U.S. Liab. Ins. Co. v. Haidinger-Hayes, Inc.

• Citation: 83 Cal.Rptr. 418,463 P.2d 770,1 Cal.3d 586
• Decision Date: 20 January 1970
• Docket Number: INC,HAIDINGER-HAYE
• Court: California Supreme Court
• Parties: , 463 P.2d 770 UNITED STATES LIABILITY INSURANCE COMPANY, Plaintiff and Respondent, v.and V. M. Haidinger, Defendants and Appellants. L.A. 29620

Page 418

83 Cal.Rptr. 418

1 Cal.3d 586, 463 P.2d 770

UNITED STATES LIABILITY INSURANCE COMPANY, Plaintiff and Respondent, v. HAIDINGER-HAYES, INC. and V. M. Haidinger, Defendants and Appellants.

L.A. 29620.

Supreme Court of California

Jan. 20, 1970.

Joseph F. Rank, Henry F. Walker and Abe Mutchnik, Los Angeles, for defendants and appellants.

Rose & Ehrmann, Herbert Z. Ehrmann, Frances Ehrmann, Los Angeles, Kaplan, Livingston, Goodwin, Berkowitz & Selvin and Herman F. Selvin, Beverly Hills, for plaintiff and respondent.

McCOMB, Justice.

Plaintiff insurance company, an out of state corporation, entered into a general agency contract with defendant Haidinger-Hayes, Inc., a licensed California insurance agent, effective March 31, 1959. Under the terms of their agreement defendant corporation had authority to solicit and underwrite proposals for insurance, to determine the premium rate, and to issue contracts of insurance in the eleven western states in plaintiff's behalf. The consideration to it was 20% Of the premiums paid. Numerous policies were solicited, underwritten and issued pursuant to this agreement. It was cancelled on December 12, 1963, at the request of plaintiff because of excessive loss history under a policy of liability insurance issued to Cresent Wharf and Warehouse Company and its wholly-owned subsidiaries (hereinafter all referred to as 'Crescent').

The negotiations for the Crescent policy were the responsibility of defendant V. M. Haidinger, president and principal executive officer of defendant corporation. Acting for and on behalf of the corporation he issued the policy on October 10, 1961, effective November 1, 1961, for a period of three years, at a premium rate of $1.05 per $100 reportable payroll. The policy covered Crescent's legal liability for claims arising out of the work, operations and other business activities of Crescent up to a limit of liability of $25,000 per claim or casualty, plus expenses of adjusting and defending such claims. The risk under this policy was 'self-rated' and was not measurable by any published standard or comparable rate. The policy by its nature anticipated the occurrence of monetary claims for injuries sustained by employees of Crescent and that a premium rate was required which would produce a reasonable profit for the insurer after the settlement, defense and payment of such claims. This policy was cancelled at the request of plaintiff on February 28, 1963. Plaintiff continued to provide a defense for all claims and to pay all losses and expenses until October 6, 1965. On that date it notified Crescent that it was rescinding the policy from its inception. It filed an action against Crescent for rescission. This action was filed November 1, 1965, for damages resulting from the Crescent risk. The two actions were consolidated for trial and were heard by the court sitting without jury.

In the rescission action plaintiff alleged that Crescent had misrepresented, prior to November 1, 1961, that under prior and existing similar liability coverage the amount of paid and incurred losses, and the expense of adjusting and defending claims, were such that if it had continued at the same rate the loss ratio would not have exceeded 50% Under the coverage proposed to be issued, whereas the true fact was that the loss ratio was in excess of 90%; that Crescent had concealed that fact from plaintiff; and that there was mistake on the part of plaintiff. Judgment was entered for Crescent, no appeal was taken, and that judgment has now become final.

The complaint herein stated several causes of action. During the trial plaintiff dismissed the breach of contract cause of action. Findings were made against both defendants on the issue of negligence in issuing the policy at the premium rate of $1.05 per $100 payroll, and judgment was based solely thereon. In their favor, however, the court found that neither was guilty of failure to disclose any material fact to plaintiff with respect to this coverage; that neither wilfully or intentionally placed their own interests or that of others ahead of plaintiff's; and that neither was guilty of any dishonest, fraudulent or malicious acts in connection therewith. Damages were found to have been proximately caused by defendants' negligence in the sum of $137,606.20 as of the date of the conclusion of the trial, plus an undetermined amount on open unsettled claims. Continuing jurisdiction was reserved to amend the judgment to insert the amount of the additional sums which plaintiff became legally obligated to pay on these open claims, when the amounts were determined, as damages against these defendants. The court found no merit in the defense pleas of the statute of limitations.

