Court Opinion

ID: 9472685
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:07:18.465023+00
Date Added: 2024-06-11T17:43:04.155018
License: Public Domain

COFFEY, Circuit Judge,
dissenting.
On appeal, this court is called upon to interpret the language, contained within an insurance contract, that governs the amount of recovery intended by the plaintiff, FSC Paper Corp. (“FSC”), and the defendant, Sun Insurance Co. of New York (“Sun Insurance”). The parties agree that throughout the five-and-one-half year period preceding the fire in question, FSC adhered to the terms of the contract and supplied Sun Insurance with quarterly reports, stating the value of the Special Pack inventory at risk in FSC’s warehouse. Ir*1285respective of this five year business practice and course of dealing, FSC claimed that following the fire on July 8, 1979, it was entitled to a recovery of replacement cost, a sum well in excess of the value stated in its quarterly report of June 30, 1979, just eight days previous to the fire.
Based upon a thorough review of the entire insurance contract, the trial court judge determined that the reporting requirement of Endorsement 11 was ambiguous. The trial judge, in order to resolve that ambiguity and properly interpret the intent of FSC and Sun Insurance on the issue of recovery, reviewed and weighed the extensive evidence presented at trial, including the parties’ prior practices, procedures, reporting methods, and business dealings. Following this review of the evidence, the trial judge entered findings of fact and concluded that “[ujnder the reasonable and businesslike interpretation of the policy ... Sun Insurance was required to determine ‘replacement cost at time and place of loss’ on the basis of the values reported [quarterly] by FSC____” The majority completely rejects the trial judge’s construction of the insurance contract on the basis that “nothing in the policy explicitly made the linkage between reported value and replacement cost.” In reaching this conclusion, the majority misconstrues the Illinois law governing the construction of insurance contracts, ignores FSC’s five- and-one-half year business practice of filing quarterly value reports with Sun Insurance, and utterly fails to consider the trial judge’s findings of fact concerning the parties’ intent on the issue of recovery. As a result, the majority erroneously holds that FSC is entitled to a recovery that far exceeds the value of Special Pack inventory, as reported by FSC in the quarterly report of June 30, 1979, just eight days previous to the loss in question.1 I dissent.
The underlying facts are undisputed. On December 31,1973, FSC and Sun Insurance entered into an insurance contract that covered the inventory of Special Pack waste newspaper stored in FSC’s warehouse. The policy was in full force and effect on July 8, 1979, when a fire destroyed 12,827 tons of the Special Pack inventory. According to FSC’s amended value report, the Special Pack had a monetary value of $611,719.63, or $47.69 per ton, as of June 30, 1979,2 but following the fire that occurred just eight days later, FSC claimed that it was entitled to recover $91.15 per ton, or $1,169,197.00. Sun Insurance disputed FSC’s inflated valuation of recovery and FSC, in turn, filed this lawsuit.
The immediate controversy stems from two provisions included within the insurance contract that must be read jointly. Endorsement 11 of the policy provides:
“VALUATION: In case of loss the basis of adjustment for all property covered by this policy, except personal property [of] employees, shall be replacement cost at time and place of loss. Personal property of employees shall be on the basis of actual cash value at time of loss.
When rendering reports as provided in Section 11, values are to be reported on an equivalent basis.”
Section 11 of the policy provides in pertinent part:
“REPORTS AND PREMIUMS: Within 60 days after the end of each quarter the Assured shall report to the Company the total values of all property at risk under this policy on the last business day of that quarter. Once during each calender year the Assured shall report to the *1286Company the values of property at risk as of quarter September 30 by locations (as defined by Section 6 hereinabove).”
