Vicksburg Furniture Mfg., Ltd. v. Aetna Cas. and Sur. Co.

• Decision Date: 15 September 1980
• Docket Number: No. 79-3826,79-3826
• Parties: VICKSBURG FURNITURE MFG., LTD., a Mississippi Corporation, Plaintiff-Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, a Connecticut Corporation, and Merchants National Bank, Defendants-Appellees. Summary Calendar. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1167

625 F.2d 1167

VICKSBURG FURNITURE MFG., LTD., a Mississippi Corporation Plaintiff-Appellant, v. The AETNA CASUALTY AND SURETY COMPANY, a Connecticut Corporation, and Merchants National Bank Defendants-Appellees.

No. 79-3826

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

Unit A

Sept. 15, 1980.

Satterfield, Allred & Colbert, Michael S. Allred, Thomas L. Kirkland, Jr., Jackson, Miss., for plaintiff-appellant.

Watkins & Eager, James L. Carroll, Paul H. Stephenson, III, Jackson, Miss., for Aetna Casualty and Surety Co.

Appeal from the United States District Court for the Southern District of Mississippi.

Before BROWN, POLITZ and TATE, Circuit Judges.

TATE, Circuit Judge:

The present diversity action, which was removed to federal court, arose out of a fire insurer's refusal to pay for a fire loss. The plaintiff corporation (Vicksburg) was the owner of a furniture factory that was destroyed by fire on July 15, 1977. Vicksburg appeals from a final judgment dismissing its suit to recover for the loss from its fire insurer (Aetna). The dismissal was based on a general jury verdict in favor of the defendant insurer. Under the instructions and evidence, the general jury verdict upheld Aetna's refusal to pay as based upon either or both of the reasons relied upon by it: (1) it claimed the policy coverage did not apply at the time of the fire because plaintiff, through its failure to comply with certain provisions of the policy requiring maintenance of a sprinkler system, had created an increase in the insured hazard; and (2) it contended that the destruction of the insured premises resulted from arson for which the plaintiff corporation is responsible (corporate arson). On appeal, Vicksburg complains of several errors in the trial court's instructions to the jury and, additionally, contends that the trial court improperly denied its motion for judgment notwithstanding the verdict (based on the alleged insufficiency of evidence) and alternatively for a new trial. Finding no error, we affirm.

Context Facts

In February 1977 Vicksburg purchased a factory for the sum of $175,000 and executed a deed of trust to secure the purchase price. It executed other deeds of trust to secure further borrowings, at least $50,000 of which was secured by the personal guaranties of the three initial stockholders, Gangwer, Stone, and Mount (who each still owned 25% of the stock at the time of the fire). In March 1977 Aetna issued a fire insurance policy to Vicksburg on the corporate property. This policy contained a provision requiring that the insured exercise due diligence in maintaining in complete working order a sprinkler system in the insured property.

On May 24, 1977 an incendiary fire occurred in the insured premises and resulted in damage to the sprinkler system. Due to this fire, Aetna paid the plaintiff the amount of $127.50 for damages resulting to the sprinkler system. Because damage to one head of the sprinkler system resulted in water leakage, the whole system was turned off approximately three weeks after the fire.

On July 15, 1977, another fire occurred, prior to the repair of the sprinkler system and while it was disconnected, which totally destroyed the insured premises. As earlier stated, Aetna refused to pay this fire loss, and Vicksburg brought the present suit to recover for same. Substantial evidence indicated that the fire was of incendiary origin. Vicksburg strongly contends, however, that insufficient evidence supports Aetna's factual claims (a) that a corporate officer-stockholder (Gangwer) was responsible for the arson, (b) that, if so, Vicksburg should be held responsible for Gangwer's individual acts so as to be chargeable therefore (under the "corporate arson" theory) and denied recovery on its fire insurance policy, and (c) that, at any rate, recovery should be denied because Vicksburg increased the insured hazard in violation of the insuring contract by failing to maintain (i. e., turning off) the sprinkler system.

On appeal, Vicksburg principally complains of: 1. deficiencies in jury instructions; and 2. the insufficiency of the evidence to establish (a) corporate arson or (b) non -waiver of the violation of the policy condition (which required Vicksburg to use due diligence to keep the sprinkler system in working order).

