Court Opinion

ID: 8903921
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:34:10.137631+00
Date Added: 2024-06-11T17:08:02.424117
License: Public Domain

LAY, Circuit Judge,
concurring and dissenting.
This is a very complex case; it arises over the ambiguity of terms used by two insurance companies in their business dealings with one another. It seems somewhat ironic to me that although the parties have *500laboriously negotiated their terms, after a loss they cannot agree as to what they agreed upon. Undoubtedly the large damage amount claimed thwarts agreement and the court must make a valiant effort to decide which party will prevail. Since the parties cannot agree, they should not be surprised when judges also have differing opinions as to what they intended the legal effect of their language to be. This preamble is perhaps a futile and too often repeated plea for skilled insurance underwriters to strive to use plain and simple terms in their agreements so that the industry itself could agree as to the legal consequences of its language. It is little wonder laymen fail to understand the insurance contracts they purchase when the insurers themselves disagree. It is unfortunate that busy courts must be flooded with litigation such as this.
I do not feel the majority opinion realistically confronts the issue, nor do I feel it adequately answers the respective contentions of the parties.
The insurance policy procured by Devon-shire on the Drexelbrook Apartment Complex was a “blanket” policy written for $10,780,00o.1 This covered the 90 apartment buildings, shopping center, office, signs, swimming pool and club house comprising the complex; this overall sum included separate limits extended for loss of rents, earnings and contents. The basic clause in controversy is the limitation clause in the addendum which is set forth on page 3 of the majority opinion.
The measure of damages for breach of contract is just compensation flowing from the breach. It is fundamental that this compensation should be the loss which compliance with the contract would have prevented. The issue is not, as the majority determines, how much pro rata reinsurance Devonshire should have obtained under the circumstances. The answer to this question was stipulated in the Agency Agreement, to-wit: the excess of the total sum insured on any one risk over the $500,000 limitation. The more fundamental issue in determining defendant’s liability is what pro rata sum a reinsurance carrier would have been liable for had Devonshire obtained the amount of reinsurance required by the agreement. This in turn depends on the meaning within the Agency Agreement of the clause “total sum insured on any one risk.”
No one disputes that the pro rata shares of the total loss to be paid by Central National and the reinsurance carrier, according to the terms of the Agency Agreement, would be determined by dividing the total sum insured (TSI) minus $500,000 by the total sum insured:
(TSI - 500,000) _ total percentage to be paid TSI by the reinsurance carrier.
Central National urges that since this was a blanket policy the maximum risk on the Drexelbrook Complex was $10,780,000 regardless of the value given to any one unit insured. Therefore it urges that the rein-surer’s percentage of the loss, determined by using the formula, would have been 95.5%:
$10,780,000 - 500.000 - 95 5% $10,780,000
Under this theory, since total loss paid was $1,267,169.39, the liability of the reinsurance carrier would be $1,210,146.75. Central National argues that that sum should now be indemnified by Devonshire by reason of its failure to obtain reinsurance. The majority opinion indicates that this would place an unrealistic emphasis on the potential risk factor. I suggest that a more accurate reason for rejecting this theory is that Central National overlooked the Agency Agreement which qualified the meaning of the “total sum insured” by the phrase “on any one risk.” The evidence is overwhelming and both Central National and Devonshire recognize the validity of this summary by the district court:
In the industry and between these parties the singular “risk” refers to that unit of property (be it one structure, less than one structure, or more than one structure) subject to a substantial risk of loss from the same, noncatastrophic, hazard.
*501Central National Insurance Co. v. Devonshire Coverage Corp., 426 F.Supp. 7 (D.Neb., filed July 16, 1976).
Furthermore, the correspondence between the parties, as set out on page 494 of the majority opinion, clearly demonstrates that Devonshire was obligated to obtain reinsurance only on an individual risk within the complex valued at over $500,000. Under Central National’s theory they would be required to pay a reinsurance premium for $10 million reinsurance on an alleged $800,-000 risk. Therefore, I consider Central National’s theory in this regard almost quixotic. All of Central National’s inter-office memos and its correspondence with Devon-shire demonstrate that this method was never seriously suggested as a possible means of determining the pro rata responsibility of the parties.
On the other hand, Devonshire urges that the court accept the undisputed testimony of Russell McFarren, Devonshire’s underwriter, that under the policy issued, he would have purchased reinsurance on the club house’s appraised value ($1,000,000) and therefore Devonshire would be liable for only $500,000,2 less the cost of reinsurance. Not only is the testimony obviously self-serving and not binding on the court, it is not relevant to the terms of the Agency Agreement.
The Agency Agreement required Devon-shire to procure reinsurance on a pro rata basis when “the amount of the total sum insured on any one risk exeeed[s] $500,000.” It is clear that the “one risk” involved here was the club house — the question not answered by the theory of either party or the majority opinion is: for what sum was the club house (the one risk) insured?
The testimony and the exhibits clearly establish that the estimated value of the one risk was $850,000 for the club house and contents, $150,000 for rents and $150,000 for business and interruption, for a total of $1,100,000. The binder issued by Devon-shire to Helmsley-Spear clearly specified these sums, and the record demonstrates that various premium computations were based on these estimates. Although these sums were the estimated values, the total sums set forth in the blanket policy issued were $150,000 for earnings, $1,230,000 for rents, $160,000 for contents and $9,190,000 for buildings. The parties do not dispute that under the blanket policy the insured was not limited in recovery to any sum certain for an individual risk but could recover up to the possible maximum loss set forth under the above limits. Since the Agency Agreement between Devonshire and Central National required reinsurance only on single risks valued in excess of $500,000, it would next seem necessary to examine the policy to determine the amount of insurance actually issued on the one risk here involved.
The assured elected, in January 1974, to proceed under “a replacement cost endorsement” clause in the policy which defined the coverage on the buildings in question. Since the blanket policy was open ended as to any one risk, at least to the amount of the overall coverage provided in determining the extent of pro rata liabilities of the parties, we must examine this endorsement to determine what the policy provided regarding the “total sum insured on any one risk.” The endorsement was intended to provide insurance beyond the actual cost of any building, and allowed for depreciation. It expressly amended the policy to substitute the term “replacement cost” for the term “actual cash value” whenever it appeared. The amount of insurance provided was further limited by Clause 3 of that endorsement which reads:
3. This Company’s liability for loss under this policy including this endorsement shall not exceed the smallest of the following amounts:
a. the amount of this policy applicable to the damaged or destroyed property;
b. the replacement cost of the property or any part thereof identical with such *502property on the same premises and intended for the same occupancy and use;
c. the amount actually and necessarily expended in repairing or replacing said property or any part thereof.
(Emphasis added).
The after the fact appraisal of the property, relied upon by the majority opinion, serves no relevant purpose in the present case.3 It can no more limit the amount the insured may collect under the policy than can the grossly undervalued appraisal of the club house set forth in the binder when the policy was issued. The majority opinion uses an appraised value since it feels the intent of the parties to limit Central National’s liability to $500,000 cannot otherwise be met.4 This attempts to rewrite the Agency Agreement. In doing so my brothers confuse a blanket policy with a scheduled policy. See Reliance Ins. Co. v. Orleans Parish School Bd., 322 F.2d 803, 806 (5th Cir. 1963). A blanket policy “insures property collectively without providing . for a distribution of the insurance to each item.” Id. The present agreement required reinsurance only to the extent that the total sum of liability for risk assured exceeded $500,000.00. Thus, the only proper method of determining the pro rata formula clause of the Agency Agreement is to determine the actual amount insured on a given risk within the policy itself. The total sum of any one risk insured under a blanket policy must necessarily be “the amount actually and necessarily expended in repairing or replacing said property or any part thereof,” specified in Clause 3 above.
The agreement should be construed as written.
The proper figure to be used in the formula should be determined from the following amounts paid by Central National to the insured in settlement of its claim:
$ 778,782 - for the club house
144,385 - for depreciation due under replacement cost endorsement
160.000 - for loss of rents and earnings
160.000 - for contents
$1,243,167 - total.
Thus, under the Agency Agreement, as set forth by the policy, the total sum insured for the risk involved here was $1,243,167.
The formula to determine the pro rata share under the contract would be:
$1,243,167 - 500.000 - 59 7g% $1,243,167 ' '
The loan adjustment expense of $33,002.39 should not be part of the formula but can be prorated pursuant to the percentage arrived at in the formula. Thus, the total damage collectible by Central National should be 59.78% of ($1,243,167 + 33,002.39) or $762,894.
Thus, I conclude judgment should be entered for this amount, after proper allowance of premium. I concur in the majority opinion’s disposition of the remaining issues.5

