North Carolina Lawyers Weekly
Colony Insurance Co. v. Peterson (Lawyers Weekly No. 12-03-0566, 65 pp.) (L. Patrick Auld, USMJ) 1:10-cv-00581; M.D.N.C.
Holding: A separate agreement existed between the plaintiff-insurer and the defendant-bank as a mortgagee. Accordingly, even if the insurer may rescind its policy with the property owner (and thus the bank as a loss payee) pursuant to G.S. § 58-3-10 due to material misrepresentations in the insurance application, the bank’s rights as a mortgagee would survive.
It is recommended that the parties’ cross-motions for summary judgment and judgment on the pleadings be granted in part and denied in part.
Facts
Before it went out of business, the defendant-LLC conducted its manufacturing operations at 501 Hamilton Road in Montezuma, Georgia and its office and warehousing operations on adjacent property at 261 Hamilton Road. After the LLC went out of business, fire destroyed the building at 261 Hamilton Road, and the defendant-bank, which held a mortgage and a security interest in personal property on both tracts, learned that there was no insurance on either tract.
The bank asked the third-party defendant insurance agency and agent to help the bank buy a force-placed insurance policy covering 501 Hamilton Road. The agency and agent obtained a policy from the plaintiff-insurer. The insurance application incorrectly stated that the property was equipped with a “central station fire alarm” and that electricity and gas were “on” at the property.
The insurer required the bank to pay for an inspection of the property. The inspection revealed the mistakes in the application, but the insurer did not inform the bank.
Subsequently, the 501 Hamilton Road property was damaged by fire.
Waiver & Estoppel
Contrary to the insurer’s argument, applying the doctrines of waiver and estoppel in this case would not expand the policy to cover risks not contemplated by the policy, i.e., that fire might destroy the subject property.
Moreover, a decision as to whether this case involves a waiver by the insurer, or circumstances that estop the insurer from denying coverage under the policy, requires resolution of a material question of fact. In the light most favorable to the bank and the LLC, the court cannot say that the 27 days between the time the insurer received the inspection report and the fire was insufficient, as a matter of law, for the insurer to take action on the inspection as provided — especially in light of testimony that, had the inspection been reviewed, immediate action would have occurred.
The insurer attempts to frame the issue as not how long it would have taken the insurer to act on that inspection report, but rather whether the sheer amount of tasks its agent, Ms. Gauthier, had to complete limited the ability to act more quickly. However, the insurer has not cited (and the magistrate judge has not found) authority supporting the position that where an insurer fails to act due to workload on an agent (unrelated to the matter at issue) the doctrines of waiver/estoppel cannot apply. On these facts — i.e., the payment of an inspection fee, a 27-day period between the insurer receiving the inspection report and the underlying event, testimony indicating that immediate action would have occurred had said inspection report been reviewed – N.C. law does not warrant a finding for the insurer on this issue at the summary judgment stage.
It would also be inappropriate to grant summary judgment on this issue in favor of the bank and the LLC.
Whether the 27-day period during which the insurer had possession of the inspection report but failed to take action establishes waiver/estoppel involves factual determinations unsuitable for resolution at summary judgment.
Rescission
To the extent a factual dispute exists as to waiver/estoppel, the court should not enter summary judgment for the insurer on the basis of its arguments regarding rescission. Moreover, on the evidence before the court, a genuine issue of material fact exists as to whether the application and/or the supplement thereto contained material misrepresentations. Self-serving declarations of materiality by an underwriter are not always conclusive. Furthermore, the record reflects that, in the past, when faced with similar discrepancies, the insurer has appeared to take actions inconsistent with its current position.
Finally, materiality is generally a question of fact for the jury. Accordingly, the court should decline to enter summary judgment as to whether the application and/or the supplement contain material misrepresentations that would permit rescission.
Fire Protective Safeguards Endorsement
The policy required the insured to maintain fire extinguishers, an automatic sprinkler system, and functioning utilities. Neither the power nor the gas was on, and the insurer contends that the property’s fire extinguishers lacked property tagging and inspection. However, defendants point out that the inspection report noted that the building had “acceptable” fire extinguishers. Defendants also contend that the sprinkler system was operational until it was vandalized.
Additionally, defendants contend that, because the Fire Protective Safeguards Endorsement has the purpose of minimizing fire risk and, “as admitted by [the insurer’s] Rule 30(b)(6) representative, any lack of utilities being on in the building had nothing to do with causing or contributing to the May 18 fire,” any breach was merely technical and would not relieve the insurer of its obligation to provide coverage.
Because a genuine issue of material fact as to waiver and estoppel remains, the court should not enter summary judgment for the insurer on the basis of violations of the policy’s Fire Protective Safeguards Endorsement.
