Case Title: New Hampshire Ins. Co. v. Fox Midwest Theatres, Inc.

Citation: 203 Kan. 720, 457 P.2d 133

Docket Number: 45,370

State: kansas

Court: Kansas Supreme Court

Date: 1969-07-17T00:00:00Z

Document:
203 Kan. 720 (1969)
457 P.2d 133
NEW HAMPSHIRE INSURANCE COMPANY, LONDON & LANCASHIRE INSURANCE, LTD., GLENS FALLS INSURANCE COMPANY, Appellants,
v.
FOX MIDWEST THEATRES, INC., a Delaware Corporation, Appellee.
No. 45,370

Supreme Court of Kansas.
Opinion filed July 17, 1969.
J.H. Eschmann, of Topeka, argued the cause, and L.M. Ascough and John A. Bausch, of Topeka, were with him on the brief for the appellants.
*721 Paul H. Niewald, of Kansas City, Missouri, argued the cause, and John C. Risjord, of Kansas City, Missouri, and Robert L. Webb, Ralph W. Oman, and Terry Bullock, of Topeka, were with him on the brief for the appellee.
The opinion of the court was delivered by
O'CONNOR, J.:
This litigation arose as the result of a fire in the Grand Theatre in Topeka on May 15, 1966, causing damage to the building. Plaintiffs are insurance companies licensed to issue fire insurance policies in Kansas, and have brought this action claiming a right of subrogation through their insured, the First National Bank of Topeka. Plaintiffs seek to recover from the defendant, Fox Midwest Theatres, Inc., the sum of $8,727.57, which constitutes the amount of loss plaintiffs were compelled to pay the insured bank under the terms of insurance policies then in effect. Defendant's liability is predicated on allegations in plaintiffs' petition that the fire and resultant damages were the result of the negligence of defendant's employees.
The defendant, as lessee, has been in possession of the theatre building under a lease agreement entered into on March 25, 1960, with the First National Bank of Topeka and other as lessors. Prior thereto a lease agreement with basically identical provisions had been executed on April 29, 1947. The present lessors and lessee are successors in interest to the original parties in the earlier agreement. On May 17, 1963, an extension agreement was executed by the lessors and lessee which extended the agreement of March 25, 1960, for a five-year term ending on June 30, 1971.
For clarity throughout the opinion plaintiffs will also be referred to as the insurance companies, the First National Bank of Topeka as the insured or lessor, and defendant as the lessee.
After filing an answer, defendant moved for summary judgment, claiming that by virtue of the provisions of the lease agreement, plaintiffs were not entitled to recover against the defendant. Subsequent thereto, counsel were allowed to file additional evidentiary matters to be considered by the court, and also written briefs. Thereupon, the district court sustained the motion and entered judgment for the defendant.
Although plaintiffs argue that the case was premature for summary judgment, it seems apparent to us there was only a question of law for the court to determine  namely, interpretation of the lease *722 agreement in light of the undisputed facts as alleged in plaintiffs' petition, which, for purposes of the motion, must be taken as true. (See, Goforth v. Franklin Life Ins. Co., 202 Kan. 413, 449 P.2d 477.) Therefore, the question for determination in this court, just as in the court below, is whether or not the lease agreement of March 25, 1960, as extended, contained provisions which exculpated the defendant, Fox Midwest Theatres, Inc., as lessee, from any tort liability resulting from fire loss to the building because of the negligence of defendant's employees.
By the terms of the agreement the lease commenced June 30, 1961, and ended June 30, 1966, during which time the lease provided for rental payments totaling $87,439.80, payable in monthly installments of $1,458.33. The extension agreement executed May 17, 1963, extending the term to 1971, contemplated extensive improvements to the theatre in the amount of not less than $40,000, entirely at the expense of the lessee.
Other pertinent portions of the lease agreement are as follows:
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The record is not clear by whom the lease was prepared. From paragraph 15 above, and an affidavit of an official of the lessor bank, the provisions are identical to those of the 1947 lease between the predecessor lessor and lessee.
The record discloses the insurance policies involved were standard fire insurance policies and covered the theatre building for loss by fire and other casualties, the contents of the building, and any improvements contemplated to be made by the lessee during the term of the lease. The policies contained a subrogation clause which provided the insurance would not be invalidated should the insured waive in writing prior to any loss any or all right of recovery against any party for loss occurring to the property. The fire loss in question was covered by the policies and was fully paid by the plaintiff insurance companies.
