Royal Indem. Co. v. Factory Mut. Ins. Co. A/k/a Fm Global A/k/a Factory Mut. Eng'g

• Citation: 786 N.W.2d 839
• Decision Date: 05 August 2010
• Docket Number: No. 07-1324.,07-1324.
• Parties: ROYAL INDEMNITY COMPANY, as successor in interest to Globe Indemnity Company, a member of Royal & SunAlliance USA, Inc.; and Federal Insurance Company, a member of the Chubb Group of Insurance Companies, as good faith subrogees of Deere & Company, a Delaware corporation, Appellees,v.FACTORY MUTUAL INSURANCE COMPANY a/k/a FM Global a/k/a Factory Mutual Engineering, a Rhode Island limited liability company, Appellant.
• Court: United States State Supreme Court of Iowa

786 N.W.2d 839

ROYAL INDEMNITY COMPANY, as successor in interest to Globe Indemnity Company, a member of Royal & SunAlliance USA, Inc.; and Federal Insurance Company, a member of the Chubb Group of Insurance Companies, as good faith subrogees of Deere & Company, a Delaware corporation, Appellees,v.FACTORY MUTUAL INSURANCE COMPANY a/k/a FM Global a/k/a Factory Mutual Engineering, a Rhode Island limited liability company, Appellant.

No. 07-1324.

Supreme Court of Iowa.

June 11, 2010.

Rehearing Denied Aug. 5, 2010.

COPYRIGHT MATERIAL OMITTED

Mark McCormick and Margaret C. Callahan of Belin Lamson McCormick Zumbach Flynn, P.C., Des Moines, Robert J. Gilbertson of Greene Espel P.L.L.P., Minneapolis, Minnesota, William H. Stanhope of Robins, Kaplan, Miller & Ciresi L.L.P., Atlanta, Georgia, and William J. Bush of Bush, Motto, Creen, Koury & Halligan, Davenport, for appellant.

David L. Brown and Aaron T. Oliver of Hansen, McClintock & Riley, Des Moines, Jeffrey J. Asperger, Bary L. Gassman, and

Peter H. Honigmann of Asperger Associates LLC, Chicago, Illinois, and Robert T. Park of Snyder, Park & Nelson, P.C., Rock Island, Illinois, for appellees.

BAKER, Justice.

Factory Mutual Insurance Company (FM) appeals from the district court judgment awarding Royal Indemnity Company and Federal Insurance Company (hereinafter referred to collectively as (Royal)) $39.5 million in damages, contending there was insufficient evidence that it breached any contract with Deere & Company (Deere), and, alternatively, that the damages were not within the contemplation of the parties. FM also asserts the claim is barred under Iowa Code section 517.5 (2001). Royal cross-appeals the district court's reduction of the jury's $39.5 million damage award by a pro tanto credit for amounts received in pretrial settlements with other defendants. Royal also appeals the court's dismissal of its negligence claim. Because we find the damages suffered were not in the contemplation of the parties and were outside the scope of liability for any breach of duty, we reverse the judgment and remand the case for dismissal of all claims.

I. Background Facts and Proceedings.

This appeal arises out of a February 20, 2001, warehouse fire that destroyed property stored there by Deere. FM is a commercial insurance provider, and from the 1950s through 1997, was Deere's sole property insurance provider. In the mid-90s, Deere sought to broaden its insurance coverage. FM was unwilling to provide the expanded coverage Deere sought, so beginning in 1997, Deere purchased its primary insurance coverage from Royal Indemnity Company and the Chubb Group of Insurance Companies. These carriers provided coverage up to $200 million, and FM provided Deere excess coverage above $200 million. In 1998, the amount at which FM's excess coverage attached rose to $400 million.

FM uses engineering evaluations in its underwriting process. Until 1997, the cost of FM's loss prevention engineering services was built into the premium it charged Deere for insurance coverage. Typically, the primary insurance carrier provides loss prevention engineering services for the insured because of its greater exposure, but Deere requested that FM continue to provide loss prevention services even though it was only the excess coverage carrier. FM agreed to do so under a separate payment-for-services contract and fee unrelated to Deere's insurance policy premiums.

For 1997, FM developed a service plan specifying the Deere locations to be inspected and the frequency of those inspections. The loss prevention services FM offered to Deere were the same as those it provided in conjunction with its insurance coverage. From 1997 to 2000, however, Deere severely cut the amount of funds available for loss prevention services. For the year 2000, Deere budgeted $498,000 for FM's loss prevention services. Deere and FM agreed that this fee would provide Deere with 3200 to 3350 hours of loss prevention services, subject to an adjustment if the hours worked went beyond 3350.

