Imperial Enterprises, Inc. v. Fireman's Fund Ins. Co.

• Decision Date: 14 July 1976
• Docket Number: No. 74-3830,74-3830
• Parties: IMPERIAL ENTERPRISES, INC., d/b/a Imperial Carpet Mills, Inc., Plaintiff-Appellant-Cross Appellee, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellee-Cross Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 287

535 F.2d 287

IMPERIAL ENTERPRISES, INC., d/b/a Imperial Carpet Mills Inc., Plaintiff-Appellant-Cross Appellee, v. FIREMAN'S FUND INSURANCE COMPANY, Defendant-Appellee-Cross Appellant.

No. 74-3830.

United States Court of Appeals Fifth Circuit.

July 14, 1976.

William H. Horton, Chattanooga, Tenn., Dudley B. Magruder, Jr., Rome, Ga., Charles J. Gearhiser, Chattanooga, Tenn., for Imperial Enterprises, Inc.

Oscar M. Smith, Rome, Ga., for Fireman's Fund.

Appeals from the United States District Court for the Northern District of Georgia.

Before GEWIN and AINSWORTH, Circuit Judges, and MARKEY ^*, Chief Judge.

GEWIN, Circuit Judge:

Appellant, "Imperial Enterprises, Inc. d/b/a Imperial Carpet Mills, Inc.," instituted this diversity action in the Northern District of Georgia to recover on a fire insurance manufacturer's output policy issued by appellee Fireman's Fund Insurance Company (Fireman's Fund). The district court rejected appellant's claim for reform of the policy and denied its motion for summary judgment, but granted Fireman's Fund's motion for summary judgment. It held that the statutory merger of Imperial Enterprises, Inc. (Imperial Enterprises) and Imperial Carpet Mills, Inc. (Carpet Mills), whereby Carpet Mills' property, including the fire insurance policy in question, was transferred to Imperial Enterprises, was an invalid assignment of the policy that resulted in forfeiture of coverage. ¹ Appellant challenges this ruling. Fireman's Fund cross-appeals from the district court's denial of its motion to amend its answer to add a counterclaim. With respect to the appeal by Imperial Enterprises, we reverse and remand; with respect to the cross-appeal, we affirm.

Carpet Mills is a carpet manufacturing firm that was incorporated in Georgia in 1959. Imperial Enterprises was incorporated in Georgia in 1965. Its sole assets consisted of Carpet Mills' stock and a note from that corporation.

In 1969 Fireman's Fund issued Policy No. MXP 156 07 45 (hereinafter building policy), which named Carpet Mills and/or Paul Kamens ² as the insured parties. This fire insurance policy covered the Carpet Mills plant and also provided coverage for business interruption losses. A second fire insurance policy, No. OP 10 19 (hereinafter output policy), was issued by Fireman's Fund to Carpet Mills, the only named insured, in 1970. This policy covered personal property, including the inventory-output still owned by Carpet Mills, in the Carpet Mills plant.

Carpet Mills and Imperial Enterprises were merged in November, 1971 pursuant to the Georgia statutory merger scheme. Imperial Enterprises was the surviving corporation, but business continued as before under the Carpet Mills trade name. The premiums for both fire insurance policies, for instance, were paid with Carpet Mills' checks. Upon consummation of the merger, Carpet Mills' assets, including the fire insurance policies, were transferred to Imperial Enterprises by operation of law. ³ Articles of merger were properly filed in various state and local offices and the merger was reported in a newspaper. Carpet Mills did not, however, take any action to assign the policies to Imperial Enterprises. Fireman's Fund was not notified concerning the transfer of the policies and did not, of course, consent to it.

In May of 1972 an extremely costly fire occurred at the Cartersville, Georgia plant of Imperial Enterprises. The plant and its contents were substantially damaged. Shortly after the fire Imperial Enterprises furnished Fireman's Fund with a copy of its fiscal 1972 financial statements, which were in its name and contained a footnote concerning the merger. Checks signed by Carpet Mills continued to be accepted by Fireman's Fund for premiums on the output policy, until its cancellation some seven or eight months after the fire.

Relying on a proof of loss statement by a party purporting to sign for Carpet Mills, Fireman's Fund paid over $34,000 on the building policy in August, 1972. Fireman's Fund denied liability under the output policy, however, stating that Carpet Mills had undervalued its inventory, thereby reducing its premiums on this policy. It asserted the alleged wrongful assignment without its consent as a basis for denying liability in its answer to the complaint below. This was the first mention of this reason for avoiding the policy coverage. ⁴

Since this is a diversity case, the district court quite correctly held that it was bound to follow Georgia substantive law. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The parties have conceded, however, that there is no Georgia law on the narrow issue presented in this case: whether a no-assignment clause in a fire insurance policy is violated by a transfer, without consent, resulting from the statutory merger of two companies, unaccompanied by any demonstrated increase in risk or hazard. This hiatus in Georgia law does not frustrate our adherence to Erie ; in such circumstances we are obliged to resolve the issue as the Georgia state courts would. To make an intelligent vicarious determination of this question, we look to all relevant sources to which the Georgia courts would look. Tompkins v. City of El Paso, 449 F.2d 842 (5th Cir. 1971). We turn first to the general principles of Georgia insurance law.

