RB COMPANY v. Aetna Insurance Company

• Decision Date: 27 March 1962
• Docket Number: No. 18842.,18842.
• Citation: 299 F.2d 753
• Parties: R. B. COMPANY, Inc., and Nu Plastics, Inc., Appellants, v. AETNA INSURANCE COMPANY et al., Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

299 F.2d 753 (1962)

R. B. COMPANY, Inc., and Nu Plastics, Inc., Appellants, v. AETNA INSURANCE COMPANY et al., Appellees.

No. 18842.

United States Court of Appeals Fifth Circuit.

March 1, 1962.

Rehearing Denied March 27, 1962.

James R. Alexander, Henry Klepak, Arthur S. Goldberg, Don Allen Henry, Goldberg & Alexander, Dallas, Tex., for appellants.

R. B. Cousins, Thompson, Coe, Cousins & Irons, Dallas, Tex., for appellees.

Before JONES, BROWN and GEWIN, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

This case presents the question whether the District Court on a special issue verdict correctly entered judgment for the Insurer. In doing so the Court sustained the Insurer's defense that the insurance either was void altogether because of wilful misrepresentation as to hazards, or at least suspended at the time of the fire by reason of substantial increases in hazards over those incidental to the use described in the policy. The Assured's appeal presents numerous errors including the insufficiency of the evidence, improper jury instruction, and conflicts in the answers to the special interrogatories.

Three policies are now involved, each issued by the same Insurer¹ to two related, but not identical, concerns covering the building and certain contents in Garland, Texas. It simplifies discussion to refer to these as the 56 Building Policy,² the 57 R. B. Co. Contents Policy,³ and the 58 Nu-Plastics Contents Policy.⁴

Several things are unique about this case. First, as we point out in greater detail, the occupancy stated on the initial policy, the 56 Building Policy (note 2, supra), was a term selected by the Insurer's agent. It was not correct and, to the knowledge of several responsible agents of the Insurer, it did not accurately describe operations being conducted on the insured premises. That probably came about from another almost simultaneous error of the Insurer. The building structures were made up of a smaller, older building and a contiguous newer concrete block structure (with one common wall). The older, smaller building was used by Nu-Plastics. The newer building was used primarily by R. B. Co., Inc. Each building had separate street numbers. The Insurer really intended to insure only the larger building, but as there was a mortgagee to be listed also as a named assured, the legal description of the mortgage was used. This admittedly covered both buildings. While the Insurer subsequently recognized that it was legally bound for the whole structure, this perhaps explains why it was so uninterested in the operations being conducted in the older building by Nu-Plastics.

But the Insurer was not ignorant of what was going on. An authorized agent of the Insurer, Frederickson, made at least two inspections of the premises at or about the time the 56 Building Policy was issued. While he tended to magnify the secret nature of the plastic recovery process being conducted, he acknowledged, and it was not disputed, that at least up through the beginning of 1957, Nu-Plastics was engaged in substantial plastic recovery operations requiring the use of flammable chemicals. More than that, the inspection was made primarily because another insurance company to whom the risk was offered declined to cover it because of excessive hazards.

At that time, Nu-Plastics was engaged in a process of attempting to recover separately the copper and the polyethylene in the plastic insulation of salvage copper wire. In this process perchlorethylene or trichlorethylene was used in a mixture with isopropyl alcohol. The per and trichlorethylene were substantially nonflammable and the percentage mixture used with isopropyl alcohol considerably reduced the flammability of the alcohol. Also used or regularly on the premises was acetone, a chemical compound having a zero to plus one flash point (in contrast to a flash point of 20 to 40 of naphtha). Sometime in 1957 they began to use cyclohexane instead of the per or trichlorethylene. This is extremely flammable with a flash point in the neighborhood of one.

It was in this setting that the 56 Building Policy was issued. It described the occupancy as "Machinery Repair and Sales." No one to this day has identified the person who actually selected that descriptive. Nor was there any explanation of why that terminology, rather than some other, was used. What is known, and what is undisputed, is that the term was chosen by the Insurer. Of course the occupancy descriptive is very significant. It bears upon the scheduled manual rates fixed by the Texas Insurance Commission. And it is the foundation of the provision against increase in the hazard.⁵

The 57 R. B. Co. Contents Policy was issued in October 1957. No further inspection was made by the Insurer and the record is absolutely silent concerning any representations made by the Assured at or before the time this Policy was applied for or issued. Frederickson testified that he was simply relying on what he learned the previous August and September in connection with the 56 Building Policy. This time, however, and again with no indication of why this terminology was chosen or changed, the occupancy was described as "Machinery Sales."