The issues on appeal are: the sufficiency of the evidence to support the findings of negligence; liability to plaintiff of the individual defendant; statutes of limitation; measure of damages; and the propriety of the reservation of jurisdiction to amend the judgment.

The trial was long and the evidence was conflicting. There were discrepancies in the testimony of defendant V. M. Haidinger. Under well-settled rules on appeal the evidence and the inferences arising therefrom must be viewed in the light most favorable to respondent plaintiff.

Question: Does the evidence support the findings of negligence?

Yes, as to negligence of both defendants in the computation of the premium rate. No, as to the finding of personal responsibility to plaintiff on the part of the individual defendant.

The court found that during the time the agency relationship existed defendants owed a duty to plaintiff to exercise reasonable care in handling plaintiff's business and, in the investigation and underwriting of each insurance risk, to also make a reasonable effort to produce a profit for plaintiff. During the late spring and early summer of 1961, the individual defendant had carried on negotiations with Crescent's insurance broker, Bayly, Martin & Fay, Inc., and had been supplied with current, accurate and detailed underwriting information concerning the Crescent risk going back to October 1, 1954. This information was reviewed and analyzed personally by defendant V. M. Haidinger.

At the time the policy was written the custom and practice among insurance underwriters in the Southern California area, and particularly at the offices of defendant corporation, in setting a premium rate for 'self-rated' insurance risks such as Crescent was by: (1) first determining a percentage ratio of reasonably anticipated losses, including adjustment and defense expense, to reasonably anticipated premiums, such percentage being known as a 'loss ratio' which would produce a reasonable profit for the insurer; (2) by arriving at the insured's reasonably anticipated loss record under the proposed coverage, including payments by way of judgment or settlement and expenses in adjusting and defending claims, determined primarily by the insured's loss record under prior similar coverages; (3) by arriving at the insured's reasonably anticipated reportable payroll from a determination of payroll under prior similar coverages; and (4) by determining what rate would result in the premium required to produce the desired 'loss ratio.' The court found that at the time this policy was issued a 'loss ratio' of a maximum of 60% Was required in order to produce a reasonable allowance for profit to plaintiff on this coverage, and that defendant V. M. Haidinger, acting on behalf of defendant Haidinger-Hayes, Inc. should in the exercise of reasonable care have known this. The court further found that, based on information in the possession of, or readily available to, these defendants at that time it was reasonable to anticipate that Crescent's losses under the policy would be at least $85,000 per year, that its reportable payroll would not exceed $7,000,000 per year, and that it was not reasonable to anticipate that the losses or payroll would be otherwise. In the exercise of reasonable care defendants should have known, the court found, that at the premium rate of $1.05 per $100 of payroll the loss ratio was 'in excess of One Hundred Ten (110%) Per Cent' and that the policy would probably result in substantial financial loss to plaintiff. Further, the court found that no rate substantially in excess of $1.05 of reported payroll was acceptable to Crescent for this coverage, and that had a substantially higher rate been requested the policy would not have been issued.

Among the information furnished or available to defendants and which, in the exercise of reasonable care, they should have considered in determining the premium rate for this policy, was that none of the coverages issued to Crescent by other companies since October 1, 1954, had gone to expiration, each having been cancelled by prior insurers because of loss experience thereunder; that losses under prior Crescent policies had been substantial; that there had been a sharp upward trend in these losses; and that there were payroll-reducing occurrences which might offect the anticipated payroll. These included the loss by Crescent of a major customer,--and with it one-third of its anticipated payroll, and the effects of automation which had begun prior to the issuance of the policy. There was evidence that defendant V. M. Haidinger knew that the anticipated payroll would not exceed $7,000,000, that if the loss ratio was over 60% That plaintiff would suffer a financial loss and that Crescent would not accept the coverage at a substantially higher premium. He admittedly reduced the reserves for open claims, without checking to ascertain the validity of prior reserves. He anticipated a reduction in the loss picture through his better efficiency in handling claims, but he did not inquire as to the facts of prior claims or the costs of defending them. While there was evidence of federal decisions after the issuance of the policy which...