Phil Schroeder, Inc. v. Royal Globe Ins. Co.

• Decision Date: 24 February 1983
• Docket Number: No. 48699-9,48699-9
• Parties: PHIL SCHROEDER, INC., Respondent, v. ROYAL GLOBE INSURANCE COMPANY, Appellant.
• Court: Washington Supreme Court

Page 65

99 Wn.2d 65

659 P.2d 509

PHIL SCHROEDER, INC., Respondent, v. ROYAL GLOBE INSURANCE COMPANY, Appellant.

No. 48699-9.

Supreme Court of Washington En Banc.

Feb. 24, 1983.

Johnson, Metzler, Gierke & Curwen, Bradford M. Gierke, Sandra B. Bobrick, Tacoma, for appellant.

Rush, Kleinwachter & Hannula, Ross E. Taylor, Rush, Kleinwachter, Hannula, Daniel L. Hannula, Tacoma, for respondent.

DORE, Justice.

Royal Globe Insurance Company (Royal Globe), defendant below, appealed the trial court's judgment for the replacement cost of a carpet in the amount of $8,337.90 plus interest of $1,127.37 plus a judgment for attorney fees under the provisions of Washington's Consumer Protection Act, RCW 19.86. We affirm the trial court, holding that an insurance policy issued to a carpet cleaning company, which contains an exclusion for damage to property "in the care, custody or control of the insured", covers the cost of replacement of wall-to-wall carpeting damaged as a result of the malfunctioning of a cleaning machine being operated by an employee of the insured.

I

An employee of the insured Phil Schroeder, Inc., (Schroeder) a carpet cleaning business, was cleaning the carpeting at a bank on December 31, 1977. During the cleaning process, a diaphragm on the cleaning machine broke, causing oil to mix with the steam and spray onto the carpet. The carpet was badly damaged and had to be replaced, at a cost of $8,337.90. This cost was paid by the insured who then presented a claim to its insurer, the Royal Globe Insurance Company.

Coverage under the insured's policy was limited by a clause excluding coverage for property damage to "property in the care, custody or control of the insured or to which the insured for any purpose is exercising physical control". Exclusion (k)(3). The policy also set forth the following definition of "insured":

Each of the following is an insured under this insurance to the extent set forth below:

(a) if the named insured is designated in the declarations as an individual, the person so designated but only with respect to the conduct of a business of which he is the sole proprietor, and the spouse of the named insured with respect to the conduct of such a business;

(b) if the named insured is designated in the declarations as a partnership or joint venture, the partnership or joint venture so designated and any partner or member thereof but only with respect to his liability as such;

(c) if the named insured is designated in the declarations as other than an individual, partnership or joint venture, the organization so designated and any executive officer, director or stockholder thereof while acting within the scope of his duties as such;

(d) any person (other than an employee of the named insured) or organization while acting as real estate manager for the named insured; and

(e) with respect to the operation, for the purpose of locomotion upon a public highway, of mobile equipment registered under any motor vehicle registration law,

(i) an employee of the named insured while operating any such equipment in the course of his employment, and

(ii) any other person while operating with the permission of the named insured any such equipment registered in the name of the named insured and any person or organization legally responsible for such operation, but only if there is no other valid and collectible insurance available, either on a primary or excess basis, to such person or organization;

Royal Globe denied Schroeder's claim solely on the basis that it was excluded under exclusion (k)(3), with Royal Globe claiming that the property was under the "care, custody or control" of the insured, Schroeder. This denial was made despite the fact that employees of Schroeder are not within the definition of the term "insured" under the contract, nor are they named or specified in the exclusionary clause.

When Royal Globe denied the claim, Schroeder brought suit to require the insurer to provide coverage. It also sought damages under RCW 19.86, Washington's Consumer Protection Act (WCPA). The trial judge found that the property in question was under the "care, custody or control" of the employee who was operating the cleaning machine, but the employee was not within the definition of "insured" under the terms of the insurance policy. The trial court further found the insurer had violated the WCPA, and awarded the insured its costs and attorney fees.

