Case Title: Agra-By-Products, Inc. v. Agway, Inc.

Citation: 347 N.W.2d 142

Docket Number: 

State: north-dakota

Court: North Dakota Supreme Court

Date: 1984-03-29T00:00:00Z

Document:
347 N.W.2d 142 (1984) AGRA-BY-PRODUCTS, INC., a corporation, Plaintiff and Appellant, v. AGWAY, INC., a corporation, Ray Wilson and Lee Leines, Defendants and Appellees. Civ. No. 10541. Supreme Court of North Dakota. March 29, 1984. *143 Stefanson, Landberg, & Alm, Moorhead, Minn., and Lamb, Schaefer, McNair & Larson, Fargo, for plaintiff and appellant; argued by Michael D. McNair, Fargo, and Dennis Bitz, Bismarck. Gjevre, McLarnan, Hannaher, Vaa, Skatvold & McLarnan, Moorhead, Minn., for defendants and appellees; argued by Timothy J. McLarnan, Moorhead, Minn. ERICKSTAD, Chief Justice. This is an appeal from a judgment entered by the District Court of Cass County on August 2, 1983, dismissing the complaint of the plaintiff, Agra-By-Products, Inc., [Agra], pursuant to the district court's order granting a motion for summary judgment in favor of the defendants, Agway, Inc., and its employees Ray Wilson and Lee Leines [Agway]. We affirm in part, reverse in part, and remand for trial. Traill County Storage, Inc., a North Dakota corporation, and Agway entered into a written lease on June 22, 1979, wherein it *144 was agreed that Traill County Storage would lease to Agway a twenty-acre test plot site, iron-clad flat storage warehouse, and cribbed elevator structure located in Traill County. Pertinent provisions of the lease read as follows: Three previous leases dated January 31, 1972, June 6, 1975, and May 23, 1977, were entered into by the parties. These leases, superseded by the lease dated June 22, 1979, also covered the warehouse and elevator and included provisions similar or identical to paragraph 5 of the lease dated June 22, 1979. On May 2, 1980, a fire destroyed or materially damaged the buildings under lease to Agway and other property. Agra, having "merged and consolidated" with Traill County Storage, commenced a lawsuit against Agway by service of summons and complaint on February 1, 1982, to recover its insurer's subrogation claims and its own uninsured loss resulting from the fire.[1] Agra alleged in its complaint that the negligence of Agway constituted a proximate cause of the fire and asked that judgment be entered in its favor against Agway for $1,500,000 plus interest, costs, and disbursements.[2] In its answer, Agway denied the allegations set forth in Agra's complaint and moved that the complaint be dismissed on grounds it failed to state a claim upon which relief could be granted. Agway alleged that Agra's cause of action was barred by provisions in the parties' lease. Agway filed a counterclaim on March 5, 1982, alleging the fire occurred because of negligence on the part of Agra in leasing *145 defective buildings and equipment and in negligently maintaining and inspecting the leased property. Agway alleged that it suffered damage to personal property as a result of Agra's negligence in the amount of $500,000.[3] Agway thereafter filed a motion to dismiss Agra's complaint on grounds it failed to state a claim upon which relief could be granted and because there was no genuine issue as to any material fact pursuant to Rules 12(b)(5) and 56(c), N.D.R.Civ.P. Affidavits in opposition to the motion were filed by J. Paul Gunkleman, Agra's President, and Raymond A. Lamb, a former shareholder and Director of Traill County Storage. These affidavits assert in part that it was never the intention of Agra to exonerate Agway from liability for its own negligence, that all parties knew that the leased premises were inadequately insured, that Agway had obtained its own insurance coverage on the leased premises, and that Agway would not reimburse Agra for any and all insurance Agra wished to carry on the leased premises. Fredrick Alm, an attorney for Agra, asserts in an opposing affidavit that he received a letter dated April 28, 1981, from the claims manager of Agway suggesting that the parties agree to a mutual waiver of their subrogation rights. A supporting affidavit submitted by James Krogh, Sunflower Department Manager for Agway and custodian of Agway's records relating to the leased property, includes assertions that Agway paid the premiums on the fire insurance policies referred to in the lease and that Agway had no separate fire insurance policy protecting its leasehold interest. On June 3, 1983, Agra moved the district court for an order to amend its complaint to allege that Agway's conduct constituted gross negligence. An affidavit filed June 9, 1983, by Duane Ilvedson on behalf of the AID Insurance Company includes the assertion that the AID Insurance Company has a $35,000 subrogation interest in certain property destroyed or damaged in the fire which was not subject to the parties' lease agreement.