Based upon the extensive evidence presented at trial, the trial judge found that Endorsement 11 of the policy “constitutes a valuation provision which is intended to fix the value of destroyed property at a specific time and place____” The trial judge further determined that “[t]he words ‘equivalent basis’ ... are not clear when read in isolation, but their meaning is clarified when viewed in the light of evidence of the [prior] practices and procedures of the parties.” According to the trial judge, the term “equivalent basis” means that “values of all property (except that of employees) are to be reported on the same basis as provided in Section 11 of the policy. Endorsement 11 then uses such reports for valuation reports for purposes of adjustment.” The trial jduge added that “Endorsement 11 provides for replacement cost at ‘time and place of loss’ which ... ties down the valuation figure to a specifically ascertainable amount when reported under Section 11.” Based upon these findings, the trial judge concluded that “[u]nder the reasonable and businesslike interpretation of the policy, including the last sentence of Endorsement No. 11, Sun Insurance was required to determine ‘replacement cost at time and place of loss’ on the basis of the values reported by FSC under Section 11.”
The majority completely rejects the trial court judge’s construction of the insurance contract. According to the majority, under Illinois law, “courts should not add terms to the [insurance] policy” and in this case, “because the parties did not provide in their contract that replacement cost was limited by the reported value, we are not free to add such a term.” The majority asserts that its result, which places absolutely no limit on the amount of recovery, complies with “traditional concepts of contract construction.” I disagree with the majority’s oversimplified analysis of the parties’ insurance policy. The law in Illinois clearly provides that “the primary object in the construction of an insurance policy is to determine the intent of the parties.” Seeburg Corp. v. United Founders Life Ins., 82 Ill.App.3d 1034, 1039, 38 Ill.Dec. 272, 403 N.E.2d 503, 506 (1980) (emphasis added). According to the Illinois Supreme Court, “[i]n order to ascertain the intent of the parties the court should not examine the [insurance] policy in a vacuum but should look to the circumstances surrounding the issuance of the policy, such as the situation of the parties and the purpose for which the policy was obtained.” Dora Township v. Indiana Ins. Co., 78 Ill.2d 376, 378, 36 Ill.Dec. 341, 400 N.E.2d 921, 922 (1980). Moreover, if a term within the insurance policy is “ambiguous and uncertain, the court should consider extrinsic matters such as the purpose sought to be accomplished, the subject matter of the contract, and the circumstances surrounding the issuan of the policy, as well as the conduct of the parties when acting thereunder.” Seeburg Corp. v. United Founders Life Ins., 82 Ill.App.3d at 1039, 38 Ill.Dec. at 275, 403 N.E.2d at 506 (emphasis added) (citations omitted). See also Great Central Insur. Co. v. Bennett, 40 Ill.App.3d 165, 171, 351 N.E.2d 582, 587 (1976).
The general rule in Illinois is that the construction of an insurance policy contract is a question of law. Michigan Chemical Corp. v. American Home Assur. Co., 728 F.2d 374, 377 (6th Cir.1984); First Nat. Bank Co., Etc. v. Insurance Co., 606 F.2d 760, 768 (7th Cir.1979); Rogers v. Robson, Masters, Ryan, Brumund, Etc., 74 Ill. App.3d 467, 470, 30 Ill.Dec. 320, 392 N.E.2d 1365, 1369 (1979), aff'd, 81 Ill.2d 201, 40 Ill.Dec. 816, 407 N.E.2d 47 (1980); Illinois Casualty Co. v. Peters, 73 Ill.App.3d 33, 34, 29 Ill.Dec. 284, 391 N.E.2d 547, 548 (1979). However, Illinois law further provides that when an ambiguity arises and “the meaning of the contract is uncertain in light of the extrinsic evidence, then the intent of the parties must be determined as a question of fact____” Sunstream Jet Exp. v. International Air Service Co., 734 F.2d 1258, 1270 (7th Cir.1984) (quoting Nerone v. Boehler, 34 Ill.App.3d 888, 891, 340 N.E.2d 534, 537 (1976)). See also 2 M. *1287Rhodes, Couch on Insurance 2d § 15:3 at 120-21 (1984) (the meaning of ambiguous words in an insurance policy is a question of fact). On appeal, the trial judge’s findings of fact on extrinsic matters must be upheld unless clearly erroneous. See Fed.R.Civ.P. 52(a). Our deference is premised upon “the unique opportunity afforded the trial court judge to evaluate the credibility of witnesses and to weigh the evidence.” Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 855, 102 S.Ct. 2182, 2189, 72 L.Ed.2d 606 (1982) (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 123, 89 S.Ct. 1562, 1576, 23 L.Ed.2d 129 (1969)). Thus, unless “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed,” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948), we are bound to accept the trial court judge’s findings of fact. See Hanna v. American Motors Corp., 724 F.2d 1300, 1309 n. 8 (7th Cir.), cert. denied, — U.S. -, 104 S.Ct. 3512, 82 L.Ed.2d 821 (1984); Medtronic, Inc. v. Benda, 689 F.2d 645, 647 (7th Cir.1982), cert. denied, 459 U.S. 1106, 103 S.Ct. 731, 74 L.Ed.2d 955 (1983). Rather than adhere to this well-settled standard of review, as it applies to the construction of insurance contracts, the majority has chosen to conduct an inappropriate, unnecessary, and inaccurate de novo review of the parties’ contract.