. This of course was an under-evaluation for the property. Nonetheless, no one could seriously urge that the total which the assured could ever collect would be $10,780,000.00.

. A. $1,000,000 - 500.000 _ $1,000,000 50%
B. 50% of $1,000,000 $500,000

. It could have perhaps triggered, as Central National early recognized, a possible defense for misrepresentation based upon the lower valuation declared. This defense was early abandoned by Central National in the settlement of the insured’s claim. It is of course useful initially to compute the average insurance premium. Reliance Ins. Co. v. Orleans Parish School Bd., 322 F.2d 803, 807 (5th Cir. 1963). Declared value is also necessary for the purpose of determining the insured is in compliance with a 90% co-insurance clause (not applicable here). Ibid.

. This is not necessarily true. Not every initial appraisal would be prognastic as to actual cost of replacement and under a blanket policy “the total sum insured on any one risk” could well exceed the initial appraised value thus requiring Central National to pay more than the $500,000.

. The majority suggestion that the applied formula results in excess rather than pro rata insurance is a non sequitur. The application of the formula itself disputes this. I think the essential difficulty in applying the formula in the given case is that the parties are attempting to use principles governing pro rata insurance to a blanket policy rather than to a scheduled policy. When this is done it is obvious that nothing but confusion can result and we are put to sea in a quagmire of conflicting legal principles.