U.S. Fire Ins. Co., Inc. v. Charter Financial Group, Inc.

• Decision Date: 12 July 1988
• Docket Number: No. 87-2382,87-2382
• Citation: 851 F.2d 957
• Parties: UNITED STATES FIRE INSURANCE COMPANY, INC., Plaintiff-Appellant, v. CHARTER FINANCIAL GROUP, INC., Houston Industrial Systems, Inc., Woodland Feed Company, Inc., Benny R. Cleveland, M.D., James M. Hebert, D.D.S., Joe Whittington, "John Doe," Unknown Claimants, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 957

851 F.2d 957

UNITED STATES FIRE INSURANCE COMPANY, INC., Plaintiff-Appellant, v. CHARTER FINANCIAL GROUP, INC., Houston Industrial Systems,

Inc., Woodland Feed Company, Inc., Benny R. Cleveland, M.D.,

James M. Hebert, D.D.S., Joe Whittington, "John Doe,"

Unknown Claimants, Defendants-Appellees.

No. 87-2382.

United States Court of Appeals, Seventh Circuit.

Argued March 29, 1988.

Decided July 12, 1988.

Stephen J. Peters, Stewart & Irwin, Indianapolis, Ind., for plaintiff-appellant.

Jerry A. Garau, Price & DeLaney P.C., Indianapolis, Ind., for defendants-appellees.

Before CUMMINGS, FLAUM and EASTERBROOK, Circuit Judges.

FLAUM, Circuit Judge.

An explosion damaged appellees' property. Appellant insurance company filed a declaratory judgment action to determine the extent of its coverage under an excess insurance policy. The district court ruled that the policy language was ambiguous, and therefore held that the insurance covered property damage in excess of $25,000. We disagree and therefore reverse.

I.

United States Fire Insurance Company, Inc. ("USFIC") issued a one-year policy of $100,000 primary insurance coverage to Charter Financial Group, Inc. ("Charter") and Houston Industrial Systems, Inc. ("HIS") on January 24, 1981. On March 11, 1981, USFIC issued a second one-year policy of excess insurance to Charter and HIS. This "Commercial Comprehensive Catastrophe Liability Policy" covered personal injury liability, property damage, and advertising liability up to $2 million.

Charter was a general partner in Woodland Feed Company ("Woodland"). Woodland permitted Refuse Resource Recovery, Inc. to use its factory to conduct research experiments on converting bio-mass (essentially sawdust) into gasahol. On January 20, 1982, an explosion occurred at Woodland, damaging the factory and adjacent property. ¹ Damage actions ensued in Indiana state court against Charter and Woodland. ²

USFIC filed a declaratory judgment action in the district court ³ to determine the limit of its obligations under the policies. On January 22, 1985 the parties reached a partial settlement, agreeing that the primary policy did not cover the property damage resulting from the explosion at the Woodland factory because the defendants had failed to designate the Woodland partnership as a named insured. ⁴ The parties nonetheless agreed that the comprehensive excess policy did cover the property damage. The sole remaining issue for the district court was the determination of the threshold amount above which the excess policy covered the damage. USFIC argued for the higher of two possible figures, Charter and HIS for the lower.

Section I of the excess policy ⁵ provides coverage for property and other damage "in excess of the retained limit." Section V of the excess policy ⁶ defines the retained limit to be the greater of (a) the "applicable limits " of listed underlying policies, or (b) "an amount stated in item 4(C) of the declarations as the result of any one occurrence not covered by" the underlying policy (emphasis added). Item 4(C) lists a "self-insured retention" amount of $25,000. Charter contended, and the district court agreed, that because the underlying policy did not cover the Woodland explosion there were no applicable limits of the underlying policy within the meaning of Sec. V(a); the incident was therefore an "occurrence not covered" by the underlying policy under Sec. V(b). The district court thus found that the $25,000 amount stated in item 4(C), being greater than the zero applicable limits under Sec. V(a), constituted the "retained limit."

USFIC urges on appeal that the district court erred in finding the limits of the underlying policy inapplicable, because Charter's failure to list the Woodland partnership on the primary policy constituted a violation of a duty to "maintain" that policy in force. Condition 0 of the excess policy ⁷ provides that if the underlying policy is not maintained in force, the excess policy shall nonetheless be applied as if the underlying policy had been maintained in force. Therefore, USFIC argues, Condition 0 requires that the underlying policy be considered "in force" as to the Woodland partnership and thus applicable to the explosion for purposes of determining the "retained limit" under the excess policy. The "retained limit," appellant asserts, is therefore the $100,000 coverage of the primary policy (the "applicable limits of the underlying policies") ⁸ because it is greater than the $25,000 self-insured amount. Because we find that the limits listed in Schedule A were applicable, we do not reach the issue of whether Charter and HIS failed to "maintain" the primary policy under Condition 0.

II.

