Opinion ID: 350585
Heading Depth: 1
Heading Rank: 1

Heading: devonshire's defenses

Text: 21 Central National's theory of liability is straightforward: Devonshire agreed that if a policy were written on any one risk exceeding $500,000, it would obtain pro rata reinsurance; the Drexelbrook clubhouse was such a risk; Devonshire breached the terms of the agreement by failing to procure the reinsurance; Devonshire was therefore obligated by its contract to indemnify Central National. Devonshire concedes that reinsurance was required by the contract and was not obtained. It contends, nonetheless, that it has defenses to liability. Acquiescence 22 After Dickson's letter of February 6, 1973, Central National made no further inquiry of Devonshire concerning reinsurance on the Helmsley-Spear policy. Devonshire contends that Central National thereby acquiesced in the failure to acquire reinsurance, so that its right to sue for breach of contract was defeated. 23 The doctrine of acquiescence as a defense to indemnity arose originally in cases in which the right to indemnity was based, not on contract, but on principles of restitution. See Pennsylvania R. R. Co. v. Erie Avenue Warehouse Co., 302 F.2d 843, 848 (3d Cir. 1962). The right to indemnity arose in such cases when a person became liable to a third party for a dangerous condition, and as between the first person and a second party, it was the second party's duty to make the condition safe. The duty of the second party to indemnify the first was held to be waived if the first party acquiesced in the continuation of the dangerous condition. Restatement of Restitution § 95 (1937). 24 In several FELA decisions, it has been held that acquiescence in the continued existence of a dangerous condition can bar indemnity for injury to a third person even where the parties expressly contract for indemnity. See Rouse v. Chicago, Rock Island & Pacific R. R. Co., 474 F.2d 1180, 1183 (8th Cir. 1973); Missouri Pacific R. R. Co. v. Arkansas Oak Flooring Co., 434 F.2d 575, 577-80 (8th Cir. 1970); Pennsylvania R. R. Co. v. Erie Avenue Warehouse Co., supra, 302 F.2d at 848; cf. Missouri Pacific R. R. Co. v. Winburn Tile Mfg. Co., 461 F.2d 984, 989 (8th Cir. 1972); Anthony v. Louisiana & Arkansas Ry. Co., 316 F.2d 858 (8th Cir. 1963) (defense can be precluded by explicit terms of indemnity contract). The rationale for these decisions is that the indemnitee's conduct in acquiescing in the dangerous condition is blameworthy apart from the conduct of the indemnitor, and therefore restitution cannot be viewed as within the scope of a contract to indemnify. See Missouri Pacific R. R. Co. v. Winburn Tile Mfg. Co., supra, 461 F.2d at 989; Pennsylvania R. R. Co. v. Erie Avenue Warehouse Co., supra, 302 F.2d at 848. 25 These cases have no application here. Central National has not acquiesced in the continued existence of any dangerous condition. No wrong has been done to a third party. Central National is therefore barred from recovering for breach of contract only if Devonshire can establish an express, enforceable, written release or oral discharge of the duty to purchase reinsurance. See 5A A. Corbin, Corbin on Contracts §§ 1238, 1240 (1964); 2 Restatement of Contracts § 402 (1932). While Central National did not inquire further after February 6, 1973, when it requested the necessary reinsurance certificates, mere silence is insufficient to constitute an oral discharge. Devonshire's contractual duty to procure reinsurance on the Drexelbrook project, and to indemnify Central National for its failure to do so, was not discharged by Central National's failure to follow up on the lack of reinsurance. Tender of Defense and Settlement 26 Alternatively, Devonshire contends that Central National is barred from indemnity because it failed to tender to Devonshire defense of Helmsley-Spear's claim, and because Central National in fact had a defense to that claim arising from the gross understatement of values in the insured's request for a quotation. It further contends that the settlement finally concluded was in certain respects unreasonable. 27 An indemnitee who unilaterally settles a claim against it, without tendering defense or submitting the settlement to its indemnitor, must, in an action for indemnity, establish: (1) at least potential liability, and (2) the reasonableness of the settlement. See Parfait v. Jahncke Service, Inc., 484 F.2d 296, 303-305 (5th Cir. 1973), cert. denied, 415 U.S. 957, 94 S.Ct. 1485, 39 L.Ed.2d 572 (1974); Tankrederiet Gefion A/S v. Hyman-Michaels Co., 406 F.2d 1039 (6th Cir. 1969). The ultimate problem with any other rule . . . is that potentially it would allow B (the indemnitee) to spend C's (the indemnitor) money without the final judgment of a court or C's agreement. Id. at 1043. 28 This defense is not available to Devonshire, however, in view of its conduct during the course of the settlement negotiations. The District Court, in its thorough opinion, set out in detail the steps taken by Central National to inform Devonshire of every step of the negotiation process. Devonshire received copies of adjustors' reports, and Central National repeatedly called upon Devonshire to have its errors and omissions carrier participate in the negotiations. Of greatest significance, Christensen, Devonshire's vice-president, was informed in detail of the settlement terms the day after settlement was reached, and agreed that it was the best possible loss settlement. At no time prior to this suit did Devonshire dispute either Central National's liability or the propriety of settlement. From these facts, it appears that Devonshire in fact ratified the settlement, and so cannot contest its reasonableness. 