According to the majority, the insurance contract between FSC and Sun Insurance “is unambiguous in its provision for recovery at replacement cost ‘at time and place of loss,’ ” and thus it is “unnecessary, and even inappropriate, to address” the trial judge’s findings of fact concerning the parties’ original intent. The majority arrives at this erroneous conclusion by separating the replacement cost provision of Endorsement 11 from the overall contract and interpreting it in isolation from the “equivalent basis” reporting provision included within that very same section. The majority’s flawed analysis directly contravenes a basic tenant of Illinois law that an insurance policy must be construed as a whole and “effect must be given to each word, clause, or term employed by the parties, and none may be rejected for lack of meaning or as surplusage.” Reserve Ins. Co. v. General Ins. Co., 77 Ill.App.3d 272, 280, 32 IIl.Dec. 552, 395 N.E.2d 933, 938 (1979). Indeed, “when the intention of the parties is sought from the [insurance policy] itself, it must be gathered from the entire instrument, rather than from isolated portions, and the policy should be construed as a whole.” 13 J. Appleman, Insurance Law and Practice § 7385 at 129-31 (1976). The terms of an insurance policy cannot be read in isolation to achieve a desired result and thereby gain an inflated recovery.
In contrast to the majority’s improper interpretation of the contract, the trial judge properly construed the insurance contract as a whole, concluding that under the policy, FSC is entitled to recover “replacement cost at time and place of loss,” based upon the quarterly value reports that FSC is required to file with Sun Insurance. According to Endorsement 11 of the policy these quarterly “values are to be reported on an equivalent basis.” The term “equivalent basis,” when used in this context, is undefined, indefinite, and obscure in meaning, thus rendering Endorsement 11 of the policy ambiguous under Illinois law. See Sunstream Jet Exp. v. International Air Service Co., 734 F.2d at 1269, and cases cited therein. In order to equitably resolve this ambiguity and properly determine the parties’ intent on the issue of recovery, the trial judge reviewed and weighed the extrinsic evidence presented at trial, including testimony and exhibits of the parties’ prior practices, procedures, reporting methods, and business dealings. Based upon evidence that the cost of Special Pack varies daily and sometimes widely and that FSC, for the five-and-one-half year period preceding the fire, “consistently reported the value of its waste newsprint at risk in the Crawford Warehouse on the basis of the dollars per ton for ending inventory,” the judge construed the entire Endorsement 11, including the replacement cost provision and the equivalent basis reporting provi*1288sion, as requiring Sun Insurance to “determine ‘replacement cost at time and place of loss’ on the basis of the values reported by FSC under Section 11.” Thus, unlike the majority, the trial judge properly applied Illinois law and reviewed the insurance policy in its entirety, including the complete language of Endorsement 11, to determine the parties’ intent on the issue of recovery at replacement cost.
According to the majority’s oversimplified interpretation of the insurance contract, “nothing in the policy explicitly made the linkage between reported value and replacement cost.” Here again the majority fails to interpret Endorsement 11 in its entirety, including the replacement cost provision and the “equivalent basis” reporting provision. The presence of these two provisions within the very same section of the insurance policy is clearly sufficient “linkage” to support the district court’s finding that “replacement cost at time and place of loss” is based upon the values reported by FSC.
