Northwestern States Portland Cem. Co. v. Hartford FI Co.

• Decision Date: 13 May 1966
• Docket Number: No. 18185.,18185.
• Citation: 360 F.2d 531
• Parties: NORTHWESTERN STATES PORTLAND CEMENT COMPANY, Appellant, v. HARTFORD FIRE INSURANCE COMPANY, the American Insurance Company, the Home Insurance Company, Insurance Company of North America, Royal Insurance Company, Limited, New Hampshire Insurance Company, Springfield Fire and Marine Insurance Company, a/k/a Springfield Insurance Company and American Central Insurance Company, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

360 F.2d 531 (1966)

NORTHWESTERN STATES PORTLAND CEMENT COMPANY, Appellant, v. HARTFORD FIRE INSURANCE COMPANY, the American Insurance Company, the Home Insurance Company, Insurance Company of North America, Royal Insurance Company, Limited, New Hampshire Insurance Company, Springfield Fire and Marine Insurance Company, a/k/a Springfield Insurance Company and American Central Insurance Company, Appellees.

No. 18185.

United States Court of Appeals Eighth Circuit.

May 13, 1966.

Robert H. Shepard, of Shepard & Shepard, Mason City, Iowa, and Peter Dorsey, of Dorsey, Owen, Marquart, Windhorst & West, Minneapolis, Minn., for appellant.

John P. Gorman, of Clausen, Hirsh, Miller & Gorman, Chicago, Ill., made argument for appellees and filed brief with Jacob T. Pincus, Chicago, Ill., and Don W. Burington, of Westfall, Laird & Burington, Mason City, Iowa.

Before MATTHES and GIBSON, Circuit Judges and HUNTER, District Judge.

ELMO B. HUNTER, District Judge.

Presented on this appeal is the question of the proper interpretation of those portions of certain fire insurance policies concerning loss from business interruption, and the question of when interest on the sum owed should commence.

Northwestern States Portland Cement Company, as plaintiff, brought suit against eight insurance companies under eight identical business interruption policies issued by the respective defendants, for loss resulting from a hostile fire at its cement manufacturing plant.¹ As a direct result of the fire a part of plaintiff's manufacturing facilities were closed down for a thirty-three day period. Plaintiff sued to recover the value of its lost production less noncontinuing expenses. The insurance companies admitted liability but resisted plaintiff's suit, claiming their liability is limited to such expense, in excess of normal, as plaintiff would have incurred in replacing finished stock used by it in reducing its loss as a result of the partial shutdown. The judgment of the trial court, including the award of interest from the date of the filing of the complaint, was in accord with the insurance companies' theory of the case. This appeal followed.

Some examination of plaintiff's business operation is necessary to an understanding of the parties' contentions and the trial court's judgment. There are three basic steps in the manufacture of cement; namely, (1) quarrying, crushing and blending limestone with clay; (2) heating the blended mixture of powdered limestone and powdered clay in a rotary kiln where a chemical reaction occurs resulting in a product known as clinker (clinker is a commodity which was not bought or sold and has no ascertainable market price); and (3) grinding clinker to the required degree of fineness and inserting additives, principally gypsum, to complete the manufacturing process.

Plaintiff operates two adjacent cement manufacturing plants in Mason City, Iowa. On July 12, 1962, in Plant No. 2 a hostile fire commenced in and destroyed the induction draft fan located there, rendering the four hundred foot long kiln of Plant No. 2 inoperable until noon of August 14, 1962.

Prior to the fire the kilns in both Plant No. 1 and Plant No. 2 ordinarily were operated continuously twenty-four hours per day for seven days each week. By reason of the thirty-three day partial shutdown of Plant No. 2 caused by the loss of operation of its kiln, plaintiff suffered an actual loss of production of 115,242 barrels of clinker, which, when properly ground and combined with the proper amounts of gypsum, would have produced at that plant 120,044 barrels of cement, the finished product. In the Court below plaintiff unsuccessfully contended the policies' words "actual loss sustained" by it was the value of this lost production less nonincurred expenses. There being no readily ascertainable market price for clinker, plaintiff contends the proper measure of damages is the net sales price of finished cement ($3.71) multiplied by the production lost during the interruption period, converted to barrels of finished cement ($3.71 × 120,044) reduced by costs of raw materials, fuel, power, finish, grinding, cooling and storage and portions of repairs and depreciation at Plant No. 2 which did not continue during the shutdown period and by total costs of that portion of Plant No. 2 that fully operated during the shutdown period. The parties agree that under plaintiff's theory of the case, and after applying reductions required by co-insurance clauses, this loss amounted to $118,029.83.

