Smith v. Royal Ins. Co., 9850.

• Decision Date: 11 March 1942
• Docket Number: No. 9850.,9850.
• Citation: 125 F.2d 222
• Parties: SMITH v. ROYAL INS. CO., Limited.
• Court: U.S. Court of Appeals — Ninth Circuit

125 F.2d 222 (1942)

SMITH v. ROYAL INS. CO., Limited.

No. 9850.

Circuit Court of Appeals, Ninth Circuit.

January 23, 1942.

Rehearing Denied March 11, 1942.

A. B. Bianchi and James M. Hanley, both of San Francisco, Cal., for appellant.

Long & Levit, Percy V. Long, Bert W. Levit, and William H. Levit, all of San Francisco, Cal., for appellee.

Before DENMAN, MATHEWS, and HEALY, Circuit Judges.

HEALY, Circuit Judge.

This suit, which is on a valued policy of fire insurance upon appellant's "leasehold interest" in certain property, is here for the fourth time.¹ The prior appeals were concerned with the question whether appellant had alleged and proved an insurable interest of a kind described in his policy, namely, an estate in the nature of a leasehold. On the last appeal we held that appellant had established his case in that respect, but that the insurer should be given an opportunity to set up such affirmative defenses as might be available to it. The present appeal relates to the proof of these defenses.

The defenses — now interposed for the first time — are (1) misrepresentation, and (2) mutual mistake of fact. As to the first it is alleged that in applying for the policy appellant, through his broker, represented that he had an interest in the property which was terminable only upon the destruction of the house by fire or other casualty. Appellee further alleged that this representation was material to the risk, that it was false, that it was relied on, and that appellee was thus entitled to rescind. Upon the issue of mutual mistake, appellee alleged that the policy was written upon the assumption of both parties that the representation was true. The trial court found in favor of the insurer on both defenses, and entered judgment accordingly.

The situation presented by this record is unique. Appellee has not sought or obtained reformation of the policy, and it strenuously denies that this is a case for reformation. It says the insurance contract, as drafted, "is the exact contract that the parties intended to make", but asserts that appellee was induced to make it because it was led to believe that appellant had a tenure of greater dignity than that which the policy insured. To put it another way, appellee, so it says, was given to understand that appellant had an interest which "ran until the property was destroyed". It would not, it claims, have insured the risk otherwise. Yet in drafting the policy it consciously chose not to describe the interest in the terms represented. The argument appears to prove too much. Presumably the Royal Insurance Company is an experienced and careful underwriter. If it had received positive assurance that appellant's interest ran for the life of his building it is incredible that the company would deliberately have omitted so to characterize the interest in the insurance contract.²

On the basis of the record it is virtually impossible to conclude that the representation was anything other than the statement of an opinion or belief based on the available data,³ or that appellee understood it in any other sense. To prove the making of the representation appellee called its agency superintendent, who had been solicited to procure the writing of the policy. In important respects the statements of this witness are so vague and equivocal as to render his testimony worthless.⁴ The evidence of the witness Farr, appellee's assistant manager, is in no better case.⁵ If this testimony be taken by its four corners and read in conjunction with the countervailing proof, one is driven to infer that the insurance people were content with the moral risk regardless of what might be the strict legal aspects of the tenure;⁶ and that, as appellant contends, both parties were in doubt as to what, exactly, the legal implications of the tenure were. The finding of the trial court on this phase was clearly erroneous.

On the issue of the falsity of the representation, the trial court found that appellant had a "month-to-month tenancy and no more".⁷ The court did not find that the representation of the more secure tenure was motivated by an intent to deceive, or that it was negligently made. On the contrary, the view taken was that the representation was made innocently in the belief on appellant's part that it was true. We thus have the rather novel situation of the court's finding the representation to be false on the basis of the very circumstances which induced appellant, in good faith, to believe the contrary. The situation, while not perhaps without precedent, is sufficiently unusual to invite scrutiny.

If appellee would avoid its contract because of the representation, it must of necessity prove its falsity. The burden of proving the defense was upon the...