Katz Drug Co. v. Commercial Standard Ins. Co.

• Decision Date: 11 January 1983
• Docket Number: No. WD,WD
• Citation: 647 S.W.2d 831
• Parties: KATZ DRUG COMPANY and Skaggs Drug Centers, Inc., Plaintiffs-Appellants, v. COMMERCIAL STANDARD INSURANCE COMPANY, Defendant-Respondent. 32786.
• Court: Missouri Court of Appeals

Page 831

647 S.W.2d 831

KATZ DRUG COMPANY and Skaggs Drug Centers, Inc., Plaintiffs-Appellants, v. COMMERCIAL STANDARD INSURANCE COMPANY, Defendant-Respondent.

No. WD 32786.

Missouri Court of Appeals,

Western District.

Jan. 11, 1983.

Motion for Rehearing and/or Transfer to

Supreme Court Overruled and Denied

March 1, 1983.

Application to Transfer Denied

April 26, 1983.

Danny L. Curtis (argued), June Clark, Niewald, Risjord & Waldeck, Kansas City, for plaintiffs-appellants.

Thos. J. Conway (argued), Stephen J. Moore, Popham, Conway, Sweeny, Fremont & Bundschu, Kansas City, for defendant-respondent.

Before NUGENT, P.J., and TURNAGE and LOWENSTEIN, JJ.

NUGENT, Presiding Judge.

Plaintiffs appeal from the judgment of the trial court that under the insurance policy between plaintiffs and Commercial Standard Insurance Company providing coverage for "errors and omissions" in the operation of an employee benefit program, plaintiffs are not entitled to recover the amount of judgment nor the cost of defense in an earlier suit brought by the widow of a former employee. Plaintiffs challenge the findings that any liability of defendant for "errors and omissions" was negated by certain intentional acts of plaintiffs' president, that coverage was provided only for lawsuits actually filed during the policy period, and that plaintiffs are not entitled to a vexatious penalty award. We reverse on the liability issue and remand for determination of damages. We affirm the refusal to award vexatious penalties.

In 1968, defendant issued an "errors and omissions" insurance policy (No. 446-11-09-51) to Katz Drug Company for "all sums which the insured shall become legally obligated to pay on account of any claim ... caused by any negligent act, error or omission ... in the administration of the Insured's Employee Benefit Programs." The policy period was November 20, 1968, to December 31, 1971.

Katz Drug employed Delphen K. Cannon from 1925 until his retirement on October 6, 1971. In 1961, Mr. Cannon applied for and received coverage through the company's group life insurance plan, certificate No. 13775.

On January 1, 1971, Katz merged with Skaggs Drug Co., Inc. (the companies are hereafter referred to as Katz-Skaggs) and arranged to terminate certificate No. 13775. Effective July 1, 1971, it was replaced with Skaggs' group life insurance policy which ended an employee's life insurance coverage on retirement. By retiring before July 1, 1971, employees could continue their after-retirement coverage under policy 13775.

In anticipation of Mr. Cannon's retirement, his wife contacted the insurance clerk at Katz-Skaggs in April, 1971 and requested a written memorandum of the insurance benefits to accrue to Mr. Cannon upon retirement. The clerk sent a memorandum in response, showing that his coverage extended beyond retirement.

On July 8, 1971, Vincent Davies of Katz-Skaggs personnel records department assured the Cannons, "You don't have a thing to worry about.... Mr. Cannon's insurance was froze, policy 13775." Not until September 7, 1971, did Mr. Cannon learn that his policy was cancelled as of June 30, 1971. At about that time, Mr. Cannon called Mr. Ariagno, a supervisor of Katz-Skaggs, to ask why he had not been informed of the cancellation and was told, "I knew it, but I didn't have the heart to tell you."

Later that month, the Cannons met with Mr. Katz, former president of the firm, and made claim for the life insurance benefits.

On October 12, 1971, Mrs. Cannon talked with Dr. Gutki, president of Katz-Skaggs, about a letter from Equitable Life Assurance Society, the carrier of policy 13775, which apparently stated that life insurance for Mr. Cannon could be reinstated, but that written authorization from Dr. Gutki was required. Dr. Gutki refused to authorize the reinstatement. Testimony indicated that his refusal was based on the fact that doing so would require similar action for other employees.

In November, 1971 Mr. Cannon wrote directly to Equitable and made another claim for the policy benefits. Equitable simply confirmed that the policy had been cancelled.

Mr. Cannon died on February 10, 1973. His widow sued Katz-Skaggs to recover damages for breach of contract to provide group life insurance benefits.