[4] On July 20, 1983, the district court issued its memorandum opinion and order granting Agway's motion for summary judgment and dismissing Agra's complaint. The court found that the terms of the parties' written lease were clear and unambiguous as a matter of law and therefore refused to consider extrinsic evidence offered to prove the intent of the parties. The court determined that it was "obvious from reading the whole lease," that the provision for insurance was for the benefit and protection of both parties and therefore Agway was an insured. The court also determined that the absence of a waiver of subrogation clause or other provision in the lease specifically absolving Agway from liability for its own negligence did not mean the parties intended that Agway be liable in such a case. The court concluded that the terms of the lease precluded any recovery by Agra from Agway. It was also concluded that the insurance companies could not recover from Agway because an insurer, as a matter of law, cannot recover from its own insured. Agra's motion to amend its complaint to allege gross negligence was denied. Agra contends that the lease is ambiguous as to whether or not Agway is responsible for its negligence and that this ambiguity results in a genuine issue of material fact so as to preclude entry of summary judgment. In accordance with this contention, Agra raises the following issues: The district court, in granting Agway's motion for summary judgment, made no distinction between the various subrogation claims and Agra's alleged uninsured loss, nor did it distinguish between the leased and non-leased property destroyed or damaged in the fire. Our standards for reviewing an appeal from a summary judgment were recently set forth in Hastings Pork v. Johanneson, 335 N.W.2d 802, 805 (N.D. 1983): A lease is subject to the general rules of contract construction. Weiss v. Anderson, 341 N.W.2d 367, 369 (N.D.1983). We have often said that the construction of a written contract to determine its legal effect is a question of law for the court to decide. See Hastings Pork v. Johanneson, supra, 335 N.W.2d at 806; Metcalf v. Security International Insurance Company, 261 N.W.2d 795, 799 (N.D.1978). The object of interpreting and construing a contract is to give effect to the mutual intention of the parties as it existed at the time of contracting. Section 9-07-03, N.D.C.C.; Metcalf v. Security International Ins. Co., supra. As the lease is reduced to writing, we must ascertain the intention of the parties from the writing alone, if possible. Section 9-07-04, N.D.C.C.; Hastings Pork, supra. There is no provision in the parties' lease which expressly absolves Agway from tort liability for a fire resulting from its negligence. Agway contends that such a result can be inferred from paragraph 5 of the lease. It argues that its obligation under the lease to reimburse Agra for insurance premiums paid by Agra for the purpose of continuing to insure the leased premises under a policy of insurance attached to and made a part of the lease reveals the parties' intent to insure the premises for their mutual benefit and protection. We are referred by the parties to decisions of other jurisdictions which comprise the "trend of modern case law ... to relieve the lessee from liability for fire damage caused by his own negligence where the circumstances lead the court to conclude the parties intended such a result." Rizzuto v. Morris, 22 Wash. App. 951, 592 P.2d 688, 690 (1979). A brief summary of these cases is included in Alaska Insurance Company v. RCA Alaska Communications, *147 Inc., 623 P.2d 1216, 1218 (Alaska 1981): See also Page v. Scott, 263 Ark. 684, 567 S.W.2d 101 (1979); Fred A. Chapin Lumber Company v. Lumber Bargains, Inc., 189 Cal. App. 2d 613, 11 Cal. Rptr. 634 (1961); West American Insurance Company v. Pic Way Shoes of Central Michigan, Inc., 110 Mich.App. 684, 313 N.W.2d 187 (1981); Mayfair Fabrics v. Henley, 97 N.J.Super. 