Court Opinion

ID: 9460896
Source: CourtListenerOpinion
Date Created: 2023-08-04 22:02:13.049811+00
Date Added: 2024-06-11T17:36:49.255380
License: Public Domain

ELY, Circuit Judge
(dissenting):
It is a fundamental principle of insurance law, now fixed by California statute, that an insurer cannot be held liable unless the insured’s loss is proximately caused by the peril or hazard insured against. California Code of Insurance § 530. Here, however, the majority ignores this principle in order to hold Royal Indemnity (hereinafter Royal) liable for the hypothetical damages of a hazard which occurred but was not the cause of any loss to the insured.
Royal and Manufacturers Mutual (hereinafter Manufacturers) both insured Kaiser against loss of profits caused by on-premises physical damage. Both companies also included idle period clauses in their policies, providing that profits which would have been lost “in the absence of the hazard insured against” were thereby excluded from coverage. Royal, in addition to its on-premises physical damage insurance, also insured Kaiser against loss of profits caused by the interruption of off-premises power. At trial Manufacturers argued that in order to give effect to its idle period clause, the Court must consider what losses Kaiser would have sustained had there been no on-premises physical damage.1 If there had been no on-premises physical damage, Manufacturers contended that there would have been substantial profits lost by Kaiser as a result of the interruption of the off-premises power supply. Therefore, according to Manufacturers, the idle period clause requires that those profits that would have been lost as a result of the interruption in off-premises power must be deducted from the actual profits lost as a result of the on-premises physical damage. The trial court, in agreeing with Manufacturers’ position, held Royal liable for the losses that would have occurred from the interruption in off-premises power, assuming there had been no prior damage to Kaiser’s plant and equipment. Royal was thus required to pay for seven-ninths of Kaiser’s damage, despite the fact that Kaiser’s loss was actually caused by a contingency (on-premises physical damage) against which both companies had insured. This is not fair.
While the majority apparently recognizes the general rule that the cost of indemnifying a loss commonly covered is shared equally by the two insurance companies up to the limit of each company’s coverage, it has nonetheless upheld the District Court’s decision. The basis for the majority’s decision is its literal interpretation of Manufacturers’ idle period clause.2 In their view the clause operates to eliminate from common coverage an amount equal to the damage that Kaiser would have suffered from the off-premises power failure if the plant had not already been disabled by *303on-premises damage. This literal interpretation violates the basic principle, heretofore emphasized, that an insured risk must cause actual damage before liability can be imposed. The majority’s error, I think, stems from its failure to take into account the purpose of the clause in the context of business interruption insurance.
“[Business interruption insurance] may be generally described as a form of insurance designed to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business, industry, or other commercial establishment or, in other words, the total or partial suspension of such business, due to the loss, or loss of use of, or damage to all or part of the buildings, plant, machinery, equipment, or other physical assets thereof, as a result of a peril or hazard insured against.”
Annot., 83 A.L.R.2d 885, 890 (1962). See also Pacific Coast Engineering Co. v. St. Paul Fire & Marine Insurance Co., 9 Cal.App.3d 270, 88 Cal.Rptr. 122 (1970); 1 Couch on Insurance (2d ed.) § 1.108, p. 102, § 1.125, p. 53. Obviously, the risk against which the policyholder was insured must be the proximate cause of the loss in order for liability to accrue to the insurance company.' And if other hazards coincidentally occur, but cause no damage, the idle period clause does not eliminate from coverage any part of the actual loss. See Rogers v. American Insurance Co., 338 F.2d 240 (8th Cir. 1964); General Insurance Co. v. Pathfinder Petroleum Company, 145 F.2d 368 (9th Cir. 1944). But the majority has interpreted the idle period clause to achieve exactly that result — e. g., liability for losses actually caused by one hazard (on-premises damage due to loss of on-premises power) is shifted to Royal which insured against a different hazard (off-premises power failure) that occurred coincidentally but caused no damage.
Idle period clauses have typically been used to eliminate from coverage any losses caused by concurrent or intervening hazards. For example, if an insured’s plant is burned to the ground after all its employees have gone on strike, an idle period clause would prevent the insured from recovering his usual business profits. He could only recover the amount of profits he would have made while the strike existed. And if an uninsured risk adds to the damage suffered by the insured, the idle period clause operates to prevent recovery for additional losses. For example, if a fire shuts down a plant for ten days, but it doesn’t reopen for fifteen days due to a strike at the same time, the insured is entitled to business profits during the time his plant was shut down because of the fire, but not for the additional time it was shut down due to the strike. Business interruption insurance reimburses the insured for the period of time that his business was idle due to the insured hazard, and the idle period clause limits the insured’s recovery to the amount he actually lost rather than his usual business profits