McMahon Bros. Realty Co. v. United States Fidelity & Guar. Co.

• Decision Date: 28 May 1963
• Docket Number: Civ. A. No. 2162.
• Parties: McMAHON BROTHERS REALTY COMPANY, a corporation of the State of Delaware, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY, a corporation of the State of Maryland, Defendant.
• Court: U.S. District Court — District of Delaware

217 F. Supp. 567

McMAHON BROTHERS REALTY COMPANY, a corporation of the State of Delaware, Plaintiff, v. UNITED STATES FIDELITY & GUARANTY COMPANY, a corporation of the State of Maryland, Defendant.

Civ. A. No. 2162.

United States District Court D. Delaware.

May 28, 1963.

Richard L. McMahon, Wilmington, Del., for plaintiff.

William Prickett, Sr. (Prickett, Prickett & Tybout), Wilmington, Del., for defendant.

STEEL, District Judge.

Plaintiff, the insured under a fire insurance policy, alleging that the insured buildings were totally destroyed by fire, sued the defendant insurer for $30,000, the face amount of the policy, which was 80% of the "agreed upon" value of $37,500 ascribed to the insured buildings. The case is at issue. One of the defenses alleged is misrepresentation of the value of the property by plaintiff, who, as agent for the defendant, procured the issuance of the policy by it.

Three matters are for decision: (1) the motion of plaintiff to strike the defense of misrepresentation; (2) the objection of plaintiff to a demand by defendant to admit facts supporting the misrepresentation defense; and (3) the motion of plaintiff for summary judgment. Basic to each is the claim of plaintiff that the misrepresentation defense is inadequate in point of law because of the Delaware "agreed upon value" statute, 18 Del.C. § 1102, and the "agreed upon value" endorsement of the policy thereunder. Jurisdiction rests upon diversity of citizenship. The insurance contract was made in Delaware, and covers Delaware realty. Whether the statute and policy legend bars the misrepresentation defense depends upon Delaware law. Section 1102 reads:

"(a) Whenever any policy of insurance shall be issued to insure any real property in this State against loss by fire, tornado, or lightning, and the property insured shall be wholly destroyed without criminal fault on the part of the insured, or his assigns, the amount of the insurance stated in such policy (except policies with blanket coverage provided for in section 1103 of this title) shall be taken conclusively to be the true value of the property insured and the true amount of loss and measure of damages, subject to the proviso in subsection (b) of this section.

"(b) Every such policy, whether hereafter issued or renewed, shall have endorsed across the face of it the following: `It is agreed between insurer and insured that the value of the real property insured is the sum of '.

"(c) The amount of the agreed value stated in the endorsement shall be binding on both parties as to value; * * *."

The policy bore the following endorsement:

"AS TO BUILDERS ONLY — It is agreed between the insurer and the insured that the value of the insured property is of the sum $37,500.00."

Although the pleadings are not verified, there are of record affidavits, admissions, answers to interrogatories and a deposition which set forth numerous pertinent facts. These must be considered in the light most favorable to defendant in ruling upon plaintiff's motion for summary judgment. So considered, they are sufficient to support the following findings: On November 1, 1958, the issuance date of the policy, the buildings insured were virtually worthless. This fact was known to plaintiff. At the time, and for some years prior thereto, the plaintiff had been acting as agent for the defendant and had insured numerous properties with it. As defendant's agent, plaintiff had authority to establish or to accept agreed upon valuations for properties and to write fire and extended coverage containing agreed upon value endorsements. The plaintiff furnished the defendant with the data upon the basis of which the policy was written, including the agreed upon valuation for the buildings and the policy limitation. In issuing the policy the defendant relied upon plaintiff's representation as to the value of the buildings. If these facts are true — and at this juncture they must be assumed to be — plaintiff obtained the policy by fraud.¹

Whether fraud, in the context of the instant case, can be asserted in defense of a claim upon a policy containing an agreed upon valuation under the Valued Policy statute of Delaware, where the fire loss was complete, as plaintiff alleges, is the question for decision.²

In the usual case fire insurance is written directly by the insurer or its agent who has no interest in the insured property. In that situation, when the insurer has failed to make an examination of the property which would have revealed its true value, the insured can recover the agreed upon value upon the occurrence of a complete loss despite the fact that the insured obtained the policy by misrepresenting the value of the property. U. S. Fire Ins. Co. of City of New York v. Sullivan, 25 F.2d 40 (8th Cir. 1928); cert. den. 278 U.S. 608, 49 S.Ct. 12, 73 L.Ed. 534 (1928). The same rule has been applied under Valued Policy statutes which obligate the insurer to pay the value fixed in the policy only "in the absence * * * of intentional fraud" by the insured. Queen Ins. Co. v. Leslie, 47 Ohio St. 409, 24 N.E. 1072, 9 L.R.A. 45 (1890); Nathan v. St. Paul Mut. Ins. Co., 243 Minn. 430, 68 N.W.2d 385 (1955). The Ohio and the Minnesota statutes considered in the Leslie and Nathan cases expressly required the insurer to examine the property before fixing its value. Although the Nebraska statute, like the Delaware statute, contained no express provision for inspection, it was nevertheless held in Sullivan that a duty to inspect was implicit in the statute.

Each of these decisions is based upon the view that the insurer could have protected itself against deception by performing its statutory duty to inspect the premises, and since it failed to do this, any excessive valuation resulting from misrepresentations by the insured is immaterial. These cases are understandable. Any other rule would permit insurance companies to over-value property, to collect premiums based on the excessive valuation, and to contest the values, and hence their liability, whenever losses occur. To prevent over insurance was the primary purpose of the Delaware statute. American Ins. Co. v. Iaconi, 8 Terry 167, 89 A.2d 141, 145-146, 36 A.L.R.2d 604 (Del.1952). See also, as to purpose of Nebraska statute, U. S. Fire Ins. Co. v. Sullivan, supra, 25 F.2d p. 41.

It may be assumed that the Delaware statute, like the Nebraska statute, implicitly imposes a duty upon an insurer to examine property before issuing a policy containing an agreed upon value clause. But here, plaintiff, the agent of defendant, was sufficiently familiar with the property to fairly appraise it. The problem arises because the agent, acting in his own interest, knowingly over-valued the property. Whether in these circumstances, a valued policy statute authorizes an insured to recover the value fixed in the policy, has not been discussed in any case cited by the parties or discovered by independent research.

It can be argued that the defendant, knowing of the interest of its agent, could have avoided its present plight by designating an independent agent to inspect the property. Of course this is so. But whether defendant was under a duty to do this is a different matter. A conclusion...