Prosser Com'n Co., Inc. v. Guaranty Nat. Ins. Co.

• Decision Date: 30 May 1985
• Docket Number: No. 6237-III-6,6237-III-6
• Citation: 700 P.2d 1188,41 Wn.App. 425
• Parties: , 700 P.2d 1188 PROSSER COMMISSION COMPANY, INC., Appellant, v. GUARANTY NATIONAL INSURANCE COMPANY, a corporation and Francis Moore, Respondents, and Dean Conarro and Ruth Conarro, husband and wife; and Richard D. Conarro and Judy Conarro, husband and wife, Appellants.
• Court: Washington Court of Appeals

Page 425

41 Wn.App. 425

40 Wn.App. 819, 700 P.2d 1188

PROSSER COMMISSION COMPANY, INC., Appellant, v. GUARANTY NATIONAL INSURANCE COMPANY, a corporation and Francis Moore, Respondents and Dean Conarro and Ruth Conarro, husband and wife; and Richard D. Conarro and Judy Conarro, husband and wife, Appellants.

No. 6237-III-6.

Court of Appeals of Washington Division 3, Panel Two.

May 30, 1985.

As Modified on Denial of Reconsideration July 17, 1985.

David E. Williams, Critchlow & Williams, Richland, Dennis Sweeney, George Fearing, Leavy, Schultz & Sweeney, Pasco, for appellants.

Bryan G. Evenson, Halverson, Applegate & McDonald, Norman R. Nashem, Jr., Nashem & Wagner, Yakima, for respondents.

GREEN, Chief Judge.

This is an appeal by Prosser Commission Company (Commission) and Dean, Ruth, Richard and Judy Conarro, intervenors, from a judgment that (1) Guaranty National Insurance Company, the Commission's insurer, had no duty to defend the Commission and is not liable for damages arising from the sale of a cow infected with brucellosis; and (2) neither Guaranty nor Francis Moore, the Commission's insurance broker, is liable for Moore's failure to procure adequate coverage. The dispositive issue is whether the court was correct when it ruled there is no coverage for this occurrence because of an exclusionary clause in Guaranty's policy relating to products and completed operations hazards. We reverse.

The Prosser Commission is a family corporation formed by Bruce and Barbara Brahs in 1969 for the purpose of operating a livestock auction business in Prosser. Mr. Brahs solicited cattle ranchers to sell their cattle at the auction on consignment. The proceeds were remitted to the ranchers less commission and charges for branding and health inspections. The Brahs occasionally purchased cattle which they sold at the auction.

The Commission was required by state and federal law to have a veterinarian present at the auctions, who inspected cattle for brucellosis--Bang's disease. In January 1978, the Commission purchased a cow in Oregon for its own account and sold it at the auction without inspection. The cow was infected with brucellosis. The purchasers, Larry and Shirla Whitby, allowed the cow to intermingle with their existing herd, thereby contaminating it. As a consequence, the herd had to be destroyed.

In March 1979, the Whitbys sued the Brahs and the Commission to recover their damages. The Brahs and the Commission had liability insurance with Guaranty National Insurance Company. Guaranty initially assumed the defense of the action subject to a reservation of their rights to assert policy defenses; however, it later withdrew from its defense on the basis the incident was excluded by the products and completed operations hazard exclusion in their policy. The Whitbys' action resulted in a judgment against the Brahs and the Commission for $57,008, statutory attorney fees and costs.

Some of the Whitbys' grazing land was shared by the Conarros. Their cattle became infected and they filed suit against the Commission and the Brahs. Guaranty also refused to defend that action. Based on the Whitbys' judgment, the Conarros obtained summary judgment establishing liability against the Commission and the Brahs, reserving for trial the question of causation and damages.

On April 26, 1982, the Commission brought this action against Guaranty alleging Guaranty violated its duty to defend or pay the Whitby judgment. It also sued Francis Moore, its insurance broker, for failing to obtain adequate insurance protection. The Conarros intervened, alleging insurance coverage exists for their probable damages. The court entered a judgment of dismissal against the Commission and the Conarros, who both appeal.

The court determined there is no coverage under Guaranty's policy because of the following exclusion:

Exclusions

This insurance does not apply:

* * *

(p) to bodily injury or property damage included within the completed operations hazard or the products hazard;

(Italics ours.) These terms are defined in the policy as follows:

"completed operations hazard" includes bodily injury and property damage arising out of operations or reliance upon a representation or warranty made at any time with respect thereto, ...

* * *

"named insured's products" means goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name including any container thereof other than a vehicle, but "named insured's products" shall not include a vending machine or any property other than such container rented to or located for use of others but not sold.

* * *

"products hazard" includes bodily injury and property damage arising out of the named insured's products or reliance upon a representation or warranty made at any time with respect thereto ...

The Commission contends the products and completed operations exclusion does not apply to its business. It argues auctioneering cattle is not the same as the sale of a "product" which, in the ordinary sense of the word, implies some form of processing before sale. It further maintains the occurrence for which coverage is sought was not the inadequate manufacture or processing of a product, but from negligence in failing to perform the service of having the cow inspected. Guaranty maintains the court was correct in applying the exclusion here because the Whitby's and Conarros' damages arose from the sale, handling or distribution of a good or product as defined in Washington's Uniform Commercial Code (UCC), RCW 62A.2-105(1). ¹

No cases have been cited dealing with precisely these facts. Nor is Guaranty's reference to the UCC helpful; insurance contracts are defined not according to definitions established by legal scholars, but according to the interpretations that would be given by the average person purchasing insurance. Phil Schroeder, Inc. v. Royal Globe Ins. Co., 99 Wash.2d 65, 68, 659 P.2d 509 (1983). The rationale behind this rule is that "insurance policies are prepared by experts in this complex area, and the intricate interplay of their various provisions is difficult for a layman to understand." ² New Amsterdam Cas. Co. v. Addison, 169 So.2d 877, 881 (Fla.Dist.Ct.App.1964). Hence, the question is whether an average businessman would understand that, by virtue of the products and completed operations exclusion, there is no coverage for the incident here.

In answering that question, we are guided by well established principles of construction in insurance law:

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 Wn.App. 221, 480 P.2d 537 (1971); Murray v. Western Pac. Ins. Co., 2 Wn.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 Wn.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 Wn.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 Wn.App. 345, 534 P.2d 1388 (1975).

* * *

"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."

* * *

"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."

* * *

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

Phil Schroeder, Inc. v. Royal Globe Ins. Co., supra 99 Wash.2d at 68- 69, 659 P.2d 509. Applying these rules, we find the Commission's position to be reasonable that the exclusion does not clearly exclude insurance protection for the circumstances presented.

The completed operations hazard or products hazard exclusion is commonly referred to as the products liability exclusion and understood to apply to specialized circumstances of loss caused by the use of goods or products manufactured or produced. Annot., 54 A.L.R.2d 518 (1957); Annot., 45 A.L.R.2d 994 (1956); Insurance Co. of N. Am. v. Electronic Purification Co., 67 Cal.2d 679, 433 P.2d 174, 63 Cal.Rptr. 382 (1967); Peerless Ins. Co. v. Clough, 105 N.H. 76, 193 A.2d 444 (1963). The terms goods or...