116, 234 A.2d 503 (1967). But see Sears, Roebuck And Company v. Poling, 248 Iowa 582, 81 N.W.2d 462 (1957); Poslosky v. Firestone Tire And Rubber Company, 349 S.W.2d 847 (Mo.1961); Wichita City Lines, Inc. v. Puckett, 156 Tex. 456, 295 S.W.2d 894 (1956). A majority of the cases cited by the parties construe lease agreements which also include, and upon which is placed considerable emphasis, a provision obligating the lessee to surrender the leased premises at the end of the lease in the same condition as when acquired with exception for loss by fire.[5] Illustrative is Cerny-Pickas & Company v. C.R. Jahn Company, 7 Ill. 2d 393, 131 N.E.2d 100 (1956). In Cerny-Pickas the lessor and insurance company brought an action to recover damages from the lessee for negligence which resulted in the fire loss of the lessor's building, machinery, and equipment. Under the lease, the lessor was required to pay for fire insurance on the leased property and the lessee was to "yield up said premises to Lessor in good condition and repair (loss by fire and ordinary wear excepted)" at the end of the lease. In ruling for the lessee, the Supreme Court of Illinois said: The court found that the parties contemplated the contingency that the leased property might be damaged or destroyed by fire. First considered was the language of the surrender clause, excepting loss by fire: In reaching its conclusion, the court also placed emphasis on the lessor's obligation under the lease to pay for fire insurance: In Liberty Mutual Fire Insurance Company v. Auto Spring Supply Company, 59 Cal. App. 3d 860,131 Cal. Rptr. 211 (1976), an insurance company, Liberty, brought a subrogation action against a sublessee of the named insured, the lessor, for fire damage to a leased building. Under the lease, the lessee was required to take out and maintain fire insurance on the building at its own expense "`with loss payable to the lessor.'" A portion of the rent payable by the sublessee under the sublease covered the premium on the fire insurance policy carried by the lessee under the terms of the lease with the lessor. Under both the lease and sublease the proceeds of the insurance policy were to be used to repair fire damage. In ruling that the insurance company, as a matter of law, was not entitled to judgment, the court said: The court also did not "deem of decisive consequence the fact that both the lease and the sublease ... [lacked] any implied exemption of [the sublessee] from liability for fire loss to [the lessor]." None of the cases cited by either party construe a lease containing a provision requiring the lessee to reimburse the lessor for premiums paid by the lessor for a policy of insurance attached to and made a part of the lease. The cases are useful, however, in that they illustrate that the essential point is to ascertain the parties' true intent by reading and construing the lease as a whole. "[E]very case like the present one must be decided on its own facts and on the actual terms of the lease." Rock Springs Realty, Inc. v. Waid, supra, 392 S.W.2d at 274. The cases also illustrate that a mutual understanding that insurance is provided for the mutual protection of the parties may be implied from provisions of the parties' lease. Agra argues that paragraph 5 of the lease, in the absence of a surrender clause excepting loss by fire, a waiver of subrogation clause or other clause specifying the effect of loss due to fire, coupled with the absence of a provision specifying that the insurance obtained should also benefit the lessee, gives rise to a dispute as to whether or not the parties intended that Agway be absolved from liability for a fire caused by its negligence. Agra contends the lease is ambiguous in this regard. It argues that the affidavits in opposition to Agway's motion to dismiss establish that Agway requested a mutual waiver of subrogation rights with Agra; that although Agway reimbursed Agra for insurance, the leased premises were not adequately insured because Agway was unwilling to reimburse Agra for premiums to procure additional insurance; and that Agway never requested that Agra include Agway as a named insured under the fire insurance policy. These facts, Agra contends, reveal the true intent of the parties and also establish that the lease is ambiguous. It is well-settled that extrinsic evidence, such as the supporting and opposing affidavits filed in this case, is to be considered only if the language of the contract is ambiguous and the parties' intentions cannot be determined from the writing alone. Section 9-07-02, N.D.C.C.; Yon v. Great Western Development Corporation, 340 N.W.2d 43, 46 (N.D.1983). The determination of whether or not the terms of a