1. Jury Instructions

In reviewing allegations of error in the trial court's instructions to the jury, we must determine whether the charge, considered as a whole, instructed the jurors so that they understood the issues to be tried and were not misled. Frosty Lands Foods v. Refrigerated Transport, 613 F.2d 1344, 1348 (5th Cir. 1980). There is no error if the instructions, when taken together, properly express the law applicable to the case, even though an isolated clause is inaccurate, ambiguous, incomplete, or otherwise subject to criticism. Delancey v. Motichek Towing Service, Inc., 427 F.2d 897, 901 (5th Cir. 1970).

The plaintiff primarily contends that the trial court erroneously instructed the jury (a) as to the burden of proof that must be satisfied to establish a defense of arson, and (b) as to the elements necessary to support a finding of corporate arson.

(a) Burden of proof necessary to establish the defense of arson

No Mississippi cases that express the Mississippi law on point are cited or were discovered. The only Mississippi decision that Vicksburg cites to support its contention that the burden is one of "clear and convincing evidence," as in fraud, is Hartford Fire Ins. Co. v. Associates Capital Corp., 313 So.2d 404 (Miss.1975). However, in that case the Mississippi Supreme Court characterized the issue of whether arson must be shown by clear evidence as "collateral" and, therefore, declined to decide it. Id. at 407. Thus, the case does not provide authority for the plaintiff's position.

The Fifth Circuit was presented the issue, in the review of an appeal involving the defense that the insured intentionally burned the insured premises, and it implicitly recognized the "preponderance of the evidence" as the correct burden of proof in Mississippi. Williams v. Cambridge Mutual Fire Insurance Co., 230 F.2d 293, 294, 296 (5th Cir. 1956). Moreover, the rule applied in most American states is that a "preponderance of the evidence" is the proper burden of proof. See 21 Appleman, Insurance Law and Practice, § 12682 (1980); 14 Couch on Insurance 2d, § 79:473 (1968). We are not persuaded that the trial court erred in concluding that, under Mississippi law, the burden of proof that must be satisfied to establish the defense of arson is merely by a preponderance of the evidence. We are unable to find that the jury instructions to this effect were incorrect.

(b) Elements necessary to support a finding of corporate arson

For purposes of an insurer's defense of corporate arson, whether an incendiary act is within either the knowledge or control of the insured corporation (so that the corporation itself is chargeable with the act) depends upon who knew of it and whether that person was acting with the authorization, knowledge, or ratification of the corporation. Charles Stores, Inc. v. Aetna Insurance Co., 428 F.2d 989, 992 (5th Cir. 1970). If an individual, not in control of the corporate affairs, willfully set fire to the premises without the complicity of the corporation, then that act is not attributable to the corporation. Id. Additionally, the act of an officer of the corporation, not authorized by the shareholders, or the act of one shareholder, who is not practically the sole shareholder, will not be charged to the corporation. Firemen's Mut. Ins. Co. v. Aponaug Mfg. Co., 149 F.2d 359, 361 (5th Cir. 1945).

The trial court instructed the jury that if it found that Gangwer one of the twenty-five percent shareholders, an officer, and a board member committed the act of arson and was also vested with virtually exclusive management and control of the corporate affairs, then the corporation must be denied recovery under the policy. This instruction adequately expresses the law applicable in the case when considered with the jury instructions as a whole. ¹

In Kimball Ice Co. v. Hartford Fire Ins. Co., 18 F.2d 563, 566 (4th Cir. 1927), the court recognized that the actions of a corporate officer who exercises complete management and control (although owning only twenty-five percent of the stock) can prevent the corporation from recovering on its fire insurance policy. See also Annotation 37 A.L.R.3d 1385, 1387 (1971); 18 Couch on Insurance 2d, § 74:671 (1968). The rationale underlying this view is expressed in Cora Pub, Inc. v. Continental Cas. Co., 619 F.2d 482, 486 (5th Cir. 1980):

In no case can arson be attributed to a corporation unless it is established that the perpetrator acted with the corporation's assent. (Citation omitted.) Of course, since the corporation has no physical existence, it can only act through its officers and agents. Moreover, proof of corporate assent to arson, like proof of any other conspiracy, is not likely to be found in the archives of the corporation. Hence, courts have permitted insurers to attribute arson to a corporation by a variety of methods other than proof of a formal grant of authority to the arsonist.

Id. at 486. ²

(Vicksburg also cites as error the trial court's inadvertent failure to give a jury instruction offered by the plaintiff. Since the omission was not objected to before verdict, it must constitute fundamental error to merit notice on appeal. Simonton v. James, 212 F.2d 174, 177 (5th Cir. 1954). Because Vicksburg's omitted...