The trial judge, in his memorandum opinion, set forth the respective positions of the parties which, in substance, are as follows:
Defendant, in support of its motion for summary judgment, contends: (1) that in consideration of the rather substantial improvements in the property to be made by the lessee and the rental payments, the lessor agreed to carry adequate fire insurance to *724 protect the improvements in which both parties had an insurable interest; (2) that under paragraph 3 of the lease, the lessee's obligation to maintain the interior of the premises in good condition expressly excepted damage by fire or other casualty; (3) that by reason of paragraph 6 of the lease, the First National Bank, plaintiffs' insured, was obligated to collect the insurance and either restore the premises for the benefit of Fox Midwest Theatres, Inc., or pay the insurance proceeds to lessee so it could restore them, regardless of the cause of the fire; and (4) that the bank expressly waived any right to assert liability against lessee for its negligence in causing a fire, and that the insurance companies, as subrogees of the bank, stand in no better position.
Plaintiffs, on the other hand, contend that contracts for exemption of liability from negligence are not favored by the law, and that they are strictly construed against the party relying on them; that there is no express provision in the lease whereby the parties agree to exonerate the defendant-lessee from its negligence, and under the strict construction rule, a claim of exemption from liability for negligence should be denied.
The basis of the trial court's decision sustaining the defendant's motion for summary judgment is reflected in a well-analyzed, comprehensive opinion which reads:
*726 While the question presented in this case has been litigated in other jurisdictions with divergent results, the recent trend of the cases is to construe leases containing similar provisions as relieving the lessee from negligently caused fires by it or its employees. For a compilation and discussion of the decisions, see Anno. 15 A.L.R.3d 786; 6 K.L.R. 98; 5 DePaul L. Rev. No. 2, p. 305; Ill. L.F., Vol. 1956, p. 301; 18 Ohio St. L.J. 423; and 33 N.Y.U.L. Rev. 585.
Plaintiffs' main argument centers on the proposition that in determining whether an exculpatory agreement exists, courts are bound to apply the rule of strict construction, and when that rule is applied to the instant lease, the lessee is not exempted from liability for fires caused by the negligence of its employees. While in our recent case of Talley v. Skelly Oil Co., supra, we said that exculpatory contracts are not favored in the law and are to be strictly construed, we recognized that exculpatory agreements voluntarily entered into by parties standing on an equal footing are enforceable as between the contracting parties themselves.
The primary rule in construction of any contract is to ascertain the intent of the parties, and such intent may best be determined by looking at the language employed and taking into consideration all the circumstances and conditions which confronted the parties when they made the contract. (Stevens v. Farmers Elevator Mutual Ins. Co., 197 Kan. 74, 415 P.2d 236; Francis v. Shawnee Mission Rural High School, 161 Kan. 634, 170 P.2d 807; Berg v. Scully, 120 Kan. 637, 245 Pac. 119.)
The rule of strict construction which plaintiffs so strongly urge in support of their position must give way where it is plain that such construction of a contract does not convey the true intention of the parties. In discussing a similar principle to the effect that an exemption of a lessee for negligence must be "clearly and explicitly stated," the Missouri court, in Rock Springs Realty, Inc. v. Waid, supra, said:
The rule of strict construction does not require that the language used be strained or distorted in order to exclude provisions which the parties clearly intended to bring within its scope. More specifically, the requirement that an exculpatory contract be strictly construed *727 means simply that the court will not extend its terms to situations not plainly within the language used. But at the same time, such contracts are to be fairly and reasonably construed and will not be given such a narrow and strained construction as to exclude from their operation situations plainly within their scope and meaning.
We, like the trial court, do not believe the rule of strict construction is available to thwart or defeat the obvious intent of the parties to the lease agreement. By the provisions of the lease the parties contemplated that the rental payments made by the lessee apply to the cost of insurance, which was the obligation of the lessor. The terms employed manifest an intention that neither party would have to bear a loss to the building caused by fire, provided, of course, that the provisions pertaining to fire insurance had been complied with and the loss was one which was covered by such insurance. In this respect, the lease is somewhat akin to a contract of indemnity, both parties agreeing that any loss should be paid by the insurance company and the proceeds applied toward restoration of the leased premises. The practical effect of such an agreement exonerates the lessee from liability to the lessor for a negligently caused fire, since such loss was covered by the insurance taken out by the lessor for the benefit of both.