written contract are clear and unambiguous is a question of law. Yon v. Great Western Development Corp., supra; Hastings Pork, supra. Questions as to the parties' intentions which cannot be resolved without the use of extrinsic evidence are questions of fact for the trier of fact. Yon, supra; Zitzow v. Diederich, 337 N.W.2d 799, 801 (N.D.1983). If the parties' intentions can be ascertained from the writing alone, without reference to extrinsic evidence, then the interpretation of the contract is entirely a question of law, and this Court will independently examine and construe the contract to determine whether or not the district court erred in its interpretation of it. Zitzow v. Diederich, supra; Hastings Pork, supra. We believe that the parties' intentions are ascertainable from the writing alone. The parties agreed to continue the insurance provisions in full force and effect as shown by the policy of insurance attached to the lease. Agway agreed to reimburse Agra for premiums paid by Agra for "said insurance" on the buildings subject to the lease. The lease also required Agway to make any and all normal, usual and ordinary maintenance and repair of the leased premises. Section 47-16-10, N.D.C.C., provides that a "lessee of real property must repair all deteriorations or injuries thereto occasioned by his ordinary negligence." *150 A lessee's insurable interest in property leased may consist, in part, of the right or obligation to make repairs. Stebane Nash Co. v. Campbellsport Mutual Insurance Co., 27 Wis.2d 112, 133 N.W.2d 737, 742-43 (1965). See Section 26-02-06, N.D.C.C.; Burroughs Corporation v. Barry, 380 F.2d 427, 432 (8th Cir.1967); Grand Forks Seed Company v. Northland Greyhound Lines, Inc., 168 F. Supp. 882, 883, 884 (D.N.D.1959); Reishus v. Implement Dealers Mutual Insurance Co., 118 N.W.2d 673, 682 (1962); Couch on Insurance 2d § 24:60. It is quite clear the parties contemplated that the leased premises might be destroyed or damaged by fire or some other peril and made provision for such a contingency by agreeing to continue to insure the leased premises. Clearly the parties intended to shift at least a portion of their risk of loss to an insurance company in return for premium payments, irrespective of negligence. To construe paragraph 5 of the lease as merely providing for reimbursement by Agway for insurance premiums paid by Agra and nothing more would place an undue hardship on Agway and ignores that the policy of insurance was to be attached to and expressly made a part of the lease. We find that paragraph 5 of the lease is a clear indication of the parties' intent to provide for the mutual protection of their insurable interests in the leased property. We can envision no other reason for such a provision. This interpretation is not inconsistent with any other provisions of the lease. Agra contends that Agway's conduct in placing a limit upon what it would pay Agra for insurance premiums, as alleged by the affidavit and deposition testimony of J. Paul Gunkelman, and in procuring its own insurance covering the leased premises, as alleged by the affidavit of Raymond Lamb, evidences a modification of the lease and raises a genuine issue of fact so as to preclude entry of summary judgment.[6] Agra does not specifically assert to what extent this alleged conduct alters the parties' lease. The district court concluded that these allegations were immaterial and did not add or detract from the terms of the written lease. Agway argues that Gunkelman's deposition testimony relates to Agway's refusal to pay a greater premium during the renegotiation of the prior lease dated June 6, 1975. We agree that the deposition testimony of Gunkelman concerning the allegation that Agway placed a limit upon what it would pay Agra for insurance premiums was made in reference to the renegotiation of a prior lease now superseded by the lease dated June 22, 1979. A letter to Lamb from Agway containing a liability insurance certificate relied upon by Lamb as an indication that Agway had procured its own insurance covering the leased premises is dated February 9, 1976. Agway argues that this evidence actually reveals that no modification of the lease of June 22, 1979, occurred. We agree. Agra's allegations do not show that there is a genuine factual issue for trial concerning whether or not the lease dated June 22, 1979, was modified by the parties pursuant to Section 9-09-06, N.D.C.C. We therefore construe the lease to protect Agway from subrogation claims arising