Holz Rubber Co., Inc. v. American Star Ins. Co.

• Decision Date: 18 April 1975
• Docket Number: S.F. 23105
• Citation: 120 Cal.Rptr. 415,533 P.2d 1055,14 Cal.3d 45
• Parties: , 533 P.2d 1055, 79 A.L.R.3d 518 HOLZ RUBBER COMPANY, INC., et al., Plaintiffs and Respondents, v. AMERICAN STAR INSURANCE COMPANY et al., Defendants, Cross-Complainants and Appellants, Max Elson, Defendant, Cross-Defendant and Appellant, Bill Joseph, Cross-Defendant and Appellant.
• Court: California Supreme Court

Page 415

120 Cal.Rptr. 415

14 Cal.3d 45, 533 P.2d 1055, 79 A.L.R.3d 518

HOLZ RUBBER COMPANY, INC., et al., Plaintiffs and Respondents, v. AMERICAN STAR INSURANCE COMPANY et al., Defendants, Cross-Complainants and Appellants Max Elson, Defendant, Cross-Defendant and Appellant Bill Joseph, Cross-Defendant and Appellant.

S.F. 23105.

Supreme Court of California In Bank.

April 18, 1975.

Farella, Braun & Martel, Jerome I. Braun, William R. Friedrich, San Francisco, William Frank Roberts and Robert A. Haughwout, Stockton, for plaintiffs and respondents.

Long & Levit, John B. Hook, San Francisco, and Albert E. Cronin, Jr., Stockton, for defendants, cross-complainants and appellants.

Mayhall, Hurley, Knutsen, Smith & Green and Edwin Mayall, Stockton, for defendant, cross-defendant and appellant and for cross-defendant and appellant.

SULLIVAN, Justice.

Plaintiffs ¹ (hereafter referred to collectively as 'Holz') brought this action against defendants American Star Insurance Comny (Star) and United States Fidelity and Guaranty Company (U.S.F. & G.) and their agent Max Elson, doing business as Max Elison Insurance Company (Elson), seeking declaratory relief and money damages under two policies of fire insurance for the loss of plaintiffs' stock due to fire. ² U.S.F. & G. and Star denied liability under the policies and cross-complained against their agent Elson and his associate Bill Joseph for indemnity. The case was tried to a jury, the parties stipulating that the amount of the stock loss under each policy was the sum of $61,199.22.

The jury returned verdicts as follows. On the complaint: in favor of plaintiffs and against Star in the sum of $61,199.22; in favor of plaintiffs and against U.S.F. & G. in the sum of $61,199.22; and in favor of Elson and against plaintiffs; on the cross-complaints in favor of Star and against Elson and Joseph in the sum of $61,199.22; and in favor of Elson and Joseph and against U.S.F. & G. Judgment was entered accordingly on the verdicts. Defendant Star appeals from that portion of the judgment in favor of plaintiffs and against Star. Cross-defendants Elson and Joseph appeal from the judgment against them and in favor of Star. Defendant U.S.F. & G. appeals from that portion of the judgment in favor of plaintiffs and against U.S.F. & G. and that portion of the judgment in favor of cross-defendants Elson and Joseph and against U.S.F. & G.

The several corporate plaintiffs constitute a rubber products manufacturing business in Lodi, California. Founded in 1936 by William L. Holz (Mr. Holz), president of the component corporations, the company was eventually moved to its present location on South Sacramento Street in Lodi. As the enterprise expanded, additional buildings were acquired and constructed so that by the time of trial Holz occupied 15 buildings on the east and west sides of Sacramento Street. Approximately half of these buildings were equipped with an automatic sprinkling system designed to minimize losses in the event of fire.

Since 1949, Mr. Holz's insurance needs had been handled by defendant Max Elson, an insurance agent and broker doing business under the name of Max Elson Insurance Company. Mr. Holz or his manager, Stanley Folsom, decided upon the type and amount of coverage desired, generally following Elson's recommendations. Elson then placed the coverage with insurance companies of his own selection.

Bill Joseph, an associate of the Elson agency, had charge of the Holz account at the time the policies in question herein were issued. Commencing in January of 1966, the agency, through Joseph, obtained two types of fire insurance coverage for the Holz operations: specific coverage on the buildings and equipment, designating the particular buildings insured, and blanket coverage on the inventory, insuring stock wherever located on the Holz premises as described in the policy. In the instant case, we are concerned only with the policies covering inventory.

