bench trial, the district judge concluded that, under Mississippi law, which applies in this diversity case, ¹ both of the policies were in effect and prorated the liability. Concluding that only one of them, the Allstate renewal policy, was in effect when the fire occurred, we reverse in part and affirm in part.

I

In January 1973 Allstate Insurance Company ("Allstate") issued its Policy No. 190 in the amount of $50,000 insuring property owned by Carroll Ed Sanders in Iuka, Mississippi, and naming Tri-State Savings and Loan Association ("Tri-State") as mortgagee. The term of this policy extended to January 9, 1976. In August 1974 Allstate issued Policy No. 899 covering both the mortgaged property, at 126 Pearl Street, and other properties owned by Sanders, and again naming Tri-State as mortgagee. Allstate intended that this policy replace its Policy No. 190, but it failed to cancel the earlier policy, so there were two Allstate policies ostensibly covering the same property at the same time. ² In March 1975 Allstate mailed Tri-State a notice canceling Policy No. 899 for nonpayment of premiums. About the same time it received this notice, Tri-State received a contradictory notice from Allstate dated "January 10," without mention of the year, stating that Policy No. 899 was to be continued in force without interruption.

In a routine check, A. W. Bonds, the managing officer of Tri-State, reviewed his files in August 1975 to ensure that there was adequate insurance on the Pearl Street property. He could not satisfy himself from the files that there was adequate insurance and he did not receive a satisfactory explanation from Allstate's Iuka agent. Therefore, to protect Tri-State's interest, Bonds obtained two consecutive thirty-day binders from Highlands Insurance Company ("Highlands") through Highlands' local agent. Highlands' agent understood that the coverage was temporary, pending determination whether the Allstate policy was effective.

Bonds later concluded that Allstate was not insuring the Pearl Street property. Accordingly, at his request, Highlands issued a policy covering the Pearl Street property in the amount of $35,000, with a loss payable clause in favor of Tri-State as mortgagee. The policy term was September 9, 1975, to September 9, 1978. The district court found that this policy was issued on the basis of Bonds' assertion that "no other insurance existed on the property."

Several months later, Allstate issued a new policy, again identified as "No. 190" ("the Allstate renewal policy"), insuring the Pearl Street property for $50,000 from January 9, 1976, to January 9, 1979. This policy also contained a loss payable clause in favor of Tri-State. No application had been made for the policy by either Sanders or Tri-State and no premium was ever paid for it.

The Pearl Street property was destroyed by fire on January 16, 1977. At that time Tri-State had in its files both the Highlands policy and the Allstate renewal policy. Tri-State later foreclosed on its mortgage but is still due a balance of $33,278.67.

Highlands filed suit against both Allstate and Tri-State seeking a declaratory judgment that its policy was not in effect at the time of the loss. Highlands contends that, because Tri-State violated the "other insurance" clause in Highlands' policy, it is not liable to Tri-State for any loss caused by the fire. Alternatively, Highlands contends that any liability should be prorated according to the total amount of insurance coverage in effect at the time of the loss. Tri-State, of course, seeks to recover from both insurers, or either one. Allstate denies liability to Tri-State on the ground that its renewal policy was issued by mistake. Allstate argues in the alternative that the "other insurance" clause in its renewal policy was violated.

II

Allstate contends that Policy No. 190 was properly terminated in 1975, and the Allstate renewal policy was sent to Tri-State in 1976 through its own clerical error. It contends, therefore, that the renewal policy was not a valid contract of insurance. The district court concluded that Allstate's renewal policy was in effect when the fire occurred and that Allstate had waived its right to cancel the policy. Allstate challenges both conclusions as misapplications of Mississippi law.