An insurance contract, like every other contract, is governed by its terms and conditions, and general rules concerning the construction of contracts apply, Ga. Code Ann. § 56-2419 (1971); Parris & Son v. Campbell,128 Ga.App. 165, 196 S.E.2d 334 (1973). Accordingly, unambiguous terms and conditions must be enforced as written, thereby, presumably, fulfilling the mutual intent the parties had in entering into the agreement. See Moore v. Allstate Insurance Co., 108 Ga.App. 60, 131 S.E.2d 834 (1963).

Extant statutory provisions are, in effect, "read into" all insurance contracts to which they apply, and they form integral parts thereof. Thames v. Piedmont Life Insurance Co., 128 Ga.App. 630, 197 S.E.2d 412 (1973). Anti-assignment provisions are explicitly permitted under Georgia law. See Ga. Code Ann. § 56-2423 (1971). Thus, where an insured conveyed his insured automobile without obtaining the insurer's consent, in violation of both a statute and the policy, coverage was forfeited. Curtis v. Girard Marine Insurance Co., 190 Ga. 854, 11 S.E.2d 3 (1940).

When, however, the policy and a statute conflict, the latter prevails. American Casualty Co. v. Southern Stages, 70 Ga.App. 22, 27 S.E.2d 227 (1943). Furthermore, the insurer carries the burden of employing language in its policy that is clear and precise as to prohibitions. Travelers Insurance Co. v. Mixon, 118 Ga.App. 31, 162 S.E.2d 830 (1968). Since insurance policies are contracts of adhesion penned by the insurer, when ambiguity is present, construction of the policy is in favor of the insured, although it must not be unreasonable or strained. Mutual Life Insurance Co. v. Bishop, 132 Ga.App. 816, 209 S.E.2d 223 (1974); Mattox v. New England Mutual Life Insurance Co., 25 Ga.App. 311, 103 S.E. 180 (1920). Thus, if two or more reasonable interpretations are possible, the reading most favorable to the insured is adopted. Burke v. Life Insurance Co., 104 Ga.App. 865, 123 S.E.2d 426 (1961). A crucial principle is that insurance policies are construed so as to avoid forfeitures, Jones v. North Carolina Mutual Insurance Co., 122 Ga.App. 383, 177 S.E.2d 199 (1970); Cotton States Mutual Insurance Co. v. Torrance, 110 Ga.App. 4, 137 S.E.2d 551 (1964), aff'd, 220 Ga. 639, 140 S.E.2d 840 (1965), and to provide coverage, Ranger Insurance Co. v. Culberson, 454 F.2d 857 (5th Cir. 1971), cert. denied, 407 U.S. 916, 92 S.Ct. 2440, 32 L.Ed.2d 694 (1972) (applying Georgia law). We turn now to an application of these general principles of Georgia law to this case.

In its output policy Fireman's Fund proscribed assignment in the following language (P 23), "Assignment of interest under this policy shall not bind the Company until its consent is endorsed thereon." However the relevant provision of the Georgia statutory corporate merger scheme provides:

(A)ll property, real, personal and mixed . . . and all other choses in action and all and every other interest of or belonging to or due to each of the corporations so merged or consolidated, shall be taken and deemed to be transferred to and vested in such (the surviving) corporation without further act or deed . . . ⁵

We find it unnecessary to decide whether this statutory provision effectively overrides the policy's anti-assignment clause; instead, we have concluded that the clause's application is at least ambiguous in the circumstances of this case, in light of the developing Georgia law in this area. ⁶

In other situations involving involuntary transfers of policies, and transfers occurring by operation of law, the Georgia courts have consistently held that anti-assignment clauses do not operate to defeat coverage. For example, in Peoples & Planters' Mutual Fire Ass'n v. Wyatt, 31 Ga.App. 684, 121 S.E. 708 (1924), the Georgia Court of Appeals held that the passing of title to property, including the insurance policy, from the wife to the husband that occurred because of the former's death did not void the policy, despite the presence of a no-transfer clause much broader than the clause in Fireman's Fund's output policy.

In the case of Universal Life Insurance Co. v. Finance Corp., 118 Ga.App. 160, 161, 162 S.E.2d 813, 814-15 (1968), the Georgia court refused to enforce a no-assignment provision in a life insurance policy on a debtor's life that had been issued in part for the creditor's benefit. The initial creditor had assigned the note to another creditor, which was the party claiming under the policy. The court concluded that Georgia statutory provisions that were enacted for the benefit of creditors effectively overrode the policy's no-assignment clause. ⁷

The rationale of...