PROVIDENCE WASHINGTON INSURANCE COMPANY v. Stanley

• Decision Date: 13 January 1969
• Docket Number: No. 25976.,25976.
• Citation: 403 F.2d 844
• Parties: PROVIDENCE WASHINGTON INSURANCE COMPANY, Appellant, v. Lottie H. STANLEY, Individually, etc., et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

403 F.2d 844 (1968)

PROVIDENCE WASHINGTON INSURANCE COMPANY, Appellant, v. Lottie H. STANLEY, Individually, etc., et al., Appellees.

No. 25976.

United States Court of Appeals Fifth Circuit.

November 26, 1968.

Rehearing Denied January 13, 1969.

COPYRIGHT MATERIAL OMITTED

Joseph S. Mead, Mead, Norman & Fitzpatrick, Birmingham, Ala., for appellant.

W. H. Baldwin, Andalusia, Ala., for appellee, Charles Little.

Oakley Melton, Jr., M. Roland Nachman, Montgomery, Ala., Griffin Sikes, Andalusia, Ala., for appellee, Lottie H. Stanley, and others; Steiner, Crum & Baker, Montgomery, Ala., Powell & Sikes, Andalusia, Ala., of counsel.

Before JOHN R. BROWN, Chief Judge, and RIVES and McENTEE^*, Circuit Judges.

Rehearing Denied January 13, 1969. See 406 F.2d 735.

RIVES, Circuit Judge:

This is a diversity suit seeking recovery under an institutional fire insurance policy. Providence Washington Insurance Company (hereinafter the "Company") appeals from a judgment entered on a general jury verdict finding it liable to Mrs. Lottie H. Stanley, in her individual capacity and as executrix of her husband's estate, for a $52,226.87 fire loss to the Covington Memorial Hospital building and its contents. The same jury also found no alternate liability of the local agent of the Company, Charles Little, who had been made a third-party defendant in the action on a theory of fraud and misrepresentation. We affirm.

I.

The Critical Facts. On February 1, 1964, the Company issued a five-year Public and Institutional Property Fire and Extended Coverage Form Policy to the following named insured:

"Covington Memorial Hospital 104 East Watson Street Andalusia, Alabama."

This policy was delivered to Graydon Stanley who, together with his wife, Mrs. Lottie H. Stanley, had operated the facility under the above trade name since 1941. The policy was issued under a reduced-rate institutional coverage plan offered through and administered by the Alabama Inspection and Rating Bureau¹ and filed with the State Insurance Department. The form policy contained, inter alia, a standard occupancy clause suspension of coverage provision.²

At the time the insurance contract was executed, title to the building and its contents was held by Covington Memorial Hospital, Inc., a family corporation of which the Stanleys held absolute control and all but one share of stock.³ The corporation was formed one year earlier for reasons not relevant to the case sub judice. Theretofore, the Stanleys had held one-half individual ownership interests in the hospital building and its contents; and they had run the enterprise through a partnership arrangement. At the time the policy was executed, the Stanleys actively managed the facility.

Two years and eight months after the policy was issued, Mr. and Mrs. Stanley decided to cease the active management of the facility. Without any disruption of hospital services and with no employee dislocations, the Stanleys leased the facility to Andalusia Hospital Corporation (AHC) on September 1, 1965.⁴ AHC continued to operate the hospital under its original trade name, Covington Memorial Hospital. From this date forward, neither of the Stanleys ever actively managed Covington Memorial Hospital. Nevertheless, Mr. Stanley, individually and as owner of the facility, paid the policy premium and filed the annual "Statement of Values" for 1966 even though he no longer ran the hospital. In December 1965, the Stanleys dissolved their corporation, Covington Memorial Hospital, Inc., and as a result individual interests in the building and its contents reverted to each.

On April 27, 1966, Mr. Stanley was critically injured in an automobile accident. The next day AHC vacated the Covington Memorial Hospital facility to occupy its newly completed complex. On May 5, 1966, Mr. Stanley died of his injuries. His will, probated on June 6, 1966, named Mrs. Stanley as Executrix-Trustee and devised Mr. Stanley's own one-half interest in the hospital and its contents one-fourth to his wife in fee and one-fourth to her as trustee for their three minor daughters.