from the insurance provisions in force and effect as shown by policy or policies of insurance made a part of the lease, regardless of whether or not Agway was negligent in causing the fire. Agra argues that this result jeopardizes most of the insurance industry by exposing insurers to unknown risks. We do not agree. "Insurance companies expect to pay their insureds for negligently caused fire, and they adjust their rates accordingly." Rizzuto, supra. Agra contends there was clearly no intent to absolve Agway from liability *151 for a fire loss caused by Agway's gross negligence and directs our attention to 15 A.L.R.3d 786, § 8, for the proposition that such distinctions in the degree of culpability have been recognized by other courts in similar cases. The cases cited in the annotation involve the question whether or not a fire exemption provision in a lease absolves the landlord or tenant from liability for loss due to fire on account of his willful or wanton conduct. See Thomas v. Atlantic Coast Line R. Co., 201 F.2d 167 (5th Cir.1953); Columbia Ins. Co. v. Texas & P. Ry. Co., 74 F. Supp. 714 (W.D.La.1947); Englehardt v. Triple X Chemical Laboratories, Inc., 53 Ill.App.3d 926, 11 Ill.Dec. 613, 369 N.E.2d 67 (1977); Bishop v. Associated Transport, Inc., 46 Tenn.App. 644, 332 S.W.2d 696 (1959). We have reviewed the cases cited and find them distinguishable. The conclusion reached in each of the cases rests on the court's interpretation of a lease provision exempting a party to the lease from liability for fire damage. In the instant case, we are not directed to provisions of the lease or to provisions in any policy of insurance from which it could be inferred that the insurance coverage obtained by the parties for their mutual benefit and protection was not intended to cover loss by fire caused by the gross negligence of Agway. "An insurer is not liable for a loss caused by the willful act of the insured, but he is not exonerated by the negligence of the insured or of his agents or others." Section 26-06-04, N.D.C.C. In an early case, this Court implied that even the "grossest negligence of the insured" could not be equated with willful conduct under the identical statutory predecessor to Section 26-06-04. See First Nat. Bank of Nome v. German American Ins. Co., 23 N.D. 139, 134 N.W. 873, 879 (1912). We have previously defined gross negligence in a general sense as "practically willful in its nature." See Sheets v. Pendergrast, 106 N.W.2d 1, 5 (N.D.1960). However, gross negligence is not "willful" as a matter of law. Wysoski v. Collette, 126 N.W.2d 896, 898 (N.D.1964). We conclude therefore that Agra suffered no prejudice from the trial court's refusal to permit Agra to amend its complaint to include the allegation of gross negligence. Agway contends that the exonerating effect of its status as a co-insured also extends to Agra's uninsured loss. It is argued that Agra had full control over the type and amount of insurance to be obtained and that Agra's failure to procure adequate insurance to cover the full value of the leased premises is a cost it will have to bear. Looking to the lease, we find no agreement as to the procurement and maintenance of a specified level of insurance. Agway agreed to reimburse Agra for "all insurance premiums of any nature of kind paid by [Agra] for said insurance on the buildings" subject to the lease; "said insurance" referring to the insurance provisions in full force and effect as shown by the policy of insurance attached to the lease. Agra did not agree "to insure the premises against loss by fire to the extent of the fair insurable value thereof." See City of Deland v. Dri-Clime Lamp Corp., 348 So. 2d 1239, 1242 (Fla.App.1977). The terms of the lease cannot be construed to absolve Agway from liability for its negligence in causing Agra's uninsured loss. We conclude that Agway is limited in its protection under the lease to the extent of insurance coverage provided for by "the insurance provisions in full force and effect as shown by policy of insurance attached [to] and made a part [of the lease]." We construe this provision to include all insurance, in effect at the time of the fire, purchased by Agra on the leased property during the term of the lease with Agway.