In addition, with respect to requirements that the 501 Hamilton Road property have an automatic sprinkler system and fire extinguishers, sufficient evidence exists to support a finding that the property was not in violation of these conditions.
Moreover, with respect to the requirement that all utilities remain on, although the bank and the LLC concede that power to the property was off, a finding of summary judgment is inappropriate. The insurer has not shown, as a matter of law that, where the water controlling the sprinkler system remained on, a lack of power or heat increased the risk of fire.
Permanently Affixed Machinery
If the machinery at the 501 Hamilton Road property were “permanently installed,” it would be considered part of the property. Therefore the bank’s recovery would be limited to the policy’s $1,000,000 coverage of the property itself. If the machinery were not permanently installed, it would be covered under the policy’s $3,500,000 coverage of business personal property.
At his deposition, the LLC’s member, defendant Peterson, was asked, “So the permanently installed machinery and equipment which you identified on Exhibit 14 and the extruder falls within the definition of building in this policy, right?” Peterson responded, “I guess so.”
Later in his deposition, Peterson described “permanently installed machinery” as machinery that would be destroyed if it were moved. Peterson’s deposition testimony does not constitute a clear admission about whether the machinery at the 501 Hamilton Road property qualified as “permanently installed” under the policy.
The court should decline to hold that the machinery’s use compels a finding that it was “permanently installed” for purposes of the policy.
To support its contention on this point, the insurer relies on the above-discussed evidence from Peterson regarding the condition of the machinery, evidence that the machinery was bolted to the floor, and evidence that Peterson intended for the machinery to remain in the building even after sale of the building. Defendants, on the other hand, cite the fuller version of Peterson’s deposition testimony regarding this matter, argue that requirements of the Occupational Safety and Health Administration explain why the machinery was bolted to the floor, and point to evidence showing that the machinery was treated as personal property (such as the filing of UCC financing statements covering the machinery and the purchasing of a $3,500,000 personal property limit to cover said property in addition to the $1,000,000 building limit).
Such competing evidence renders this issue inappropriate for summary judgment.
Mortgagee/Loss Payee
The rights of the bank as a loss payee and a mortgagee under the policy are distinct from one another and turn on the plain terms of the policy. With respect to those rights as a mortgagee, the policy limits payment to “loss of or damage to buildings or structures.” Accordingly, the bank’s rights as a mortgagee extend only to the $1,000,000 building limit. However, this finding does not affect the bank’s rights as a loss payee, as to which it assumes the position of the Insured.
The parties have not cited, and independent research has not revealed, N.C. case law interpreting G.S. § 58-3-10 on facts similar to this case.
The mortgage-holders provision in the policy states in relevant part, “If we deny [the insured’s] claim because of [the insured’s] acts or because [the insured has] failed to comply with the terms of this Coverage Part, the mortgage-holder will still have the right to receive loss payments if the mortgage-holder: (1) Pays any premium due under this Coverage Part at our request if you have failed to do so; (2) Submits a signed, sworn proof of loss within 60 days after receiving notice from us of your failure to do so; and (3) Has notified us of any change in ownership, occupancy or substantial change in risk known to the mortgage-holder.”
Under the plain language of the mortgage-holders clause and N.C. case law, a separate agreement existed between the insurer and the bank as a mortgagee.
Accordingly, even if the insurer may rescind its policy with the LLC (and thus the bank as a loss payee) pursuant to G.S. § 58-3-10 due to material misrepresentations in the application and/or the supplement, the bank’s rights as a mortgagee would survive. The court thus should grant the bank’s motion for summary judgment on this point.
Agency & Agent
Where the LLC and Peterson allege that the agency and agent are responsible for the alleged misrepresentations that the insurer contends free it from its obligations to the LLC and the bank, this case is distinguishable from DirecTV, Inc. v. Amerilink Corp., 1:01cv943, 2002 WL 31165149 (M.D.N.C. 2002), and Kohl’s Department Stores, Inc. v. Target Stores, Inc., 214 F.R.D. 406 (E.D.Va. 2003). The court should deny the agency and agent’s motion for judgment on the pleadings.
The LLC and Peterson have cited evidence that “Peterson did not see the [supplement] or know of its existence until after this litigation began.” Furthermore, the LLC and Peterson contend that, despite providing the insurance agent with a report indicating that there was no power in the building, the agent “did not review the FPS report; rather, he placed the report in his file.”
Finally, this court has an insufficient basis to declare, as a matter of law, that Peterson had a “reasonable opportunity” to review the application and/or supplement. Accordingly, the court should leave for the finder of fact the question of whether the insurance agency and agent were negligent (or breached a fiduciary duty) or the LLC and Peterson were contributorily negligent.
The parties’ motions should be granted in part and denied in part.