In the landmark case of General Mills v. Goldman (8th Cir.1950), 184 F.2d 359, cert. denied 340 U.S. 947, 71 S. Ct. 532, 95 L. Ed. 683, a similar lease was involved. There, among other things, the lessee agreed to return the premises to the lessor at the end of the term in as good condition as they were in, "loss by fire and ordinary wear excepted." The lease did not contain express provisions regarding the obligation to insure; but evidence was admitted showing there was an understanding between the parties that the lessor carry the insurance, which it did. The court held, in substance, that it was intended by the parties that the rents should pay the premiums, that any fire loss would be satisfied from the insurance, and that the exception "loss by fire" exempted the lessee from liability for any fire loss which was ordinarily covered by insurance. The court, in effect, equated the lease to a contract of indemnity in respect to the insurance and rejected the applicability of the rule of strict construction, saying:
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The court expressed a similar view in Mayfair Fabrics v. Henley, et al., 97 N.J. Super. 116, 234 A.2d 503, declining to determine the case on the basis of strict construction.
In another leading decision, Cerny-Pickas & Co. v. C.R. Jahn Co., 7 Ill. 2d 393, 131 N.E.2d 100, in which the lease provided that the lessee should keep the premises in repair and redeliver them upon termination in good condition, "loss by fire and ordinary wear excepted," and that the lessor should pay for fire insurance but lessee should pay for any increase in rates due to the nature of its business, the court stated:
*729 The court concluded that from the lease as a whole the lessee was not to be held liable for loss by fire, regardless of the cause thereof, and that the parties intended that the lessor should look solely to insurance as compensation for damage caused by any kind of fire.
When the provisions of the lease in the instant case are examined in their entirety, the over-all intention of the parties seems clear. They agreed that the lessor should purchase fire insurance protecting the improvements on the premises and providing "for adequate protection" of the building itself. Either party could at any time have the premises appraised and the insurance coverage adjusted to be compatible with the results of such appraisal. The lessee was required to subordinate its activities in order not to void the insurance or increase the rates. Further, and of special significance, are the terms providing that if the premises were damaged by fire, the lessor would "rebuild, repair or replace the same at Lessor's expense;" but should the lessor fail to make such repairs, the lessee was given the option of rebuilding or repairing the premises, and if such option were exercised, the lessor agreed "to make available to lessee the proceeds of all insurance received by lessor on account of such damage." The true implication of these provisions is that the landlord's obligation to insure was an obligation intended to inure to the benefit of both parties. We believe it highly illogical to think that the parties would provide that the proceeds of insurance could be made available to the lessee for purpose of making repair, and at the same time the lessee be required to reimburse the insurer for a negligently caused fire. Such an interpretation would defeat the manifest intention of the parties that insurance was for both the lessor's and lessee's benefit.
Where, as here, the lease contemplated that any insurance was for the benefit of both parties, recovery by the insurer from the lessee, if permitted, would indeed be a windfall. For that matter, there is nothing in the agreement disclosing an intent that the lessee should purchase insurance for protection of the premises against its own negligence or that of its employees. In Rock Springs Realty, Inc. v. Waid, supra, the court noted:
The lease provisions in the Rock Springs case were virtually identical to those in the instant lease, including a provision similar to the one here that the lessee agreed to maintain the interior of the premises in good repair "damage by fire or other casualty being expressly excepted." We subscribe to the reasoning as set forth in the Missouri court's opinion, and particularly with its conclusion expressed in the following language:
The judgment is affirmed.