Omni Development Corp. v. Atlas Assur. Co. of America

• Decision Date: 02 April 1998
• Docket Number: No. 97CA0179,97CA0179
• Citation: 956 P.2d 665
• Parties: 98 CJ C.A.R. 1533 OMNI DEVELOPMENT CORPORATION and Dennis Witte, Plaintiffs, v. ATLAS ASSURANCE COMPANY OF AMERICA, a foreign corporation, Defendant-Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, a foreign corporation, Intervenor-Appellee. . I
• Court: Colorado Court of Appeals

Page 665

956 P.2d 665

98 CJ C.A.R. 1533

OMNI DEVELOPMENT CORPORATION and Dennis Witte, Plaintiffs, v. ATLAS ASSURANCE COMPANY OF AMERICA, a foreign corporation, Defendant-Appellant, v. INSURANCE COMPANY OF NORTH AMERICA, a foreign corporation,

Intervenor-Appellee.

No. 97CA0179.

Colorado Court of Appeals,

Div. I.

April 2, 1998.

Rehearing Denied April 30, 1998.

Certiorari Denied Oct. 26, 1998.

No Appearance for Plaintiffs.

Wood, Ris & Hames, P.C., F. Michael Ludwig, Dennis A. Hanson, Denver, for Defendant-Appellant.

Montgomery, Kolodny, Amatuzio, Dusbabek & Parker, LLP, Kevin F. Amatuzio, Joel A. Kolodny, Denver, for Intervenor-Appellee.

Opinion by Judge DAVIDSON.

In this declaratory judgment action, defendant, Atlas Assurance Company of America, appeals from the summary judgment entered against it in favor of Insurance Company of North America (INA) as the intervenor seeking reimbursement for insurance proceeds paid by INA to plaintiffs, Omni Development Corporation (Omni) and Dennis Witte. We affirm.

In 1982, Hampden Center Limited (HCL) acquired, among other properties, a five-story office building subject to a senior mortgage held by Teachers' Insurance and Annuity Association (TIAA). INA provided insurance for TIAA's interest in the building.

In October 1986, HCL filed a petition for bankruptcy and reorganization under Chapter 11 of the United States Bankruptcy Code. On September 11, 1989, the bankruptcy court approved HCL's second amended plan of reorganization. Among other things, the plan called for HCL to abandon the office building and provided for an adversary proceeding to determine the disputed interest in a parking lot adjacent to the building. TIAA also was given the option at the time of abandonment to accept a deed in lieu of foreclosure. Between the time the plan was confirmed and March 1992, when the interests in the adjoining parking lot were settled and an amendment to the reorganization plan was approved, TIAA did not accept a deed in lieu of foreclosure and took no action to foreclose or otherwise obtain possession of the building.

After confirmation of the bankruptcy plan, HCL quitclaimed its interest in the building to the holders of a leasehold interest in the ground under the building. They in turn quitclaimed this interest to Omni and Witte.

On December 21, 1990, water pipes froze and burst in the building causing extensive damage.

TIAA sold its note secured by the mortgage in the building to plaintiffs on April 1, 1992. Thereafter, on June 29, 1993, TIAA assigned to plaintiffs its interest in any insurance proceeds up to $500,000 that might be recovered from the claim on the office building.

Plaintiffs inquired about coverage by defendant which informed them that its policy had terminated prior to the occurrence and had been replaced by another company.

Shortly thereafter, plaintiffs submitted a claim to INA. After investigating the loss, INA paid plaintiffs $495,000 to settle the claim. Plaintiffs also signed a subrogation agreement giving INA the right to pursue recovery for "damages for any claim for damages arising as a result of the incident."

Plaintiffs then filed suit seeking to determine liability for the insurance claim. INA was permitted to intervene in the action. The trial court determined that the policy issued by defendant was in effect at the time the claim arose, that TIAA had an insurable interest in the building, and that its assignees were entitled to the insurance proceeds. The court then directed defendant, as the primary insurer, to reimburse INA for the amount it paid plaintiffs in satisfaction of the claim.

I.

Defendant first contends that the trial court erred in determining that its notice of cancellation or non-renewal operated to extend coverage under its insurance policy. We disagree.

Summary judgment is a drastic remedy, to be granted only upon a showing that no genuine issue of material fact exists. The non-moving party is entitled to the benefit of all favorable inferences that may be drawn from the undisputed facts. All doubts must be resolved against the moving party. Peterson v. Halsted, 829 P.2d 373 (Colo.1992).

Unambiguous provisions of an insurance policy must be given their plain meaning. American Family Mutual Insurance Co. v. Johnson, 816 P.2d 952 (Colo.1991). The cancellation provisions of an insurance policy require strict compliance by an insurer. State Compensation Insurance Fund v. Building Systems, Inc., 713 P.2d 940 (Colo.App.1985).

