Security Mutual Cas. Co. v. Affiliated FM Insurance Co.

• Decision Date: 29 December 1972
• Docket Number: No. 71-1308.,71-1308.
• Citation: 471 F.2d 238
• Parties: SECURITY MUTUAL CASUALTY COMPANY et al., Appellee, v. AFFILIATED FM INSURANCE COMPANY, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

471 F.2d 238 (1972)

SECURITY MUTUAL CASUALTY COMPANY et al., Appellee, v. AFFILIATED FM INSURANCE COMPANY, Appellant.

No. 71-1308.

United States Court of Appeals, Eighth Circuit.

Submitted January 11, 1972.

Decided December 29, 1972.

Rehearing and Rehearing Denied January 19, 1973.

COPYRIGHT MATERIAL OMITTED

Lawrence Zelle, Robins, Davis & Lyons, Minneapolis, Minn., for appellant.

O. C. Adamson, II, Minneapolis, Minn., for appellee.

Before MATTHES, Chief Judge, BRIGHT, Circuit Judge, and WEBSTER,^* District Judge.

Rehearing and Rehearing En Banc Denied January 19, 1973.

WEBSTER, District Judge.

This is an appeal from a declaratory judgment in favor of Security Mutual Casualty Company, et al. (Security), plaintiffs below, exonerating Security from any liability to appellant Affiliated FM Insurance Company (Affiliated) on account of a certain contract of reinsurance between the parties in respect to a $6,988,000 fire loss in Newark, New Jersey on December 31, 1967. The factual issues were submitted to a jury upon special findings, pursuant to Fed.R.Civ.P. 49(a). Based upon findings of the jury that defendant had made misstatements or concealments of material matters, all of which increased the risk of loss, the trial judge entered judgment declaring Security not liable to Affiliated on the contract and ruling against Affiliated on its counterclaim to recover amounts claimed by it to have been due under the contract. Thereafter, appellant filed its motion for judgment notwithstanding the verdict or, in the alternative, for a new trial, which the trial judge denied in an unpublished order entered March 31, 1971. From this judgment and order Affiliated appeals.

In the Spring of 1967, Hillside Metal Products, Inc. approached Philadelphia Manufacturers Mutual Insurance Company to obtain insurance on the building complex which it occupied in Newark, New Jersey. Philadelphia is an affiliate of Factory Mutuals System and insures "standard FM" risks, which are highly protected or are near perfect or very low hazard risks. In June, 1967, Philadelphia agreed to insure and circulated among the Factory Mutuals System members an invitation to accept part of the risk. Several members declined because of the previous high loss experience of Hillside. In July, an inspector for Philadelphia discovered that a tenant in buildings 10 and 11 was engaged in leather working and thus was using flammable liquids which would result in making these buildings "non-standard". Philadelphia notified Hillside that it intended to cancel the policy as to buildings 10, 11 and 15. Philadelphia then asked its subsidiary company, appellant Affiliated, to issue a $1,250,000 policy directly to Hillside. Affiliated bound the contract and then attempted to secure reinsurance. Affiliated requested current information from Philadelphia, and on July 26 was informed about the flammable liquid hazard. On July 30, Affiliated had received further information that Hillside had sustained three large losses. Affiliated approached a number of other companies for reinsurance, but they declined. About this time, Philadelphia decided that the best solution was to ask Affiliated to insure buildings 2, 2B and 3, in addition to buildings 10, 11, and 15. At the same time, it was decided that Philadelphia would keep its previously issued $21,500,000 policies in effect and that Affiliated would reinsure Philadelphia for $5,500,000 with respect to these buildings. Philadelphia apparently intended to limit its liability under the $21,500,000 policies to $5,500,000 in respect to these buildings, but somehow failed to do so.

On August 25, 1967, Affiliated issued a certificate of reinsurance to Philadelphia for the $5,500,000. By utilizing its treaty reinsurers, Affiliated was able to re-reinsure $3,000,000 of the $5,500,000 risk. It then turned to facultative reinsurers (not bound to insure), to whom it owed a duty to use the utmost good faith in its communications, and with whom Affiliated had a policy to disclose all pertinent information.

One such group was the Security Mutual pool, of which Security Casualty Company was a member. E. W. Blanch Company of Minneapolis acted as agent for the pool in accepting risks. Ralph Palmieri, an employee of Affiliated, called E. W. Blanch Company and read, over the telephone, a prepared data sheet on the coverage. In so doing, he mentioned only one prior loss of $21,000. He did not mention the flammable liquid hazard caused by the leather working tenant. He did not inform the agent that the business interruption insurance was a valued policy¹ providing for payment of $35,000 per diem. He did not mention other declinations. Blanch agreed to place $500,000 of reinsurance.