Although it is not clearly spelled out, it appears that the 58 Nu-Plastics Contents Policy was requested in early January 1958 about the time other policies originally in the suit (but no longer involved) were issued by other insurance companies. At any event, the 58 Nu-Plastics Contents Policy was not issued until March 12, 1958. The record is again blank on how the descriptive was selected, but the policy describes the occupancy as "Plastics Manufacturing." The record is likewise equally silent concerning any representations made by the Assured as to the nature or kind of operations then being conducted on, at, or before, the time the policy was applied for or delivered.

The fire of May 30, 1958, occurred while each of these policies was nominally in force. In the meantime, two significant events admittedly occurred and there is controversy whether the third did. First, sometime in early 1957, Nu-Plastics abandoned the polyethylene-copper recovery process. Its activity thereafter was of an experimental nature. Second, in the middle of 1957 a new concern, Customs Distillers, owned and operated as a sole venture of one of the stockholder-owners of R. B. Co. and Nu-Plastics, commenced the removal of chemicals from salvaged naphtha. The third, and hotly disputed, question was whether a doorway in the common wall between the older-small building and the larger one had been cut before or after the 56 Building Policy was issued.

On these three events, the Insurer denied the policies were effective. Its contention ran this way. The third undercut all for if, as the Insurer's proof tended to show, the doorway was cut into the common wall after the delivery of the 56 Building Policy, the jury could find that there was an increase in hazard since under applicable Texas Insurance Commission rules for rating, this breach of a fire wall would automatically compel the higher rate (plastics manufacturing) for the whole structure.

The second event, if not decisive as a matter of law, is at least significant since, being wholly the activity of Customs Distillers, this eliminated altogether the element of whether the use of naphtha was usual and incidental to the occupancy of the Assured (either R. B. Co., Inc. or Nu-Plastics, Inc.) as that term is used in the hazard suspension clause, see note 5, supra. This second event — the distillation of naphtha in vats at high temperature — also permitted a jury finding that the hazard was increased over (a) the described occupancy of Machinery Sales as well as (b) the actual occupancy and hazards of the Nu-Plastics process being followed in 1956-1957. In connection with this aspect, the increase in hazard was established by two types of proof: expert testimony comparing relative flammability of naphtha with these other chemicals and, perhaps more persuasive, the high rates commanded by the Insurance Commission manual for storage of naphtha and other volatiles.

The Insurer in asserting these defenses did not shirk from the burden imposed by Texas law of sustaining them. Dixie Fire Ins. Co. v. Henson, Tex.Civ. App., 1925, 277 S.W. 756, Aff'd Tex.Com. App., 285 S.W. 265; St. Paul Fire & Marine Ins. Co. v. Westmoreland, Tex. Com.App.1937, 130 Tex. 65, 105 S.W.2d 203. See 24B Tex.Jur.Insurance §§ 435, 436, 462. The Assureds, on the other hand, rejoined generally with the denial of misrepresentation of hazards and, as a sort of confession and avoidance, asserted that the Insurer knew, or ought to have known, of these increased hazards and with such knowledge, actual or constructive, continued to receive premiums. On that was rested its claim of waiver and estoppel.

The trial Judge considered this a case for the jury and, overruling motions of the Assured and the Insurer for directed verdict, submitted it on the basis of special interrogatories, F.R.Civ.P. rule 49, 28 U.S.C.A., after carefully following the suggestion of Clegg v. Hardware Mutual Casualty Co., 5 Cir., 1959, 264 F.2d 152, at 157, that the parties should be informed of this proposed submission.

The verdict is something less than satisfactory. But that does not necessarily involve criticism of Court or counsel or jury. The fact is that one of the sometimes unexpected, but wholesome, results of special interrogatories jury submission is to emphasize the absolute necessity that there be first a clear understanding of the precise legal issues for jury resolution and then a translation of them into articulate questions which may be authoritatively answered by a simple categorical. In a general way this is to say that not only is it the jury's imprecision which is hidden by the traditional general charge and verdict. Many juridical errors of omission and commission by court and counsel are likewise perpetually concealed....