Stevens Industries, Inc. v. Maryland Casualty Company

• Decision Date: 17 June 1968
• Docket Number: No. 24439.,24439.
• Parties: STEVENS INDUSTRIES, INC., Appellant, v. MARYLAND CASUALTY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

391 F.2d 411 (1968)

STEVENS INDUSTRIES, INC., Appellant, v. MARYLAND CASUALTY COMPANY, Appellee.

No. 24439.

United States Court of Appeals Fifth Circuit.

February 7, 1968.

Certiorari Denied June 17, 1968.

A. G. Cleveland, Jr., Atlanta, Ga., Kilpatrick, Cody, Rogers, McClatchey & Regenstein, Atlanta, Ga., Perry, Walters, Langstaff & Lippitt, Albany, Ga., of counsel.

Thomas E. Joiner, Atlanta, Ga., Robert B. Langstaff, Albany, Ga., Emmet J. Bondurant, II, Atlanta, Ga., for appellant.

H. P. Burt, D. D. Rentz, Burt & Burt, Donald D. Rentz, Albany, Ga., for appellee.

Before TUTTLE, GEWIN and AINSWORTH, Circuit Judges.

Certiorari Denied June 17, 1968. See 88 S.Ct. 2285.

GEWIN, Circuit Judge.

This is an appeal from a judgment of the United States District Court for the Middle District of Georgia, 279 F.Supp. 681, granting a motion for summary judgment in favor of Maryland Casualty Company (Maryland) in a declaratory judgment action brought by it as the comprehensive liability insurer of Stevens Industries, Inc. (Stevens). Stevens also sought declaratory judgment by means of counterclaim. The court held that Maryland was not liable to defend or pay judgments resulting from claims asserted by farmers against Stevens, arising out of the sale of defective peanut seeds. From this judgment Stevens has appealed.

The question we must decide is whether under the terms of the insurance contract there was coverage. We conclude that the district court correctly found there was not, and affirm.

Stevens is a Georgia corporation engaged in the business of the manufacture, sale, and processing of agricultural products, including the processing and sale of peanuts for use as seed by farmers and dealers in southwest Georgia.¹ As a part of its processing procedure the peanuts are removed from their shells and treated with a mercury compound in order to enhance productivity. During the period of approximately March to May of 1965, Stevens accidentally over-treated the seed peanuts. Without realizing the mistake, the seeds were then sold to various dealers and farmers. As a result numerous claims for damages have been made by the purchasers who contend that the excess application of the mercury compound caused the seeds to be defective in that some failed to germinate at all, while others reacted in various ways as follows: germinated but soon died; germinated, lived, but failed to produce; or germinated, lived, bore, but produced in less than expected quantities. At the time Maryland filed its suit for declaratory judgment only one suit had actually been filed against Stevens, but many others were threatened and imminent. Some of the farmers' claims for damages were based on the contention that the crop yield would have been greater if the seed had not been defective. Other claimants contended that they suffered a reduction in yield below an "average yield" or that their crop yield was substandard. In some instances it was asserted that the seed germinated but the plants failed to produce and died. The damages claimed also included such items as plowing expenses, cost of insecticides, fertilizers, land preparation, replacement seed and land rental charges. Many of these claims were settled by Stevens prior to its notification of Maryland on July 5, 1965. The facts with respect to the nature of the claims, the settlements effected and the contentions of the parties were fully developed.

Maryland had issued a comprehensive liability policy to Stevens on July 1, 1964, which was in effect throughout the period in question. Maryland received a specific premium of $71.00 in return for providing protection under Coverage C of the policy, entitled "Property Damage Liability — Except Automobile." This clause obligated Maryland "To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of injury to or destruction of property, including the loss of use thereof, caused by accident." (Emphasis supplied). In addition, Maryland also agreed to defend any action brought against Stevens alleging liability covered under the policy. Exclusion (A) of the policy provided:

"This policy does not apply: (A) to liability assumed by the insured under any contract or agreement except under coverages A & C, (1) a contract as defined herein or (2) as respects the insurance which is afforded for the Products Hazard as defined, a warranty of goods or products;"

In the definition section of the policy, the word "contract" is defined as follows: "The word `contract' means, if in writing, a lease of premises, easement agreement, agreement required by municipal ordinance, side-track agreement, or elevator or escalator maintenance agreement." In addition, "Products Hazard" is defined as "(1) Goods or products manufactured, sold, handled or distributed by the named insured or by others trading under his name, if the accident occurs after possession of such goods or products has been relinquished to others by the named insured or by others trading under his name and if such accident occurs away from premises owned, rented, or controlled by the name insured or on premises for which the classification stated in Division (a) of the declarations excludes any part of the foregoing." (Emphasis added.)