Citing policy No. 446-11-09-51, the company tendered the defense of that suit to Commercial Standard, which refused the tender and disclaimed coverage. ¹ Katz-Skaggs defended the suit itself. The jury found that the company failed to give proper notice of the policy cancellation to Mr. Cannon in time for him to assure continuance of his coverage, and awarded judgment to Mrs. Cannon. See Cannon v. Katz Drug Co., 577 S.W.2d 82 (Mo.App.1978).

Katz-Skaggs satisfied the judgment of $37,889.79 and initiated this action in two counts. In Count I, plaintiffs asked the court to declare that defendant's policy 446-11-09-51 provided coverage for the Cannon lawsuit and to award $69,967.18 in actual damages plus vexatious penalties and attorneys' fees. Count II asked for expenses incurred in the defense of an unrelated suit against Katz-Skaggs by Granville and Fannie Blair concerning an automobile accident. In that suit, Commercial Standard refused the tender of defense, forcing Katz-Skaggs to defend the suit. Plaintiffs sought actual damages of $1,516.93 plus attorneys' fees and vexatious penalties.

As to Count I, the trial court reviewed the Cannon transcripts and heard new evidence on the issue of attorneys' fees. Its findings of fact and conclusions of law included the following: (1) the basis of recovery in Cannon v. Katz Drug, supra, was breach of contract; (2) after failure to give proper notice of cancellation, Katz-Skaggs could have had Mr. Cannon's policy reinstated, avoiding damages to him; (3) any liability for "errors and omissions" which might have arisen because of the failure to notify "was avoided" by Dr. Gutki's intentional act in refusing to authorize reinstatement; (4) alternatively, Commercial Standard received no notice of the conversations between the Cannons and employees of Katz-Skaggs during the policy period; (5) policy 446-11-09-51 required that a suit or claim must be filed against Katz-Skaggs during the policy period, and none having been filed, Commercial Standard has a complete defense; and (6) Commercial Standard's refusal to defend and indemnify Katz-Skaggs was reasonable and not vexatious.

As to Count II, Commercial Standard filed an offer of judgment under Rule 77.04 specifying that it would allow judgment to be entered for $2,298.45. The trial court entered judgment for plaintiff in that amount plus attorneys' fees of $1,500, but did not award vexatious penalties.

On appeal, Katz-Skaggs argues: (1) the policy provides coverage because it does not require that a suit or claim must be filed within the policy period or that coverage is forfeited for failure to give notice of claims made; (2) the trial court was bound by the finding in Cannon v. Katz Drug, supra, that Katz-Skaggs' employees committed an "error or omission" in failing to notify Mr. Cannon of the policy cancellation, and therefore, could not find that an intentional act relieved defendant of liability; and (3) defendant's refusal to defend the Cannon and the Blair lawsuits entitles Katz-Skaggs to a vexatious penalty award for each case.

Plaintiffs first challenge the trial court's ruling that plaintiffs were not covered by the policy because "446-11-09-51 requires that a suit or claim must be filed during the policy period and the fact that no suit or claim was filed against [Katz-Skaggs] during the policy period ... constitutes a complete defense ..." ² and because defendant received no notice from plaintiffs of any conversations with the Cannons until after the policy period. We agree with plaintiffs that neither of these points precludes coverage.

Paragraph thirteen of the policy's general conditions provides:

13. Notice of claim or suit. If claim is made or a suit is brought against the Insured, the Insured shall immediately forward to the company every demand, notice, summons or other process received by him or his representative.

In addition, the endorsement provides:

IV. ENDORSEMENT PERIOD, TERRITORY. This endorsement applies only to claims under the local jurisdiction of a court of law within the United States of America, its territories or possessions or Canada, ... provided such a claim is brought against the Named Insured during the policy period and the Named Insured at the effective date of this endorsement had no knowledge of or could not have reasonably foreseen any circumstances which might result in a claim or suit.

Without question, no lawsuit was filed before December 31, 1971, the end of the policy period. The parties disagree only as to whether the policy equates a claim with a suit, requiring that absent a filing of a lawsuit, no claim has been filed. We hold that in this context, a claim and a suit are not equal.

First, both paragraph thirteen and the endorsement distinguish between a claim and a suit by using both terms. If the terms were equivalent, the wording would be redundant.

Second, unless the reasonable expectations of the policyholder are to the contrary, unambiguous language in an insurance policy must be afforded its plain meaning. If language is open to different constructions, the interpretation most favorable to the insured must be used. McNeal v. Manchester Ins. & Indemn. Co., 540 S.W.2d 113, 120 (Mo.App.1976). Here the term "claim" can be considered either a demand for some asserted right (as argued by plaintiffs) or an actual lawsuit (as argued by defendant). Assuming arguendo that either of these interpretations is reasonable, we apply the meaning most favorable to Katz-Skaggs as the insured, and determine that "claim" as used in policy 446-11-09-51 must include any demand made upon Katz-Skaggs as a result of the company's negligent acts, errors or omissions in the...