The Elson agency placed one-half of the insurance on the inventory with defendant U.S.F. & G. and one-half with defendant Star. The policies were identical, each running for a period of three years, from January 1, 1966, to January 1, 1969, and providing coverage for 50 percent of any fire-induced stock losses but not exceeding $125,000. The policies described the covered locations as 1129--1201 and 1202--10 South Sacramento Street. Although the 1202--10 designation referred to the area on the east side of the street, some of the buildings located there had not been assigned street numbers.

Both the U.S.F. & G. and Star policies contained an identical 'Automatic Sprinkler Warranty' ³ which we set forth in full in the margin. ⁴

The policies were written on the basis of a sprinklered building rate, which was about one-fifth or one-sixth the unsprinklered building rate. At the time they were issued in January 1966, all but two of the buildings on the Holz premises were sprinklered; the unsprinklered buildings were designated as 1231 South Sacramento Street.

There is a conflict in the testimony as to whether the policies were intended to cover stock stored in the unsprinklered buildings. Representatives from both insurance companies testified that the policies were issued upon the assumption that all buildings in which inventory would be stored were sprinklered. Joseph testified that when he placed the insurance, he advised the companies that all buildings containing insured stock were sprinklered, and that he knew the policies were written at a sprinklered rate based upon this representation. He further testified that he had no intention of insuring the unsprinklered buildings at 1231 South Sacramento Street, as he and Mr. Holz had decided not to cover these structures. Mr. Holz and his manager Folsom, called as witnesses on plaintiffs' case in chief, initially testified that they assumed that the stock being stored in the unsprinklered buildings was covered by the policies; the former stated that he was sure that this fact was considered in determining the rates charged. On plaintiffs' case in rebuttal, however, Mr. Holz testified that the stock stored in the unsprinklered buildings in existence when the policies were written was confined to remnants and 'no value' stock which was never inventoried or included on the reporting forms sent to the insurance companies. ⁵

Approximately one year after issuance of the Star and U.S.F. & G. policies, Holz began construction of an additional warehouse structure on the east side of Sacramento Street, identified at trial as Building No. 5. ⁶ The four other structures (Buildings No. 1--4) which had been built by Holz on the east side of the street were physically connected with one another. Building No. 5 was detached because of a 20-foot utility easement of the City of Lodi on its south side. However it was connected with Buildings 1--4 by compressed air, gas, water and power lines. The entire storage area on the east side of the street was enclosed by a six-foot wire mesh fence with a barbed wire top. Spaces inside the fence not occupied by buildings were used by Holz for open storage; additional unfenced open areas on the east side were used for parking.

Following its procedure with the other four buildings, Holz planned to have Building No. 5 equipped with an automatic sprinkler system upon the structure's completion. ⁷ Mr. Holz and Wilbur Barnes, president of the California Automatic Water Sprinkler Company, testified that a building must be complete before a sprinkler system can be installed because the system is suspended from the framework of the building and because it is dangerous to install sprinklers during the course of construction.

In March 1967, when Building No. 5 was practically finished, Folsom solicited from two companies bids for installation of a sprinkler system. In July 1967 he signed an order to purchase an ordinary hazard system. However, the Pacific Fire Rating Bureau (Bureau) ⁸ whose approval was necessary to qualify the building for the lower 'sprinklered' insurance rates, refused to approve the proposed system; instead, the Bureau recommended installation of a 'calculated system.' On January 2, 1968, Holz ordered the latter system; on January 31 the Bureau approved the plans. On the morning of February 13, 1968, Building No. 5 was destroyed by fire. At that time, the sprinkler equipment was lying outside of Building No. 5 awaiting installation.

Because of its need for additional storage space, Holz had begun moving inventory into Building No. 5 before it was fully completed. According to the testimony of Mr. Holz, some of this stock came from other buildings on the premises, sprinklered as well as unsprinklered. The inventory in Building No. 5 was included in the monthly reports sent by Holz to the insurance companies.

Joseph of the Elson agency admitted having knowledge that stock was being stored in Building No. 5 while it was unsprinklered and that Holz was including in the monthly reports all stock on the premises, including that contained in Building No. 5. However, he denied ever telling Folsom or Mr. Holz that the inventory placed in the unsprinklered building would be covered under the terms of the policies. Mr. Holz and Folsom testified that, as a result of their dealings with the Elson agency over the years, it was their understanding that stock placed in a newly constructed unsprinklered building was covered under a blanket policy at sprinklered building rates, as long as Holz installed sprinklers within a reasonable time.

Neither Star nor U.S.F. & G. was ever expressly informed that stock was being stored in Building No. 5 prior to installation of sprinklers, and both companies denied any prior knowledge of this fact. Evidence was introduced from which the jury could have inferred that U.S.F. & G. either had or should have had such knowledge. ⁹

As a result of the fire which destroyed Building No. 5, Holz...