Both parties agree that Maryland is not liable under the terms of the policy for the accident which occurred within Steven's own plant resulting from the overtreatment with the mercury compound. The disagreement occurs over whether or not there was a second accident which occurred after the seeds left the plant. Stevens contends that a second accident occurred when the excess mercury compound unexpectedly prevented some seeds from germinating and others from fully developing into mature plants. Maryland contends that the only accident in this case occurred within Stevens' own plant and that even if there were a second accident, there was no requisite "injury to property". Both parties filed motions for summary judgment, supported with affidavits and briefs. The district court, after a careful consideration of all materials submitted, found that there was no second accident occurring after the seed peanuts left the plant. The issue of whether there was an injury to property was therefore never reached.

Jurisdiction in this case is based upon diversity of citizenship and thus Georgia law is controlling. Erie Railroad Company v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). However, despite diligent search by the able counsel for both sides, neither has been able to point to any Georgia law directly in point under the facts presented here. Nor has our independent research revealed any. We therefore occupy the position of deciding this case as the Georgia courts would decide it if confronted with these facts. Birkett L. Williams Company v. Smith, 353 F.2d 60 (5 Cir. 1965); United States Fidelity & Guaranty Co. v. Anderson Construction Company, 260 F.2d 172 (9 Cir. 1958). Certain general principles of Georgia contract law are clear. Contracts of insurance, being contracts of adhesion drawn by the legal draftsmen of the insurer are to be "construed as reasonably understood by the insured." Loftin v. United States Fire Insurance Company, 106 Ga.App. 287, 127 S.E.2d 53 (1962). Insurance policies are to be interpreted liberally in favor of coverage of the insured. Johnson v. Mutual Life Insurance Company, 154 Ga. 653, 115 S.E. 14 (1922). When the insurer relies on an exclusionary clause of the policy it has the burden of proving that the facts upon which the asserted claim is based came within the exclusion. State Mutual Life Assurance Co. v. Dorsey, 357 F.2d 600 (5 Cir. 1966), Darby v. Interstate Life & Accident Insurance Co., 107 Ga. App. 409, 130 S.E.2d 360 (1963). Nevertheless, where the terms and conditions of the policy are clear and unambiguous, the court must declare and enforce the contract as made between the parties. Nelson v. Southern Guaranty Insurance Company, 221 Ga. 804, 147 S.E.2d 424 (1966), Andrews v. Georgia Mutual Insurance Company, 110 Ga.App. 92, 137 S.E.2d 746 (1964).

The district court based its finding that the failure of the seeds to properly germinate and produce did not constitute a distinct accident within the meaning of the policy on the rationale that the word "accident" is a term "of movement, of change * * * something affirmative — not negative, something active — not passive.² The cases³ by which counsel for Stevens attempted to persuade the court below that a second accident did occur within the meaning of similar policies and under similar circumstances were distinguished by the trial judge on the basis that "in each of them something affirmative happened. There was motion or there was change and the happening resulted in observable property damage." For example, in the Hauenstein case, collated in footnote 3 above, the court found that the cracking, as a result of shrinkage, of acoustical plaster installed by the insured was an accident within the meaning of a comprehensive liability policy similar to the one in the present case. The trial court emphasized the affirmative nature of the action of shrinking and cracking, causing damage to the structure. We agree that this affirmative action test may often be a useful concept in cases of this type. What happened here is that an accident occurred in Stevens' plant which resulted in a later loss. We agree with the reasoning of the District Judge to the effect that the failure of the seed to germinate properly was not an accident, but rather was the result of the accident which happened at the plant when the seeds were on the premises of the insured. In essence the claims against Stevens seek damages because of something the seeds failed to do, i. e., produce in expected quantities, not because of something the seeds affirmatively did. The district court was justified in holding that no second accident occurred. In...