29 Devonshire contends that, even if it is found to have conceded Central National's liability to its insured, it is not bound by two elements of the settlement which are unreasonable. 30 First, Devonshire challenges the $160,000 settlement of the insured's claim for rents and earnings. It points to undisputed evidence that Central National's vice-president, Gordon, instructed adjustor Day to accept the insured's rents and earnings figure without audit. It contends that the unaudited nature of the rents and earnings figure was not disclosed to Christensen, so that his consent to the settlement did not extend to these figures. 31 Helmsley-Spear submitted worksheets showing loss of earnings of $127,347.44 and loss of rents of $112,814.29, after application of co-insurance factors. At the March 28 meeting, it was agreed that these claims would be compromised for $160,000. The compromise of a $240,000 claim for $160,000 appears reasonable. Devonshire's failure to object, even after being informed that the insured's figures were unaudited, confirms this conclusion. The findings of the District Court to this effect are not clearly erroneous. 32 Second, Devonshire challenges the action of Central National in making a $144,385 payment under the replacement cost endorsement to the policy. This amount was payable only if the damaged or destroyed property is actually repaired or replaced by the insured with due diligence and dispatch. 4 33 The fire loss occurred in October 1973. The first permit for repair was obtained by the insured in April, 1974, approximately five months after the fire. Prior to this time, it was necessary for the insured to engage an architect to draw plans for the repairs. The insured first incurred expenses for repair in April 1974; the expenses continued steadily through October of that year. It appears, therefore, that the insured began reconstruction efforts shortly after the loss and continued them steadily until repairs were completed. Central National could not have avoided its obligation under the replacement cost endorsement on the grounds of lack of diligence by the insured; Devonshire therefore cannot escape its obligation to indemnify Central National on the basis of this portion of the settlement. The District Court did not err in so holding. 5 II. MEASURE OF DAMAGES 34 Both parties appeal from the District Court's computation of damages arising from Devonshire's breach of its duty to reinsure. 35 It has been held that the measure of damages (for breach of a contract to insure) is the amount the plaintiff would have been paid had the insurance been effected, or, at least, that the promisor is liable, within the amount of the proposed insurance, for the loss attributable to his failure to obtain insurance. 36 4 J. Appleman, Insurance Law & Practice § 2269 at 215-16 (1969) (footnotes omitted). 37 The parties and the District Court appear to agree that this general principle is applicable to the breach of a contract to purchase reinsurance; all agree that the proper measure of damages is the amount which would have been applied to the loss under reinsurance obtained as provided in the agency agreement. Each party has its own answer, however, to the key question: how much reinsurance was Devonshire required to obtain on this risk under the agency agreement? 38 It should be noted, at the outset, that the agreement itself is silent on the question, providing only in the addendum that the excess over the above mentioned $500,000 limitation must be reinsured on a pro rata basis, not on an excess of loss basis, with financial (sic) sound and reputable reinsurers. 39 The addendum is not a model of clarity. The District Court by clear implication found it to be ambiguous and permitted parol evidence to aid in its construction. As a general rule an ambiguous clause is construed most strongly against the drafter, especially when the contract is one between an insurance company and its insured. In this case the contract clause was contained in an agency contract between an insurer (the drafter) and its agent. There was substantial evidence that both Central and Devonshire understood the contract clause to mean that Devonshire would not write insurance on Central's behalf which would expose Central to liability in excess of $500,000 on any one risk. The District Court so held and this holding is not clearly erroneous. Central National's expert, Joseph Barker testified that the addendum clause was intended to limit Central National's loss to $500,000 and that Devonshire was expected to place agency reinsurance on a pro rata basis to protect this objective. Clarence E. Crippen, who was a vice president of Devonshire at the time the addendum was executed, confirmed this construction when he testified the whole purpose of the Addendum to the Agency Agreement was to place upon Devonshire the burden of seeing to it that Central National Insurance Company was not exposed to any risk for more than $500,000. 40 It was thus established by proper construction that it was Devonshire's contractual obligation to obtain reinsurance on any one risk sufficient to limit Central National's liability to a maximum of $500,000. 