Mississippi law does not allow a party to avoid a contract on the ground of unilateral mistake if the mistake was merely the result of that party's inattention or negligence. Hunt v. Davis, 208 Miss. 710, 724, 45 So.2d 350, 352 (1950) (quoting Wall v. Wall, 177 Miss. 743, 748, 171 So. 675, 677 (1937)); Sacred Heart S. Missions, Inc. v. Terminix Int'l, Inc., 479 F.Supp. 348, 350-51 (N.D.Miss.1979). This rule, however, is not inexorable. See Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d 57, 60-61 (Miss.1976) (quoting State Highway Comm'n v. State Constr. Co., 203 Or. 414, 435, 436, 280 P.2d 370, 380, 381 (1955)); Sacred Heart S. Missions, Inc. v. Terminix Int'l, Inc., 479 F.Supp. at 351. If (1) the alleged mistake, although unilateral, is of so fundamental a character that the minds of the parties never in fact met, or an unconscionable advantage has been gained; and (2) there was no gross negligence or willful neglect by the party responsible for the mistake, either in committing the mistake or in not seeking relief from it, then the court may, in its discretion, excuse the responsible party. Mississippi State Bldg. Comm'n v. Becknell Constr., Inc., 329 So.2d at 59-60. ³

The district judge concluded that Allstate's business practices precluded it from denying coverage under its renewal policy. As he noted in his findings of fact, Allstate had issued Policy No. 899 to replace Policy No. 190, but, because of clerical error, nevertheless neglected for six months to terminate Policy No. 190. Thus Allstate itself violated the "other insurance" clauses of both Policy No. 190 and Policy No. 899 ⁴ by keeping both policies in force simultaneously. Allstate then sent Tri-State conflicting notices, one of them saying Policy No. 899 was canceled, the other saying that policy was to be continued. It further confused matters by failing to provide a full date in the continuation notice. When Tri-State's general manager communicated with Allstate to find out whether Allstate had insurance on the Pearl Street property, Allstate was unable to give him a definite answer. Several months later, apparently through another clerical mistake, Allstate sent the renewal policy to Tri-State. Although no one paid the premium on this policy, Allstate allowed the policy to remain in Tri-State's files for almost a year, with a copy in its own files, and did nothing either to collect the premium or to cancel the policy until after the loss. These findings are sufficient to warrant the district court's conclusion that Allstate was so negligent that it should not be permitted to invoke its alleged clerical mistake to avoid its contract of insurance with Tri-State on the renewal policy. See Terre Haute Cooperage, Inc. v. Branscome, 203 Miss. 493, 502, 35 So.2d 537, 541 (1948). ⁵

Neither assent to coverage nor express acceptance was required of Tri-State. Considering its status as mortgagee, its acceptance of the contract may be implied from its retention of the renewal policy. A mortgagee is not required to mail express acceptance to every insurer who issues a policy protecting its insurable interest or run the risk of noncoverage. We agree with the district court's conclusion that, in the circumstances of this case, Tri-State's mere retention of the renewal policy was sufficient to constitute acceptance of a contract of insurance with Allstate. ⁶

This result is not altered by nonpayment of the policy premium. The Allstate renewal policy had a deferred premium payment endorsement that apparently eliminated payment of the premium as a condition precedent to the formation of a valid contract of insurance. ⁷ The record also suggests that Allstate sometimes issued policies and kept them in force even though premiums were not paid on them. ⁸ Moreover, the loss payable provision entitles Tri-State by law to the benefit of the Mississippi "union" or "standard mortgage clause." Miss. Code Ann. § 83-13-9. ⁹ This clause automatically becomes a part of a fire insurance policy insuring property on which there is a mortgage when the policy contains a loss payable clause for a mortgagee. ¹⁰ In effect the statutory clause creates a new and independent contract between the mortgagee and the insurer, ¹¹ a contract " 'dependent for its validity solely upon the course of action of the insurance company and the mortgagee.' " Bacot v. Phoenix Ins. Co., 96 Miss. 223, 247, 50 So. 729, 734 (1909) (quoting Syndicate Ins. Co. v....