However, plaintiff did not sustain any loss of sales as a result of the kiln in Plant No. 2 being inoperable for the thirty-three days because at the time of the fire plaintiff had on hand a large inventory of finished cement, and also substantial amount of stockpiled clinker which it continued to use in the grind department of Plant No. 2, which department was thereby enabled to operate during the shutdown period. Specifically, defendants contend the proper measure of damages is the expense in excess of normal that plaintiff would (and did) incur in replacing any finished stock used by it to reduce the loss. It is agreed that such excess cost incurred in replacing the 120,044 barrels of cement at the older and less efficient Plant No. 1 after the interruption period was terminated was $32,123.33.²

The parties also agree that plaintiff should be reimbursed for expediting expense the sum of $2,874.67 in addition to whatever other sum plaintiff is entitled to receive.

In concurring with defendants' theory of the case that the actual loss incurred by plaintiff within the meaning of the policies was the excess cost required to manufacture cement at the less efficient facilities ($32,123.33) the trial court allowed that sum plus the expediting expense ($2,874.67) for a total judgment of $34,998.00 with interest from December 21, 1962, the date of the filing of the petition.

On this appeal plaintiff's principal contention is that the trial court erred in failing to find that its loss under the insurance policies consisted of the value of the clinker (reduced by noncontinuing production expenses) which would have been produced in the kiln at Plant No. 2 had the kiln not been shut down for thirty-three days by a hostile fire. In contending that its "actual loss sustained" is the value of lost production less noncontinuing expenses plaintiff reasons that its business is the production and the sale of cement; that as a result of the fire it lost production, not sales, and that under the language of the policy both production and sales are insured. Plaintiff suggests that in any event the policy provisions "actual loss sustained" are not defined and have not been defined since a policy revision in 1945; are ambiguous; and therefore the insured's interpretation must prevail. Thus, plaintiff urges that it be compensated for the value of lost clinker production less noncontinuing costs.

However, we are persuaded that the district court did not err in finding that the purpose and intent of the policy provisions are to insure against loss of earnings, and that if there is no loss of earnings, liability is limited to the extra expense necessary to prevent loss of earnings.

The governing portions of the eight insurance policies include what is known as Business Interruption Form No. 4. The provisions of this form are the focal point of the present controversy and we proceed to discuss them.

Paragraph 1 makes it clear that the policies are not fire insurance policies that provide for the reimbursement for specific property destroyed by fire.³ Rather, it states "This policy covers only against loss resulting directly from necessary interruption of business, caused by damage to or destruction of real or personal property, except finished stock." It is readily apparent, as we will endeavor to explain, that the loss mentioned is actual loss of earnings resulting from the interruption of the insured's business caused by the perils insured against. That this is so is consistent with the basic object for which such a business is ordinarily conducted, viz., to realize earnings from the operation of the business. In numerous cases and text authorities it has been stated, and we think correctly, that the essential nature and purpose of business interruption insurance generally is to protect the earnings which the insured would have enjoyed had there been no interruption of the business. Rogers v. American Insurance Company et al., 338 F.2d 240 (8th Cir., 1964); Fidelity-Phenix Fire Insurance Co. of New York v. Benedict Coal Corp., 64 F.2d 347, 352 (4th Cir., 1933); National Union Fire Ins. Co. of Pittsburgh v. Anderson-Prichard Oil Corp., 141 F.2d 443, 445 (10th Cir., 1944); Quality Molding Company v. American National Fire Insurance Company, 272 F.2d 779 (7th Cir., 1959); 44 C.J.S. Insurance § 48; Annotation, 83 A.L.R.2d 885. Appleman, Insurance Law and Practice, Vol. 5, Sec. 3120.

According to Paragraph 2 it is the actual loss sustained resulting directly from the interruption of business not...