II

There are certain basic principles that apply in any examination of exclusionary clauses in insurance contracts. Chief among these is that exclusionary clauses are to be most strictly construed against the insurer. West Am. Ins. Co. v. State Farm Mut. Auto. Ins. Co., 4 Wash.App. 221, 480 P.2d 537 (1971); Murray v. Western Pac. Ins. Co., 2 Wash.App. 985, 472 P.2d 611 (1970). The policy should be interpreted in accordance with the way it would be understood by the average person purchasing insurance. Zinn v. Equitable Life Ins. Co., 6 Wash.2d 379, 107 P.2d 921 (1940). It must not be forgotten that the purpose of insurance is to insure, and that construction should be taken which will render the contract operative, rather than inoperative. Scales v. Skagit Cy. Med. Bur., 6 Wash.App. 68, 491 P.2d 1338 (1971). A construction which contradicts the general purpose of the contract or results in a hardship or absurdity is presumed to be unintended by the parties. Nautilus, Inc. v. Transamerica Title Ins. Co., 13 Wash.App. 345, 534 P.2d 1388 (1975).

These are principles that are not confined to Washington law, but are of nationwide application. The courts of other states have elaborated upon these rules. As stated by the court in Aetna Cas. & Sur. Co. v. Haas, 422 S.W.2d 316 (Mo.1968):

"Exclusion clauses are strictly construed against the insurer, especially if they are of uncertain import. An insurer may, of course, cut off liability under its policy with a clear language, but it cannot do so with that dulled by ambiguity. As with the provisions of the policy as a whole, so also with the exceptions to the liability of the insured, the language must be construed so as to give the insured the protection which he reasonably had a right to expect; and to that end any doubts, ambiguities and uncertainties arising out of the language used in the policy must be resolved in his favor."

Aetna, at 321, quoting from Boswell v. Travelers Indem. Co., 38 N.J.Super. 599, 120 A.2d 250 (1956).

As noted by the court in Harris, Jolliff & Michel, Inc. v. Motorists Mut. Ins. Co., 21 Ohio App.2d 81, 85, 255 N.E.2d 302 (1970):

"Where exceptions, qualifications or exemptions are introduced into an insurance contract, a general presumption arises to the effect that that which is not clearly excluded from the operation of such contract is included in the operation thereof."

(Italics ours.) Harris, quoting from Home Indemnity Co. v. Plymouth, 146 Ohio St. 96, 64 N.E.2d 248 (1945).

The Harris court went on to note at page 85, 255 N.E.2d 302 that:

Where there is such an ambiguity in an exclusion, that meaning which excludes the least is necessarily the most liberal construction for the insured.

The definition of "insured" under the Royal Globe policy is set out in the earlier part of this opinion. It very carefully limits the term as it applies to a corporation: (1) to specifically named individuals; (2) to the corporation and any executive officers, directors or shareholders thereof; and (3) for operation of motor vehicles only, to an employee of the insured, but only while operating such a vehicle in the course of his employment.

The exclusionary clause (k)(3), on the other hand, specifies that coverage is excluded for property damage to

property in the care, custody or control of the insured or as to which the insured is for any purpose exercising physical control;

The word "insured" not only appears twice in the exclusionary clause but is set forth in bold letters on the policy.

We find persuasive the reasoning of Holter v. National Union Fire Ins. Co., 1 Wash.App. 46, 459 P.2d 61 (1969). In that case, the court was faced with an insurance policy containing a word-for-word-identical exclusionary clause, and a near-identical definition of "insured". There, an employee of the plaintiff had damaged an elevator while operating it. The insurance company refused to provide coverage and the employer brought suit against it. The insurance company argued that the care, custody or control provision of the policy excluded coverage, even though the employee, and not the insured, was operating the elevator. The company argued that under the doctrine of respondeat superior, the acts of the employee were the acts of the master, so that the exclusionary clause would be operative.

The court rejected the argument of the insurance company, holding, at pages 49-51, 459 P.2d 61, that the exclusionary clause did not apply.

The rule that a master must respond in damages for injuries inflicted by his servant in the course of employment does not dispose of the issue facing us in this appeal. It establishes the liability of defendant "[t]o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property" as agreed in the general insuring agreement. It does not broaden the scope of the word "insured" in the care, custody and control exclusion. This result could very easily be accomplished by stating "this policy does not apply ... to injury or destruction of property in the care, custody or control of the insured or any of his employees, or property as to which the insured or any of his employees for any purpose is exercising physical control." That such an inclusion of employees in the "care, custody and control" exclusion has been utilized is demonstrated by the insurance policy referred to in A.T. Morris & Co. v. Lumber Mut. Cas. Ins. Co., 163 Misc. 715, 298 N.Y.S. 227 (Mun.Ct.1937).

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