The district court determined, and the parties do not dispute, that Indiana law governs the interpretation of this insurance contract. Ambiguous insurance policies are construed against the insurer. Sur v. Glidden-Durkee, 681 F.2d 490, 496-97 (7th Cir.1982) (citing Huntington Mut. Ins. Co. v. Walker, 181 Ind.App. 618, 392 N.E.2d 1182, 1185 (1979)). "The test for determining whether a contract is ambiguous is whether reasonable men would find the contract subject to more than one interpretation." Tastee-Freez Leasing Corp. v. Milwid, 173 Ind.App. 675, 365 N.E.2d 1388, 1390 (1977). We must look to the plain meaning of all contract provisions, endeavoring to "give effect to the intent of the parties at the time they formed the contract." Keystone Square Shopping Ctr. Co. v. Marsh Supermarkets, Inc., 459 N.E.2d 420, 422 (Ind.App.1984). When there is no real doubt about what the parties intended, in other words, we will not find the contract ambiguous. See J. Appleman, Insurance Law and Practice Sec. 7402. The question, therefore, is whether the excess insurance contract is reasonably susceptible to appellees' interpretation: that failure to designate Woodland as a named insured rendered the scheduled limits of the underlying policy "inapplicable" and thereby obligated USFIC to pay for all property damage above $25,000.

A.

Several other courts have considered policy language fixing the lower limits of excess insurance coverage. Almost all of these reported cases deal with an insured's claim that the excess insurance should "drop down" to effectively become primary insurance when the underlying insurer has become insolvent. Courts have analyzed the policy language on a case by case basis. See Zurich Ins. Co. v. Heil Co., 815 F.2d 1122, 1125 (7th Cir.1987) (listing cases). Some have found the excess insurer liable to provide coverage down to the designated self-insured amount or lower; most have found no such "drop down" liability. When an excess policy provides that it will pay above any amounts "recoverable" from underlying insurers, courts have construed the policies against the excess insurers, holding them liable for the entire damage when the underlying insurer has become insolvent. At least two courts have found it a reasonable interpretation of such a contract that no insurance is "recoverable" from an insolvent company. See Reserve Ins. Co. v. Pisciotta, 30 Cal.3d 800, 640 P.2d 764, 180 Cal.Rptr. 628 (1982) (en banc); MacNeal v. Interstate Fire and Casualty Co., 132 Ill.App.3d 564, 477 N.E.2d 1322, 87 Ill.Dec. 794 (1985).

The majority of courts, however, have found that in the absence of language promising to pay above amounts "recoverable," excess insurance contracts do not obligate the excess insurer to provide primary coverage when the underlying insurer has become insolvent. The cases focus on the words describing the limit below which the excess insurance will not cover loss or damage. See, e.g., Mission Nat'l Ins. Co. v. Duke Transp. Co., 792 F.2d 550 (5th Cir.1986) ("limits of underlying insurance as set out" in schedule); Garmany v. Mission Ins. Co., 785 F.2d 941 (11th Cir.1986) (same); Continental Marble & Granite v. Canal Ins. Co., 785 F.2d 1258 (5th Cir.1986) (per curiam) (policy paid down to a designated amount if underlying insurance "inapplicable"); Radiator Specialty Co. v. First State Ins. Co., 651 F.Supp. 439 (W.D.N.C.), aff'd, 836 F.2d 193 (4th Cir.1987) ("limits ... indicated beside the underlying insurance listed"). These courts effectively held that the reference in the excess policies to underlying insurance related only to the stated limits of that listed underlying insurance. Therefore, the excess coverage started at the level of underlying insurance stated in Schedule A whether or not such primary insurance had been paid, was recoverable, or was even in effect on the date of the insurable event.

Several courts have reached this conclusion after examining language substantially similar to the language of the USFIC excess policy at issue here ("applicable limits of [listed] underlying policies"). See Steve D. Thompson Trucking, Inc. v. Twin City Fire Ins. Co., 832 F.2d 309 (5th Cir.1987); Fried v. North River Ins. Co., 710 F.2d 1022 (4th Cir.1983); Molina v. United States Fire Ins. Co., 574 F.2d 1176 (4th Cir.1978); Wommack v. United States Fire Ins. Co., 323 F.Supp. 981 (W.D.Ark.1971). ⁹ These courts found that the policy language unambiguously obligated the insurer to pay only the damage amount in excess of underlying insurance listed on the Schedule attached to the excess policy. In contrast to a promise to pay above amounts "recoverable," which may vary, the excess policies in these cases referenced a specific amount--like the $100,000 limit in the instant case. See MacNeal, 87 Ill.Dec. at 797, 477 N.E.2d at 1325. Similarly, the "total of the applicable limits of the underlying policies listed in Schedule A" of USFIC's excess policy describes the dollar amount listed on Schedule A under "general liability-property damage" as opposed to the other listed categories of primary insurance. ¹⁰ "The term 'applicable limits,' in relation ... to the Schedule A ... policies, refers only to the category of coverage applicable to the incident from which the...