In June, one month after her husband's untimely death and AHC's vacation of the Covington Memorial Hospital facility, Mrs. Stanley went to the offices of the Company's local agent, Little-Teel Insurance Agency, to inquire what she should do about insuring the now inactive facility and its contents. She informed Little that she could not find the original policy he had written for her husband. She also told him that she planned to liquidate the complex rather than attempt to find another tenant. Little assured her that she was adequately covered under the original policy and that she need not worry about changing coverage until she had completely liquidated the building and its contents. In reliance thereon, Mrs. Stanley commenced liquidation, advertising her intentions and keeping regular business hours in the hospital office eight hours a day, six days a week.

With knowledge that the facility was no longer an "operating hospital" and with knowledge that liquidation thereof had commenced,⁵ Little engaged in certain questionable and unexplained conduct. On June 6, he received an informational copy of a notice of delinquency of filing the self-inspection report; the notice was sent by the Bureau to the Company. On the bottom thereof, he made the following notation: "This policy will be cancelled effective July 1, 1966." The letter, with notation affixed, was then mailed on June 10 to the Bureau. Yet on June 13, Little personally completed the self-inspection report in which he indicated, inter alia: the hospital was still operational; boiler, laundry, and automatic sprinkler systems were adequately maintained; elevator service was working; and a night watchman was still on the payroll. He signed without authorization the names of two former Covington Memorial-AHC supervisors as certifying the above information; and he added his own signature as an endorsement thereof. He subsequently admitted that he knew all of the information was false. Yet he mailed this report to the Bureau, with information copies of it eventually getting to the Company. A Bureau agent testified that the receipt of the report indicated to him that the facility was still an operational hospital. He further stated information to the contrary would have required discontinuance of eligibility for coverage under the plan, not to speak of possible investigation of why such information was not reported initially. Little's only explanations of his irregular actions were that the inspection reports were "merely routine" and his unshakeable belief that the facility was "a hospital until it was completely liquidated." Finally, not once during the interim between AHC's vacation of the premises on April 28 and the fire loss on October 8, 1966 — a period of almost six months — did Little ever communicate the true situation to the Company, to its state manager, or to the Bureau.

In the context of the foregoing facts, the issue of ultimate liability for the loss is controlled by determination of two questions: (1) Was Mrs. Stanley, individually and in her representative capacity, an "insured" under the institutional policy? (2) Was her non-operational facility "occupied" within the meaning of the policy suspension provision or, if not technically occupied, was the Company barred by operation of law from asserting its right of suspension? But for its abandonment on appeal, there would be a third question, viz.: (3) The Company having been found liable, does the jury verdict in Little's favor properly exonerate him from partial or total liability for alleged perpetration of fraud and misrepresentation on the Company?

II.

Designation of the Insured. The policy designated as the insured "Covington Memorial Hospital," without any reference to its corporate existence. Mr. Stanley, who had done business under the trade name Covington Memorial Hospital for over twenty years, was issued the policy written by the state manager and local agent of the Company. Mr. Stanley paid every premium and filed every "Statement of Values" as each came due. Less the value of one share of stock, the Stanleys' interest in the insured property was identical whether held as stockholder or as partners. After her husband's untimely death, Mrs. Stanley held the exact same interest which she possessed at the time the policy was executed, enhanced by her husband's testamentary disposition of his entire interest part to her individually and part to her as trustee for their daughters.

In order to recover on a fire insurance policy, the claimant must show an existing contract and an insurable interest in the property. See 4 J. Appleman, Insurance § 2121, p. 18 (1941). Otherwise, the contract is void notwithstanding even an honest but erroneous impression by both insurer and insured that an insurable interest exists. 4 J. Appleman, supra, § 2122, p. 19. According to Alabama law, moreover, such insurable interest must exist both at the time of contract execution and at the time of the loss. Girard Fire & Marine Ins. Co. v. Gunn, 1930, 221 Ala. 654, 130 So. 180, 183. Accord: Commercial Union Fire Ins. Co. of New York v. Parvin, 1966, 279 Ala. 645, 189 So.2d 330, 332.

The overwhelming majority of jurisdictions, including Alabama, recognize that a stockholder in a corporation has a legal insurable interest in its property in proportion to the amount of his stockholdings. Aetna Insurance Co. v. Kennedy, 1909, 161 Ala. 600, 50 So. 73, 74; see 4 J. Appleman, supra, § 2145, pp. 41-43. Whether as stockholders or as partners, the Stanleys were the uncontroverted owners of the entire interest in the building and its contents, entitled to contract with the Company to protect their investment. Compare Weisfeld d/b/a M & W Fruit Co. v. St. Paul Fire & Marine Ins. Co., S.D.Tex. 1964, 236 F.Supp. 496, 499, aff'd per curiam, 5 Cir.1965, 354 F.2d 241, with Booker T. Washington...