for that period. While it may be argued that under this interpretation the idle period clause is only “boilerplate”, past decisions indicate that such “boilerplate” was intended to prevent insured parties from recovering larger damages than those actually suffered. In Eisenson v. Home Ins. Co., 84 F.Supp. 41 (D.C.Fla. 1949) the court awarded the insured recovery for prevented net profits on the basis of net profits for the twelve months preceding the fire for which it was insured, notwithstanding that the business had operated at a loss for several months immediately before the fire due to the cancellation of a large contract and would have continued to operate at a net loss. And in General Insurance Co. v. Pathfinder Petroleum, supra, our court held that when the insured had been in business for eight months during the first five of which profits were high, but during the last three of which profits were much lower and would have been lower still during the period of business interruption, recovery *304should be based on an average of the profits over the entire prior eight months. See Annot., 83 A.L.R.2d 885, 906 (1962).
Interpreting the idle period clause as a limitation to prevent greater than actual recoveries by the insured avoids the majority anomalous result whereby liability is imposed when there has been no actual damage from the insured risk. Furthermore, an interpretation of the clause in light of its purpose, unlike the majority’s literal interpretation, is consistent with other fundamental principles of insurance law, such as: (1) policies should be interpreted in light of the purposes for which they are presumably made, i. e., the courts should consider what losses the insured was attempting to protect himself against; (2) the reasonable expectations of the parties should be carried out, i. e., did the insured expect that if he insured himself from fire, and the fire occurred, that the simultaneous occurrence of an earthquake would allow the company insuring against business interruptions caused by fires to escape liability; (3) when it is possible to give two meanings to language the meaning most favorable to the insured should be adopted. In the instant case, the importance of the latter principles are minimized because our case does not involve a suit between an insured and his insurance company, but between two insurance companies. But in the next case between the insured and the insurance company the majority’s holding will compel the following bizarre result: If a plant, insured for fire, is burned to the ground, and five seconds later the charred remains fall into a pit caused by an earthquake, for which the plant was not insured, then the idle period clause operates to eliminate the insurance company’s liability. The company can successfully argue, after this decision, that if there had been no fire, there still would have been an earthquake five seconds later, so the insured can only recover what the business would have earned in the next five seconds. This will result in allowing the carrier to avoid liability for losses that it insured — loss of profits due to fire. Since the fire occurred first and was the proximate cause of the damage, the insured should be able to recover notwithstanding that an earthquake occurred later, causing no further damage. Of course, if the earthquake in some way added to the actual damage suffered by the insured, for example, by extending the time required to rebuild the plant, the idle period clause should properly eliminate the additional damage from the company’s liability. But the majority’s result will require that the insurance company be relieved from liability in the above example. That result is completely contrary to the existing principles of insurance law.
In our case Kaiser insured itself against business interruptions caused by two different contingencies — damages caused by the loss of off-premises power (insured by Royal) and damages caused by the loss of on-premises power (insured by both Royal and Manufacturers). Both of these contingencies occurred, but only one caused damage to Kaiser. At the time the off-premises power was reduced, Kaiser was already shut down, damaged and disabled from the earlier loss of on-premises power, and the loss of off-premises power did not in any way extend or enlarge the period of business interruption (the damage). If the loss of off-premises power had added to the damage caused by the loss of on-premises power, then Royal would be liable for that additional amount of damages caused by the loss of off-premises power. But to hold Royal liable for the loss to Kaiser of off-premises power that Kaiser could not use because of prior on-premises damage violates the basic concept of insurance law that there is liability only where the hazard caused damage. The majority’s decision ignores all traditional principles of insurance law and, at the same time, works an injustice with which I cannot associate myself. I would reverse.

. Manufacturers’ idle period clause stated: “This Company shall not be liable for
“4. Loss with respect to any period during which goods would not have been produced or business operation or services maintained had no fire or other peril insured against occurred.”
Manufacturers’ policy also insured Kaiser against “ . . . the actual loss sustained . . . due to interruption of business as a result of [on premises] physical damage caused directly by the perils insured against hereunder ... .” (Emphasis added.) (One of the “perils insured against” was “direct action of wind”.)

. While there was conflicting testimony offered by the insurance companies as to the meaning of the clause, I view the interpretation of the policy’s unambiguous language as a legal question rather than a factual question.