[7] Nor do we construe the lease so as to absolve Agway from liability for damage caused by its negligence to buildings or other property not subject to the lease. Agway argues that it was foreseeable that if a fire broke out it could spread to adjacent buildings or equipment, leased or non-leased, and that the insurance coverage provided by paragraph 5 of the lease was intended to provide the sole source of compensation for any and all fire losses. We do not construe the lease so broadly. There is no provision in the lease that has any application to non-leased property. Such property is beyond the terms of the lease. See Sannit v. Aarons, 297 F. Supp. 798, 800 (D.Del.1969). We hold, as a matter of law, that the provisions of the parties' lease absolve Agway from liability to Agra for fire damage caused by Agway's negligence to property subject to the lease, but only to the extent of insurance coverage purchased by Agra provided by the insurance policy or policies in force and effect for the property under lease to Agway. The summary judgment of the district court is therefore affirmed in part and reversed in part. We remand this case for trial on the merits of Agra's claims concerning Agway's liability for Agra's alleged uninsured loss and damages to non-leased property. Costs on appeal shall be awarded to the appellant, Agra. SAND, GIERKE, PEDERSON and VANDE WALLE, JJ., concur. [1] Rule 17(a), N.D.R.Civ.P., which requires that every action be prosecuted in the name of the real party in interest, is complied with where an action is brought against a tort-feasor in the name of an insured who has been paid by an insurer for only a portion of his loss. Vantine Paint & Glass Company of Dickinson, Inc. v. Kudrna, 194 N.W.2d 760 (N.D.1972); Regent Cooperative Equity Exchange v. Johnston's Fuel Liners, Inc., 122 N.W.2d 151 (N.D.1963). [2] Agra alleged that it sustained the following damage as a result of the fire: "[T]otal and partial losses to property ..., including a grain elevator, a ... galvanized steel building utilized as a warehouse, sunflower hulls, fences, feedbunks, cattle self-feeders, a granary, granary contents, electrical equipment, a grain dryer, feedlot watering system, a concrete slab, crops, bridge planks and telephone poles, and other numerous special and general damages, incidental and consequential damages including loss of earnings, interest expenses, clean up expenses, supervisory expenses, equipment rental expenses, and other damages including loss of rental income." [3] Agway also caused a third-party summons and complaint to be served upon Traill County Storage, Inc., for its failure to include a waiver of subrogation clause in the lease agreement. The third-party complaint was dismissed without prejudice pursuant to the terms of a settlement agreement reached by the parties. [4] AID Insurance Company asserts that it has a subrogation interest in the following non-leased property destroyed or damaged in the fire: sunflower hulls (4,165,420 lbs.), various fences, bunkers, hay feeders, self-feeders, granaries, lighting system, and planking. [5] See generally Annot., Validity, Construction, and Effect of Provision of Lease Exempting Landlord or Tenant From Liability on Account of Fire, 15 A.L.R.3d 786, § 7 (1967 & Supp. 1983). [6] Section 9-09-06, N.D.C.C., which sets forth requirements for the alteration of a written contract, reads as follows: "A contract in writing may be altered by a contract in writing or by an executed oral agreement and not otherwise. An oral agreement is executed within the meaning of this section whenever the party performing has incurred a detriment which he was not obligated by the original contract to incur." [7] The record does not disclose policies physically attached to the lease. Attached to the affidavit of James Krogh are copies of various insurance policy declaration sheets in the possession of Agway; however, it is asserted that Agway does not have copies of all the insurance policies in effect at the time of the fire. The following information is attached to the affidavit as described by Krogh: (1) "[D]eclaration sheets from four insurance policies in effect in 1975 and 1976. These four declaration sheets collectively are referred to as Exhibit 1 and are the policies referred to in paragraph 5 of the 1979 and earlier versions of the lease," (2) Declaration sheets and endorsements from Capitol Indemnity Corp., Monticello Ins. Co. and National American Ins. Co. all in effect at the time of the fire, and (3) "A copy of a policy from Midland Union Mut. Ins. Co. in effect at the time of the fire." Agra is the named insured on all the policies referred to in the affidavit, which are, to the best of Krogh's information, all standard fire insurance policies.