FM's service plan for Deere focused on: (1) managing change-evaluate conceptual, planned, or occurring changes; (2) audits of human element programs-record reviews; (3) walk-throughs of high hazard areas; (4) spot checking of sprinkler control valves and water flow alarms; and (5) water testing on a three-year frequency or as needed based on facility changes. FM's servicing plan provided that if it found any deficiencies during a records review, a full inspection of all valves and alarms may be warranted. FM agreed to provide Deere the loss prevention services outlined in the plan through the year 2000.

In 2000, Deere began the process of consolidating its storage facilities from seven Quad Cities warehouses to one centralized facility. Deere ultimately focused on a facility owned by Petersen Properties, LC (Petersen). Mark Dold, Deere's manager of implements and attachments, was in charge of coordinating the evaluation of the facility. As part of the evaluation process, Dold advised FM that Deere required a first-inspection-site-risk evaluation to determine whether the fire protection system was appropriate for Deere's storage needs. FM agreed to do an evaluation and assigned Tim Geiger, an experienced engineer, to perform the evaluation of the proposed facility.

On July 31, 2000, Geiger toured the Petersen facility. After the tour, Geiger was asked by Tim Kelly, the FM Account Engineer, to complete a simple COPE evaluation and email a report with his recommendations for loss expectancies over $1 million. A COPE is a basic outline on the Construction, Occupancy, Protection, and Exposure of the facility being inspected. During trial, Geiger also referred to this as a fire special inspection. According to Geiger, this inspection is not the same as a first-inspection-site-risk evaluation which can take up to five full days. FM generally tests the fire alarm sprinkler systems during a first inspection. Geiger explained that the scope of a special inspection is determined by what the client requests, and he believed Deere asked him to determine sprinkler specifications for the products it intended to store in the facility.

After touring the facility, Geiger prepared and emailed his report to Nancy Yeager, a member of Deere's risk management department, with copies to Dold and Kelly. The report contained the specifics of the sprinkler system currently installed in the facility, as well as recommendations for altering the system to better protect Deere's product. Geiger did not test the sprinkler system nor look at any of the facility's maintenance records.

Deere made a series of additional inquiries of Geiger concerning what modifications would need to be made to the current sprinkler system to protect Deere's stored products. Geiger answered them all. In addition, FM supervised a pump acceptance test at the facility. On October 2, Geiger sent Dold a “punch list” letter outlining his recommendations to bring the fire system at the facility up to FM safety standards. In this letter, Geiger recommended that the fire alarm system be upgraded, the sprinkler water alarms tested every month, and the high intensity discharge lights relamped. Deere used this list of recommendations in negotiating with Petersen. On October 26, 2000, Deere entered into a lease for a portion of the warehouse and moved its products into the facility in late November 2000 even though the punch list items had not yet been remedied. When Deere moved into the warehouse, the sprinkler system still had not been tested.

FM's contract with Deere to provide loss-prevention services expired on December 31, 2000. On that date, the FM/Deere insurance relationship ended, and Royal became responsible for loss-prevention inspections at all Deere locations.

Early in the morning on February 20, 2001, a fire broke out in the warehouse. The Davenport Fire Department was called, and an engine arrived thirteen minutes after the fire was discovered. The firefighters attached their hoses to the warehouse hydrants but found the water pressure insufficient to put out the fire. The firefighters attempted to put out the fire for several hours, but eventually could no longer control the fire and retreated. The fire burned for several days, and all of Deere's products were destroyed. The Davenport fire chief testified he believed they could have extinguished the fire if there had been sufficient water pressure.

The Davenport fire marshal conducted a cause and origin investigation of the fire. Deere and FM also hired experts to investigate the cause of the fire. Neither the fire marshal nor any of the experts were able to determine the cause of the fire. At trial, the fire marshal testified that faulty lights were no longer being investigated as a possible cause of the fire and the investigation was now focused on arson. Deere's fire expert identified three possible causes of the fire. These included: (1) arson, (2) electrical failure or malfunction, and (3) an accident or careless human act as cigarette butts were found at the fire's point of origin. The fire marshal and the experts were also unable to determine why the water pressure was insufficient to extinguish the fire on the day of the incident.

Deere brought an action claiming Petersen negligently maintained the warehouse fire alarm and sprinkler systems. Deere included River Cities Management LLC ¹ and FM as defendants. Royal paid in excess of $70 million under its policy to Deere for property loss and other expenses associated with the fire and thereby became subrogated to Deere's claim.

Before trial, all of the named defendants, except FM, reached settlement agreements with Royal. A jury trial was held, and the jury returned a verdict for Royal in the amount of $39,509,145.00. FM filed a motion for judgment notwithstanding the verdict. FM also filed a motion to apply the pro tanto credit rule.

The court denied FM's motion for judgment...