6 Since no reinsurance was in fact obtained it was the District Court's responsibility to fix the amount which would have discharged that duty. 41 Devonshire contends that it could not have been under a duty to acquire more than $500,000, the difference between the estimated values of the clubhouse property at the time of the policy ($1,000,000) and $500,000. Central National, however, contends that since a blanket policy was issued, it was necessary to provide for reinsurance in a maximum amount equal to $10,780,000 (the total coverage) less $500,000. It argues that if Devonshire had properly reinsured the entire project (since it was a blanket policy), Central's pro rata share of each dollar of actual loss would only be $.046 and hence it would not have reached its $500,000 maximum exposure on this particular loss. It claims indemnity for 95.4% of the loss. We think this places an unrealistic emphasis on the potential risk factor in this case. The blanket exposure of $10,780,000 has significance only to the extent that replacement values of the clubhouse were so underestimated that, because there was no co-insurance under the policy, the insurer would become liable for damages in an amount greater than that upon which the premium was based. 42 The District Court found that Devonshire had breached its fiduciary duty to Central in this respect by unreasonable conduct and should be liable for not reinsuring based upon true replacement values. While this reasoning is not without force, we note that it sounds in tort and the case was not tried upon this theory. We reach the same result simply by holding that, under the facts of this case, indemnity should be limited to that amount of Central National's liability which would not have been incurred had the clubhouse been reinsured at replacement value with pro rata insurance in excess of Central National's $500,000 limit. 7 The District Court established these amounts as follows: 43 Since Central National's limit of $500,000 was 31.27214% of this amount, the District Court found that Devonshire's pro rata share of the ultimately established loss would be 68.727855%. This finding is supported by substantial evidence and is not clearly erroneous. The District Court found that additional damages compensable under the contract included a proportionate share of the loss adjustment expenses of $33,002.39, based upon customary practice in the reinsurance industry. These findings are likewise supported by substantial evidence and are not clearly erroneous. 8 Allowance for Premium 44 The District Court held that the damages should be reduced by the portion of the premium which the reinsurer would have paid had Devonshire obtained reinsurance. The District Court applied the 68.727855% factor to the premium on the total blanket policy of $10,780,000. We think this was error. Any adjustment based upon a hypothetical reduction in premium expense should be consistent with the single risk which was the subject of the loss. 9 On remand the District Court should determine the amount of premium which would have been charged to obtain equivalent coverage on the clubhouse property aggregating $1,598,867. 10 Credit in the amount of 68.727855% of such premium should be allowed. Prejudgment Interest 45 Finally, the District Court denied prejudgment interest, holding that (t)he proper manner of calculating the damages in this case was vigorously contested and the result ultimately reached by the Court does not entirely conform to any of the various theories propounded by the parties during the pendency of this action. See Inland Drilling Company v. Davis Oil Company, 183 Neb. 116, 158 N.W.2d 536 (1968). See Lundt v. Parsons Constr. Co., 181 Neb. 609, 150 N.W.2d 108, 112 (1967). 46 Under Nebraska law, where the amount due on a contract or claim is subject to reasonable controversy and is incapable of being fixed by computation, recovery of interest may be had only from the date of the determination of the right of recovery and the amount thereof. Wilson Concrete Co. v. A. S. Battiato Constr. Co., 196 Neb. 185, 241 N.W.2d 819, 821 (1976), citing Muller Enterprises, Inc. v. Gerber, 178 Neb. 463, 133 N.W.2d 913 (1965). Where, in contrast, the amount due on a contract claim is liquidated, prejudgment interest may be had. Foxley Cattle Co. v. Bank of Mead, 196 Neb. 1, 241 N.W.2d 495, 499 (1976). The key consideration is whether the claim is liquidated; in making this determination it becomes difficult if not impossible to color match different factual situations to cover every controversy. Wilson Concrete Co. v. A. S. Battiato Const. Co.,supra, 241 N.W.2d at 821. 47 In this case, the amount due Central National turned on the proper determination of the amount of reinsurance that was required by the agency agreement. At various times in the course of the litigation, Central National itself computed this amount in three different ways. Devonshire had its own calculation. The District Court, in its final determination, arrived at a figure which had not been advanced by any of the parties. 48 Under the District Court's interpretation, which we have found to be proper, the amount of reinsurance was computed by reference to the replacement value of the clubhouse at the time of the policy's issuance. This value was not established until trial, and was based upon evidence adduced there. From these circumstances, we conclude that this was not a case where the amount due on the contract could be computed; rather, the amount due could only finally be determined at trial. The amount was thus unliquidated, and prejudgment interest was properly denied.