On December 8, Philadelphia informed Affiliated that Hillside had suffered losses of $3,600,000 in 1963; $2,000,000 in 1965; $400,000 in 1966. This information was not given Blanch prior to the loss.

After the fire on December 31, 1967, Hillside refused to limit Philadelphia's liability to $5,500,000. Philadelphia paid Hillside $1,450,000 for property damage and $5,538,000 for business interruption, a total of $6,988,000. It then collected $5,500,000 from Affiliated, leaving Philadelphia with a net loss of $1,488,000.

The several issues were submitted to a jury on special findings. The jury found that Affiliated had misrepresented to Security Hillside's loss record; that it had misrepresented the occupancy of Hillside's buildings and had failed to disclose that the business interruption clause of the reinsurance on Hillside was being written as valued business interruption insurance; that each of these representations were material matters; that each of these representations was made with intent to deceive and defraud; and that each of these representations increased the risk of loss.

There was a secondary issue over whether, assuming Security's liability, it should pay its fractional part of the intended exposure or its fractional part of the total loss paid by Affiliated. In a separate special finding the jury apportioned the loss on the issue of pro rata sharing of insurance $152,240 to Security and $347,760 to Affiliated.

Issues Presented

The court incorporated these findings in a declaratory judgment in favor of Security, holding it without liability as a reinsurer (and thereby mooting the secondary issue of apportionment). In this appeal appellant Affiliated contends that the district court prejudicially misstated and misapplied the law of Minnesota in its instructions to the jury; that the court erred in denying defendant's motion for a directed verdict; and that the court erred in not submitting the defense of waiver and in submitting the apportionment finding to the jury without appropriate instructions.

I The Instructions

Appellant contends that the court's instructions erroneously stated the law of Minnesota applicable to misrepresentations by parties seeking insurance (in this case, reinsurance). The main thrust of the attack is upon the court's refusal to instruct the jury that bad faith — or absence of good faith — must be shown in order to establish that a statement made or omitted was a "misrepresentation" within the meaning of Section 60A.08, Subd. 9, Minnesota Statutes Annotated, which provides:

"No oral or written misrepresentation made by the assured, or in his behalf, in the negotiation of insurance, shall be deemed material, or defeat or avoid the policy, or prevent its attaching, unless made with intent to deceive and defraud, or unless the matter misrepresented increases the risk of loss."

Expressed another way, appellant contends that bad faith must be proved regardless of whether the party asserting the defense of misrepresentation claims it was made with intent to deceive or that it increased the risk of loss. We disagree.

In his charge, Judge Larson read Section 60A.08, supra, to the jury, repeated it, and then instructed them as follows:

"This means, as the statute indicates, that a material misrepresentation, made with intent to deceive and defraud, avoids the policy of insurance or reinsurance. A material misrepresentation not made with intent to deceive and defraud does not avoid the policy unless by the misrepresentation the risk of loss is increased. If a material misrepresentation increases the risk of loss, the policy is avoided regardless of the intent with which it was made.

"The term intent as used in the phrase `intent to deceive and defraud\' means a deliberate falsification or withholding of information material to the risk with an actual design or purpose to deceive and defraud.

"The phrase `increases the risk of loss\' means that there must be a greater likelihood of liability being imposed on the insurer (here the plaintiff reinsurance companies) than would have been the case if the facts were as the insured (here the defendant Affiliated) stated them to be."

Judge Larson then instructed the jury that a person is liable for misrepresentation "if he makes a false representation of a past or existing material fact susceptible of knowledge, knowing it to be false, or as of his own knowledge without knowing whether it is true or false, with intention to induce the person to whom it is made to act in reliance upon it, or under such circumstances that such person is justified in acting in reliance upon it, and such person is thereby deceived and induced to act in reliance upon it, to his pecuniary damage." After discussing factors to be considered, Judge Larson charged the jury that intentional concealment can have the same effect as a misrepresentation,² but that there is normally no liability for mere non-disclosure unless there is a duty to speak.

The trial court fully and accurately instructed the jury on the meaning and elements of misrepresentation of a material matter within the meaning of M.S.A. § 60A.08.³ The court correctly instructed the jury that under the statute "a material misrepresentation...