The insurer has the burden of establishing that an insurance policy has lapsed. Butkovich v. Industrial Commission, 690 P.2d 257 (Colo.App.1984).

The pertinent provision of the policy provides that:

If the Company elects not to renew this policy, the Company will mail to the named insured at the address shown in this policy, written notice of the nonrenewal not less than 90 days before the effective date.

Here, the property was insured under a policy issued by defendant with a stated term effective from December 1, 1989, to December 1, 1990. The policy contained an endorsement which required written notification to the named insured 90 days prior to cancellation or nonrenewal. Although defendant determined that it would not renew the policy, it failed to notify HCL until October 30, 1990, 31 days before termination. The notice sent by defendant, therefore, stated that:

You are hereby notified in accordance with the terms and conditions of the above mentioned policy, and in accordance with law, that the above mentioned policy will expire effective at and from the hour and date mentioned above and the policy will NOT be renewed.

The notice also stated that "cancellation or termination will take effect at: February 1, 1991[at] 12:01 a.m. (standard time)."

In addition, the notice provided for billing the insured in the event of cancellation or termination for the premium earned to the time of cancellation and contained a space for entering the amount of the premium either owed to or by the insured at the time of cancellation.

Defendant asserts, nevertheless, that this notice merely served as an option to renew the policy through February 1, 1991, that HCL chose not to renew the policy for that term, and that the policy, by its own terms, expired on December 1, 1990.

However, the plain language of the insurance contract required 90 days notice to the named insured prior to termination of a policy. Accordingly, under the circumstances, cancellation was effective February 1, 1991. Therefore, the policy was in effect at the time the damage to the building occurred. See Campbell v. Home Insurance Co., 628 P.2d 96 (Colo.1981) (notice of cancellation not void by inclusion of an effective date earlier than the time required under the policy but coverage extended to include required notice period); Rotenberg v. American Standard Insurance Co., 865 P.2d 905 (Colo.App.1993) (proper notice required under statute for cancellation or nonrenewal of insurance policy).

II.

Alternatively, defendant argues, even if the policy otherwise was extended to February 1, 1991, it was no longer in effect on the date of the loss because it had been canceled by the actions of the named insured when it purchased replacement insurance effective December 1, 1990. We do not agree.

The historical view of the doctrine of cancellation by substitution was that an insured unilaterally could cancel an insurance policy merely by purchasing a substitute policy. See National Union Indemnity Co. v. Standard Accident Co., 179 Ark. 1097, 20 S.W.2d 125 (1929). However, the doctrine of cancellation by substitution is now generally disfavored. See Glens Falls Insurance Co. v. Founders' Insurance Co., 209 Cal.App.2d 157, 25 Cal.Rptr. 753 (1962); Copley v. Pekin Insurance Co., 111 Ill.2d 76, 94 Ill.Dec. 757, 488 N.E.2d 1004 (1986); Franklin v. Carpenter, 309 Minn. 419, 244 N.W.2d 492 (1976); MFA Mutual Insurance Co. v. Southwest Baptist College, Inc., 381 S.W.2d 797 (Mo.1964); Tyner v. Cherokee Insurance Co., 262 S.C. 462, 205 S.E.2d 380 (1974); Milbank Mutual Insurance Co. v. State Farm Fire & Casualty Co., 294 N.W.2d 426 (S.D.1980).

Generally accepted principles of contract law guide this determination. Cancellation by substitution is inconsistent with the principle that the termination of a contract occurs only by agreement of the parties. Milbank Mutual Insurance Co. v. State Farm Fire & Casualty Co., supra.

We agree with the modern view of cancellation by substitution and, thus, conclude that an insurance policy may be canceled only by compliance with the terms of the policy, by operation of law, or by mutual agreement of the parties to the contract. Accordingly, at a minimum, notice from the named insured communicated to the insurer that the insured is canceling the policy and obtaining replacement coverage is required to terminate the existing policy.

Here, HCL purchased a new insurance policy after it received notice from defendant that the old policy would terminate on February 1, 1991. The mere fact that the policies overlapped does not cancel the first policy by substitution. HCL did not notify defendant that it was canceling its existing policy of insurance or give notice that it intended for the new policy to substitute for the old. Thus, the trial court properly determined that the insurance policy issued by defendant was in effect at the time of the incident.

III.

Defendant also contends that the trial court erred in finding that TIAA, as the mortgagee, had an insurable interest in the damaged property for which plaintiffs, as successors in interest, and INA, as the subrogee, could assert a claim. Defendant argues that, once HCL abandoned the building under the plan of reorganization confirmed by the bankruptcy court, TIAA was no longer a mortgagee but an owner and, as a result, no longer had an interest in the building to insure. We reject this contention.

A.

An insured seeking to enforce a claim under an...