Furthermore, the trial court judge’s construction of the insurance policy comports with the application of common sense, the parties’ previous course of conduct, and sound business principles. For the five- and-one-half year period preceding the fire in question, Sun Insurance received quarterly value reports from FSC. These quarterly reports allowed Sun Insurance to calculate the amount of inventory at risk in FSC’s warehouse, annually adjust FSC’s premium payment, and accurately project any future liabilities while allowing FSC to pay premiums based upon its fluctuating inventory rather than a fixed price. See, e.g., Standard Lumber Co. v. Travelers Indemnity Co., 440 F.2d 544, 546 (7th Cir.1971). Under the majority’s construction of the insurance policy, the very purpose of the quarterly reporting requirement is rendered meaningless because an insured such as FSC is permitted to report an inventory at a low value (i.e. historical cost) for premium purposes and then turn around and claim recovery for loss at a higher value (i.e. actual replacement). In this situation the insurer has absolutely no guarantee as to the extent of its potential liability and the insured has the windfall of low premium payments and high recovery at the time of loss. The eventual result of the majority’s inaccurate, “deep-pocket” analysis is financial disaster for the insurer.
I further note that the majority’s assertion, “it could just as easily have been the reverse,” that is, reporting inventory at a high value and claiming recovery for loss at a low value, defies logic. Certainly FSC filed quarterly value reports with the expectation that it would receive that value in the event of loss, just as Sun Insurance requested quarterly reports to annually adjust FSC’s premiums, limit potential losses, and accurately project future liabilities. A contrary interpretation of the “equivalent basis” reporting requirement renders the provision absolutely meaningless, subjecting Sun Insurance and other insurance companies who underwrite policies of this nature to serious financial problems. In short, the majority’s position, as well as FSC’s conduct, is a complete aberration of the parties’ insurance contract and the accepted practice in the insurance business to periodically report inventory values and thereby calculate the amount of insurance and the amount of premiums in direct proportion to the value of the goods at risk. See 15 M. Rhodes, Couch on Insurance 2d § 54.91 at 478-79 (1983); 4 J. Appleman, Insurance Law and Practice § 2377 at 420-22 (1969).
After thoroughly examining the entire insurance contract, the trial judge properly determined that the “equivalent basis” reporting requirement of Endorsement 11 was ambiguous. Following a review of the extrinsic evidence presented at trial, the judge found that under the terms of the insurance policy FSC and Sun Insurance did not intend for FSC to realize an unjust windfall. Unlike the majority, I adhere to the clearly erroneous standard of review and defer to the trial judge’s findings, as he was in the best position to evaluate the credibility of the witnesses and to weigh the evidence and exhibits presented at trial. Indeed, upon review of the entire record I *1289am certainly left with no definite and firm conviction that a mistake has been committed. In fact, I agree with the trial court judge’s construction of the entire Endorsement 11, including the replacement cost provision and the equivalent basis reporting provision that FSC’s recovery is limited to $47.69 per ton, the amount contained in FSC’s amended value report for June 30, 1979, just eight days previous to the loss in question. To borrow a line from Judge Cudahy’s dissent in Alliance to End Repression v. City of Chicago, 742 F.2d 1007 at 1022 (7th Cir.1984) (Cudahy, J., dissenting), “the majority has ... interpreted the [insurance policy] in a way contrary to the plain words used by the parties and has completely ignored the district court’s understanding of these words.” As a result, the majority embarks upon a complex and rather confusing advisory opinion concerning replacement cost calculation in this case. I dissent from the majority’s improper construction of the parties’ insurance contract, as well as the majority’s unwarranted analysis of replacement cost.

. According to FSC’s amended quarterly report, the value of its Special Pack waste newspaper inventory, as of June 30, 1979, was $47.69 per ton. The fire of July 8, 1979, destroyed 12,827 tons of the Special Pack inventory, totalling $611,719.63 worth of damage at FSC’s reported value. The record reveals that under the majority’s complex replacement cost calculation, it is possible that FSC will receive $1,169,197.00 in damage recovery.

. The record reveals that on July 20, 1979, FSC claimed the value of its Special Pack was $45.04 per ton as of June 30, 1979. On August 10, 1979, approximately one month after the fire, FSC amended its report claiming that the value of its Special Pack was $47.69 per ton as of June 30, 1979.